Attached files
| file | filename |
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| EX-31.2 - EXHIBIT 31.2 - CAROLINA BANK HOLDINGS INC | v433290_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - CAROLINA BANK HOLDINGS INC | v433290_ex31-1.htm |
| EX-32.1 - EXHIBIT 32.1 - CAROLINA BANK HOLDINGS INC | v433290_ex32-1.htm |
| EX-23.1 - EXHIBIT 23.1 - CAROLINA BANK HOLDINGS INC | v433290_ex23-1.htm |
| EX-21.1 - EXHIBIT 21.1 - CAROLINA BANK HOLDINGS INC | v433290_ex21-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number: 000-31877
Carolina Bank Holdings, Inc.
(Exact name of registrant as specified in its charter)
| NORTH CAROLINA | 56-2215437 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 101 nORTH SPRING STREET | ||
| Greensboro, North Carolina | 27401 | |
| (Address of principal executive offices) | (Zip Code) |
(336) 288-1898
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ 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 ¨
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. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last 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. $54,513,000
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. 5,037,108 shares of common stock outstanding as of March 22, 2016.
Documents Incorporated by Reference.
Portions of the Registrant’s definitive Proxy Statement dated April 7, 2016 are incorporated by reference into Part III of this report.
FORM 10-K CROSS-REFERENCE INDEX
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General
Carolina Bank Holdings, Inc. was incorporated under the laws of the State of North Carolina on August 16, 2000, at the direction of the Board of Directors of Carolina Bank, for the purpose of serving as the bank holding company of Carolina Bank. The Bank exchanged all of its outstanding shares of capital stock for shares of our common stock on a one-for-one basis, thereby making us its sole shareholder and bank holding company. Our corporate office is located at 101 North Spring Street, Greensboro, North Carolina.
Carolina Bank is a North Carolina chartered bank, which was incorporated in August 1996 and began banking operations in November 1996. The Bank’s main banking office is located at 101 North Spring Street, Greensboro, North Carolina.
At December 31, 2015, we had 192 full-time equivalent employees.
Business of Carolina Bank Holdings, Inc. and Carolina Bank
Our only function is the ownership of all of the issued and outstanding stock of the Bank and ownership of all of the issued and outstanding common securities of Carolina Capital Trust, a Delaware business trust formed in December 2004 for the purpose of selling $10,000,000 of trust preferred securities. We do not engage in any separate lines of business other than those of the Bank. The Bank engages in a general banking business in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina. Its operations are primarily commercially oriented and directed to individuals and small to medium-sized businesses located in its market area and its deposits and loans are derived primarily from customers in its geographic market. The Bank provides most traditional commercial and consumer banking services, including personal and commercial checking and savings accounts, money market accounts, certificates of deposit, individual retirement accounts and related business and individual banking services. The Bank’s lending activities are concentrated in commercial lending to small-to-medium sized businesses located primarily in its market area, construction and development loans and various consumer-type loans to individuals, including installment loans, credit card products, mortgage loans and equity lines of credit. The Bank started a mortgage banking division in 2007 to originate residential loans through third-party brokers and banks and to sell these loans at a profit to institutional investors. A retail loan production office was added to the mortgage loan division in 2010 and expanded to three retail loan production offices in addition to loan officers in five branch offices as of December 31, 2015. The mortgage banking division originated approximately $672 million and $574 million in loans held for sale during 2015 and 2014, respectively. The mortgage banking division generated net income of $1.6 million in 2015 but experienced a net loss of $0.7 million in 2014.
Primary Market Area
The Bank’s primary service area consists of the cities of Greensboro, High Point, Burlington, Winston-Salem and Asheboro, North Carolina and the areas immediately surrounding Greensboro, High Point, Burlington, Winston-Salem and Asheboro, all of which are located in Guilford, Alamance, Forsyth and Randolph counties, North Carolina. Residential mortgage loan production offices are located in Burlington, Chapel Hill, and Sanford, NC. The mortgage banking division originates residential loans throughout the southeastern United States, primarily North Carolina and contiguous states.
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Competition
Commercial banking in the Bank’s primary service area and in North Carolina as a whole is extremely competitive due to the early adoption of state laws permitting state-wide and interstate branching. The Bank competes directly for deposits in its primary service area with other commercial banks, savings banks, credit unions, agencies issuing United States government securities and all other organizations and institutions engaged in money market transactions. In its lending activities, the Bank competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. In Guilford County, 21 commercial banks operate 141 full service offices, including all of the largest banks in North Carolina. In Alamance County, 16 commercial banks operate 43 full service branch offices. In Randolph County, 13 commercial banks operate 33 full service branch offices. In Forsyth County, 17 commercial banks operate 90 full service offices, including all of the largest banks in North Carolina.
Interest rates, both on loans and deposits, and prices of services are significant competitive factors among financial institutions generally. Office location, office hours, customer service, community reputation and continuity of personnel are also important competitive factors. Many of the Bank’s competitors have greater resources, broader geographic markets and higher lending limits, and can offer more products and better afford and make more effective use of media advertising, support services and electronic technology than the Bank. The Bank depends on its reputation as a community bank in its local market, direct customer contact, its ability to make credit and other business decisions locally, and personalized service to counter these competitive disadvantages.
Employees
Carolina Bank employed 192 full-time equivalent employees at December 31, 2015. We do not have any officers or employees who are not also officers or employees of the Bank. None of our employees are covered by a collective bargaining agreement. We believe our relations with our employees to be good.
Regulation
Regulation of Carolina Bank
General. The Bank is a North Carolina chartered commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision, examination and regulation by the North Carolina Office of the Commissioner of Banks (“Commissioner”) and the FDIC and to North Carolina and federal statutory and regulatory provisions governing such matters as capital standards, mergers, subsidiary investments and establishment of branch offices. The FDIC also has the authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition and will be required to obtain regulatory approval prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.
As a federally insured depository institution, the Bank is subject to various regulations promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board” or “FRB”), including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).
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The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank, and is intended primarily for the protection of the FDIC and the depositors of the Bank, rather than shareholders. Changes in the regulatory framework could have a material effect on the Bank that in turn, could have a material effect on the Company. Certain of the legal and regulatory requirements are applicable to the Bank and Company. This discussion does not purport to be a complete explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.
State Law. The Bank is subject to extensive supervision and regulation by the Commissioner. The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail its resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.
North Carolina Banking Law Modernization Act. On October 1, 2012, as a result of the recommendations of the Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws, legislation went into effect that comprehensively modernizes North Carolina’s banking laws for the first time since the Great Depression. As a result of the legislation, Articles 1 through 10, 12, and 13 of Chapter 53 of the North Carolina General Statutes were repealed, and new Chapter 53C, entitled “Regulation of Banks,” became law. Major changes enacted by the law include: a comprehensive list of definitions enhancing the clarity and meaning of the various sections of North Carolina’s banking law, a broader reliance on the North Carolina Business Corporations Act, and incorporation of modern concepts of capital adequacy and regulatory supervision. In 2013, a bill was enacted by the North Carolina General Assembly to make certain technical corrections and clarifications to Chapter 53C.
Dodd–Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:
| · | the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies; |
| · | the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies; |
| · | the establishment of strengthened capital and prudential standards for banks and bank holding companies; |
| · | enhanced regulation of financial markets, including derivatives and securitization markets; |
| · | the elimination of certain trading activities by banks; |
| · | a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits; |
| · | amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and |
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| · | disclosure and other requirements relating to executive compensation and corporate governance. |
During 2013 and 2014, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the FDIC, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission adopted a final version of the Volcker Rule (the “Rule”). As in earlier versions, the Rule invokes Federal Reserve Chairman Paul Volcker’s core concept of restricting United States banks from making certain kinds of speculative investments that do not benefit their customers. The Rule compels banks to sell prohibited instruments by 2017. The new prohibition could cause a bank financial loss on the eventual sale and could cause the bank to recognize an estimate of that loss immediately under applicable accounting rules since the prohibited instruments no longer can be held to maturity. The Company has not engaged in the types of speculative investments that are covered by the Rule and accordingly does not expect any impact on its operations.
We believe that certain aspects of the Dodd-Frank Act, including, without limitation, the additional cost of maintaining higher capital levels along with monitoring those levels and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.
Deposit Insurance. The Bank’s deposits are insured up to limits set by the DIF of the FDIC. 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 October 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%.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.
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. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation became effective on April 1, 2011.
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The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and 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. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of the Bank’s FDIC deposit insurance.
Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 150% for assets with relatively high credit risk, such as high volatility commercial real estate loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. In July 2013, U.S. banking regulators issued final regulatory capital rules that address certain requirements of the Dodd-Frank Act which are designed to improve the resiliency of the U.S. banking system, increase the quantity and quality of regulatory capital, and enhance risk sensitivity. A new Common Equity Tier 1 (“CET1”) ratio was introduced and is computed by dividing CET1 by risk weighted assets. Risk weights for highly volatile commercial real estate loans and for assets on nonaccrual or past due 90 days or more were increased to 150% under the new rules. CET1 consists of common stock and associated surplus and retained earnings less several adjustments, such as goodwill, certain deferred tax assets, gains on sale of securitization exposures, and certain investments in other unconsolidated financial institutions’ capital instruments. The new minimum risk-based capital ratios, effective January 1, 2015, are 4.5% for CET1, 6% for Tier 1, and 8% for Total Capital. In addition, the new capital regulations provide for the phase-in of a capital conservation buffer over a four year period requiring the following minimum risk-based capital ratios by January 1, 2019: 7% for CET1, 8.5% for Tier1 Capital, and 10.50% for Total Capital. The minimum Tier 1 Leverage capital ratio remains at 4%.
As of December 31, 2015, the Company was classified as well capitalized with Tier 1 Risk-Based, Tier 1 Leverage, and Total Risk-Based Capital of 12.66%, 10.16%, and 14.39%, respectively. Also, as of December 31, 2015, the Bank was classified as well capitalized with Tier 1 Risk-Based, Tier 1 Leverage, Common Equity Tier 1, and Total Risk-Based Capital of 12.09%, 9.71%, 12.09%, and 13.81%, respectively.
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The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of board of director and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such changes could affect the ability of banks to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDIC Improvement Act”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement Act provides for, among other things:
| - | publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, |
| - | the establishment of uniform accounting standards by federal banking agencies, |
| - | the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, |
| - | additional grounds for the appointment of a conservator or receiver, |
| - | restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements, and |
The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.
A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.
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The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.
Office of Foreign Assets Control (“OFAC”) Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the OFAC rules based on their administration by the U.S. Treasury’s Office of Foreign Assets Control. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure of a financial institution to comply with these sanctions could result in legal consequences for the institution.
Community Reinvestment Act. We are subject to the provisions of the Community Reinvestment Act of 1977, as amended (“CRA”). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with the examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency’s assessment of our record is made available to the public. Such an assessment is required of any bank which has made any application for a domestic deposit-taking branch, relocation of a main office, branch or ATM, merger or consolidation with or acquisition of assets or assumption of liabilities of a federally insured depository institution.
An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the appropriate bank regulatory agency. The agencies emphasize that small banks are not exempt from CRA requirements. We are currently evaluated using the intermediate small bank performance criteria, which include the small bank lending evaluation and a community development test. The performance criteria for small banks focuses on the bank’s loan-to-deposit ratio, adjusted for seasonal variations and as appropriate, other lending-related activities, such as loan originations for sale to secondary markets or community development lending or qualified investments; the percentage of loans and, as appropriate, other lending-related activities located in our assessment areas; our record of lending to and, as appropriate, other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of our loans given our assessment areas, capacity to lend, local economic conditions, and lending opportunities; and our record of taking action, if warranted, in response to written complaints about our performance in meeting the credit needs of our assessment areas.
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Regulatory agencies will assign a composite rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance” to the institution using the foregoing ground rules. A bank’s performance need not fit each aspect of a particular rating profile in order for the bank to receive that rating; exceptionally strong performance with respect to some aspects may compensate for weak performance in others, and the bank’s overall performance must be consistent with safe and sound banking practices and generally with the appropriate rating profile. To earn an outstanding rating, a bank first must exceed some or all of the standards mentioned above. The agencies may assign a “needs to improve” or “substantial noncompliance” rating depending on the degree to which the bank has failed to meet the standards mentioned above. The regulation further states that the agencies will take into consideration these CRA ratings when considering any application and that a bank’s record of performance may be the basis for denying or conditioning the approval of an application. While the latest CRA evaluation reflected satisfactory performance in lending, qualified investments and community development within our assessment area, the overall rating was downgraded to “needs improvement” due to perceived mortgage loan pricing disparities on loans originated by our wholesale mortgage division in markets outside our assessment area.
Federal Home Loan Bank (“FHLB”) System. The FHLB System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $0.7 million at December 31, 2015. The FHLB of Atlanta serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It offers advances to members in accordance with policies and procedures established by the FHFA and the Board of Directors of the FHLB of Atlanta. Long-term advances may only be made for the purpose of providing funds for residential housing finance, small businesses, small farms and small agribusinesses.
Reserves. Pursuant to regulations of the FRB, the Bank must maintain average daily reserves equal to 3% on transaction accounts of $15.2 million up to $110.2 million, plus 10% on the remainder. This percentage is subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of December 31, 2015, the Bank met its reserve requirements.
The Bank is also subject to the reserve requirements of North Carolina commercial banks. North Carolina law requires state nonmember banks to maintain, at all times, a reserve fund in an amount set by the Commissioner.
Liquidity Requirements. FDIC policy requires that banks maintain an average daily balance of liquid assets (cash, certain time deposits, mortgage-backed securities, loans available for sale and specified United States government, state, or federal agency obligations) in an amount which it deems adequate to protect the safety and soundness of the bank. The FDIC currently has no specific level which it requires. The Bank maintains its liquidity position under policy guidelines based on liquid assets in relationship to deposits and short-term borrowings. Based on its policy calculation guidelines, the Bank’s calculated liquidity ratio was 28.6% of total deposits and short-term borrowings at December 31, 2015, which management believes is adequate.
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Dividend Restrictions. Under FDIC regulations, the Bank is prohibited from making any capital distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. In addition, under North Carolina law, the Bank may declare and pay dividends only out of retained earnings. The FDIC and the Commissioner have the power to further restrict the payment of dividends by the Bank. The Company is current on its trust preferred interest payments as of December 31, 2015.
Limits on Loans to One Borrower. The Bank generally is subject to both FDIC regulations and North Carolina law regarding loans to any one borrower, including related entities. Under applicable law, with certain limited exceptions, loans and extensions of credit by a state chartered nonmember bank to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15% of Total Risk-Based Capital of the Bank. Loans and extensions of credit fully secured by readily marketable collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 10% of Total Risk-Based Capital of the Bank. Under these limits, the Bank’s loans to one borrower were limited to $11.5 million at December 31, 2015. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit.
Transactions with Related Parties. Transactions between a state nonmember bank and any affiliate are governed by Regulation W which implements Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state nonmember bank is any company or entity which controls, is controlled by or is under common control with the state nonmember bank. In a holding company context, the parent holding company of a state nonmember bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution or state nonmember bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.
Loans to Directors, Executive Officers and Principal Stockholders. State nonmember banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the applicable regulations thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a state nonmember bank and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% stockholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made in the ordinary course of business and on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Loans made by the Bank were made in the ordinary course of business and on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender.
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State nonmember banks also are subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended (“BHCA”), prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to the lender. The Bank is in compliance with this requirement of the BHCA.
Restrictions on Certain Activities. State chartered nonmember banks with deposits insured by the FDIC are generally prohibited from engaging in equity investments that are not permissible for a national bank. The foregoing limitation, however, does not prohibit FDIC-insured state banks from acquiring or retaining an equity investment in a subsidiary in which the bank is a majority owner. State chartered banks are also prohibited from engaging as a principal in any type of activity that is not permissible for a national bank and, subject to certain exceptions, subsidiaries of state chartered FDIC-insured banks may not engage as a principal in any type of activity that is not permissible for a subsidiary of a national bank, unless in either case, the FDIC determines that the activity would pose no significant risk to the DIF and the bank is, and continues to be, in compliance with applicable capital standards.
We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank’s operations.
Regulation of Carolina Bank Holdings, Inc.
Federal Regulation. We are subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.
We are required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, we would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.
The merger or consolidation of the Bank with another bank, or the acquisition by the company of assets of another bank, or the assumption of liability by the company to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.
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We are required to give the Federal Reserve Board prior written notice of any purchase or redemption of our outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” and “well managed” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.
The status of the company as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to promote community welfare; and
- acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.
However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”), which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.
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A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the FDIC Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the CRA. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. We have not yet elected to become a financial holding company.
Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.
Sarbanes-Oxley Act (“SOX”) of 2002. In July 2002, the SOX of 2002 was signed into law and became some of the most sweeping federal laws addressing accounting, corporate governance and disclosure issues. The impact of the SOX is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements.
In general, the SOX mandates important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and established regulatory body to oversee auditors of public companies. It backs these requirements with SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases 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 this new legislation on public companies, including us, is significant in terms of the time, resources and costs associated with complying with the new law. Because the SOX, for the most part, applies equally to larger and smaller public companies, we are presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.
Recent Regulatory Initiatives. Beginning in late 2008 and continuing through 2009, the federal government took sweeping actions in response to the deepening economic recession. As mentioned above, President Bush signed the Emergency Economic Stabilization Act of 2008 (“EESA”) into law on October 3, 2008. Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program (“TARP”) for the purpose of stabilizing the U.S. financial markets. On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program. The Capital Purchase Program was designed to invest up to $250 billion (later increased to $350 billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate. In connection with its investment in senior preferred stock, the Treasury also received ten-year warrants to purchase common shares of participating institutions.
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We applied, and were approved, for participation in the Capital Purchase Program in late 2008. On January 9, 2009, the Company issued and sold to the Treasury (1) 16,000 shares of the company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 357,675 shares of the Company’s common stock for an aggregate purchase price of $16.0 million in cash. The Company repurchased $5 million in preferred stock and repurchased the warrant for $1.8 million during 2013. The remaining $11 million in preferred stock was repurchased in 2015 from net proceeds of $14.1 million obtained from the sale of convertible preferred stock which was later converted to common stock.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratio represents capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum requirement for a bank holding company’s ratio of capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8.0%. At least half of the qualifying total capital must be composed of Tier 1 capital, which includes common equity, retained earnings and a limited amount of qualifying perpetual preferred stock, less goodwill and certain other intangibles. The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves (Tier 2 capital).
The Federal Reserve Board also requires bank holding companies to maintain a minimum “leverage ratio.” This leverage ratio of Tier 1 capital to adjusted average assets is equal to 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies are required to maintain a minimum leverage ratio of at least 4.0% to 5.0%.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.
Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, our ability to pay cash dividends depends upon the cash dividends we receive from the Bank or from funds held at the holding company from prior capital offerings. At present, our only source of income is dividends paid by the Bank and interest earned on any investment securities we hold. We must pay all of our operating expenses from funds we receive from the Bank or from excess funds held at the holding company. Therefore, shareholders may receive dividends from the Company only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Bank to us will likely be limited to amounts needed to pay any separate expenses of the Company and/or to make required payments on our debt obligations, including the interest payments on our outstanding junior subordinated debt.
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The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the company, and any subsidiary of the company and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.
Interstate Branching
Under the Riegle-Neal Interstate Banking and Branching Act (the “Riegle-Neal Act”), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle-Neal Act. These mergers are also subject to similar aging and deposit concentration limits.
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North Carolina “opted-in” to the provisions of the Riegle-Neal Act. Since July 1, 1995, an out-of-state bank that did not already maintain a branch in North Carolina was permitted to establish and maintain a de novo branch in North Carolina, or acquire a branch in North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank involved in the interstate merger transaction permit interstate merger.
Incentive Compensation Policies and Restrictions. In July 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 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.
In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the SEC, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant and the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.
Future Legislation
We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.
Item not applicable to smaller reporting companies.
ITEM 1B. Unresolved Staff Comments.
Item not applicable to smaller reporting companies.
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The following table sets forth certain information regarding our properties:
| OFFICE LOCATION | YEAR OPENED | SQUARE FOOTAGE | OWN/LEASE | |||
| Main / Corporate Office | 2008 | 43,000 | Land lease | |||
| 101 North Spring Street | ||||||
| Greensboro, NC 27401 | ||||||
| Lawndale Office | 2000 | 15,000 | Own | |||
| 2604 Lawndale Drive | ||||||
| Greensboro, NC 27408 | ||||||
| Jefferson Village Office | 2001 | 2,975 | Own | |||
| 1601 Highwoods Boulevard | ||||||
| Greensboro, NC 27410 | ||||||
| Asheboro Office | 2003 | 5,800 | Own | |||
| 335 S. Fayetteville Street | ||||||
| Asheboro, NC 27203 | ||||||
| High Point Office | 2007 | 4,500 | Own | |||
| 4010 Brian Jordan Place | ||||||
| High Point, NC 27265 | ||||||
| Burlington Office | 2007 | 5,000 | Own | |||
| 3214 South Church Street | ||||||
| Burlington, NC 27215 | ||||||
| Stratford Office | 2013 | 3,448 | Lease | |||
| 275 South Stratford Road | ||||||
| Winston-Salem, NC 27103 | ||||||
| Peace Haven Office | 2015 | 6,940 | Own | |||
| 1554 North Peace Haven Road | ||||||
| Winston-Salem, NC 27104 | ||||||
| Corporate Training Center | 2013 | 7,103 | Own | |||
| 618 West Friendly Avenue | ||||||
| Greensboro, NC 27401 | ||||||
| Burlington Loan Production Office | 2010 | 4,460 | Lease | |||
| 411-B Alamance Road | ||||||
| Burlington, NC 27215 | ||||||
| Sanford Loan Production Office | 2013 | 1,920 | Lease | |||
| 143 Charlotte Avenue, Suite 101 | ||||||
| Sanford, NC 27330 | ||||||
| Chapel Hill Loan Production Office | 2013 | 1,260 | Lease | |||
| 1516 E. Franklin Street, Suite 202 | ||||||
| Chapel Hill, NC 27514 |
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As of December 31, 2015, there were no pending material legal proceedings to which we are a party, or of which any of our property is the subject, that, if decided adversely to us, could have a material adverse financial effect.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Summary
Our common stock is listed for quotation on the Nasdaq Global Market under the symbol “CLBH.” As of March 22, 2016, we had issued and outstanding 5,037,108 shares of common stock which were held by approximately 1,150 shareholders.
No cash dividends were declared or paid on shares of our common stock in 2015 or 2014.
Market for the Common Stock
Our common stock is traded on the Nasdaq Global Market under the symbol “CLBH.” The following table gives the high and low sale prices for the calendar quarters indicated.
| 2015 | ||||||||
| First Quarter | $ | 10.20 | $ | 9.30 | ||||
| Second Quarter | 12.98 | 11.01 | ||||||
| Third Quarter | 13.87 | 12.00 | ||||||
| Fourth Quarter | 18.49 | 12.82 | ||||||
| 2014 | ||||||||
| First Quarter | $ | 10.73 | $ | 9.56 | ||||
| Second Quarter | 10.97 | 9.00 | ||||||
| Third Quarter | 10.88 | 9.60 | ||||||
| Fourth Quarter | 10.00 | 9.14 |
See Item 12 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.
