ITEM 1A. Risk Factors.
Item not applicable to smaller reporting companies.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
Item not applicable to smaller reporting companies.
ITEM 2.
ITEM 2. Properties.
The following table sets forth certain information regarding our properties:
ITEM 3.
ITEM 3. Legal Proceedings.
As of December 31, 2013, 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.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
PART II
ITEM 5.
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 20, 2014, we had issued and outstanding 3,429,640 shares of common stock which were held by approximately 1,350 shareholders.
No cash dividends were declared or paid on shares of our common stock in 2013 or 2012.
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.
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.
ITEM 6.
ITEM 6. Selected Financial Data.
Not applicable to smaller reporting companies.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
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.
·
Competitive pressures among financial institutions may increase.
·
Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged.
·
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.
·
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.
Our mortgage 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 on a limited basis we hedge some optional loan commitments by selling mortgage-backed securities on a forward basis. We opted to account for loans originated in our mortgage division, loans held for sale, at fair value which is based on what secondary markets are currently offering for portfolios with similar characteristics. Forward sale mortgage-backed securities and the value of the estimated loan commitments that are hedged 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 hedged loan commitments. Hedging loan commitments through forward sales of mortgage-backed-securities was discontinued during 2013 due to economic reasons. We also make provisions for future warranty claims that arise from borrower fraud or from our 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. As claims are paid the liability account is reduced. 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, certain mortgage loans held for sale, derivative assets, and derivative liabilities 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, may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring 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 decreased by $30.1 million or 4.34% from $691.9 million at December 31, 2012, to $661.8 million at December 31, 2013. Loans held for sale decreased by $103.4 million due to decreased loan originations by our mortgage loan division and faster funding of loan sales by investors during 2013. Loans held for sale reached a peak at December 31, 2012 due to strong originations and slower funding by investors in the fourth quarter of 2012. Loans held for investment decreased by $17.6 million or 3.8% during 2013, from declining loan originations, primarily construction and development loans, and from loan charge-offs. Although loans held for investment declined in 2013, growth of approximately 6.2% was realized in the final six months of 2013. Carolina Bank, which makes both commercial and retail loans, experienced slow loan demand in 2011 through the first six months of 2013 due to declining economic conditions in its primary lending markets, Guilford, Randolph, Alamance, and Forsyth Counties, North Carolina. Our compounded annual growth (loss) rate for the five years ended December 31, 2013 for loans held for investment and assets was (2.4%) and 1.4%, respectively.
Liabilities. Total liabilities decreased by $25.8 million or 4.0% from $638.0 million at December 31, 2012, to $612.2 million at December 31, 2013 as overnight borrowings at the Federal Home Loan Bank were paid off and time deposits were not aggressively pursued due to an abundance of liquidity. Deposits decreased by $11.8 million, or 2.0%, during 2013 as non-interest bearing demand deposits increased while time deposits declined. The decline in deposits in 2013 was a result of pricing and the lack of asset growth which would require additional liquidity. The compounded annual growth rate for the five years ended December 31, 2013 for deposits was 3.1%