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ITEM 6. Selected Financial Data.
Item not applicable to smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our financial condition and results of operations. Because we have no material operations and conduct no business on our own other than owning our subsidiaries, Carolina Bank and Carolina Capital Trust, and because Carolina Capital Trust has no operations other than the issuance of its trust preferred securities, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of Carolina Bank. Carolina Bank also owns two limited liability companies for the purpose of holding foreclosed real estate, the assets and operations of which are consolidated into Carolina Bank and included herein. For ease of reading and because the financial statements are presented on a consolidated basis, Carolina Bank Holdings, Inc. and Carolina Bank are collectively referred to herein as “we”, “our”, or “us”, unless otherwise noted.
Forward-looking Statements
This report contains forward-looking statements with respect to our financial condition and results of operations and business. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected include the following:
| · | General economic conditions may deteriorate and negatively impact the ability of our borrowers to repay loans and our depositors to maintain balances. |
| · | Changes in interest rates could reduce our net interest income. |
| · | Competition among financial institutions is intense and may increase. |
| · | Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged. |
| · | Regulatory requirements have become more complex and costly over the past few years, especially for community banks. We may be forced to exit certain types of products and services if regulatory costs exceed the benefits. |
| · | New products developed and new methods of delivering products could result in a reduction in our business and income. |
| · | Increases in interest rates, increases in warranty losses, or changes in the securitization of mortgages could negatively impact our mortgage banking income. |
| · | Adverse changes may occur in the securities market. |
| · | Technology fraud and losses from cyberattacks are a major threat to banks of all sizes, bank service providers and to bank customers. We could experience challenges in meeting future cyber threats if they become more complex and more frequent. |
| · | Local, state or federal taxing authorities may take tax positions that are adverse to us. |
| · | Unpredictable natural and other disasters could have an adverse effect on our operations or on the willingness of our customers to access our financial services. |
Critical Accounting Policies
Our accounting and financial policies are in accordance with accounting principles generally accepted in the United States and conform to general practices in the banking industry. The more critical accounting and reporting policies include our accounting for the allowance for loan losses. Our accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgment. These estimates are based on our opinion of an amount that is adequate to absorb losses in the existing loan portfolio. The allowance for loan losses is established through a provision for loan losses based on available information including the composition of the loan portfolio, historical loan losses, specific impaired loans, availability and quality of collateral, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of our allowance for loan losses could result in material changes in our consolidated financial condition or consolidated financial results of operations. The methodology we employ to determine the allowance for loan losses involves a number of assumptions and estimates about uncertain matters. We periodically review our assumptions and methodology.
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Our mortgage banking division originates residential mortgage loans which are sold to investors. We generally obtain optional commitments to sell loans when we grant optional commitments to make loans or hedge some optional loan commitments by selling mortgage-backed securities on a forward basis. We opted to account for loans originated in our mortgage banking division, loans held for sale, at fair value which is based on what secondary markets are currently offering for portfolios with similar characteristics or based on actual commitment prices from investors. Forward sale mortgage-backed securities and the value of the estimated loan commitments are also accounted for at fair value. Assumptions related to the closing ratio of loan commitments and the projected profit from loan sales are used to estimate the fair value of loan commitments. Hedging loan commitments through forward sales of mortgage-backed-securities was discontinued during 2013 but resumed in 2015. We also make provisions for future warranty claims that arise from borrower fraud or from underwriting errors that are later detected on residential mortgage loans that are sold. The provision for warranty claims involves a charge against income and an increase in an estimated liability for warranty claims based primarily on the volume of originations and projected losses on past and current originations. The estimated liability for warranty claims is reduced as claims are paid. Warranty provisions involve a number of assumptions including the quality of loans originated, the volume of loans originated, changes in real estate values, and historical and projected warranty claims.
Securities available-for-sale, mortgage loans held for sale originated by our mortgage banking division, optional commitments to make loans entered into by our mortgage banking division, and derivative assets and liabilities, primarily forward sale mortgage-backed securities, are recorded at fair value on a recurring basis. From time to time, certain assets, consisting primarily of other real estate owned and impaired loans, are recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of the lower of cost or fair value accounting resulting in a write-down during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. In periods where there is no adjustment, the asset is generally not considered to be at fair value. Management believes this is a critical accounting policy because the estimation of fair value involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.
Comparison of Financial Condition
Assets. Our total assets increased by $21.5 million, or 3.2%, from $679.3 million at December 31, 2014, to $700.8 million at December 31, 2015. Our asset mix changed at December 31, 2015 from December 31, 2014 as loans, both held for sale and for investment, decreased while interest-bearing deposits with banks and bank term deposits increased. Loans held for investment decreased by $6.4 million, or 1.4%, during 2015, due to higher maturities and unscheduled pay-offs of loans in 2015 compared to 2014. Average loans held for investment and average loans held for sale increased $2.3 million and $13.5 million in 2015 from 2014, respectively. Our compounded annual growth rate for the three years ended December 31, 2015 for loans held for investment and assets was 0.3% and 0.4%, respectively.
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Liabilities. Total liabilities increased by $13.1 million, or 2.1%, from $626.6 million at December 31, 2014, to $639.7 million at December 31, 2015. Deposits increased by $12.4 million, or 2.1%, during 2015 as non-interest bearing demand deposits increased while time deposits declined. Non-interest bearing demand deposits, primarily commercial checking accounts, are a major strategic focus and increased $19.0 million, or 17.9%, during 2015. The compounded annual growth rate for the three years ended December 31, 2015 for average non-interest bearing demand deposits and total deposits was 23.9% and 0.9%, respectively. Over the long term, we plan to continue our efforts to gain deposits through quality service, convenient locations, and competitive pricing. While deposit growth is an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank advances and repurchase borrowings may be utilized where cost beneficial, for liquidity purposes, or to better match the repricing of assets and liabilities.
Stockholders’ equity. Our total stockholders’ equity increased $8.5 million at December 31, 2015 to $61.1 million from $52.7 million at December 31, 2014 due to net proceeds of $14.1 million obtained from the sale of convertible preferred stock which was later converted to common stock. The net proceeds of the offering were used to redeem $11.0 million in Series A preferred stock and to provide additional capital to support future growth. Retained net income of $5.4 million further added to stockholders’ equity during 2015.
Asset Quality
Our non-performing assets, composed of foreclosed real estate and other repossessed assets, non-accrual loans and non-performing restructured loans, totaled approximately $7.7 million at December 31, 2015 and $12.1 million at December 31, 2014. Non-performing assets, as a percentage of total assets, was 1.10% and 1.78% at December 31, 2015 and 2014, respectively. There were no loans 90 days or more past due and still accruing interest at December 31, 2015 and 2014. Foreclosed real estate and other repossessed assets were $4.6 million and $5.6 million at December 31, 2015 and 2014, respectively. Net loan charge-offs totaled $1.7 million and $2.6 million for the years ended December 31, 2015 and 2014, respectively. Impaired loans, including loans on non-accrual, decreased to $14.4 million at December 31, 2015 from $18.6 million at December 31, 2014. In general, loans are impaired when, based on current information and events, collection of all contractual amounts due is not probable.
Loans are graded according to an internal loan rating classification system, and “classified loans” represent adversely classified loans with identified weaknesses and potential or identified losses of principal and/or interest due. Classified loans decreased to $5.9 million at December 31, 2015 from $13.5 million at December 31, 2014 due to continuing efforts to improve asset quality. Loan rating classification information is detailed in Note 3 to the consolidated financial statements as of December 31, 2015 and 2014.
The decrease in impaired loans and classified loans in 2015 from 2014 resulted from success in disposing of problem loans through payoffs and foreclosures, from reduction in new additions to classified loans as a result of an improved credit culture, and from an improving economy. The economic conditions in our primary markets in North Carolina improved in 2015 due to an increasing labor force and rising employment. The seasonally adjusted unemployment rate in North Carolina averaged 5.6% in 2015 compared to 6.1%, 7.8%, 9.1% and 10.1% for 2014, 2013, 2012 and 2011, respectively.
Liquidity, Capital, and Regulatory Resources
The objective of our liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses our ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
| 22 |
Our primary sources of internally generated funds are principal and interest payments on loans receivable, non-interest income and proceeds from loan sales related to our mortgage banking operations, and cash flows generated from other operations. External sources of funds include deposits, repurchase agreements, federal funds purchased from banks, and advances from secured lines of credit at the Federal Home Loan Bank of Atlanta and Federal Reserve Bank.
Carolina Bank is required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, interest-bearing deposits with banks, bank term deposits, and investment securities available-for-sale are the primary liquid assets of Carolina Bank which increased $28.3 million at December 31, 2015 from December 31, 2014. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During 2015, we increased our levels of short-term liquidity due to a decrease in loans, additional equity from a capital raise, retained income, and an increase in deposits. We maintained adequate secondary sources of liquidity during 2014 and 2015 as our secured credit availability for additional advances from the Federal Home Loan Bank and available secured discount borrowings from the Federal Reserve Bank exceeded $155.2 million at December 31, 2015. We also have $25 million in discretionary, uncommitted, unsecured Federal funds lines from three correspondent banks.
We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of December 31, 2015 and 2014, our levels of capital exceeded all applicable published regulatory requirements. During 2013, Basel III capital requirements were adopted by United States banking regulators. The Basel III regulations establish a common equity Tier 1 capital requirement of 4.5% in 2015 and 7.0% by 2019. The new regulations changed risk weights for certain on and off balance sheet assets and required deductions from capital for certain types of assets. All of the capital ratios for Carolina Bank and the consolidated company improved in 2015 as shown in Note 10 to the consolidated financial statements as of December 31, 2015 and 2014. The increases in the capital ratios in 2015 are primarily the result of retained income, low growth, and the increase in common equity from a private placement capital offering. We believe we are in compliance with the Basel III and all regulatory capital requirements.
Carolina Bank issued $9.3 million in subordinated debentures in 2008 which is included in the regulatory capital of the Bank and the consolidated capital of Carolina Bank Holdings, Inc. and Subsidiary as Tier 2 capital. These subordinated debentures lost 60% of their capital eligibility through September 30, 2016 and will lose 20% per year over a two year period beginning in October 2016. Included in the regulatory capital of Carolina Bank Holdings, Inc. and Subsidiary is $10.0 million in junior subordinated debentures related to trust preferred securities which has been primarily reinvested in Carolina Bank. Carolina Bank Holdings, Inc. and Carolina Bank were current on interest payments on the trust preferred securities and subordinated debentures as of December 31, 2015. No common stock dividends are anticipated in the near future.
In March 2015, we issued 15,500 shares of convertible preferred stock, Series B, at $975 per share in a private placement offering and received $14.1 million in net proceeds. The net proceeds from the offering were used to retire the remaining Series A preferred stock of $11.0 million in May 2015 and to improve capital levels. The convertible preferred stock, Series B, was converted into 1,550,000 shares of common stock in May 2015, and no dividends were declared or paid on the newly issued convertible preferred stock.
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Regulatory requirements have become more complex and costly over the past few years, especially for community banks. The Company has been challenged to find the human and system resources to implement the many new regulatory requirements that pertain to banks. The Company may discontinue certain products and services in the future if the regulatory costs exceed the expected benefits.
Results of Operations for the Years ended December 31, 2015 and 2014
General. We had net income of $5.8 million and $3.3 million for the years ended December 31, 2015 and 2014, respectively. Net income available to common stockholders was $5.4 million, or $1.17 per diluted share, for 2015 compared to $2.4 million, or $0.70 per diluted share, for 2014. Net income available to common stockholders represents net income less preferred stock dividends. The increase in net income in 2015 was primarily due to higher mortgage banking income. Net interest income, the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, was $23.6 million in 2015 compared to $23.3 million in 2014, an increase of 1.7%. Non-interest income, principally service charges and fees, mortgage banking income, increase in cash value of life insurance, plus gain on sale of investments amounted to $13.6 million in 2015 and $9.4 million in 2014. Mortgage banking income increased approximately $4.3 million, or 55.1%, during 2015 due to increased originations and increased profit margins realized on originations. Our provision for loan losses was $1.1 million and $1.4 million in 2015 and 2014, respectively. Reduced net loan charge-offs and lower allowances for loan losses on non-impaired loans resulted in a decrease in the provision for loan losses in 2015. We incurred non-interest expense of $27.9 million in 2015 and $27.0 million in 2014. The increase in non-interest expense of $0.9 million, or 3.4%, was primarily from higher incentive compensation in the mortgage banking division and from additional professional fees related to resolving problem assets and regulatory issues.
Our commercial/retail bank segment reported 2015 net income of $4.5 million compared to $4.3 million in 2014, primarily due to an increase in net interest income and a lower provision for loan losses. Our mortgage banking division reported net income of $1.6 million in 2015 compared to a net loss of $0.7 million in 2014 due to a 17% rise in the origination of loans held for sale, an increase of $0.4 million in interest rate lock commitments, and an increase in profit margins on loans sold. The holding company reported a net loss of $0.3 million in 2015 and $0.2 million in 2014 related to interest expense on trust preferred subordinated debt and other corporate expenses. Segment information is detailed in Note 16 to the consolidated financial statements as of December 31, 2015 and 2014.
Net interest income. Net interest income is the amount of interest earned on interest-earning assets such as loans, investments, and interest-earning deposits in other financial institutions less the interest expense incurred on interest-bearing liabilities such as interest-bearing deposits and borrowed money. Net interest income is the principal source of our earnings. Net interest income is affected by the general level of interest rates, competition, and the volumes and mix of interest-earning assets and interest-bearing liabilities.
For the year ended December 31, 2015, net interest income increased by $0.4 million, or 1.7%, to $23.6 million from $23.3 million for the year ended December 31, 2014. The net yield on average interest-earning assets was 3.73% in 2015 and 3.80% in 2014. The interest rate spread was 3.62% in 2015 and 3.70% in 2014. The decrease in the net yield on interest-earning assets and the interest rate spread in 2015 resulted primarily from a greater decline in loan yields than the decrease in the cost of interest-bearing liabilities. The increase in non-interest-bearing demand deposits positively impacted the net yield, but the shift to lower yielding interest-bearing assets negatively impacted the yield on interest-earning assets.
The table below provides a detailed analysis of the effective yields and rates on the categories of interest-earning assets and interest-bearing liabilities for the years indicated.
| 24 |
| Net Interest Income and Average Balance Analysis | ||||||||||||||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
| Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||||||||||||
| Balance (1.) | Inc./Exp. | Yield/Cost | Balance (1.) | Inc./Exp. | Yield/Cost | Balance (1.) | Inc./Exp. | Yield/Cost | ||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 61,847 | $ | 267 | 0.43 | % | $ | 43,713 | $ | 201 | 0.46 | % | $ | 86,921 | $ | 242 | 0.28 | % | ||||||||||||||||||
| Taxable investments | 47,720 | 1,310 | 2.75 | % | 57,743 | 1,547 | 2.68 | % | 42,631 | 1,221 | 2.86 | % | ||||||||||||||||||||||||
| Non-taxable investments (2.) | 15,930 | 717 | 4.50 | % | 17,845 | 797 | 4.47 | % | 15,064 | 719 | 4.77 | % | ||||||||||||||||||||||||
| Loans held for sale | 52,372 | 2,013 | 3.84 | % | 38,825 | 1,577 | 4.06 | % | 50,405 | 1,883 | 3.74 | % | ||||||||||||||||||||||||
| Loans (2.) (3.) | 465,163 | 22,431 | 4.82 | % | 462,870 | 22,676 | 4.90 | % | 432,471 | 22,245 | 5.14 | % | ||||||||||||||||||||||||
| Interest-earning assets | 643,032 | 26,738 | 620,996 | 26,798 | 627,492 | 26,310 | ||||||||||||||||||||||||||||||
| Yield on average interest-earning assets | 4.16 | % | 4.32 | % | 4.19 | % | ||||||||||||||||||||||||||||||
| Non interest-earning assets | 46,810 | 43,816 | 44,037 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 689,842 | $ | 664,812 | $ | 671,529 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
| Interest checking | $ | 51,724 | $ | 38 | 0.07 | % | $ | 45,712 | $ | 33 | 0.07 | % | $ | 40,961 | $ | 38 | 0.09 | % | ||||||||||||||||||
| Money market and savings | 291,014 | 915 | 0.31 | % | 296,563 | 924 | 0.31 | % | 296,913 | 1,061 | 0.36 | % | ||||||||||||||||||||||||
| Time certificates and IRAs | 138,403 | 1,142 | 0.83 | % | 146,098 | 1,593 | 1.09 | % | 164,895 | 1,935 | 1.17 | % | ||||||||||||||||||||||||
| Other borrowings | 22,468 | 630 | 2.80 | % | 24,072 | 641 | 2.66 | % | 26,635 | 722 | 2.71 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 503,609 | 2,725 | 512,445 | 3,191 | 529,404 | 3,756 | ||||||||||||||||||||||||||||||
| Cost on average interest-bearing liabilities | 0.54 | % | 0.62 | % | 0.71 | % | ||||||||||||||||||||||||||||||
| Non-interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 118,355 | 94,618 | 82,343 | |||||||||||||||||||||||||||||||||
| Other liabilities | 8,599 | 6,851 | 6,895 | |||||||||||||||||||||||||||||||||
| Total non-interest-bearing liabilities | 126,954 | 101,469 | 89,238 | |||||||||||||||||||||||||||||||||
| Total liabilities | 630,563 | 613,914 | 618,642 | |||||||||||||||||||||||||||||||||
| Stockholders' equity | 59,279 | 50,898 | 52,887 | |||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 689,842 | $ | 664,812 | $ | 671,529 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 24,013 | $ | 23,607 | $ | 22,554 | ||||||||||||||||||||||||||||||
| Net yield on average interest-earning assets | 3.73 | % | 3.80 | % | 3.59 | % | ||||||||||||||||||||||||||||||
| Interest rate spread | 3.62 | % | 3.70 | % | 3.48 | % | ||||||||||||||||||||||||||||||
| (1.) | Average balances are computed on a daily basis. |
| (2.) | Interest income and yields related to certain investment securities and loans exempt from federal income tax are stated on a fully taxable basis using a 34% federal tax rate, reduced by the nondeductible portion of interest expense. |
| (3.) | Nonaccrual loans are included in the average loan balance. |
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Rate/Volume analysis of net interest income. The effect of changes in average balances (volume) and rates on interest income, interest expense and net interest income for the period indicated is shown below. The effect of a change in the average balance has been determined by applying the average rate in the earlier period to the change in average balance in the later period, as compared with the earlier period. The effect of a change in the average rate has been determined by applying the average balance in the earlier period to the change in the average rate in the later period as compared with the earlier period. Changes resulting from average balance/rate variances have been allocated between volume and rate on a proportional basis.
| Rate / Volume Variance Analysis | ||||||||||||||||||||||||
| Years Ended | ||||||||||||||||||||||||
| December 31, 2015 vs. 2014 | December 31, 2014 vs. 2013 | |||||||||||||||||||||||
| Interest | Increase (Decrease) | Interest | Increase (Decrease) | |||||||||||||||||||||
| Increase | Due To Change in | Increase | Due To Change in | |||||||||||||||||||||
| (Decrease) | Volume | Rate | (Decrease) | Volume | Rate | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits | $ | 66 | $ | 79 | $ | (13 | ) | $ | (41 | ) | $ | (154 | ) | $ | 113 | |||||||||
| Taxable investments | (237 | ) | (274 | ) | 37 | 326 | 409 | (83 | ) | |||||||||||||||
| Non-taxable investments | (80 | ) | (86 | ) | 6 | 78 | 127 | (49 | ) | |||||||||||||||
| Loans held for sale | 436 | 524 | (88 | ) | (306 | ) | (459 | ) | 153 | |||||||||||||||
| Loans | (245 | ) | 112 | (357 | ) | 431 | 1,519 | (1,088 | ) | |||||||||||||||
| Total interest-earning assets | (60 | ) | 355 | (415 | ) | 488 | 1,442 | (954 | ) | |||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Interest checking | $ | 5 | $ | 4 | $ | 1 | $ | (5 | ) | $ | 4 | $ | (9 | ) | ||||||||||
| Money market and savings | (9 | ) | (17 | ) | 8 | (137 | ) | (1 | ) | (136 | ) | |||||||||||||
| Time certificates and IRAs | (451 | ) | (80 | ) | (371 | ) | (342 | ) | (211 | ) | (131 | ) | ||||||||||||
| Other borrowings | (11 | ) | (44 | ) | 33 | (81 | ) | (69 | ) | (12 | ) | |||||||||||||
| Total interest-bearing liabilities | (466 | ) | (137 | ) | (329 | ) | (565 | ) | (277 | ) | (288 | ) | ||||||||||||
| Net interest income | $ | 406 | $ | 492 | $ | (86 | ) | $ | 1,053 | $ | 1,719 | $ | (666 | ) | ||||||||||
A shift into more loans almost offset the negative impact of lower yields on loans and lower average balances held in taxable investments during 2015. A decrease in average balances of and rates paid on time certificates positively impacted net interest income during 2015.
Provision for loan losses. The allowance for loan losses, established through charges to expense in the form of a provision for loan losses, allows for known and expected loan losses in our loan portfolio. The provision for loan losses decreased in 2015 to $1.1 million from $1.4 million in 2014, primarily because of improving loan loss trends which are used to calculate allowances for loan losses on non-impaired loans. Specific allowances on impaired loans were $0.8 million and $0.7 million at December 31, 2015 and 2014, respectively. Loan charge-offs, net of recoveries, were $1.7 million and $2.6 million during 2015 and 2014, respectively. The level of the allowance for loan losses is based on our estimate as to the amount required to maintain an allowance adequate enough to provide for known and expected losses. We consider, among other things, nonperforming loans, impaired loans, delinquencies, collateral values, loss trends, and general economic conditions when assessing the adequacy of the allowance. Real estate market conditions improved in 2015 and 2014 from the previous five years during which real estate values declined and there was tepid demand for new real estate. The allowance for loan losses was $5.9 million, or 1.26%, of loans and $6.5 million, or 1.38%, of loans at December 31, 2015 and 2014, respectively.
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The following table describes the activity relating to our allowance for loan losses for the years indicated:
| Analysis of the Allowance for Loan Losses | ||||||||||||||||||||
| At or for the Years Ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Beginning Balance | $ | 6,520 | $ | 7,663 | $ | 9,944 | $ | 11,793 | $ | 12,359 | ||||||||||
| Provision for loan losses | 1,085 | 1,436 | 3,450 | 2,360 | 6,850 | |||||||||||||||
| Charge-Offs: | ||||||||||||||||||||
| Commercial | (914 | ) | (1,913 | ) | (1,703 | ) | (2,142 | ) | (569 | ) | ||||||||||
| Real Estate | (3,224 | ) | (1,463 | ) | (4,648 | ) | (2,299 | ) | (7,617 | ) | ||||||||||
| Consumer | (7 | ) | (109 | ) | (81 | ) | (20 | ) | (6 | ) | ||||||||||
| Total | (4,145 | ) | (3,485 | ) | (6,432 | ) | (4,461 | ) | (8,192 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial | 483 | 382 | 464 | 122 | 100 | |||||||||||||||
| Real Estate | 1,918 | 502 | 205 | 129 | 674 | |||||||||||||||
| Consumer | 11 | 22 | 32 | 1 | 2 | |||||||||||||||
| Total | 2,412 | 906 | 701 | 252 | 776 | |||||||||||||||
| Net Charge-Offs: | (1,733 | ) | (2,579 | ) | (5,731 | ) | (4,209 | ) | (7,416 | ) | ||||||||||
| Ending Balance | $ | 5,872 | $ | 6,520 | $ | 7,663 | $ | 9,944 | $ | 11,793 | ||||||||||
Non-interest income. Non-interest income consists principally of service charges and fees, mortgage banking income, investment services income, increase in cash value of life insurance, gain on sale of SBA loans, and gain on sale of investments. Non-interest income was $13.6 million and $9.4 million in 2015 and 2014, respectively.
Mortgage banking income, which represents income earned from the origination and sale of residential mortgage loans, increased to $12.1 million in 2015 from $7.8 million in 2014 due to a 17.0% increase in loan originations to $672 million in 2015 from $574 million in 2014 and from higher profit margins realized on loan sales. The mortgage banking division originates residential mortgage loans through other banks and brokers in addition to retail loan officers, who are located in three loan production offices and in four of our banking offices, and sells the loans to investors. Most of the residential mortgage loans originated by the mortgage division are conforming conventional or government loans. Netted against mortgage banking income are warranty claim provisions of $0.17 million in 2015 and $0.15 million in 2014. Warranty claim provisions provide a liability for future claims that might arise from borrower fraud that is later detected on loans we originated and sold or from underwriting errors we made on loans originated and sold. Improved underwriting and quality control procedures since 2010, as well as improved real estate values, resulted in lower estimated losses for originations after 2009. The liability to fund future warranty claims was $1.5 million at December 31, 2015 and $1.4 million at December 31, 2014. Warranty claims were $0.1 million in 2015 and have totaled $1.1 million since establishment of the mortgage division in 2007. In addition, eleven loans with a total current carrying balance, including fair value loss adjustments recorded when transferred, of $2,440,000 have been repurchased and are included in loans held for investment.
Other non-interest income included $0.4 million from the increase in cash value of life insurance in both 2015 and 2014. The amortization of a $3 million investment in a low income housing fund reduced other non-interest income by $0.3 million in both 2015 and 2014. Tax credits related to the low income housing investment of $0.4 million in both 2015 and 2014 are reflected as a reduction in income tax expense.
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Gains on the sale of investments were $0.03 million in 2015 and $0.27 million in 2014. SBA lending was started in 2015 with gains on the sale of SBA loans of $0.13 million in 2015.
Non-interest expense. Non-interest expense was $27.9 million in 2015 compared to $27.0 million in 2014, an increase of 3.4%. The increase in non-interest expense in 2015 was primarily from an increase in salary and benefits of $0.8 million related to incentive compensation and overtime with most of the increase in the mortgage banking division due to increased loan originations.
Professional fees include legal fees, audit and accounting fees, director fees, regulatory expense, consulting fees and other fees paid to professional organizations for specialized services. Professional fees increased 20.0% in 2015 to $2.1 million, primarily from increased legal expenses related to resolving non-performing assets and regulatory issues.
Income taxes. Income tax expense was $2.5 million, or 30.3% of income before income taxes in 2015 compared to $0.9 million, or 20.9%, of income before income taxes in 2014. The less favorable tax rate in 2015 was primarily because non-taxable income and income tax credits represented a smaller percentage of net income before income taxes in 2015 and because the state tax rate decreased 1% beginning in 2016 which negatively impacted deferred state income assets and related deferred state income tax expense in 2015.
Financial condition. Total assets were $700.8 million at December 31, 2015, an increase of 3.2% from total assets of $679.3 million at December 31, 2014. The increase in assets was funded by an increase in deposits of $12.4 million, or 2.1%, and by an increase in equity of $8.5 million from retained income and from net proceeds from a private placement stock offering, net of retirement of preferred stock. We periodically utilize wholesale deposit sources such as brokered deposits and deposits from other depository institutions on a limited basis to meet specific asset/liability management needs or to realize substantially lower funding costs. We had approximately $27.2 million and $22.9 million in deposits from other depository institutions and $21.8 million and $19.7 million of brokered deposits at December 31, 2015 and December 31, 2014, respectively.
Interest-bearing deposits with banks of $69.2 million primarily represent overnight deposits with the Federal Reserve, Federal Home Loan Bank, and correspondent banks and increased $31.0 million at December 31, 2015 from a year ago. These deposits averaged $47.5 million during 2015. Bank term deposits of $16.6 million at December 31, 2015 represent FDIC insured certificates of deposit in other banks with maturities from one month to twenty-four months. Investment securities decreased $4.5 million in 2015 to $62.3 million at December 31, 2015. Loans held for investment decreased $6.4 million, or 1.4%, to $465.8 million at December 31, 2015, due to heavy maturities and unscheduled payoffs throughout 2015. Loan originations were actually higher in 2015 than 2014 when loan growth of 6.3% was experienced. We believe our targeted marketing efforts, experienced lenders, local decision making, and emphasis on personal relationships and superior customer service have been key drivers of our loan growth in prior years; however, our emphasis on stronger risk management practices and a weak economy limited growth in 2010 through 2013. Approximately 87.5% of our loans at December 31, 2015 were secured by some form of real estate. At December 31, 2015, loans secured by residential properties in the form of home equity lines and closed end loans comprised 28.2% of our loan portfolio while construction & development loans and commercial real estate loans comprised 13.4% and 45.9% of our loan portfolio, respectively. Another 11.5% of our loan portfolio was commercial and industrial loans with the balance in consumer and other loans.
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Asset quality is a primary concern of our credit administration. A thorough credit analysis is made of most loans before origination. Experienced lenders and a credit administrator review the loans’ structure including terms, rate, collateral and repayment sources in addition to adherence to our lending policy. On an ongoing basis, a risk rating program and other credit administration tools are utilized to monitor loans and overall asset quality. Non-performing loans amounted to approximately $3.1 million, or 0.7% of loans outstanding, and $6.5 million, or 1.4%, of loans outstanding, at December 31, 2015 and 2014, respectively. Our allowance for loan losses was 1.26% and 1.38% of loans outstanding at December 31, 2015 and 2014, respectively. Net loan charge-offs were 0.37% and 0.56% of average loans during 2015 and 2014, respectively.
Investment securities decreased to $62.3 million at December 31, 2015 from $66.8 million at December 31, 2014, a decline of 6.8%. Our investment securities portfolio consists primarily of mortgage-backed securities issued by the U.S. government and government sponsored entities, municipal securities, corporate securities and U.S. agency asset backed securities. Approximately 76.0% of the investment securities at December 31, 2015 were classified as available-for-sale and were recorded at market value. Changes in market value are reflected as a separate component of stockholders’ equity. We do not engage in the practice of trading securities.
Other real estate owned which consists of foreclosed real estate decreased $1.0 million, or 18.1%, to $4.6 million at December 31, 2015 from $5.6 million at December 31, 2014. During 2015, other real estate owned increased $0.7 million from foreclosure and improvements to properties and was reduced by sales of $1.2 million and by impairment charges of $0.5 million.
We opened for business in November 1996 and have not paid any cash dividends to our stockholders. Stock dividends were paid in 2007, 2005, 2004, 2001, and 2000. Certain reclassifications were made to common stock from other equity accounts to record the stock dividends.
Investment Portfolio. At December 31, 2015 and 2014, our investment portfolio comprised approximately 8.9% and 9.8% of total assets, respectively.
The following table summarizes the carrying value amounts of securities at the dates indicated. Available-for-sale securities are reported at estimated fair value and held-to-maturity securities are reported at amortized cost.
| Analysis of Investment Securities | ||||||||||||||||||||||||
| Amortized Cost and Market Values | ||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
| Amortized | Market | Amortized | Market | Amortized | Market | |||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||
| Municipal securities | $ | 17,095 | $ | 17,656 | $ | 19,093 | $ | 19,896 | $ | 23,395 | $ | 23,609 | ||||||||||||
| Mortgage-backed securities | 16,589 | 16,978 | 18,670 | 19,352 | 20,479 | 20,962 | ||||||||||||||||||
| Corporate securities | 8,903 | 8,939 | 9,822 | 9,964 | 15,147 | 15,306 | ||||||||||||||||||
| Asset-backed securities | 3,654 | 3,732 | 1,847 | 1,930 | 2,015 | 2,060 | ||||||||||||||||||
| Unrestricted stock | 43 | 55 | 42 | 58 | 42 | 79 | ||||||||||||||||||
| 46,284 | 47,360 | 49,474 | 51,200 | 61,078 | 62,016 | |||||||||||||||||||
| Held-to-Maturity | ||||||||||||||||||||||||
| Municipal securities | $ | 7,360 | $ | 7,564 | $ | 7,722 | $ | 7,898 | $ | 8,178 | $ | 7,998 | ||||||||||||
| Mortgage-backed securities | 5,251 | 5,253 | 5,945 | 5,983 | 6,632 | 6,464 | ||||||||||||||||||
| Corporate securities | 500 | 500 | - | - | - | - | ||||||||||||||||||
| Asset-backed securities | 1,843 | 1,909 | 1,977 | 2,064 | - | - | ||||||||||||||||||
| 14,954 | 15,226 | 15,644 | 15,945 | 14,810 | 14,462 | |||||||||||||||||||
| Total | $ | 61,238 | $ | 62,586 | $ | 65,118 | $ | 67,145 | $ | 75,888 | $ | 76,478 | ||||||||||||
| 29 |
The following table presents maturities and weighted average yields of debt securities at the date indicated:
| Analysis of Investment Securities | ||||||||||||||||||||||||
| At December 31, 2015 | ||||||||||||||||||||||||
| Due One | One Year | Five Years | Due | |||||||||||||||||||||
| Year or | Through | Through | After | Market | ||||||||||||||||||||
| Less | Five Years | Ten Years | Ten Years | Total | Value | |||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||
| Investment Securities | ||||||||||||||||||||||||
| Municipal securities | $ | - | $ | - | $ | 3,356 | $ | 5,522 | $ | 8,878 | $ | 9,106 | ||||||||||||
| Tax-free municipal securities | - | 1,537 | 6,874 | 7,166 | 15,577 | 16,114 | ||||||||||||||||||
| Mortgage-backed securities | - | 4,418 | 1,182 | 16,240 | 21,840 | 22,231 | ||||||||||||||||||
| Corporate securities | 4,952 | 1,971 | 2,480 | - | 9,403 | 9,439 | ||||||||||||||||||
| Asset-backed securities | - | - | 3,655 | 1,842 | 5,497 | 5,641 | ||||||||||||||||||
| Total | $ | 4,952 | $ | 7,926 | $ | 17,547 | $ | 30,770 | $ | 61,195 | $ | 62,531 | ||||||||||||
| Weighted Average Yields | ||||||||||||||||||||||||
| Municipal securities | - | - | 3.91 | % | 3.44 | % | 3.62 | % | ||||||||||||||||
| Tax-free municipal securities | - | 3.89 | % | 4.16 | % | 5.00 | % | 4.52 | % | |||||||||||||||
| Mortgage-backed securities | - | 3.03 | % | 2.09 | % | 2.66 | % | 2.70 | % | |||||||||||||||
| Corporate securities | 1.93 | % | 1.43 | % | 2.49 | % | - | 1.97 | % | |||||||||||||||
| Asset-backed securities | - | - | 3.10 | % | 3.69 | % | 3.30 | % | ||||||||||||||||
| 1.93 | % | 2.80 | % | 3.52 | % | 3.40 | % | 3.24 | % | |||||||||||||||
Loan Portfolio. Our loan portfolio is concentrated in real estate loans. Construction and development loans, which carry more risk during recessions and periods of falling real estate prices, represented 13.4% of the loan portfolio. Commercial real estate loans, secured by nonfarm nonresidential and multifamily properties, represent 45.9% of the loan portfolio and have experienced the highest levels of charge-offs in the past two years. There are no foreign loans. The following table presents, at the dates indicated, the composition of our loan portfolio by loan type:
| Analysis of Loans | ||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Loans Secured by Real Estate: | ||||||||||||||||||||||||||||||||||||||||
| Construction & development | $ | 62,289 | 13.37 | % | $ | 75,869 | 16.07 | % | $ | 50,397 | 11.35 | % | $ | 64,669 | 14.01 | % | $ | 51,383 | 10.55 | % | ||||||||||||||||||||
| Commercial real estate | 213,987 | 45.94 | % | 215,280 | 45.59 | % | 212,272 | 47.80 | % | 215,258 | 46.61 | % | 251,015 | 51.54 | % | |||||||||||||||||||||||||
| Home equity lines | 78,952 | 16.95 | % | 71,006 | 15.04 | % | 66,926 | 15.07 | % | 66,523 | 14.41 | % | 66,172 | 13.59 | % | |||||||||||||||||||||||||
| Residential real esate | 52,363 | 11.24 | % | 51,902 | 10.99 | % | 54,115 | 12.18 | % | 48,857 | 10.58 | % | 51,499 | 10.57 | % | |||||||||||||||||||||||||
| Total Loans Secured by Real Estate | 407,591 | 87.50 | % | 414,057 | 87.69 | % | 383,710 | 86.40 | % | 395,307 | 85.61 | % | 420,069 | 86.25 | % | |||||||||||||||||||||||||
| Commercial and industrial | 55,641 | 11.95 | % | 54,359 | 11.51 | % | 55,504 | 12.50 | % | 61,251 | 13.27 | % | 60,863 | 12.50 | % | |||||||||||||||||||||||||
| Consumer & other | 2,572 | 0.55 | % | 3,773 | 0.80 | % | 4,873 | 1.10 | % | 5,170 | 1.12 | % | 6,099 | 1.25 | % | |||||||||||||||||||||||||
| Total Loans Held for Investment | $ | 465,804 | 100.00 | % | $ | 472,189 | 100.00 | % | $ | 444,087 | 100.00 | % | $ | 461,728 | 100.00 | % | $ | 487,031 | 100.00 | % | ||||||||||||||||||||
The table that follows shows the loan portfolio at December 31, 2015 by loan type, maturity and whether the interest rate is fixed or variable. Loans on non-accrual have been excluded.
| 30 |
| Analysis of Certain Loan Maturities | ||||||||||||||||||||||||||||||||
| As of December 31, 2015 | ||||||||||||||||||||||||||||||||
| Real Estate | Consumer | Commercial & Other | Total | |||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Due within one year: | $ | 78,605 | 19.43 | % | $ | 1,825 | 70.96 | % | $ | 21,523 | 38.68 | % | $ | 101,953 | 22.03 | % | ||||||||||||||||
| Due after one year through five years: | ||||||||||||||||||||||||||||||||
| Fixed Rate | 123,498 | 30.53 | % | 662 | 25.74 | % | 25,012 | 44.95 | % | 149,172 | 32.24 | % | ||||||||||||||||||||
| Variable Rate | 51,594 | 12.76 | % | 60 | 2.33 | % | 6,367 | 11.44 | % | 58,021 | 12.54 | % | ||||||||||||||||||||
| 175,092 | 43.29 | % | 722 | 28.07 | % | 31,379 | 56.39 | % | 207,193 | 44.78 | % | |||||||||||||||||||||
| Due after five years: | ||||||||||||||||||||||||||||||||
| Fixed Rate | 65,940 | 16.30 | % | 25 | 0.97 | % | 1,984 | 3.57 | % | 67,949 | 14.69 | % | ||||||||||||||||||||
| Variable Rate | 84,844 | 20.98 | % | - | 0.00 | % | 755 | 1.36 | % | 85,599 | 18.50 | % | ||||||||||||||||||||
| 150,784 | 37.28 | % | 25 | 0.97 | % | 2,739 | 4.93 | % | 153,548 | 33.19 | % | |||||||||||||||||||||
| $ | 404,481 | 100.00 | % | $ | 2,572 | 100.00 | % | $ | 55,641 | 100.00 | % | $ | 462,694 | 100.00 | % | |||||||||||||||||
A certain degree of risk is inherent in the extension of credit. We have established loan and credit policies designed to control both the types and amounts of risks assumed and to ultimately minimize credit losses. Such policies include limitations on loan-to-collateral values for various types of collateral, requirements for appraisals of certain real estate collateral, problem loan management practices and collection procedures, and non-accrual and charge-off guidelines.
Loans secured by real estate mortgages comprised 87.5% and 87.7% of our loan portfolio at December 31, 2015 and 2014, respectively. Residential real estate loans consist mainly of first and second mortgages on single-family homes. Loan-to-value ratios for these loans are generally limited to 90% for second mortgages and 85% for first mortgages, unless private mortgage insurance is obtained. Commercial real estate loans are secured by business and commercial properties with loan-to-value ratios generally limited to 80%. The repayment of both residential and commercial real estate loans is dependent primarily on the income and cash flows of the borrowers with the real estate serving as a secondary source of repayment. Real estate construction loans generally consist of financing of commercial and multi-family real estate projects and some one-to-four family dwellings. Usually the loan-to-cost ratios are limited to 80%, and permanent financing commitments are generally required prior to advancing loan proceeds.
Commercial and industrial loans primarily represent loans to businesses and may be made on either a secured or unsecured basis. Commercial lending involves risk because repayment usually depends on the cash flows generated by a borrower’s business, and the debt service capacity of a business can deteriorate because of downturns in national and local economic conditions or in specific industries. To manage this risk, initial and continuing financial analysis of a borrower’s financial information is generally required.
Allowance for loan losses. The allowance for loan losses is increased by direct charges to operating expense. Losses on loans are charged against the allowance in the period in which management has determined that such loans have become uncollectible, or in the case of non-performing real estate loans, when updated appraisals indicate a loss in value. Recoveries of previously charged-off loans are credited to the allowance.
| 31 |
Our allowance for loan losses is composed of two parts, a specific portion related to impaired loans and a general section related to loans that are not impaired. Loans are impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms will not be collected. Our impaired loans decreased to $14.4 million at December 31, 2015 from $18.6 million at December 31, 2014, primarily because non-performing loans decreased $3.3 million to $3.1 million at December 31, 2015. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $0.8 million at December 31, 2015 from $0.7 million at December 31, 2014. The general allowance, the difference between our allowance for loan losses and the specific portion of the allowance for loan losses, decreased to $5.0 million at December 31, 2015 from $5.8 million at December 31, 2014. These allowances apply to non-impaired loans and were determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.03% on other consumer loans to 2.33% on commercial and industrial loans, to categories of performing loans at each period end. We changed our methodology in 2015 of estimating annual loss ratios inherent in the loan portfolio by averaging loan charge-offs, net of recoveries, for the past five years from four years utilized in 2014. The change to five years in 2015 from four years produced a higher allowance and higher provision of approximately $571,000. A similar change from three years in 2013 to four years in 2014 produced a higher allowance and provision in 2014 by approximately $825,000. We believe that using five years to calculate the estimated loss ratios more accurately reflects expected losses over time.
The general section of our allowance includes a qualitative component which is calculated based on nine environmental factors such as delinquency trends, net loan charge-offs in the current period compared to historical loan charge-offs, the current level of nonperforming loans compared to historical levels, changes in economic and business conditions that affect the collectability of the loan portfolio and changes in the value of collateral dependent loans. The qualitative component of our general section of the allowance was $0.8 million and $0.7 million at December 31, 2015 and 2014, respectively. An unallocated component is also included in the general section of the allowance which was $0.04 million and $0.2 million at December 31, 2015 and 2014, respectively.
The following table presents the allocation of the allowance for loan losses at the dates indicated, compared with the percent of loans in the applicable categories of total loans.
| Allocation of the Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| % Loans | % Loans | % Loans | % Loans | % Loans | ||||||||||||||||||||||||||||||||||||
| in Each | in Each | in Each | in Each | in Each | ||||||||||||||||||||||||||||||||||||
| Amount | Category | Amount | Category | Amount | Category | Amount | Category | Amount | Category | |||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Balance at end of period applicable to: | ||||||||||||||||||||||||||||||||||||||||
| Real Estate Loans | ||||||||||||||||||||||||||||||||||||||||
| Construction & development | $ | 1,005 | 13.37 | % | $ | 1,495 | 16.07 | % | $ | 1,459 | 11.35 | % | $ | 2,349 | 14.01 | % | $ | 2,948 | 10.55 | % | ||||||||||||||||||||
| Commercial real estate | 2,546 | 45.94 | % | 2,144 | 45.59 | % | 2,564 | 47.80 | % | 4,068 | 46.61 | % | 3,690 | 51.54 | % | |||||||||||||||||||||||||
| Home equity lines of credit | 441 | 16.95 | % | 766 | 15.04 | % | 580 | 15.07 | % | 609 | 14.41 | % | 1,126 | 13.59 | % | |||||||||||||||||||||||||
| Residential real estate | 507 | 11.24 | % | 483 | 10.99 | % | 472 | 12.18 | % | 863 | 10.58 | % | 994 | 10.57 | % | |||||||||||||||||||||||||
| 4,499 | 87.50 | % | 4,888 | 87.69 | % | 5,075 | 86.40 | % | 7,889 | 85.61 | % | 8,758 | 86.25 | % | ||||||||||||||||||||||||||
| Commercial and Consumer Loans | ||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial | 1,309 | 11.95 | % | 1,413 | 11.51 | % | 2,562 | 12.50 | % | 1,885 | 13.27 | % | 2,985 | 12.50 | % | |||||||||||||||||||||||||
| Consumer and other | 20 | 0.55 | % | 28 | 0.80 | % | 17 | 1.10 | % | 133 | 1.12 | % | 46 | 1.25 | % | |||||||||||||||||||||||||
| Unallocated | 44 | 191 | 9 | 37 | 4 | |||||||||||||||||||||||||||||||||||
| Total | $ | 5,872 | 100.00 | % | $ | 6,520 | 100.00 | % | $ | 7,663 | 100.00 | % | $ | 9,944 | 100.00 | % | $ | 11,793 | 100.00 | % | ||||||||||||||||||||
Nonperforming loans. When a loan is past due 90 days as to interest or principal or there is serious doubt as to collectability, the accrual of interest is generally discontinued unless the estimated fair value of the collateral is sufficient to assure the collection of the principal balance and accrued interest. A non-accrual loan is not returned to accrual status unless principal and interest are current and the borrower has demonstrated the ability to continue making payments as agreed. The following table sets forth information on nonaccrual loans, restructured loans, total nonperforming loans, and nonperforming assets at the dates indicated:
| 32 |
| Nonperforming Assets | ||||||||||||||||||||
| At December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Nonperforming restructured loans | $ | 901 | $ | 4,254 | $ | 4,649 | $ | 7,443 | $ | 9,060 | ||||||||||
| Other nonaccrual loans | 2,209 | 2,204 | 12,082 | 5,624 | 13,855 | |||||||||||||||
| Total nonperforming loans | 3,110 | 6,458 | 16,731 | 13,067 | 22,915 | |||||||||||||||
| Real estate owned | 4,592 | 5,610 | 2,329 | 5,940 | 6,728 | |||||||||||||||
| Other repossessed assets | - | 44 | - | - | - | |||||||||||||||
| Total nonperforming assets | $ | 7,702 | $ | 12,112 | $ | 19,060 | $ | 19,007 | $ | 29,643 | ||||||||||
| Accruing loans past due 90 days or more | $ | - | $ | - | $ | - | $ | 33 | $ | - | ||||||||||
| Performing restructured loans | 9,687 | 9,774 | 10,381 | 13,822 | 18,502 | |||||||||||||||
| Allowance for loan losses | 5,872 | 6,520 | 7,663 | 9,944 | 11,793 | |||||||||||||||
| Nonperforming loans to period end loans held for investment | 0.67 | % | 1.37 | % | 3.77 | % | 2.83 | % | 4.71 | % | ||||||||||
| Allowance for loan losses to nonperforming loans | 188.81 | % | 100.96 | % | 45.80 | % | 76.10 | % | 51.46 | % | ||||||||||
| Nonperforming assets to total assets | 1.10 | % | 1.78 | % | 2.88 | % | 2.75 | % | 4.40 | % | ||||||||||
Nonperforming assets decreased in 2015 from 2014 as loan quality improved due to an improving economy, due to our continued efforts to reduce nonperforming assets, and due to our efforts to minimize the origination of new nonperforming loans by an improved credit culture. Other real estate owned decreased at December 31, 2015 from December 31, 2014 due to sales, impairment charges, and a reduction in new repossessions. As shown in Note 3 to the consolidated financial statements, our classified loans decreased $7.6 million during 2015 to $5.9 million at December 31, 2015 and our impaired loans decreased by $4.2 million to $14.4 million at December 31, 2015. During 2015, we decreased our restructured loans to borrowers experiencing financial difficulty as total troubled debt restructurings declined to $10.6 million at December 31, 2015 from $14.0 million at December 31, 2014. Performing restructured loans decreased to $9.7 million at December 31, 2015 from $9.8 million at December 31, 2014. The following table gives expanded disclosure of our loans outstanding and impaired loans by loan type along with specific loan loss allowances at December 31, 2015 and December 31, 2014, and net loan charge-offs in 2015 and 2014.
| 33 |
| At December 31, 2015 | ||||||||||||||||||||
| Impaired Loans | Year to Date | |||||||||||||||||||
| Loans Outstanding | Specific Loan | Net Loan | ||||||||||||||||||
| Balances | Percent | Balances | Loss Allowances | Charge-offs | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | $ | 62,289 | 13.37 | % | $ | 175 | $ | 12 | $ | - | ||||||||||
| Commercial real estate | 213,987 | 45.94 | % | 9,044 | 480 | 1,289 | ||||||||||||||
| Home equity lines | 78,952 | 16.95 | % | 390 | 51 | (7 | ) | |||||||||||||
| Residential real estate | 52,363 | 11.24 | % | 4,423 | 272 | 24 | ||||||||||||||
| Total real estate | 407,591 | 87.50 | % | 14,032 | 815 | 1,306 | ||||||||||||||
| Commercial & industrial | 55,641 | 11.95 | % | 362 | 18 | 431 | ||||||||||||||
| Consumer & other | 2,572 | 0.55 | % | - | - | (4 | ) | |||||||||||||
| Total loans held for investment | $ | 465,804 | 100.00 | % | $ | 14,394 | $ | 833 | $ | 1,733 | ||||||||||
| At December 31, 2014 | ||||||||||||||||||||
| Impaired Loans | Year to Date | |||||||||||||||||||
| Loans Outstanding | Specific Loan | Net Loan | ||||||||||||||||||
| Balances | Percent | Balances | Loss Allowances | Charge-offs | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | $ | 75,869 | 16.07 | % | $ | 1,056 | $ | - | $ | (10 | ) | |||||||||
| Commercial real estate | 215,280 | 45.59 | % | 10,848 | 357 | 702 | ||||||||||||||
| Home equity lines | 71,006 | 15.04 | % | 614 | 127 | 241 | ||||||||||||||
| Residential real estate | 51,902 | 10.99 | % | 5,520 | 216 | 28 | ||||||||||||||
| Total real estate | 414,057 | 87.69 | % | 18,038 | 700 | 961 | ||||||||||||||
| Commercial & industrial | 54,359 | 11.51 | % | 522 | 22 | 1,531 | ||||||||||||||
| Consumer & other | 3,773 | 0.80 | % | - | - | 87 | ||||||||||||||
| Total loans held for investment | $ | 472,189 | 100.00 | % | $ | 18,560 | $ | 722 | $ | 2,579 | ||||||||||
Deposits. The maturity distribution of time deposits of $100,000 or more at December 31, 2015, 2014 and 2013 is presented below. Such deposits may be more volatile and interest rate sensitive than other deposits. In 2015 and 2014, we focused on increasing lower cost demand accounts and lowered the pricing on time deposits to improve our net interest income which resulted in a decline in time deposits.
| Certificates of Deposit in Amounts of $100,000 or More | ||||||||||||
| At December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Remaining maturity: | ||||||||||||
| Three months or less | $ | 15,680 | $ | 11,628 | $ | 7,103 | ||||||
| Over three through six months | 11,153 | 49,526 | 19,151 | |||||||||
| Over six through twelve months | 25,208 | 22,418 | 24,703 | |||||||||
| Over twelve months | 30,691 | 5,290 | 51,340 | |||||||||
| $ | 82,732 | $ | 88,862 | $ | 102,297 | |||||||
| 34 |
Interest rate sensitivity. Interest rate sensitivity management is concerned with the timing and magnitude of repricing assets compared to liabilities and is a part of asset/liability management. It is the objective of interest rate sensitivity management to generate stable growth in net interest income, and to control the risks associated with interest rate movements. We measure interest rate risk by using simulation analysis. Our simulation analysis indicates, in the absence of growth or changes in interest rates or changes in the mix of assets and liabilities, our net interest income will decline approximately 3.1% in 2016 from 2015; however, our simulation analysis also indicates that net interest income will increase from the aforementioned 2016 simulation if short-term interest rates rise or fall. Our simulation analysis indicates that our net interest income will increase 1.7%, 4.4%, 7.4% and 9.9% in one year above the aforementioned 2016 simulation, if interest rates immediately rise 1%, 2%, 3%, and 4%, respectively. The increase in net interest income in one year above the no change 2016 simulation is 0.4%, 1.2%, 2.3% and 3.4% if interest rates rise gradually 1%, 2%, 3%, and 4%, respectively. Our strategic plan projects growth in loans held for investment and in non-interest bearing deposits in order to grow net interest income in 2016 and beyond.
There are a number of assumptions listed below that impact our simulation modeling. These assumptions may change due to external or internal forces:
| · | Our Carolina Bank prime interest rate is 4.50% compared to the Wall Street Journal Prime interest rate which is 3.50%. We expect the Carolina Bank prime interest rate to rise less than the Wall Street Journal Prime interest rate until the two reached parity at 5.25%. Approximately 19.8% of our loans held for investment, or $92.4 million at December 31, 2015, adjust with the Carolina Bank prime interest rate. |
| · | Floors have been obtained on a number of our variable rate loans which improves our loan yields in a low interest rate environment. |
| · | Most of our home equity lines of credit are variable rate and adjust with the Wall Street Journal Prime rate. These borrowers may choose to switch to fixed rate loans when short term interest rates rise. |
| · | Our money market and premium savings account rates, which together compose approximately 48% of our deposits, only rise 1.30% with the first 2% increase in the Federal funds rate, then rise 1.50% with the next 2% increase in the Federal funds rate, and increase 0.85% for each remaining 1% increase in the Federal funds rate beyond the first 4% increase. |
| · | Early pre-payment of loans, both variable and fixed, have been substantial in 2015. Although historical data is used to simulate future pre-payments, simulation modeling noted above assumes replacement of like new loans with those paid off which may not occur. |
Although net interest income is projected to increase as rates rise, net income is projected to fall when interest rate rise due to the negative impact that higher rates have on mortgage loan originations and related mortgage banking income. The provision for loan losses is also projected to increase as interest rates rise due to added stress on borrowers from higher loan payments.
The table below reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Fixed rate loans are reflected at their contractual maturity date and variable rate loans are reflected when the loans may be re-priced contractually, except variable loans that have reached their floors are treated as fixed rate loans. Investments in restricted and unrestricted stocks are excluded from the presentation. Interest-bearing liabilities with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected in the earliest re-pricing interval due to contractual arrangements which give the bank the opportunity to vary rates paid on these deposits within a thirty day or shorter period. The interest rate sensitivity of our assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.
| 35 |
| Repricing Schedule as of December 31, 2015 | ||||||||||||||||||||
| More than | ||||||||||||||||||||
| 0-90 | 91-365 | 1 Year to | Over | |||||||||||||||||
| Days | Days | 3 Years | 3 Years | Total | ||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||
| Interest-bearing deposits | $ | 69,233 | $ | - | $ | - | $ | - | $ | 69,233 | ||||||||||
| Bank term deposits | 747 | 14,114 | 1,743 | - | 16,604 | |||||||||||||||
| Investment securities | 15,597 | 130 | 3,706 | 42,826 | 62,259 | |||||||||||||||
| Loans held for sale | 39,583 | - | - | - | 39,583 | |||||||||||||||
| Loans | 76,875 | 54,968 | 86,345 | 244,506 | 462,694 | |||||||||||||||
| Total | 202,035 | 69,212 | 91,794 | 287,332 | 650,373 | |||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||
| Savings, NOW and money market | 349,815 | - | - | - | 349,815 | |||||||||||||||
| Time Deposits | 23,708 | 54,259 | 44,090 | 10,246 | 132,303 | |||||||||||||||
| Federal Home Loan Bank advances | 27 | 81 | 227 | 2,346 | 2,681 | |||||||||||||||
| Securities sold under agreements to repurchase | 47 | - | - | - | 47 | |||||||||||||||
| Subordinated debentures | 19,610 | - | - | - | 19,610 | |||||||||||||||
| Total | 393,207 | 54,340 | 44,317 | 12,592 | 504,456 | |||||||||||||||
| Interest sensitive gap | $ | (191,172 | ) | $ | 14,872 | $ | 47,477 | $ | 274,740 | $ | 145,917 | |||||||||
| Cumulative gap | $ | (191,172 | ) | $ | (176,300 | ) | $ | (128,823 | ) | $ | 145,917 | $ | 145,917 | |||||||
| Ratio of interest-sensitive assets to interest-sensitive liabilities | 51.38 | % | 127.37 | % | 207.13 | % | 2281.86 | % | 128.93 | % | ||||||||||
| Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities | 51.38 | % | 60.61 | % | 73.81 | % | 128.93 | % | 128.93 | % | ||||||||||
Return on equity and assets. The following table shows the return on assets (net income divided by average total assets), return on equity (net income divided by average equity), cash dividend payout ratio (cash dividends declared divided by net income), and equity to asset ratio (average equity divided by average total assets) for each period indicated.
| For the Years | ||||||||||||
| Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Return on Average Assets | 0.84 | % | 0.50 | % | 0.60 | % | ||||||
| Return on Average Stockholders' Equity | 9.73 | % | 6.57 | % | 7.58 | % | ||||||
| Dividend Payout Ratio | - | - | - | |||||||||
| Average Stockholders' Equity as a Percentage of Average Assets | 8.59 | % | 7.66 | % | 7.88 | % | ||||||
| 36 |
Inflation. Since our assets and liabilities are primarily monetary in nature, our performance is more affected by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not necessarily be the same.
While the effect of inflation on a financial institution is normally not as significant as is its influence on those businesses which have large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in the money supply, and financial institutions will normally experience above average growth in assets, loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item not applicable to smaller reporting companies.
| 37 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Carolina Bank Holdings, Inc. and Subsidiary
Greensboro, NC
We have audited the accompanying consolidated balance sheets of Carolina Bank Holdings, Inc. and Subsidiary (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 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 opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carolina Bank Holdings, Inc. and Subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
| /s/ Elliott Davis Decosimo, PLLC | |
| Charlotte, North Carolina | |
| March 23, 2016 |
Elliott Davis Decosimo PLLC | www.elliottdavis.com
| 38 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2015 and 2014
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands, except share data) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 6,559 | $ | 7,942 | ||||
| Interest-bearing deposits with banks | 69,233 | 38,232 | ||||||
| Bank term deposits | 16,604 | 14,106 | ||||||
| Securities available-for-sale, at fair value | 47,360 | 51,200 | ||||||
| Securities held-to-maturity (fair values of $15,226 in 2015 and $15,945 in 2014) | 14,954 | 15,644 | ||||||
| Loans held for sale | 39,583 | 39,780 | ||||||
| Loans | 465,804 | 472,189 | ||||||
| Less allowance for loan losses | (5,872 | ) | (6,520 | ) | ||||
| Net loans | 459,932 | 465,669 | ||||||
| Premises and equipment, net | 19,007 | 18,311 | ||||||
| Other real estate owned | 4,592 | 5,610 | ||||||
| Bank-owned life insurance | 11,843 | 11,483 | ||||||
| Other assets | 11,131 | 11,286 | ||||||
| Total assets | $ | 700,798 | $ | 679,263 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Deposits | ||||||||
| Non-interest bearing demand | $ | 125,189 | $ | 106,163 | ||||
| NOW, money market and savings | 349,815 | 344,919 | ||||||
| Time | 132,303 | 143,816 | ||||||
| Total deposits | 607,307 | 594,898 | ||||||
| Advances from the Federal Home Loan Bank | 2,681 | 2,785 | ||||||
| Securities sold under agreements to repurchase | 47 | 176 | ||||||
| Subordinated debentures | 19,610 | 19,610 | ||||||
| Other liabilities and accrued expenses | 10,014 | 9,139 | ||||||
| Total liabilities | 639,659 | 626,608 | ||||||
| Commitments and contingencies - Note 11 | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding none in 2015 and 10,994 shares in 2014 | - | 10,994 | ||||||
| Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 5,021,330 in 2015 and 3,434,680 in 2014 | 5,021 | 3,435 | ||||||
| Additional paid-in capital | 29,234 | 16,339 | ||||||
| Retained earnings | 26,174 | 20,748 | ||||||
| Stock in directors' rabbi trust | (1,831 | ) | (1,465 | ) | ||||
| Directors' deferred fees obligation | 1,831 | 1,465 | ||||||
| Accumulated other comprehensive income | 710 | 1,139 | ||||||
| Total stockholders’ equity | 61,139 | 52,655 | ||||||
| Total liabilities and stockholders’ equity | $ | 700,798 | $ | 679,263 | ||||
See accompanying notes to consolidated financial statements.
| 39 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended December 31, 2015 and 2014
| 2015 | 2014 | |||||||
| (in thousands, except per share data) | ||||||||
| Interest income | ||||||||
| Loans | $ | 24,314 | $ | 24,168 | ||||
| Investment securities, taxable | 1,310 | 1,547 | ||||||
| Investment securities, non taxable | 479 | 532 | ||||||
| Interest from deposits in banks | 267 | 201 | ||||||
| Total interest income | 26,370 | 26,448 | ||||||
| Interest expense | ||||||||
| NOW, money market and savings | 953 | 957 | ||||||
| Time deposits | 1,142 | 1,593 | ||||||
| Other borrowed funds | 630 | 641 | ||||||
| Total interest expense | 2,725 | 3,191 | ||||||
| Net interest income | 23,645 | 23,257 | ||||||
| Provision for loan losses | 1,085 | 1,436 | ||||||
| Net interest income after provision for loan losses | 22,560 | 21,821 | ||||||
| Non-interest income | ||||||||
| Service charges | 1,232 | 1,269 | ||||||
| Mortgage banking income | 12,054 | 7,771 | ||||||
| Gain on sale of investment securities | 27 | 274 | ||||||
| Other | 330 | 99 | ||||||
| Total non-interest income | 13,643 | 9,413 | ||||||
| Non-interest expense | ||||||||
| Salaries and benefits | 17,784 | 16,951 | ||||||
| Occupancy and equipment | 3,105 | 3,070 | ||||||
| Foreclosed property expense | 317 | 270 | ||||||
| Professional fees | 2,138 | 1,781 | ||||||
| Outside data processing | 1,079 | 1,090 | ||||||
| FDIC insurance | 498 | 534 | ||||||
| Advertising and promotion | 932 | 938 | ||||||
| Stationery, printing and supplies | 582 | 560 | ||||||
| Other | 1,499 | 1,810 | ||||||
| Total non-interest expense | 27,934 | 27,004 | ||||||
| Income before income taxes | 8,269 | 4,230 | ||||||
| Income tax expense | 2,502 | 884 | ||||||
| Net income | 5,767 | 3,346 | ||||||
| Dividends and accretion on preferred stock | 341 | 933 | ||||||
| Net income available to common stockholders | $ | 5,426 | $ | 2,413 | ||||
| Net income per common share | ||||||||
| Basic | $ | 1.24 | $ | 0.70 | ||||
| Diluted | $ | 1.17 | $ | 0.70 | ||||
See accompanying notes to consolidated financial statements.
| 40 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2015 and 2014
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Net income | $ | 5,767 | $ | 3,346 | ||||
| Other comprehensive income (loss): | ||||||||
| Investment securities available-for-sale: | ||||||||
| Unrealized holding gains (losses) | (623 | ) | 1,062 | |||||
| Tax effect | 212 | (361 | ) | |||||
| Reclassification of gains recognized in net income | (27 | ) | (274 | ) | ||||
| Tax effect | 9 | 93 | ||||||
| (429 | ) | 520 | ||||||
| Comprehensive income | $ | 5,338 | $ | 3,866 | ||||
See accompanying notes to consolidated financial statements.
| 41 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2015 and 2014
| Stock in | Directors' | Accumulated | ||||||||||||||||||||||||||||||||||
| Convertible | Additional | Directors' | Deferred | Other | ||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Paid-In | Retained | Rabbi | Fees | Comprehensive | |||||||||||||||||||||||||||||
| Stock | Stock | Stock | Capital | Earnings | Trust | Obligation | Income | Total | ||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2013 | $ | 10,994 | $ | - | $ | 3,429 | $ | 16,226 | $ | 18,336 | $ | (1,347 | ) | $ | 1,347 | $ | 619 | $ | 49,604 | |||||||||||||||||
| Net income | - | - | - | - | 3,346 | - | - | - | 3,346 | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | - | - | 520 | 520 | |||||||||||||||||||||||||||
| Directors' fees deferred less payment of deferred fees | - | - | - | - | - | (118 | ) | 118 | - | - | ||||||||||||||||||||||||||
| Stock options exercised | - | - | 6 | 47 | - | - | - | - | 53 | |||||||||||||||||||||||||||
| Stock options expensed | - | - | - | 22 | - | - | - | - | 22 | |||||||||||||||||||||||||||
| Tax benefit from distribution of non-qualified stock | - | - | - | 44 | - | - | - | - | 44 | |||||||||||||||||||||||||||
| Preferred stock dividends declared | - | - | - | - | (934 | ) | - | - | - | (934 | ) | |||||||||||||||||||||||||
| Balance, December 31, 2014 | $ | 10,994 | $ | - | $ | 3,435 | $ | 16,339 | $ | 20,748 | $ | (1,465 | ) | $ | 1,465 | $ | 1,139 | $ | 52,655 | |||||||||||||||||
| Net income | - | - | - | - | 5,767 | - | - | - | 5,767 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | - | - | (429 | ) | (429 | ) | |||||||||||||||||||||||||
| Directors' fees deferred less payment of deferred fees | - | - | - | - | - | (366 | ) | 366 | - | - | ||||||||||||||||||||||||||
| Stock options exercised | - | 37 | 349 | - | - | - | - | 386 | ||||||||||||||||||||||||||||
| Tax benefit from distribution of non-qualified stock | - | - | 26 | - | - | - | - | 26 | ||||||||||||||||||||||||||||
| Convertible preferred stock issued | - | 14,069 | - | - | - | - | - | - | 14,069 | |||||||||||||||||||||||||||
| Convertible preferred stock converted to common stock | - | (14,069 | ) | 1,549 | 12,520 | - | - | - | - | - | ||||||||||||||||||||||||||
| Preferred stock retired | (10,994 | ) | - | - | - | - | - | - | - | (10,994 | ) | |||||||||||||||||||||||||
| Preferred stock dividends declared | - | - | - | (341 | ) | - | - | - | (341 | ) | ||||||||||||||||||||||||||
| Balance, December 31, 2015 | $ | - | $ | - | $ | 5,021 | $ | 29,234 | $ | 26,174 | $ | (1,831 | ) | $ | 1,831 | $ | 710 | $ | 61,139 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
| 42 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 2015 and 2014
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 5,767 | $ | 3,346 | ||||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities | ||||||||
| Provision for loan losses | 1,085 | 1,436 | ||||||
| Depreciation | 828 | 874 | ||||||
| Increase in cash surrender value of bank-owned life insurance | (360 | ) | (354 | ) | ||||
| Stock-based compensation expense | - | 66 | ||||||
| Deferred income taxes (benefit) | 330 | (281 | ) | |||||
| Amortization, net of accretion | 119 | 138 | ||||||
| Capitalized interest on fixed asset construction | (40 | ) | (20 | ) | ||||
| Increase in fair value of loans held for sale | (230 | ) | (230 | ) | ||||
| Gain on sale of other real estate owned | (265 | ) | (217 | ) | ||||
| Gain on sale of investments | (27 | ) | (274 | ) | ||||
| Gain on sale of loans held for sale | (11,631 | ) | (7,692 | ) | ||||
| Impairment of other real estate owned | 510 | 156 | ||||||
| Proceeds from sale of loans held for sale | 683,907 | 570,830 | ||||||
| Originations of loans held for sale | (671,849 | ) | (574,306 | ) | ||||
| Increase in interest rate lock commitments | (393 | ) | - | |||||
| Loss on sale of premises and equipment | 18 | 178 | ||||||
| Decrease in other assets | 467 | 1,169 | ||||||
| Increase in other liabilities and accrued expenses | 971 | 1,506 | ||||||
| Net cash provided by (used for) operating activities | 9,207 | (3,675 | ) | |||||
| Cash flows from investing activities | ||||||||
| Increase in bank term deposits | (2,498 | ) | (2,988 | ) | ||||
| Purchases of investment securities available-for-sale | (2,610 | ) | (5,171 | ) | ||||
| Purchases of investment securities held-to-maturity | (500 | ) | (2,015 | ) | ||||
| Maturities and calls of securities available-for-sale | 2,484 | 4,789 | ||||||
| Maturities and calls of securities held-to-maturity | 372 | 379 | ||||||
| Repayments from mortgage-backed securities available-for-sale | 2,058 | 2,883 | ||||||
| Repayments from mortgage-backed securities held-to-maturity | 689 | 682 | ||||||
| Net (increase) decrease in loans | 4,059 | (37,079 | ) | |||||
| Proceeds from sales of investment securities | 1,295 | 9,359 | ||||||
| Improvements to other real estate owned | (136 | ) | (872 | ) | ||||
| Purchases of premises and equipment | (1,502 | ) | (1,395 | ) | ||||
| Proceeds from sales of other real estate owned and premises and equipment | 1,502 | 4,363 | ||||||
| Net cash provided by (used for) investing activities | 5,213 | (27,065 | ) | |||||
| Cash flows from financing activities | ||||||||
| Net increase in deposits | 12,409 | 15,801 | ||||||
| Net proceeds from issuance of preferred stock converted to common stock | 14,069 | - | ||||||
| Repurchase of preferred stock | (10,994 | ) | - | |||||
| Net decrease in Federal Home Loan Bank Advances | (104 | ) | (100 | ) | ||||
| Decrease in securities sold under agreements to repurchase | (129 | ) | (2,856 | ) | ||||
| Proceeds from exercise of stock options | 412 | 53 | ||||||
| Dividends paid on preferred stock | (465 | ) | (880 | ) | ||||
| Net cash provided by financing activities | 15,198 | 12,018 | ||||||
| Net increase (decrease) in cash and cash equivalents | 29,618 | (18,722 | ) | |||||
| Cash and cash equivalents at beginning of period | 46,174 | 64,896 | ||||||
| Cash and cash equivalents at end of period | $ | 75,792 | $ | 46,174 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid during the period for interest | $ | 2,797 | $ | 3,199 | ||||
| Cash paid (received) during the period for income taxes | $ | 1,852 | $ | (182 | ) | |||
| Supplemental disclosure of non-cash transactions | ||||||||
| Transfer of loans to other real estate owned | $ | 593 | $ | 6,398 | ||||
| Change in unrealized gains on securities available-for-sale, net of tax | $ | (429 | ) | $ | 520 | |||
See accompanying notes to consolidated financial statements.
| 43 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies
Carolina Bank Holdings, Inc. (the “Holding Company”) is a North Carolina corporation organized in 2000. In August 2000 pursuant to the plan of share exchange approved by the shareholders of Carolina Bank (the “Bank”), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Holding Company. The Holding Company presently has no employees.
The Bank was incorporated in August 1996, and began banking operations in November 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance, Randolph and Forsyth counties of North Carolina and operates under the laws of North Carolina, the Rules and Regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank has three locations in Greensboro, two offices in Winston-Salem and an office in Asheboro, Burlington and High Point. The Bank opened its second office in Winston-Salem in August 2015 which had been under construction during 2014 and 2015. One of the Greensboro branches closed on July 31, 2015 due to an expiring lease in December of 2015. All banking offices are in the Piedmont Triad region of North Carolina. A wholesale mortgage division is located at the Greensboro corporate headquarters, and mortgage loan production offices are located in Burlington, Chapel Hill, and Sanford.
The following is a description of the significant accounting and reporting policies that the Holding Company and Bank (collectively the “Company”) follow in preparing and presenting their consolidated financial statements.
| (a) | Basis of presentation and consolidation |
The consolidated financial statements include the accounts of the Holding Company and its wholly-owned subsidiary, the Bank, which includes the wholesale mortgage division. The Bank also owns two limited liability companies for the purpose of holding foreclosed real estate, the assets and operations of which are consolidated into the Bank and included herein. All significant inter-company balances and transactions have been eliminated in consolidation.
The Company’s financial statements are presented in accordance with Accounting Standards Codification (“ASC”) Topic 105, “The FASB Accounting Standards Codification and The Hierarchy of Generally Accepted Accounting Principles”, which codifies generally accepted accounting principles (“GAAP”) in the United States.
| (b) | Use of estimates |
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes. 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 and the valuation of other real estate owned.
| 44 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
| (c) | Securities |
Investments in equity securities that have readily determinable fair values and all investments in debt securities are classified at acquisition into one of three categories and accounted for as follows:
| · | securities held-to-maturity - reported at amortized cost; |
| · | trading securities - reported at fair value with unrealized gains and losses included in earnings, or; |
| · | securities available-for-sale - reported at estimated fair value with unrealized gains and losses reported as a separate component of comprehensive income (net of tax effect). |
The Company does not engage in any securities trading activities. Gains and losses on sales of securities are recognized on a specific identification basis. Purchases and sales of investments are recorded on a trade-date basis. Premiums and discounts are amortized into interest income using a method that approximates the level yield method. An investment in the Federal Home Loan Bank of $739,000 and $723,000 at December 31, 2015 and 2014, respectively, is included in other assets and represents restricted stock which is carried at cost and is required for advances or borrowings. An investment in Pacific Coast Bankers’ Bancshares of $102,000 at December 31, 2015 and 2014 is included in other assets and carried at cost.
| (d) | Loans held for sale and hedging activities |
Loans held for sale represent residential real estate loans originated by the mortgage division, which was formed in 2007. Generally, optional commitments to sell these loans are made shortly after origination commitments are entered into with borrowers. The Company opted to account for loans held for sale at fair value which is measured based on what secondary markets are currently offering for portfolios with similar characteristics. The Company also sells mortgage-backed securities on a forward basis to hedge some of its origination commitments to borrowers (“interest rate lock commitments”). Forward sale mortgage-backed securities and the value of interest rate lock commitments are also accounted for at fair value. Assumptions related to the closing ratio of mortgage loan commitments and the projected profit from loan sales are used to estimate the fair value of interest rate lock commitments. These estimates of fair value vary based on the level of interest rates and demand for residential mortgage loans.
| (e) | Loans and allowance for loan losses |
Loans are carried at their principal amount outstanding. Interest income is recorded as earned on the accrual basis. Loan origination fees and certain origination costs are capitalized with the net fee or cost recognized as an adjustment to interest income using the interest method.
| 45 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
The Company uses the allowance method in providing for loan losses. The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level to cover known and inherent risks of loss in the loan portfolio. In determining the provision amount, management gives consideration to current and anticipated economic conditions, the growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, delinquencies, loss trends, and other factors. Management believes that the allowance for loan losses is appropriate in light of the risk inherent in the loan portfolio. While management uses the best information available to make evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used. The Company changed its allowance methodology during 2015 to more accurately reflect the estimated loss ratios inherent in the loan portfolio by increasing the look-back period for computing historical losses to the most recent five years from the most recent four years, adjusted for certain subjective factors. The change to five years in 2015 from four years produced a higher allowance and higher provision of approximately $571,000. A similar change from three years in 2013 to four years in 2014 produced a higher allowance and provision in 2014 by approximately $825,000. Net loan charge-offs, which are loan charge-offs less recoveries, are the basis for computing loan loss trends, and the Company generally records charge-offs on non-performing real estate loans when new appraisals are obtained rather than waiting until collection efforts have been exhausted. Net loan charge-offs for 2015 and 2014 were $1,733,000 and $2,579,000, respectively.
Management considers loans to be impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors that influence management’s judgments include, but are not limited to, loan payment pattern, source of repayment, and value of collateral, if any. A loan would not be considered impaired if an insignificant delay in loan payment occurs and management expects to collect all amounts due. The major sources of identification of loans to be evaluated for impairment include past due and non-accrual reports, internally generated lists of certain risk grades, and regulatory reports of examination. Impaired loans are measured using either the discounted expected cash flow method or the value of collateral method. When the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet all payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed and income is recognized only to the extent cash payments are received.
| 46 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
| (f) | 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 amount or the new fair value less costs to sell. Fair value is generally determined by appraisal.
| (g) | Premises and equipment |
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Useful lives are estimated at twenty-five to forty-five years for buildings and three to ten years for equipment. Leasehold improvements are amortized over the expected terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Expenditures for major renewals and betterments are capitalized and those for maintenance and repairs are charged to operating expenses as incurred.
| (h) | Income taxes |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered in income. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.
| (i) | Cash and cash equivalents |
For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks, federal funds sold, and interest-bearing deposits with banks. The Company maintains due from accounts with correspondent banks. During the normal course of business, the Company may have cash deposits with these banks that are in excess of federally insured limits.
| (j) | Income per common share |
Basic income per common share is computed based on the weighted average number of common shares outstanding. Diluted income per share includes the dilutive effects of stock options.
| 47 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
| (k) | Stock options |
The Company’s shareholders approved the 2009 Omnibus Stock Ownership and Long Term Incentive Plan (“Omnibus Plan”) in 2009 to replace three expired stock option plans, a nonqualified plan for directors and two incentive stock option plans for management and employees. The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights to employees and directors. An aggregate of 500,000 shares of the Company’s common stock have been reserved for issuance under the terms of the Omnibus Plan; of which, 10,000 incentive stock options have been issued.
The Company accounts for stock option grants in accordance with the standard, Accounting for Stock-Based Compensation. The fair value of an option granted in 2014 to an executive was $22,000 which was expensed in 2014. There were no stock options granted in 2015. As of December 31, 2015, there was no unrecognized compensation cost related to non-vested share-based compensation.
The fair value of the option granted in 2014 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0%, expected volatility of 30%, risk-free interest rate of 0.90%, and weighted average expected life of three years. The weighted average fair value per share of the option granted for the year ended December 31, 2014 was $2.15.
The following is a summary of stock options outstanding, adjusted for the stock splits that have occurred in prior years:
| Employee Stock Options | ||||||||||||
| Weighted | Aggregate | |||||||||||
| Average | Intrinsic | |||||||||||
| Exercise | Value | |||||||||||
| Shares | Price | ($000s) | ||||||||||
| Balance at January 1, 2014 | 113,004 | $ | 10.25 | $ | - | |||||||
| Issued | 10,000 | 9.86 | ||||||||||
| Exercised | (5,904 | ) | 9.00 | |||||||||
| Forfeited | (41,880 | ) | 9.41 | |||||||||
| Balance at December 31, 2014 | 75,220 | 10.77 | - | |||||||||
| Issued | - | - | ||||||||||
| Exercised | (36,650 | ) | 10.38 | |||||||||
| Forfeited | (2,000 | ) | 10.72 | |||||||||
| Balance at December 31, 2015 | 36,570 | $ | 11.16 | $ | 266 | |||||||
| Exercisable at December 31, 2015 | 36,570 | $ | 11.16 | $ | 266 | |||||||
| 48 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
At December 31, 2015, stock options granted to employees were exercisable at a weighted average exercise price of $11.16 per share. The range of exercise prices at December 31, 2015 for stock option plans was $9.86 - $11.65 per share. The weighted average remaining contractual term for outstanding stock options was 29 months.
The aggregate intrinsic value of all stock options and of all exercisable options at December 31, 2015 was $266,000.
| (l) | Reclassification |
Certain amounts in the 2014 consolidated financial statements have been reclassified to conform to the 2015 presentation.
| (m) | Advertising |
Advertising costs are expensed as incurred.
| (n) | Operating segments |
ASC 280, “Segment Reporting”, provides guidance on the reporting and disclosure of information about operating segments. The Company is considered to have three principal business segments in 2015 and 2014, the Commercial/Retail bank, the Mortgage Banking Division, and the Holding Company. The Mortgage Banking Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. The Mortgage Banking Division added a retail mortgage loan production office in July 2010 and another five retail mortgage loan production offices between 2012 and 2015, of which three have closed. Retail mortgage loan officers are also located in four of eight full service bank offices. Financial performance for 2015 and 2014 and selected balance sheet information at December 31, 2015 and 2014 for each segment is shown in Note 16.
| (o) | Retail repurchase agreements |
Funds are borrowed on an overnight basis through retail repurchase agreements with bank customers. Retail repurchase agreements are collateralized by securities of U.S. governmental agencies or by mortgage-backed securities issued by government sponsored entities. The market value of collateral pledged for retail repurchase agreements is monitored by the Company to equal or exceed the balances borrowed.
| 49 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
| (p) | Impact of recently adopted accounting standards |
In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force), to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low income housing tax credit. The ASU permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if those conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). An entity that has used the effective yield method to account for its investments in qualified affordable housing before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments were effective for the Company on a retrospective basis for interim and annual reporting periods beginning in 2015. The Company has a $3 million qualified affordable housing investment of which $1.3 million has been amortized through non-interest income using the effective yield method which approximates the proportional amortization method. These amendments did not have a material effect on the Company’s consolidated financial statements.
In May 2014 and August 2015, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the consolidation requirements in Accounting Standards Codification (ASC) 810, Consolidation, and significantly changes the consolidation analysis required under U.S. GAAP. The amendments include the following:
| · | Limited partnerships will be considered variable interest entities (“VIEs”), unless the limited partners have either substantive kick-out or participating rights. |
| · | The amendments change the effect that fees paid to a decision maker or service provider have on the consolidation analysis. Specifically, it is less likely that the fees themselves will be considered a variable interest, that an entity will be a VIE, or that consolidation will result. |
| · | The amendments significantly modify how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. |
| · | For entities other than limited partnerships, the amendments clarify how to determine whether the equity holders (as a group) have power over the entity (this will most likely result in a change to current practice). The clarification could affect whether the entity is a VIE. |
| · | The deferral of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, for investments in certain investment funds has been eliminated. |
| 50 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and are not expected to have a material effect on the Company’s consolidated financial statements.
The FASB published ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, in April, 2015. Debt issuance costs are specific incremental costs, other than those paid to the lender, that are directly attributable to issuing a debt instrument. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of such costs. The amortization of debt issuance costs continues to be calculated using the effective interest method and is reported as interest expense. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. These amendments are not expected to have a material effect on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by:
| · | Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income |
| · | Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes |
| · | Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements |
| · | Allowing equity investments that do not have readily determinable fair values, to be measured at cost minus impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer |
| · | Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities |
| · | Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and |
| · | Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. |
| 51 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 1 - Summary of significant accounting policies (continued)
| · | Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. |
| · | Clarifying that a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with the organization’s other deferred tax assets. |
The new guidance is effective for the Company’s 2018 interim and annual statements. These amendments are not expected to have a material effect on the Company’s consolidated financial statements.
In December 2012, the FASB issued its proposed Accounting Standards Update which set forth a current expected credit loss (“CECL”) model. This model will replace the multiple impairment models that currently exist for debt instruments in U.S. GAAP. The CECL model uses a single expected credit loss measurement objective for the allowance for credit loss. Under this model, the allowance for lifetime expected credit losses, when combined with the reported balance of the debt instrument, would reflect management’s estimate of the cash flows it expects to collect, based on its assessment of credit risk as of the reporting date. The FASB has completed its major decisions in this area, and expects to issue a final standard during the second quarter of 2016. As an SEC filer, the Company will be required to apply the guidance for 2019 interim and annual financial statements.
Due to the magnitude of this change, these amendments are expected to have a material effect on the Company’s consolidated financial statements.
The FASB is expected to complete and release revised standards for lease costs in 2016. The new standard will likely result in the capitalization of several of the Company’s leases, resulting in the addition of fixed assets and long-term liabilities onto the balance sheet. When finalized, this standard is not expected to have a material effect on net income. The closely-watched project, which has provoked much debate, is expected to become effective in 2019 for public companies.
Several other accounting standards have been issued or proposed by the FASB or other standards-setting bodies during the periods presented or will be effective subsequent to December 31, 2015.
| 52 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 2 - Securities
A summary of the amortized cost and estimated fair values of securities available-for-sale and held-to-maturity follows:
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (in thousands) | ||||||||||||||||
| December 31, 2015 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Municipal securities | $ | 17,095 | $ | 569 | $ | 8 | $ | 17,656 | ||||||||
| FNMA, FHLMC, and GNMA mortgage-backed securities | 16,589 | 390 | 1 | 16,978 | ||||||||||||
| Corporate securities | 8,903 | 58 | 22 | 8,939 | ||||||||||||
| Asset-backed securities | 3,654 | 78 | - | 3,732 | ||||||||||||
| Unrestricted stock | 43 | 12 | - | 55 | ||||||||||||
| $ | 46,284 | $ | 1,107 | $ | 31 | $ | 47,360 | |||||||||
| Held-to-maturity | ||||||||||||||||
| Municipal securities | $ | 7,360 | $ | 204 | $ | - | $ | 7,564 | ||||||||
| FNMA mortgage-backed securities | 5,251 | 17 | 15 | 5,253 | ||||||||||||
| Corporate securities | 500 | - | - | 500 | ||||||||||||
| Asset-backed securities | 1,843 | 66 | - | 1,909 | ||||||||||||
| $ | 14,954 | $ | 287 | $ | 15 | $ | 15,226 | |||||||||
| December 31, 2014 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| Municipal securities | $ | 19,093 | $ | 831 | $ | 28 | $ | 19,896 | ||||||||
| FNMA, FHLMC, and GNMA mortgage-backed securities | 18,670 | 682 | - | 19,352 | ||||||||||||
| Corporate securities | 9,822 | 149 | 7 | 9,964 | ||||||||||||
| Asset-backed securities | 1,847 | 83 | - | 1,930 | ||||||||||||
| Unrestricted stock | 42 | 16 | - | 58 | ||||||||||||
| $ | 49,474 | $ | 1,761 | $ | 35 | $ | 51,200 | |||||||||
| Held-to-maturity | ||||||||||||||||
| Municipal securities | $ | 7,722 | $ | 198 | $ | 22 | $ | 7,898 | ||||||||
| FNMA mortgage-backed securities | 5,945 | 38 | - | 5,983 | ||||||||||||
| Asset-backed securities | 1,977 | 87 | - | 2,064 | ||||||||||||
| $ | 15,644 | $ | 323 | $ | 22 | $ | 15,945 | |||||||||
| 53 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 2 - Securities (continued)
The scheduled maturities of debt securities available-for-sale and held-to-maturity at December 31, 2015 were as follows:
| Bullet Securities | Declining Balance Securities | Total | ||||||||||||||||||||||
| Estimated | Estimated | Estimated | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| Due in one year or less | $ | 4,952 | $ | 4,991 | $ | - | $ | - | $ | 4,952 | $ | 4,991 | ||||||||||||
| Due from one to five years | 3,509 | 3,586 | 4,417 | 4,557 | 7,926 | 8,143 | ||||||||||||||||||
| Due from five to ten years | 9,789 | 10,095 | 4,837 | 4,922 | 14,626 | 15,017 | ||||||||||||||||||
| Over ten years | 7,748 | 7,923 | 10,989 | 11,231 | 18,737 | 19,154 | ||||||||||||||||||
| $ | 25,998 | $ | 26,595 | $ | 20,243 | $ | 20,710 | $ | 46,241 | $ | 47,305 | |||||||||||||
| Held-to-maturity | ||||||||||||||||||||||||
| Due in one year or less | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Due from one to five years | - | - | - | - | - | - | ||||||||||||||||||
| Due from five to ten years | 2,921 | 2,977 | - | - | 2,921 | 2,977 | ||||||||||||||||||
| Over ten years | 4,940 | 5,087 | 7,093 | 7,162 | 12,033 | 12,249 | ||||||||||||||||||
| $ | 7,861 | $ | 8,064 | $ | 7,093 | $ | 7,162 | $ | 14,954 | $ | 15,226 | |||||||||||||
Municipal securities, mortgage-backed securities, corporate securities, and asset-backed securities were sold during 2015 and 2014 for gains totaling $27,000 and $274,000, respectively.
At December 31, 2015, securities with a carrying value of approximately $16,220,000 were pledged to secure retail repurchase agreements and certain deposits.
Management evaluates securities for other-than-temporary impairment at least quarterly. Consideration is given to the length of time and the extent to which the fair values have been less than amortized cost, the financial condition and near-term prospects of the security issuers, and the intent and ability to retain impaired investments for a period to allow recovery in fair value.
At December 31, 2015, four municipal securities, two mortgage-backed securities, and two corporate debt securities with a total fair value of $11,056,000 had total unrealized losses of $46,000. Values on these securities with unrealized losses fluctuate based on changes in the values of U.S. Treasury bonds with similar characteristics, debt ratings changes of the issuing institutions, financial performance of the related institutions, world events, and demand for the securities. As management has the ability and intent to hold these debt securities until maturity, no declines are deemed to be other-than-temporary.
| 54 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 2 - Securities (continued)
Information pertaining to securities with gross unrealized losses at December 31, 2015 and 2014, by category and length of time that individual securities have been in a continuous loss position, follows:
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||
| Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||
| of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | ||||||||||||||||||||||||||
| Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||
| December 31, 2015: | ||||||||||||||||||||||||||||||||||
| Municipal securities | 3 | $ | 3,440 | $ | 2 | 1 | $ | 244 | $ | 6 | 4 | $ | 3,684 | $ | 8 | |||||||||||||||||||
| FNMA and FHLMC mortgage-backed securities | 2 | 5,414 | 16 | - | - | - | 2 | 5,414 | 16 | |||||||||||||||||||||||||
| Corporate securities | 1 | 985 | 15 | 1 | 973 | 7 | 2 | 1,958 | 22 | |||||||||||||||||||||||||
| Total | 6 | $ | 9,839 | $ | 33 | 2 | $ | 1,217 | $ | 13 | 8 | $ | 11,056 | $ | 46 | |||||||||||||||||||
| December 31, 2014: | ||||||||||||||||||||||||||||||||||
| Municipal securities | 1 | $ | 1,469 | $ | 22 | 5 | $ | 4,977 | $ | 28 | 6 | $ | 6,446 | $ | 50 | |||||||||||||||||||
| Corporate securities | - | - | - | 1 | 972 | 7 | 1 | 972 | 7 | |||||||||||||||||||||||||
| Total | 1 | $ | 1,469 | $ | 22 | 6 | $ | 5,949 | $ | 35 | 7 | $ | 7,418 | $ | 57 | |||||||||||||||||||
Note 3 - Loans and allowance for loan losses
The following is a description of loan categories and related risk factors:
Construction & development - The construction and development loan portfolio includes loans to construct new homes, multifamily units, retail establishments, and commercial properties as well as development loans that facilitate the final construction of the aforementioned properties. A majority of properties being constructed are for low income housing and are being pre-sold to developers. A few of the properties being constructed are for speculative purposes with repayment dependent on the sale of completed construction to the final users of the property. This portfolio experienced the highest losses during the most recent economic downturn and generally has the highest risk of our loan portfolio; however, loans for speculative purposes have been reduced to limit risk.
Commercial real estate - Commercial real estate loans include owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. This loan portfolio also includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. Apartment buildings, office and industrial buildings, motels, nursing homes, and retail shopping centers are examples of properties financed by commercial real estate loans. Loans in this portfolio segment are sensitive to declines in real estate values and to the cash flow of commercial borrowers.
| 55 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
Home equity lines – Home equity lines of credit are revolving, open-end loans secured by 1-4 family residential properties, generally junior liens at a loan to value ratio of less than 90%. These loans are generally for a term of 15 years, require interest payments monthly, and have floating interest rates tied to the prime rate although fixed rates are also offered. Home equity lines can be sensitive to key economic measures that impact consumers such as unemployment, home prices, and the prime interest rate.
Residential real estate – Residential real estate loans are closed-end loans secured by 1-4 family residential properties, primarily first liens with a small percentage of junior liens. These loans are generally for a term of 5 to 30 years, require interest and principal payments monthly, and are primarily fixed rate. This portfolio can be sensitive to key economic measures that impact consumers such as unemployment and home values.
Commercial & industrial - The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations.
Consumer & other - The consumer & other loan portfolio segment includes direct consumer installment loans and overdrafts. These loans may be secured by vehicles, stocks, deposits or may be unsecured. Fixed and variable rates are offered. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
Loans at December 31, 2015 and 2014 were as follows:
| 2015 | 2014 | |||||||
| ( in thousands) | ||||||||
| Real Estate Loans: | ||||||||
| Construction & development | $ | 62,289 | $ | 75,869 | ||||
| Commercial real estate | 213,859 | 215,025 | ||||||
| Home equity lines | 78,952 | 71,006 | ||||||
| Residential real estate | 52,363 | 51,902 | ||||||
| Total real estate loans | 407,463 | 413,802 | ||||||
| Commercial & industrial | 55,641 | 54,359 | ||||||
| Consumer & other | 2,572 | 3,773 | ||||||
| Total loans | 465,676 | 471,934 | ||||||
| Less: | ||||||||
| Net deferred loan fees (costs) | (128 | ) | (255 | ) | ||||
| Allowance for loan losses | 5,872 | 6,520 | ||||||
| $ | 459,932 | $ | 465,669 | |||||
| 56 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
The activity in the allowance for loan losses for 2015 and 2014 is summarized as follows:
| Construction & | Commercial | Home equity | Residential | Commercial | Consumer | |||||||||||||||||||||||||||
| development | real estate | lines | real estate | & industrial | & other | Unallocated | Total | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||||||
| Beginning of year balance | $ | 1,495 | $ | 2,144 | $ | 766 | $ | 483 | $ | 1,413 | $ | 28 | $ | 191 | $ | 6,520 | ||||||||||||||||
| Provision for loan losses | (490 | ) | 1,691 | (332 | ) | 48 | 327 | (12 | ) | (147 | ) | 1,085 | ||||||||||||||||||||
| Charge-offs | - | (2,990 | ) | (104 | ) | (130 | ) | (914 | ) | (7 | ) | - | (4,145 | ) | ||||||||||||||||||
| Recoveries | - | 1,701 | 111 | 106 | 483 | 11 | - | 2,412 | ||||||||||||||||||||||||
| Balance at December 31 | $ | 1,005 | $ | 2,546 | $ | 441 | $ | 507 | $ | 1,309 | $ | 20 | $ | 44 | $ | 5,872 | ||||||||||||||||
| 2014 | ||||||||||||||||||||||||||||||||
| Beginning of year balance | $ | 1,459 | $ | 2,564 | $ | 580 | $ | 472 | $ | 2,562 | $ | 17 | $ | 9 | $ | 7,663 | ||||||||||||||||
| Provision for loan losses | 26 | 282 | 427 | 39 | 382 | 98 | 182 | 1,436 | ||||||||||||||||||||||||
| Charge-offs | (22 | ) | (1,050 | ) | (244 | ) | (147 | ) | (1,913 | ) | (109 | ) | - | (3,485 | ) | |||||||||||||||||
| Recoveries | 32 | 348 | 3 | 119 | 382 | 22 | - | 906 | ||||||||||||||||||||||||
| Balance at December 31 | $ | 1,495 | $ | 2,144 | $ | 766 | $ | 483 | $ | 1,413 | $ | 28 | $ | 191 | $ | 6,520 | ||||||||||||||||
| Balances at December 31, 2015 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at December 31 | $ | 1,005 | $ | 2,546 | $ | 441 | $ | 507 | $ | 1,309 | $ | 20 | $ | 44 | $ | 5,872 | ||||||||||||||||
| Ending balance individually evaluated for impairment | $ | 12 | $ | 480 | $ | 51 | $ | 272 | $ | 18 | $ | - | $ | - | $ | 833 | ||||||||||||||||
| Ending balance collectively evaluated for impairment | $ | 993 | $ | 2,066 | $ | 390 | $ | 235 | $ | 1,291 | $ | 20 | $ | 44 | $ | 5,039 | ||||||||||||||||
| Loans Outstanding: | ||||||||||||||||||||||||||||||||
| Balance at December 31 | $ | 62,289 | $ | 213,987 | $ | 78,952 | $ | 52,363 | $ | 55,641 | $ | 2,572 | $ | - | $ | 465,804 | ||||||||||||||||
| Ending balance individually evaluated for impairment | $ | 175 | $ | 9,044 | $ | 390 | $ | 4,423 | $ | 362 | $ | - | $ | - | $ | 14,394 | ||||||||||||||||
| Ending balance collectively evaluated for impairment | $ | 62,114 | $ | 204,943 | $ | 78,562 | $ | 47,940 | $ | 55,279 | $ | 2,572 | $ | - | $ | 451,410 | ||||||||||||||||
| Balances at December 31, 2014 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at December 31 | $ | 1,495 | $ | 2,144 | $ | 766 | $ | 483 | $ | 1,413 | $ | 28 | $ | 191 | $ | 6,520 | ||||||||||||||||
| Ending balance individually evaluated for impairment | $ | - | $ | 357 | $ | 127 | $ | 216 | $ | 22 | $ | - | $ | - | $ | 722 | ||||||||||||||||
| Ending balance collectively evaluated for impairment | $ | 1,495 | $ | 1,787 | $ | 639 | $ | 267 | $ | 1,391 | $ | 28 | $ | 191 | $ | 5,798 | ||||||||||||||||
| Loans Outstanding: | ||||||||||||||||||||||||||||||||
| Balance at December 31 | $ | 75,869 | $ | 215,280 | $ | 71,006 | $ | 51,902 | $ | 54,359 | $ | 3,773 | $ | - | $ | 472,189 | ||||||||||||||||
| Ending balance individually evaluated for impairment | $ | 1,056 | $ | 10,848 | $ | 614 | $ | 5,520 | $ | 522 | $ | - | $ | - | $ | 18,560 | ||||||||||||||||
| Ending balance collectively evaluated for impairment | $ | 74,813 | $ | 204,432 | $ | 70,392 | $ | 46,382 | $ | 53,837 | $ | 3,773 | $ | - | $ | 453,629 | ||||||||||||||||
| 57 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
A loan is past due when the borrower has not made a payment by the contractual due date. The following table presents the carrying value of loans that are past due thirty days or more. Loans which are ninety days or more past due are generally on non-accrual status, at which time all accrued interest is removed from interest income, as shown in the following table:
| Loans Past | ||||||||||||||||||||||||||||
| Number of Days Past Due | Due 90 Days | |||||||||||||||||||||||||||
| 90 Days | Total | Total | or More | |||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | or More | Past Due | Current | Loans | & Accruing | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| At December 31, 2015 | ||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||
| Construction & development | $ | 22 | $ | - | $ | 175 | $ | 197 | $ | 62,092 | $ | 62,289 | $ | - | ||||||||||||||
| Commercial real estate | - | - | 1,735 | 1,735 | 212,252 | 213,987 | - | |||||||||||||||||||||
| Home equity lines | 125 | - | 265 | 390 | 78,562 | 78,952 | - | |||||||||||||||||||||
| Residential real estate | 528 | 180 | 935 | 1,643 | 50,720 | 52,363 | - | |||||||||||||||||||||
| Total real estate | 675 | 180 | 3,110 | 3,965 | 403,626 | 407,591 | - | |||||||||||||||||||||
| Commercial & industrial | - | - | - | - | 55,641 | 55,641 | - | |||||||||||||||||||||
| Consumer & other | - | - | - | - | 2,572 | 2,572 | - | |||||||||||||||||||||
| Total loans | $ | 675 | $ | 180 | $ | 3,110 | $ | 3,965 | $ | 461,839 | $ | 465,804 | $ | - | ||||||||||||||
| At December 31, 2014 | ||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||
| Construction & development | $ | - | $ | - | $ | 990 | $ | 990 | $ | 74,879 | $ | 75,869 | $ | - | ||||||||||||||
| Commercial real estate | - | - | 3,107 | 3,107 | 212,173 | 215,280 | - | |||||||||||||||||||||
| Home equity lines | - | - | 355 | 355 | 70,651 | 71,006 | - | |||||||||||||||||||||
| Residential real estate | 622 | 38 | 1,923 | 2,583 | 49,319 | 51,902 | - | |||||||||||||||||||||
| Total real estate | 622 | 38 | 6,375 | 7,035 | 407,022 | 414,057 | - | |||||||||||||||||||||
| Commercial & industrial | - | 70 | 83 | 153 | 54,206 | 54,359 | - | |||||||||||||||||||||
| Consumer & other | 25 | - | - | 25 | 3,748 | 3,773 | - | |||||||||||||||||||||
| Total loans | $ | 647 | $ | 108 | $ | 6,458 | $ | 7,213 | $ | 464,976 | $ | 472,189 | $ | - | ||||||||||||||
Loans are determined to be impaired when, based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the original loan agreement. At December 31, 2015 and 2014, the total recorded investment in impaired loans amounted to approximately $14,394,000 and $18,560,000, respectively. Of these impaired loans, $3,110,000 and $6,458,000 were on non-accrual at December 31, 2015 and 2014, respectively.
Five impaired loans with an aggregate principal balance of $470,000 and aggregate carrying balance of $404,000 were in the process of foreclosure at December 31, 2015.
| 58 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
The recorded investment and related information for impaired loans is summarized as follows:
| Impaired Loans | ||||||||||||||||||||
| At End of Year | For Year Ended | |||||||||||||||||||
| Unpaid | Related | Average | Interest | |||||||||||||||||
| Recorded | Principal | Loan Loss | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| With no related allowance recorded | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Commercial real estate | 2,819 | 3,380 | - | 7,484 | 193 | |||||||||||||||
| Home equity lines | 193 | 360 | - | 362 | 16 | |||||||||||||||
| Residential real estate | 2,565 | 2,689 | - | 2,754 | 149 | |||||||||||||||
| Total real estate | 5,577 | 6,429 | - | 10,600 | 358 | |||||||||||||||
| Commercial & industrial | - | - | - | - | - | |||||||||||||||
| Consumer & other | - | - | - | - | - | |||||||||||||||
| Total loans | 5,577 | 6,429 | - | 10,600 | 358 | |||||||||||||||
| With an allowance recorded | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | 175 | 175 | 12 | 97 | 1 | |||||||||||||||
| Commercial real estate | 6,225 | 6,453 | 480 | 6,569 | 358 | |||||||||||||||
| Home equity lines | 197 | 265 | 51 | 265 | 11 | |||||||||||||||
| Residential real estate | 1,858 | 1,955 | 272 | 2,057 | 100 | |||||||||||||||
| Total real estate | 8,455 | 8,848 | 815 | 8,988 | 470 | |||||||||||||||
| Commercial & industrial | 362 | 362 | 18 | 383 | 20 | |||||||||||||||
| Consumer & other | - | - | - | - | - | |||||||||||||||
| Total loans | 8,817 | 9,210 | 833 | 9,371 | 490 | |||||||||||||||
| Total impaired loans | $ | 14,394 | $ | 15,639 | $ | 833 | $ | 19,971 | $ | 848 | ||||||||||
| December 31, 2014 | ||||||||||||||||||||
| With no related allowance recorded | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | $ | 1,056 | $ | 1,056 | $ | - | $ | 875 | $ | 6 | ||||||||||
| Commercial real estate | 5,300 | 7,980 | - | 8,133 | 386 | |||||||||||||||
| Home equity lines | 320 | 527 | - | 528 | 20 | |||||||||||||||
| Residential real estate | 3,685 | 3,914 | - | 3,964 | 145 | |||||||||||||||
| Total real estate | 10,361 | 13,477 | - | 13,500 | 557 | |||||||||||||||
| Commercial & industrial | 116 | 1,110 | - | 1,640 | 1 | |||||||||||||||
| Consumer & other | - | - | - | - | - | |||||||||||||||
| Total loans | 10,477 | 14,587 | - | 15,140 | 558 | |||||||||||||||
| With an allowance recorded | ||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||
| Construction & development | - | - | - | - | - | |||||||||||||||
| Commercial real estate | 5,548 | 5,943 | 357 | 6,026 | 288 | |||||||||||||||
| Home equity lines | 294 | 350 | 127 | 351 | 17 | |||||||||||||||
| Residential real estate | 1,835 | 1,911 | 216 | 1,998 | 217 | |||||||||||||||
| Total real estate | 7,677 | 8,204 | 700 | 8,375 | 522 | |||||||||||||||
| Commercial & industrial | 406 | 417 | 22 | 447 | 22 | |||||||||||||||
| Consumer & other | - | - | - | - | - | |||||||||||||||
| Total loans | 8,083 | 8,621 | 722 | 8,822 | 544 | |||||||||||||||
| Total impaired loans | $ | 18,560 | $ | 23,208 | $ | 722 | $ | 23,962 | $ | 1,102 | ||||||||||
| 59 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
Loans are graded according to an internal loan rating classification system when originated. Loan grades are periodically re-evaluated during servicing, internal loan reviews, and external loan reviews. The general categories of the internal loan rating classification are:
| · | Pass - Acceptable loans. |
| · | Special Mention - Loans with potential identified weaknesses in administration or servicing. |
| · | Classified - Adversely classified loans with identified weaknesses, and potential or identified losses of principal and/or interest due. |
The following is a breakdown of loans by the general categories of the internal rating system:
| At December 31, 2015 | ||||||||||||||||
| Pass | Special Mention | Classified | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Real Estate Loans: | ||||||||||||||||
| Construction & development | $ | 62,110 | $ | - | $ | 179 | $ | 62,289 | ||||||||
| Commercial real estate | 202,252 | 9,270 | 2,465 | 213,987 | ||||||||||||
| Home equity lines | 78,014 | 128 | 810 | 78,952 | ||||||||||||
| Residential real estate | 48,251 | 1,635 | 2,477 | 52,363 | ||||||||||||
| Total real estate | 390,627 | 11,033 | 5,931 | 407,591 | ||||||||||||
| Commercial & industrial | 54,691 | 950 | - | 55,641 | ||||||||||||
| Consumer & other | 2,572 | - | - | 2,572 | ||||||||||||
| Total loans | $ | 447,890 | $ | 11,983 | $ | 5,931 | $ | 465,804 | ||||||||
| At December 31, 2014 | ||||||||||||||||
| Pass | Special Mention | Classified | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Real Estate Loans: | ||||||||||||||||
| Construction & development | $ | 74,813 | $ | 66 | $ | 990 | $ | 75,869 | ||||||||
| Commercial real estate | 194,767 | 12,965 | 7,548 | 215,280 | ||||||||||||
| Home equity lines | 69,937 | 40 | 1,029 | 71,006 | ||||||||||||
| Residential real estate | 45,310 | 2,723 | 3,869 | 51,902 | ||||||||||||
| Total real estate | 384,827 | 15,794 | 13,436 | 414,057 | ||||||||||||
| Commercial & industrial | 53,449 | 817 | 93 | 54,359 | ||||||||||||
| Consumer & other | 3,773 | - | - | 3,773 | ||||||||||||
| Total loans | $ | 442,049 | $ | 16,611 | $ | 13,529 | $ | 472,189 | ||||||||
Loans that are past due 90 days or more or where there is serious doubt as to collectability are placed on non-accrual status. Non-accrual loans are not returned to accrual status unless principal and interest are current and borrowers have demonstrated the ability to make contractual payments. Accrued interest is reversed through a charge to income when loans are placed on non-accrual and future payments on non-accrual loans are generally applied to principal.
| 60 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
The following is a summary of non-accrual loans at December 31, 2015 and 2014:
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Real Estate Loans: | ||||||||
| Construction & development | $ | 175 | $ | 990 | ||||
| Commercial real estate | 1,735 | 3,107 | ||||||
| Home equity lines | 265 | 355 | ||||||
| Residential real estate | 935 | 1,923 | ||||||
| Total real estate | 3,110 | 6,375 | ||||||
| Commercial & industrial | - | 83 | ||||||
| Consumer & other | - | - | ||||||
| Total loans | $ | 3,110 | $ | 6,458 | ||||
During 2015 and 2014, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with GAAP to determine whether they should be reported as troubled debt restructurings.
The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:
| · | Rate Modification - A modification in which the interest rate is changed. |
| · | Term Modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed. |
| · | Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time. |
| · | Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. |
| · | Combination Modification - Any other type of modification, including the use of multiple categories above. |
Available commitments for troubled debt restructurings outstanding as of December 31, 2015 totaled $243,000.
| 61 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
The following tables present troubled debt restructurings as of December 31, 2015 and 2014:
| Troubled Debt Restructurings | ||||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||
| Non-Accrual | Total | |||||||||||||||||||||
| Accrual Status | Status | Modifications | ||||||||||||||||||||
| # | Amount | # | Amount | # | Amount | |||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||
| Construction & development | 0 | $ | - | 1 | $ | 175 | 1 | $ | 175 | |||||||||||||
| Commercial real estate | 12 | 7,073 | 1 | 338 | 13 | 7,411 | ||||||||||||||||
| Home equity lines | 0 | - | 0 | - | 0 | - | ||||||||||||||||
| Residential real estate | 11 | 2,252 | 2 | 388 | 13 | 2,640 | ||||||||||||||||
| Total real estate | 23 | 9,325 | 4 | 901 | 27 | 10,226 | ||||||||||||||||
| Commercial & industrial | 1 | 362 | 0 | - | 1 | 362 | ||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | ||||||||||||||||
| Total loans | 24 | $ | 9,687 | 4 | $ | 901 | 28 | $ | 10,588 | |||||||||||||
| December 31, 2014 | ||||||||||||||||||||||
| Non-Accrual | Total | |||||||||||||||||||||
| Accrual Status | Status | Modifications | ||||||||||||||||||||
| # | Amount | # | Amount | # | Amount | |||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||
| Construction & development | 1 | $ | 66 | 4 | $ | 990 | 5 | $ | 1,056 | |||||||||||||
| Commercial real estate | 12 | 7,360 | 4 | 2,339 | 16 | 9,699 | ||||||||||||||||
| Home equity lines | 0 | - | 0 | - | 0 | - | ||||||||||||||||
| Residential real estate | 10 | 1,943 | 5 | 920 | 15 | 2,863 | ||||||||||||||||
| Total real estate | 23 | 9,369 | 13 | 4,249 | 36 | 13,618 | ||||||||||||||||
| Commercial & industrial | 2 | 405 | 1 | 5 | 3 | 410 | ||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | ||||||||||||||||
| Total loans | 25 | $ | 9,774 | 14 | $ | 4,254 | 39 | $ | 14,028 | |||||||||||||
The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.
Troubled debt restructurings are classified as impaired loans when modified, and fair value calculations are performed to determine the specific allowances for loan losses related to these loans. Troubled debt restructurings can be removed from such status and returned to non-impaired status in years subsequent to restructure if the interest rate charged at restructure was
| 62 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
greater than or equal to the rate charged for a new extension of credit with comparable risk and if
the loan is performing and there is no available information to indicate that performance will not continue.
The following tables present newly restructured loans that occurred during 2015 and 2014:
| New Troubled Debt Restructurings | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2015 | ||||||||||||||||||||||||||||||
| Rate | Term | Payment | Combination | Total | ||||||||||||||||||||||||||
| Modifications | Modifications | Modifications | Modifications | Modifications | ||||||||||||||||||||||||||
| # | Amount | # | Amount | # | Amount | # | Amount | # | Amount | |||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||
| Pre-Modification Outstanding Recorded Investment: | ||||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||||
| Construction & development | 0 | $ | - | 0 | $ | - | 0 | $ | - | 1 | $ | - | 1 | $ | - | |||||||||||||||
| Residential real estate | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total real estate | 0 | - | 0 | - | 0 | - | 1 | - | 1 | - | ||||||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total loans | 0 | $ | - | 0 | $ | - | 0 | $ | - | 1 | $ | - | 1 | $ | - | |||||||||||||||
| Post-Modification Outstanding Recorded Investment: | ||||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||||
| Construction & development | 0 | $ | - | 0 | $ | - | 0 | $ | - | 1 | $ | 175 | 1 | $ | 175 | |||||||||||||||
| Residential real estate | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total real estate | 0 | - | 0 | - | 0 | - | 1 | - | 1 | 175 | ||||||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total loans | 0 | $ | - | 0 | $ | - | 0 | $ | - | 1 | $ | - | 1 | $ | 175 | |||||||||||||||
| Year Ended December 31, 2014 | ||||||||||||||||||||||||||||||
| Pre-Modification Outstanding Recorded Investment: | ||||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||||
| Construction & development | 0 | $ | - | 0 | $ | - | 3 | $ | - | 0 | $ | - | 3 | $ | - | |||||||||||||||
| Residential real estate | 0 | - | 1 | 410 | 1 | 234 | 0 | - | 2 | 644 | ||||||||||||||||||||
| Total real estate | 0 | - | 1 | 410 | 4 | 234 | 0 | - | 5 | 644 | ||||||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total loans | 0 | $ | - | 1 | $ | 410 | 4 | $ | 234 | 0 | $ | - | 5 | $ | 644 | |||||||||||||||
| Post-Modification Outstanding Recorded Investment: | ||||||||||||||||||||||||||||||
| Real Estate Loans: | ||||||||||||||||||||||||||||||
| Construction & development | 0 | $ | - | 0 | $ | - | 3 | $ | 565 | 0 | $ | - | 3 | $ | 565 | |||||||||||||||
| Residential real estate | 0 | - | 1 | 398 | 1 | 230 | 0 | - | 2 | 628 | ||||||||||||||||||||
| Total real estate | 0 | - | 1 | 398 | 4 | 795 | 0 | - | 5 | 1,193 | ||||||||||||||||||||
| Consumer & other | 0 | - | 0 | - | 0 | - | 0 | - | 0 | - | ||||||||||||||||||||
| Total loans | 0 | $ | - | 1 | $ | 398 | 4 | $ | 795 | 0 | $ | - | 5 | $ | 1,193 | |||||||||||||||
| 63 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 3 - Loans and allowance for loan losses (continued)
There were no troubled debt restructurings with a payment default occurring within 12 months of the restructure date, and the payment default occurring during December 31, 2015 and 2014.
Troubled debt restructuring defaults can result in a higher allowance for loan losses and a corresponding higher provision for loan losses because defaults generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include troubled debt restructurings, are evaluated for specific additions to the allowance for loan losses by subtracting the recorded investment in these impaired loans from their fair values. Fair value is generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively impact the collateral values if declining real estate values are impacting the sale of collateral.
The Company made loans in the ordinary course of business to certain directors and executive officers of the Company and to their affiliates and associates. The total amount of such loans outstanding was $4,084,000 and $8,732,000 at December 31, 2015 and 2014, respectively. During 2015, new loans were $982,000 and repayments were $5,630,000, exclusive of retired directors. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with borrowers not related to the lender.
Note 4 - Premises and equipment
Premises and equipment at December 31, 2015 and 2014 were as follows:
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Land | $ | 4,600 | $ | 4,419 | ||||
| Building and improvements | 7,983 | 6,307 | ||||||
| Construction in progress | - | 987 | ||||||
| Leasehold improvements | 7,452 | 7,878 | ||||||
| Furniture and equipment | 5,459 | 5,594 | ||||||
| Land improvements | 1,349 | 1,004 | ||||||
| 26,843 | 26,189 | |||||||
| Less accumulated depreciation | (7,836 | ) | (7,878 | ) | ||||
| Premises and equipment, net | $ | 19,007 | $ | 18,311 | ||||
Capitalized interest added to fixed additions was $40,000 in 2015 and $20,000 in 2014.
Depreciation expense was $828,000 in 2015 and $874,000 in 2014.
| 64 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 5 - Deposits
The aggregate amount of certificates of deposit with a minimum denomination of $250,000 was $22,354,000 and $28,004,000 at December 31, 2015 and 2014, respectively.
The Company has accepted deposits during the ordinary course of business from certain directors and executive officers of the Company and from their affiliates and associates. The total amount of these deposits outstanding was $7,607,000 and $1,430,000 at December 31, 2015 and 2014, respectively.
At December 31, 2015, the scheduled maturities of time deposits were as follows:
| (in thousands) | ||||
| 2016 | $ | 77,931 | ||
| 2017 | 32,811 | |||
| 2018 | 11,316 | |||
| 2019 | 6,678 | |||
| 2020 | 3,567 | |||
| Thereafter | - | |||
| $ | 132,303 | |||
The Company periodically utilizes brokered deposits to lower its funding costs or to meet certain
asset/liability objectives. Brokered deposits totaled $21,880,000 and $19,701,000 at December, 31, 2015 and 2014, respectively.
Overdrafts from demand deposit accounts of $11,000 and $28,000 were reclassified as loans at December 31, 2015 and 2014, respectively.
Note 6 - Advances from Federal Home Loan Bank of Atlanta
The Company had the following advances from the Federal Home Loan Bank outstanding at December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| ( in thousands) | ||||||||
| Amortizing fixed rate advances at 1.00% | $ | 744 | $ | 792 | ||||
| Amortizing fixed rate advance at 1.25% | 1,166 | 1,198 | ||||||
| Amortizing fixed rate advance at 0.50% | 413 | 423 | ||||||
| Amortizing fixed rate advance at 0.25% | 282 | 291 | ||||||
| Amortizing fixed rate advance at 0.00% | 76 | 81 | ||||||
| $ | 2,681 | $ | 2,785 | |||||
| 65 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 6 - Advances from Federal Home Loan Bank of Atlanta (continued)
These advances are secured by the Company’s FHLB stock and a blanket floating lien on the Company’s one-to-four family residential and commercial real estate loan portfolios.
Outstanding loan balances of approximately $88.9 million were pledged to the Federal Home Loan Bank at December 31, 2015. The contractual maturities of these advances are as follows:
| (in thousands) | ||||
| 2016 | $ | 108 | ||
| 2017 | 112 | |||
| 2018 | 115 | |||
| 2019 | 120 | |||
| 2020 | 124 | |||
| Thereafter | 2,102 | |||
| $ | 2,681 | |||
Credit availability for additional advances from the Federal Home Loan Bank was $56,425,000 at December 31, 2015. The Company had a discount borrowing line of $98,822,000 at December 31, 2015 from the Federal Reserve Bank of Richmond which is secured by land development, construction, commercial, and home equity loans. No borrowings have been conducted under the Federal Reserve line except for testing. The Federal Reserve line changes monthly as pledged loan amounts and collateral values fluctuate.
Note 7 - Subordinated debentures
In December 2004, the Company issued $10,310,000 of unsecured junior subordinated debentures which accrue and pay interest quarterly at three month LIBOR plus 2% per annum. These debentures were issued to Carolina Capital Trust (“Carolina Trust”), a wholly owned subsidiary of the Company which is not consolidated in these consolidated financial statements pursuant to accounting standards incorporated within ASC 810, “Consolidation”. Carolina Trust acquired these debentures using the proceeds of its offerings of common securities to the Company and $10 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1 capital under current Federal Reserve Board guidelines. The Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates trust preferred securities as an element of Tier 1 capital for certain institutions. However, bank holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital. The Company has entered into contractual arrangements which, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Carolina Trust under the Trust Preferred Securities. The Trust Preferred Securities are redeemable upon maturity of the debentures on January 7, 2035, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Carolina Trust in whole or in part, on or after January 7, 2010.
| 66 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 7 - Subordinated debentures (continued)
In August and September of 2008, Carolina Bank issued $9,300,000 of unsecured junior subordinated notes to outside investors which accrue and pay interest quarterly at three month LIBOR plus 4% per annum. The notes qualify as Tier 2 capital for the Bank, subject to a 20% reduction which began on October 1, 2013 and continues each year thereafter until maturity. The notes are redeemable upon maturity on September 30, 2018, or earlier at the Bank’s option, in whole or part subject to regulatory approval, beginning September 30, 2013. The expenses of the offering of $373,000 were capitalized at issuance and were amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.
Note 8 - Income taxes
The Company does not have an accrual for uncertain tax positions as of December 31, 2015 and 2014, as deductions taken and benefits accrued are generally widely understood administrative practices and procedures. Any potential income tax adjustments would likely result in timing differences which would transfer a tax cost or benefit from one year to another year. The Company’s income taxes were examined for 2013, with no adjustments. With limited exceptions, income tax returns prior to 2012 are not subject to examination by the taxing authorities.
Deferred tax assets represent the future tax benefit of deductible differences, and if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. At December 31, 2015 and 2014, management believes realization of the deferred tax assets is more likely than not and accordingly has not recorded a valuation allowance.
The provision for income tax expense (benefit) consisted of the following for the years ended December 31:
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Current | ||||||||
| Federal | $ | 1,747 | $ | 957 | ||||
| State | 425 | 208 | ||||||
| 2,172 | 1,165 | |||||||
| Deferred | ||||||||
| Federal | 238 | (266 | ) | |||||
| State | 92 | (15 | ) | |||||
| 330 | (281 | ) | ||||||
| $ | 2,502 | $ | 884 | |||||
| 67 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 8 - Income taxes (continued)
A reconciliation of reported income tax expense for the years ended December 31, 2015 and 2014 to the amount of tax expense computed by multiplying income before taxes by the statutory federal income tax rate of 34% follows:
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Tax provision at statutory rate | $ | 2,811 | $ | 1,438 | ||||
| Increase (decrease) in income taxes resulting from | ||||||||
| State income taxes net of federal benefit | 271 | 165 | ||||||
| Decrease in deferred state income tax assets from a decrease in future state tax rates | 92 | - | ||||||
| Increase in cash value of life insurance | (123 | ) | (120 | ) | ||||
| Nontaxable municipal income reduced by nondeductible interest expense | (246 | ) | (236 | ) | ||||
| Tax credits | (370 | ) | (371 | ) | ||||
| Other | 67 | 8 | ||||||
| $ | 2,502 | $ | 884 | |||||
| 68 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 8 - Income taxes (continued)
The primary components of deferred income taxes which are included in other assets are as follows:
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets | ||||||||
| Allowance for loan losses | $ | 2,151 | $ | 2,432 | ||||
| Deferred compensation expense | 2,786 | 2,516 | ||||||
| Impaired assets | 437 | 478 | ||||||
| Provision for warranty claims | 567 | 537 | ||||||
| Accrued Expenses | 18 | 78 | ||||||
| Carryforward credits | 58 | 163 | ||||||
| Unrealized losses, net of gains, on forward sale mortgage-backed securities | 11 | - | ||||||
| Other | 68 | 49 | ||||||
| Gross deferred tax assets | 6,096 | 6,253 | ||||||
| Deferred tax liabilities | ||||||||
| Depreciable basis of premises and equipment | 789 | 669 | ||||||
| Deferred loan costs | 316 | 333 | ||||||
| Prepaid assets | 19 | 93 | ||||||
| Interest rate lock commitments | 144 | |||||||
| Unrealized gain on securities | 366 | 587 | ||||||
| Gross deferred tax liabilities | 1,634 | 1,682 | ||||||
| Net deferred tax assets | $ | 4,462 | $ | 4,571 | ||||
Note 9 - Preferred stock
In December 2008, the shareholders of the Company approved an amendment to the Articles of Incorporation authorizing the issuance of up to 1,000,000 shares of preferred stock, no par value. In January 2009, the Company issued 16,000 shares of preferred stock, Series A, to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock as part of the preferred stock transaction. Dividends at 5% per annum were paid for the first five years. The dividend rate increased to 9% per annum in February 2014.
The U.S. Treasury sold its holding of $16 million in preferred stock to private investors in February 2013, and the warrant to the U.S. Treasury was repurchased by the Company in April 2013. The Company retired 5,006 shares of its outstanding Series A preferred stock in 2013 and retired the remaining shares in May of 2015.
| 69 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 9 - Preferred stock (continued)
On March 31, 2015, the Company issued 15,500 shares of Series B convertible preferred stock at $975 per share in a private placement offering and received approximately $14,069,000 in net proceeds after offering expenses of $1,044,000. The net proceeds from this private placement were used to retire the remaining Series A preferred stock in May of 2015 and to improve capital levels. All 15,500 shares of the Series B convertible preferred stock were converted into 1,550,000 shares of common stock on May 22, 2015 following shareholder approval. No dividends were ever declared or paid on the Series B convertible preferred stock.
Note 10 - Regulatory matters
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends, which may be paid at any date, is generally limited to the dividend capacity of the Bank, and loans or advances are limited to 15 percent of the Bank’s common stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect would cause the Bank’s capital to be reduced below applicable minimum regulatory capital requirements.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weighting, 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, Tier 1, and Common Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). At December 31, 2015, management believes that the Company and the Bank met all capital adequacy requirements.
As of December 31, 2015, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
| 70 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 10 - Regulatory matters (continued)
The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2015 and 2014 are presented in the table that follows:
| Minimum Regulatory | Requirements to be | |||||||||||||||||
| Actual | Capital Ratios | “Well Capitalized” | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
| ($ in thousands) | ||||||||||||||||||
| December 31, 2015: | ||||||||||||||||||
| Total Capital | ||||||||||||||||||
| (To risk weighted assets) | ||||||||||||||||||
| Consolidated | $ | 79,978 | 14.39% | $ | 44,471 | ³8% | n/a | n/a% | ||||||||||
| Carolina Bank | 76,791 | 13.81% | 44,470 | ³8% | $ | 55,587 | ³10% | |||||||||||
| Tier 1 Capital | ||||||||||||||||||
| (To risk weighted assets) | ||||||||||||||||||
| Consolidated | 70,386 | 12.66% | 33,353 | ³6% | n/a | n/a% | ||||||||||||
| Carolina Bank | 67,199 | 12.09% | 22,235 | ³6% | 44,470 | ³8% | ||||||||||||
| Common Equity Tier 1 | ||||||||||||||||||
| (To risk weighted assets) | ||||||||||||||||||
| Carolina Bank | 67,199 | 12.09% | 22,235 | ³4.5% | 36,132 | ³6.5% | ||||||||||||
| Tier 1 Leverage | ||||||||||||||||||
| (To average assets) | ||||||||||||||||||
| Consolidated | 70,386 | 10.16% | 27,699 | ³4% | n/a | n/a% | ||||||||||||
| Carolina Bank | 67,199 | 9.71% | 27,685 | ³4% | 34,607 | ³5% | ||||||||||||
| December 31, 2014: | ||||||||||||||||||
| Total Capital | ||||||||||||||||||
| (To risk weighted assets) | ||||||||||||||||||
| Consolidated | $ | 73,616 | 13.68% | $ | 43,065 | ³8% | n/a | n/a% | ||||||||||
| Carolina Bank | 73,580 | 13.67% | 43,055 | ³8% | $ | 53,819 | ³10% | |||||||||||
| Tier 1 Capital | ||||||||||||||||||
| (To risk weighted assets) | ||||||||||||||||||
| Consolidated | 61,516 | 11.43% | 21,532 | ³4% | n/a | n/a% | ||||||||||||
| Carolina Bank | 61,480 | 11.42% | 21,528 | ³4% | 32,292 | ³6% | ||||||||||||
| Tier 1 Leverage | ||||||||||||||||||
| (To average assets) | ||||||||||||||||||
| Consolidated | 61,516 | 9.11% | 27,006 | ³4% | n/a | n/a% | ||||||||||||
| Carolina Bank | 61,480 | 9.11% | 26,990 | ³4% | 33,737 | ³5% | ||||||||||||
| 71 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 11 - Commitments and Contingencies
In the normal course of business, the Company is party to lawsuits, none of which management believes could have a material adverse effect on the consolidated financial statements.
Operating leases
The Company leases land for its main office, three loan production offices, and one branch facility under operating leases. One leased branch and a leased loan production office were closed in 2015 due to expiring leases. Total lease expense on the closed facilities was approximately $273,000. Total future minimum lease payments, excluding renewal options, at December 31, 2015, under continuing leases are as follows:
| Future Mininum Lease Payments at December 31, 2015 | ||||
| (in thousands) | ||||
| Due in one year | $ | 350 | ||
| Due in Years 2 and 3 | 661 | |||
| Due in Years 4 and 5 | 586 | |||
| Due after Year 5 | 2,499 | |||
| $ | 4,096 | |||
Total lease expense was approximately $739,000 in 2015 and $700,000 in 2014.
Loans
In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At December 31, 2015 and 2014, pre-approved but unused lines of credit for loans totaled approximately $190,789,000 and $174,665,000, respectively. In addition, the Company had $1,224,000 and $1,812,000 in performance standby letters of credit at December 31, 2015 and 2014, respectively. These commitments represent no more than the normal lending risk that the Bank commits to its borrowers. If these commitments are drawn, the Company will obtain collateral if it is deemed necessary based on management’s credit evaluation of the counterparty. Management believes that these commitments can be funded through normal operations.
Note 12 - Derivatives and financial instruments
A derivative is a financial instrument that derives its cash flows and value by reference to an underlying instrument, index or referenced interest rate. These instruments are designed to hedge exposures to interest rate risk or for speculative purposes. The Company increased its use of derivatives related to hedging interest rate lock commitments during 2015.
| 72 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 12 - Derivatives and financial instruments (continued)
Accounting guidance requires an entity to recognize derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. Changes in the fair value of derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.
The Company sells residential mortgage loans on a best efforts basis and a mandatory basis in order to minimize the impact of changing interest rates on the value of fixed loan commitments given to borrowers. Optional commitments to sell mortgage loans are consummated at approximately the same time that optional commitments are given to borrowers to originate the loans under best efforts sales. Mandatory loan sales are generally made after loans are closed; the related fixed rate loan commitments granted to borrowers when they lock in their loan rates are hedged by selling mortgage-backed securities on a forward basis. The forward sold mortgage-backed securities are later purchased to close the hedge once the mandatory sales are consummated. The Company resumed selling loans on a mandatory basis and re-instituted hedging mortgage loan rate lock commitments during 2015.
The table below provides the carrying values of derivative instruments of mortgage loan rate lock commitments and forward sale mortgage-backed securities at December 31, 2015:
| Carrying | Carrying | Gain (loss) | Notional | |||||||||||||
| Value of | Value of | Included | Amount of | |||||||||||||
| Derivatives designated as | Assets | Liabilities | in Income | Derivative | ||||||||||||
| hedging instruments: | (in thousands) | |||||||||||||||
| At December 31, 2015: | ||||||||||||||||
| Mortgage loan rate lock commitments (hedged through best efforts sales commitments) | $ | 355 | $ | 17 | $ | 338 | $ | 36,194 | ||||||||
| Mortgage loan rate lock commitments (hedged through mortgage-backed securities forward sales) | 65 | 10 | 55 | 7,140 | ||||||||||||
| Forward sale mortgage-backed securities | - | 284 | (284 | ) | 32,000 | |||||||||||
| 73 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 12 - Derivatives and financial instruments (continued)
The table below presents the aggregate fair value and aggregate unpaid principal of loans held for sale at December 31, 2015 and 2014:
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||
| Aggregate Fair | Aggregate Fair | |||||||||||||||||||||||
| Value Less | Value Less | |||||||||||||||||||||||
| Aggregate | Aggregate | Aggregate | Aggregate | |||||||||||||||||||||
| Aggregate | Unpaid | Unpaid | Aggregate | Unpaid | Unpaid | |||||||||||||||||||
| Fair Value | Principal | Principal | Fair Value | Principal | Principal | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Loans held for sale, at fair value | $ | 39,583 | $ | 38,925 | $ | 658 | $ | 39,780 | $ | 39,353 | $ | 427 | ||||||||||||
Interest income on loans held for sale is recognized based on contractual rates and is reflected in interest income on loans in the Consolidated Statements of Income. The following table details net gains resulting from changes in fair value of these loans which were recorded in mortgage banking income in the consolidated statements of income during the years ended December 31, 2015 and 2014, respectively. These changes in fair value are mostly offset by economic hedging activities and also fluctuate based on the change in the aggregate loan principal outstanding. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
| Loans Held for Sale, At Fair Value | ||||||||
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Net gains resulting from changes in fair value | $ | 230 | $ | 230 | ||||
Note 13 - Employee benefit plans
All employees of the Company who meet certain eligibility requirements can elect to participate in the Bank’s 401(k) plan. Participants may make voluntary contributions resulting in salary deferrals in accordance with Section 401(k) of the Internal Revenue Code and the plan documents. The Company makes a 100% matching contribution up to a maximum of six percent of compensation, which is vested immediately. The Company’s matching expense was $633,000 in 2015 and $559,000 in 2014.
The Company has a nonqualified deferred compensation plan under which directors may elect to defer their directors’ fees. Participating directors receive an additional matching contribution for monthly fees and the amounts deferred are invested solely in Company stock that is held in a rabbi trust. The matching contribution was 25% during 2015 and 2014. The Company stock held by the trust and the related deferred compensation liability are recorded at an amount equal to the original compensation deferred. Changes in the fair value of the stock are not recognized in the Company’s financial statements. At December 31, 2015, deferred directors’ fees of $1,831,000 had been used to purchase 258,665 shares of the Company’s stock held by the trust after distribution of shares to retiring directors. Deferred directors’ fees of $24,000 were also remitted to the trust before December 31, 2015 to purchase stock or make director distributions in 2016.
| 74 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 13 - Employee benefit plans (continued)
In addition, the Company has a supplemental executive retirement plan for certain officers. The plan was expanded in 2008 to include certain new officers and directors. The future benefits of the plan are funded primarily by life insurance policies on certain employees with the Company designated as the beneficiary. Expenses were $734,000 in 2015 and $873,000 in 2014 related to this plan. At December 31, 2015 and 2014, other liabilities include $5,772,000 and $5,281,000, respectively, for this supplemental retirement plan.
Note 14 - Fair value of financial statements
The Company has adopted the accounting standards within FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures”, which provides a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company has not elected the fair value option to value liabilities. Securities available-for-sale, loans held for sale, and interest rate lock commitments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
When measuring fair value, valuation techniques should be appropriate in the circumstances and consistently applied. A hierarchy is used to prioritize valuation inputs into the following three levels to determine fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – observable inputs other than the quoted prices included in Level 1.
Level 3 – unobservable inputs.
Fair Value on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.
Securities available-for-sale
Investment securities available-for-sale are recorded at fair value. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active
| 75 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
exchange, such as the New York Stock Exchange, or are traded by brokers and dealers in active over-the-counter markets. U.S. Treasury securities, actively traded corporate bonds and stocks, and money market and mutual funds are Level 1 securities. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, certain corporate debt securities, and asset-backed securities issued by government agencies. Securities classified as Level 3 include asset-backed securities and corporate debt securities in less liquid markets.
Loans held for sale
The Company opted to account for loans held for sale at fair value which is measured based on what secondary markets are currently offering for portfolios with similar characteristics or based on sales commitments actually made to investors. As such, the Company classifies loans subject to recurring fair value adjustments as Level 2 valuation.
Interest rate lock commitments
The mortgage banking division of the Company sells its residential mortgage loans held for sale on a forward best efforts basis at a fixed price or on a mandatory basis by entering into forward sale mortgage-backed securities transactions at approximately the same time that fixed rate commitments are given to borrowers. The value of the estimated interest rate lock commitments (“IRLCs”) given to borrowers were marked to market through the income statement during 2015. The significant unobservable input used in the Level 3 fair value measurement of the Company’s IRLCs on loans held for sale is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio is largely dependent on loan processing stages and the change in prevailing interest rates from the time of the rate lock. The closing ratio is computed by management using historical data.
The fair value of IRLCs is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing due to delays in meeting commitment closing dates. The Company classifies interest rate lock commitments as Level 3. Gain on IRLCs for the period is included in mortgage banking income of non-interest income on the Consolidated Statements of Income. The mortgage banking division resumed reporting IRLCs in 2015 after having suspended recognition in 2014 due to immateriality. Below is a summary of activity related to IRLCs for the years ended December 31, 2015 and 2014.
| Interest Rate Lock Commitments | ||||||||
| Level 3 | ||||||||
| Fair Value | Fair Value | |||||||
| (in thousands) | ||||||||
| Balance, December 31, 2014 and 2013 | $ | - | $ | - | ||||
| Gains (losses) included in other income | 393 | - | ||||||
| Transfers in and out | - | - | ||||||
| Balance, December 31, 2015 and 2014 | $ | 393 | $ | - | ||||
| 76 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
Unrealized gains (losses) on forward sale mortgage-backed securities
The mortgage banking division of the Company resumed selling a portion of its loans on a mandatory basis in 2015 and hedging the related loans and forward commitments to borrowers by entering into forward sale mortgage-backed securities transactions at approximately the same time that fixed rate commitments are given to borrowers. The forward sale mortgage-backed securities are purchased or closed when the related loans sales are consummated. The unrealized gains or losses on forward sale mortgage-backed securities are included in mortgage banking income to properly match the income from IRLCs noted above. The Company classifies unrealized gains (losses) on forward sale mortgage-backed securities as Level 1 since end of the day bid prices in the active mortgage backed securities market are used to determine the unrealized losses. Unrealized gains are shown as other assets and unrealized losses are shown as other liabilities on the consolidated balance sheet.
Assets measured at fair value on a recurring basis at December 31, 2015 and 2014 are summarized below.
| Assets | ||||||||||||||||
| Measured at | Fair Value Measured Using | |||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in thousands) | ||||||||||||||||
| At December 31, 2015: | ||||||||||||||||
| Securities available-for-sale: | ||||||||||||||||
| Municipal securities | $ | 17,656 | $ | - | $ | 17,656 | $ | - | ||||||||
| Mortgage-backed securities | 16,978 | - | 16,978 | - | ||||||||||||
| Corporate securities | 8,939 | - | 8,939 | - | ||||||||||||
| Asset-backed securities | 3,732 | - | 3,732 | - | ||||||||||||
| Unrestricted stock | 55 | 55 | - | - | ||||||||||||
| Total available-for-sale securities | 47,360 | 55 | 47,305 | - | ||||||||||||
| Loans held for sale | 39,583 | - | 39,583 | - | ||||||||||||
| Interest rate lock commitments | 393 | - | - | 393 | ||||||||||||
| Unrealized losses, net of gains, on forward sale mortgage-backed securities | (30 | ) | (30 | ) | - | - | ||||||||||
| Total | $ | 86,943 | $ | 55 | $ | 86,888 | $ | - | ||||||||
| At December 31, 2014: | ||||||||||||||||
| Securities available-for-sale: | ||||||||||||||||
| Municipal securities | $ | 19,896 | $ | - | $ | 19,896 | $ | - | ||||||||
| Mortgage-backed securities | 19,352 | - | 19,352 | - | ||||||||||||
| Corporate securities | 9,964 | - | 9,964 | - | ||||||||||||
| Asset-backed securities | 1,930 | - | 1,930 | - | ||||||||||||
| Unrestricted stock | 58 | 58 | - | - | ||||||||||||
| Total available-for-sale securities | 51,200 | 58 | 51,142 | - | ||||||||||||
| Loans held for sale | 39,780 | - | 39,780 | - | ||||||||||||
| Total | $ | 90,980 | $ | 58 | $ | 90,922 | $ | - | ||||||||
| 77 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
Fair Value on a Non-recurring Basis. The Company measures certain assets at fair value on a non-recurring basis and the following is a general description of the methods used to value such assets:
Impaired loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, liquidation value, discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At December 31, 2015 and 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. 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.
Other real estate owned and repossessed assets
Properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or the new fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where an appraisal less estimated selling costs is used to determine fair value, management adjustments are significant to the fair value measurements, or other means are used to estimate fair value in the absence of an appraisal, the Company records the other real estate owned as nonrecurring Level 3 within the valuation hierarchy.
| 78 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
Assets measured at fair value on a non-recurring basis at December 31, 2015 and 2014 are summarized below:
| Assets | ||||||||||||||||
| Measured at | Fair Value Measured Using | |||||||||||||||
| Description | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| (in thousands) | ||||||||||||||||
| At December 31, 2015: | ||||||||||||||||
| Impaired loans | $ | 13,561 | $ | - | $ | 4,400 | $ | 9,161 | ||||||||
| Other real estate owned | 4,592 | - | - | 4,592 | ||||||||||||
| At December 31, 2014: | ||||||||||||||||
| Impaired loans | $ | 17,838 | $ | - | $ | 7,360 | $ | 10,478 | ||||||||
| Other real estate owned | 5,610 | - | - | 5,610 | ||||||||||||
Fair Value on a Recurring or Non-recurring Basis – Unobservable Inputs for Level 3. For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:
| Significant | Significant | |||||||||
| Valuation | Unobservable | Unobservable | ||||||||
| Description | Fair Value | Technique | Inputs | Input Value | ||||||
| ($ in thousands) | ||||||||||
| At December 31, 2015: | ||||||||||
| Impaired loans | $ | 9,161 | Discounted appraisals | Collateral discounts | 8.00%-10.00% | |||||
| Discounted cash flows | Cash flow estimates/ | 80% - 100% / | ||||||||
| discounted rates | original note rate | |||||||||
| Other real estate owned | 4,592 | Discounted appraisals | Collateral discounts | 8.00%-10.00% | ||||||
| Net derivative assets/liabilities: | ||||||||||
| interest rate lock commitments | 393 | Pricing models | Loan closing ratios | 25% - 100% | ||||||
| 81% Average | ||||||||||
| At December 31, 2014: | ||||||||||
| Impaired loans | $ | 10,478 | Discounted appraisals | Collateral discounts | 8.00%-10.00% | |||||
| Discounted cash flows | Cash flow estimates/ | 80% - 100% / | ||||||||
| discounted rates | original note rate | |||||||||
| Other real estate owned | 5,610 | Discounted appraisals | Collateral discounts | 8.00%-10.00% | ||||||
| 79 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
Fair Value of items not valued as such. The Company measures certain financial assets and liabilities at fair value for disclosure purposes only. The assumptions used in estimating the fair value of these financial instruments are detailed below.
Bank term deposits: Discounted cash flows have been used to value bank term deposits. The discount rate used is based on interest rates currently being offered by banks accepting institutional term deposits on comparable terms.
Securities held-to-maturity: The fair values of securities held to maturity are recorded on a non-recurring basis when an impairment in value that is deemed to be other than temporary occurs. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. At December 31, 2015, there were no fair value adjustments related to $14,954,000 of securities held-to-maturity.
Net non-impaired loans held for investment: For most variable rate loans, fair values are based on carrying values. Fixed rate commercial, other installment, and certain real estate mortgage loans are valued using discounted cash flows. The discount rates used to determine the present value of these loans are based on interest rates currently being charged by the Company on comparable loans as to credit risk and term.
Time deposits: Discounted cash flows have been used to value fixed rate and variable rate term deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.
Trust preferred subordinated debt: The fair value of trust preferred subordinated debt was determined by discounting cash flows using a rate 3% higher than the actual current rate over an estimated remaining term of 12 years in 2015 and 12.5 years in 2014. The trust preferred debt was issued at favorable rates in 2004, and current rates are approximately 3% higher when available. Under the current capital guidelines, the Company’s trust preferred subordinated debt is included in Tier 1 capital.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of financial instruments at December 31, 2015 and 2014. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and due from banks and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand deposits, NOW, money market and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
| 80 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 14 - Fair value of financial statements (continued)
| Fair Value Measurements | ||||||||||||||||||||
| Quoted | ||||||||||||||||||||
| Prices in | ||||||||||||||||||||
| Active Markets | Significant | |||||||||||||||||||
| for Identical | Other | Significant | ||||||||||||||||||
| Assets or | Observable | Unobservable | ||||||||||||||||||
| Carrying | Fair | Liabilities | Inputs | Inputs | ||||||||||||||||
| Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| Financial Instruments - Assets | ||||||||||||||||||||
| Bank term deposits | $ | 16,604 | $ | 16,571 | $ | - | $ | 16,571 | $ | - | ||||||||||
| Investment securities held-to-maturity | 14,954 | 15,226 | - | 15,226 | - | |||||||||||||||
| Net non-impaired loans held for investment | 446,371 | 446,535 | - | - | 446,535 | |||||||||||||||
| Financial Instruments - Liabilities | ||||||||||||||||||||
| Time deposits | 132,303 | 131,889 | - | - | 131,889 | |||||||||||||||
| Subordinated debentures | 19,610 | 17,018 | - | - | 17,018 | |||||||||||||||
| December 31, 2014 | ||||||||||||||||||||
| Financial Instruments - Assets | ||||||||||||||||||||
| Bank term deposits | $ | 14,106 | $ | 14,101 | $ | - | $ | 14,101 | $ | - | ||||||||||
| Investment securities held-to-maturity | 15,644 | 15,945 | - | 15,945 | - | |||||||||||||||
| Net non-impaired loans held for investment | 447,831 | 448,603 | - | - | 448,603 | |||||||||||||||
| Financial Instruments - Liabilities | ||||||||||||||||||||
| Time deposits | 143,816 | 143,881 | - | - | 143,881 | |||||||||||||||
| Subordinated debentures | 19,610 | 16,885 | - | - | 16,885 | |||||||||||||||
| 81 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 15 - Income per common share (EPS)
The reconciliation of the numerators and denominators of the basic income per share and diluted income per share computation at December 31, 2015 and 2014 follows:
| Net Income Available to | ||||||||||||
| Common | Per | |||||||||||
| Stockholders | Shares | Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| 2015 | ||||||||||||
| Basic income per share: | ||||||||||||
| Net income available to common stockholders | $ | 5,426 | 4,389,086 | $ | 1.24 | |||||||
| Effect of dilutive securities | ||||||||||||
| Stock options and convertible preferred stock | - | 231,325 | - | |||||||||
| Diluted income per share: | ||||||||||||
| Net income available to common stockholders and assumed conversions | $ | 5,426 | 4,620,411 | $ | 1.17 | |||||||
| 2014 | ||||||||||||
| Basic income per share: | ||||||||||||
| Net income available to common stockholders | $ | 2,413 | 3,431,385 | $ | 0.70 | |||||||
| Effect of dilutive securities | ||||||||||||
| Stock options | - | 2,218 | - | |||||||||
| Diluted income per share: | ||||||||||||
| Net income available to common stockholders and assumed conversions | $ | 2,413 | 3,433,603 | $ | 0.70 | |||||||
There were stock options covering 75,300 shares in 2014 that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise prices exceeded the average market prices.
Note 16 - Operating segments
The Company is considered to have three principal business segments in 2015 and 2014, the Commercial/Retail Bank, the Mortgage Banking Division, and the Holding Company. The Mortgage Banking Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the mortgage division in July 2010. Financial performance for 2015 and 2014, reflective of inter-
| 82 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 16 - Operating segments (continued)
company eliminations, and selected balance sheet information, reflective of inter-company eliminations, at December 31, 2015 and 2014 for each segment is as follows:
| Year Ended December 31, 2015 | ||||||||||||||||
| Commercial/ | Mortgage | |||||||||||||||
| Retail | Banking | Holding | ||||||||||||||
| Bank | Division | Company | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest income | $ | 24,350 | $ | 2,013 | $ | 7 | $ | 26,370 | ||||||||
| Interest expense | 471 | 2,015 | 239 | 2,725 | ||||||||||||
| Net interest income (loss) | 23,879 | (2 | ) | (232 | ) | 23,645 | ||||||||||
| Provision for loan losses | 1,085 | - | - | 1,085 | ||||||||||||
| Net interest income (loss) after provision for loan losses | 22,794 | (2 | ) | (232 | ) | 22,560 | ||||||||||
| Non-interest income | 1,589 | 12,054 | - | 13,643 | ||||||||||||
| Non-interest expense | 18,186 | 9,571 | 177 | 27,934 | ||||||||||||
| Income (loss) before income taxes | 6,197 | 2,481 | (409 | ) | 8,269 | |||||||||||
| Income tax (benefit) expense | 1,710 | 931 | (139 | ) | 2,502 | |||||||||||
| Net income (loss) | $ | 4,487 | $ | 1,550 | $ | (270 | ) | $ | 5,767 | |||||||
| Total Assets | $ | 659,773 | $ | 40,703 | $ | 322 | $ | 700,798 | ||||||||
| Net Loans | 459,932 | 39,583 | - | 499,515 | ||||||||||||
| Equity | 4,487 | 1,550 | 55,102 | 61,139 | ||||||||||||
| Year Ended December 31, 2014 | ||||||||||||||||
| Commercial/ | Mortgage | |||||||||||||||
| Retail | Banking | Holding | ||||||||||||||
| Bank | Division | Company | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest income | $ | 24,864 | $ | 1,577 | $ | 7 | $ | 26,448 | ||||||||
| Interest expense | 1,381 | 1,577 | 233 | 3,191 | ||||||||||||
| Net interest income (loss) | 23,483 | - | (226 | ) | 23,257 | |||||||||||
| Provision for loan losses | 1,436 | - | - | 1,436 | ||||||||||||
| Net interest income (loss) after provision for loan losses | 22,047 | - | (226 | ) | 21,821 | |||||||||||
| Non-interest income | 1,643 | 7,770 | - | 9,413 | ||||||||||||
| Non-interest expense | 18,004 | 8,891 | 109 | 27,004 | ||||||||||||
| Income (loss) before income taxes | 5,686 | (1,121 | ) | (335 | ) | 4,230 | ||||||||||
| Income tax (benefit) expense | 1,417 | (419 | ) | (114 | ) | 884 | ||||||||||
| Net income (loss) | $ | 4,269 | $ | (702 | ) | $ | (221 | ) | $ | 3,346 | ||||||
| Total Assets | $ | 638,177 | $ | 40,657 | $ | 429 | $ | 679,263 | ||||||||
| Net Loans | 465,669 | 39,780 | - | 505,449 | ||||||||||||
| Equity | 4,269 | (702 | ) | 49,088 | 52,655 | |||||||||||
| 83 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 17 - Condensed financial statements of parent company
Financial information pertaining to Carolina Bank Holdings, Inc. is as follows:
Condensed Balance Sheets
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Assets: | ||||||||
| Cash | $ | 3,208 | $ | 110 | ||||
| Investment in Carolina Capital Trust | 310 | 310 | ||||||
| Investment in Carolina Bank | 67,952 | 62,619 | ||||||
| Other assets | 42 | 118 | ||||||
| Total assets | $ | 71,512 | $ | 63,157 | ||||
| Liabilities and stockholders' equity: | ||||||||
| Accrued expenses | $ | 63 | $ | 192 | ||||
| Junior subordinated debentures | 10,310 | 10,310 | ||||||
| Stockholders' Equity | 61,139 | 52,655 | ||||||
| Total liabilities and stockholders' equity | $ | 71,512 | $ | 63,157 | ||||
Condensed Statements of Operations
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Interest income | $ | 7 | $ | 7 | ||||
| Interest expense | 239 | 233 | ||||||
| Other expense | 177 | 109 | ||||||
| Total expense | 416 | 342 | ||||||
| Income tax benefit | 139 | 114 | ||||||
| (Loss) before equity in undistributed earnings of subsidiaries | (270 | ) | (221 | ) | ||||
| Equity in undistributed earnings of subsidiaries | 6,037 | 3,567 | ||||||
| Net income | $ | 5,767 | $ | 3,346 | ||||
| Dividends on preferred stock | (341 | ) | (933 | ) | ||||
| Net income available to common stockholders | $ | 5,426 | $ | 2,413 | ||||
| 84 |
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2015 and 2014
Note 17 - Condensed financial statements of parent company (continued)
Condensed Statements of Cash Flows
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Operating activities: | ||||||||
| Net income | $ | 5,767 | $ | 3,346 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Equity in undistributed earnings of subsidiaries | (6,037 | ) | (3,567 | ) | ||||
| Dividends received from subsidiary | 300 | 1,000 | ||||||
| (Increase) decrease in other assets | 76 | (104 | ) | |||||
| Increase (decrease) in accrued expenses | (4 | ) | 4 | |||||
| Net cash provided by operating activites | 102 | 679 | ||||||
| Financing activities: | ||||||||
| Proceeds from exercise of stock options | 386 | 53 | ||||||
| Net proceeds from issuance of preferred stock converted to common stock | 14,069 | - | ||||||
| Repurchase of preferred stock | (10,994 | ) | - | |||||
| Dividends paid | (465 | ) | (880 | ) | ||||
| Net cash provided by (used for) financing activities | 2,996 | (827 | ) | |||||
| Net increase (decrease) in cash | 3,098 | (148 | ) | |||||
| Cash at beginning of year | 110 | 258 | ||||||
| Cash at end of year | $ | 3,208 | $ | 110 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for interest | $ | 236 | $ | 234 | ||||
Note 18 - Subsequent events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the consolidated financial statements were issued and no subsequent events occurred requiring accrual or disclosure.
| 85 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management's Annual 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 the supervision of the Company's Chief Executive Officer and Chief 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, 2015. 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). 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 the design and operating effectiveness of internal control over financial reporting. |
| · | All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. |
The Company’s management, including its principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the COSO in Internal Control—Integrated Framework (2013). Based on that assessment, management believes that, as of December 31, 2015, the Company’s internal control over financial reporting is effective based on those criteria.
| 86 |
This annual report 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 rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the fourth quarter of 2015. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the fourth quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.
As of the date of this report, Carolina Bank was assigned a “needs to improve” rating under the Community Reinvestment Act or 1977, as amended.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Incorporated by reference to pages 4-8 and pages 11-13 of the Proxy Statement.
We have adopted a Code of Ethics that applies, among others, to our principal executive officer and principal financial officer. Our Code of Ethics is available to any person, without charge, upon written request submitted to T. Allen Liles, Carolina Bank Holdings, Inc., 101 North Spring Street, Greensboro, North Carolina 27401.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to pages 8-10 and 13-19 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Incorporated by reference to pages 3-4 of the Proxy Statement.
| 87 |
The following table sets forth certain information with respect to the Company’s equity compensation plans at December 31, 2015.
| Plan Category | Number of securities | Weighted-average | Number of securities | |||||||||
| to be issued upon | exercise price of | remaining available | ||||||||||
| exercise of | outstanding options, | for future issuance | ||||||||||
| outstanding options | warrants and rights | under equity | ||||||||||
| compensation plans | ||||||||||||
| (excluding securities | ||||||||||||
| reflected in column (a)) | ||||||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 36,570 | $ | 11.16 | 490,000 | ||||||||
| Equity compensation plans not approved by security holders | None | N/A | None | |||||||||
| Total | 36,570 | $ | 11.16 | 490,000 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Incorporated by reference to pages 8 and 9 of the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Incorporated by reference to pages 20-21 of the Proxy Statement.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
| (a) | The following documents are filed as part of this report: |
| 1. | Financial statements included in Item 8 of this Annual Report on Form 10-K: |
Report of independent registered public accounting firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015 and 2014
| 88 |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to Consolidated Financial Statements
| 2. | Financial statement schedules required to be filed by Item 8 of this Form: None |
| 3. | Exhibits |
| Exhibit Number |
Description | |
| 3.1 | Articles of Incorporation of Registrant(1) | |
| 3.2 | Articles of Amendment of Registrant(11) | |
| 3.3 | Bylaws of Registrant(2) | |
| 4.1 | Form of Stock Certificate for Common Stock(2) | |
| 4.2 | Indenture(3) | |
| 10.1 | Employment Agreement of Robert T. Braswell(4) | |
| 10.2 | Employment Agreement of T. Allen Liles(5) | |
| 10.3 | Employment Agreement of John Richard Spiker II (15) | |
| 10.4 | Employment Agreement of Daniel D. Hornfeck(5) | |
| 10.5 | 1997 Incentive Stock Option Plan(6) | |
| 10.6 | 1997 Non-qualified Stock Option Plan(7) | |
| 10.7 | 2007 Incentive Stock Option Plan(7) | |
| 10.8 | Salary Continuation Agreement between Carolina Bank and Robert T. Braswell(8) | |
| 10.9 | Salary Continuation Agreement between Carolina Bank and T. Allen Liles(9) | |
| 10.10 | Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck(5) | |
| 10.11 | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell(9) | |
| 10.12 | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles(9) | |
| 10.13 | Carolina Bank Directors’ Deferral Plan(9) |
| 89 |
| Exhibit Number |
Description | |
| 10.14 | Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett(5) | |
| 10.15 | Director Retirement Agreement Between Carolina Bank and Gary N. Brown(5) | |
| 10.16 | Director Retirement Agreement Between Carolina Bank and George E. Carr, III(5) | |
| 10.17 | Director Retirement Agreement Between Carolina Bank and James E. Hooper(5) | |
| 10.18 | Amended and Restated Declaration of Trust of Carolina Capital Trust(10) | |
| 10.19 |
Guarantee Agreement(10) | |
| 10.20 |
2009 Omnibus Stock Ownership and Long Term Incentive Plan(12) | |
| 10.21 |
Employment Agreement of Phillip B. Carmac (14) | |
| 21.1 | Subsidiaries (Filed herewith) | |
| 23.1 | Consent of Elliott Davis Decosimo, PLLC (Filed herewith) | |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith) | |
| 31.2 |
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith) | |
| 32.1 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith) | |
| 99.1 | Proxy Statement for the 2016 Annual Meeting of Shareholders(13) |
| (1) | Incorporated by reference to Form 10-K of Carolina Bank Holdings, Inc. (Filed March 30, 2009 with the Securities and Exchange Commission). |
| (2) | Incorporated by reference to Form 10-KSB of Carolina Bank Holdings, Inc. (Filed April 2, 2001 with the Securities and Exchange Commission). |
| (3) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed January 4, 2005 with the Securities and Exchange Commission). |
| (4) | Incorporated by reference to Form 8-K/A of Carolina Bank Holdings, Inc. (Filed June 9, 2008 with the Securities and Exchange Commission). |
| (5) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed June 5, 2008 with the Securities and Exchange Commission). |
| (6) | Incorporated by reference to the registrant’s Registrant Statement on Form S-8, filed with the Securities and Exchange Commission on June 2, 2003 |
| (7) | Incorporated by reference to Form S-8 of Carolina Bank Holdings, Inc. (Filed May 11, 2000 with the Securities and Exchange Commission). |
| 90 |
| (8) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed May 27, 2008 with the Securities and Exchange Commission). |
| (9) | Incorporated by reference to Form 10-KSB of Carolina Bank Holdings, Inc. (Filed March 28, 2003 with the Securities and Exchange Commission). |
| (10) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed January 4, 2005 with the Securities and Exchange Commission). |
| (11) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed April 1, 2015 with the Securities and Exchange Commission). |
| (12) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed March 5, 2010 with the Securities and Exchange Commission). |
| (13) | Filed with the Securities and Exchange Commission Pursuant to Rule 14a-6. |
| (14) | Incorporated by reference to Form 10-K of Carolina Bank Holdings, Inc. (Filed March 29, 2011 with the Securities and Exchange Commission). |
| (15) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed March 11, 2015 with the Securities and Exchange Commission). |
| 91 |
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.
| CAROLINA BANK HOLDINGS, INC. | ||
| (Registrant) | ||
| By: | /s/ Robert T. Braswell | |
| Robert T. Braswell | ||
| President and | ||
| Chief Executive Officer | ||
| Date: | March 23, 2016 | |
| 92 |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Donald H. Allred | March 23, 2016 | |
| Donald H. Allred | ||
| Director | ||
| /s/ Susan Alt | March 23, 2016 | |
| Susan Alt | ||
| Director |
| /s/ Robert T. Braswell | March 23, 2016 | |
| Robert T. Braswell | ||
| President, Chief Executive Officer and Director | ||
| /s/ Kevin J. Baker | March 23, 2016 | |
| Kevin J. Baker | ||
| Director | ||
| /s/ J. Alexander S. Barrett | March 23, 2016 | |
| J. Alexander S. Barrett | ||
| Director | ||
| /s/ Stephen K. Bright | March 23, 2016 | |
| Stephen K. Bright | ||
| Director |
| /s/ Gary N. Brown | March 23, 2016 | |
| Gary N. Brown | ||
| Chairman of the Board of Directors | ||
| /s/ Michael F. Bumpass | March 23, 2016 | |
| Michael F. Bumpass | ||
| Director | ||
| /s/ Abby Donnelly | March 23, 2016 | |
| Abby Donnelly | ||
| Director | ||
| /s/ James E. Hooper | March 23, 2016 | |
| James E. Hooper | ||
| Director | ||
| /s/ J. Edward Kitchen | March 23, 2016 | |
| J. Edward Kitchen | ||
| Director |
| /s/ Kim A. Thompson | March 23, 2016 | |
| Kim A. Thompson | ||
| Director |
| 93 |
| /s/ T. Allen Liles | March 23, 2016 | |
| T. Allen Liles | ||
| Secretary, Treasurer and | ||
| Principal Financial and Principal Accounting Officer |
| 94 |
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 3.1 | Articles of Incorporation of Registrant * | |
| 3.2 | Articles of Amendment of Registrant * | |
| 3.3 | Bylaws of Registrant* | |
| 4.1 | Form of Stock Certificate for Common Stock* | |
| 4.2 | Indenture* | |
| 10.1 | Employment Agreement of Robert T. Braswell* | |
| 10.2 | Employment Agreement of T. Allen Liles* | |
| 10.3 | Employment Agreement of John Richard Spiker* | |
| 10.4 | Employment Agreement of Daniel D. Hornfeck* | |
| 10.5 | 1997 Incentive Stock Option Plan* | |
| 10.6 | 1997 Non-qualified Stock Option Plan* | |
| 10.7 | 2007 Incentive Stock Option Plan* | |
| 10.8 | Salary Continuation Agreement between Carolina Bank and Robert T. Braswell* | |
| 10.9 | Salary Continuation Agreement between Carolina Bank and T. Allen Liles* | |
| 10.10 | Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck* | |
| 10.11 | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell* | |
| 10.12 | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles* | |
| 10.13 | Carolina Bank Directors’ Deferral Plan* | |
| 10.14 | Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett* | |
| 10.15 | Director Retirement Agreement Between Carolina Bank and Gary N. Brown* | |
| 10.16 | Director Retirement Agreement Between Carolina Bank and George E. Carr, III* | |
| 10.17 | Director Retirement Agreement Between Carolina Bank and James E. Hooper* | |
| 10.18 | Amended and Restated Declaration of Trust of Carolina Capital Trust* | |
| 10.19 | Guarantee Agreement* | |
| 10.20 | 2009 Omnibus Stock Ownership and Long Term Incentive Plan* | |
| 10.21 | Employment Agreement of Phillip B. Carmac* | |
| 21.1 | Subsidiaries (Filed herewith) | |
| 23.1 | Consent of Elliott Davis Decosimo, PLLC (Filed herewith) | |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith) | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith) | |
| 32.1 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith) | |
| 99.1 | Proxy Statement for 2015 Annual Meeting of shareholders** | |
* Incorporated by reference.
** To be filed with the Securities and Exchange Commission pursuant to Rule 14a-6.
| 95 |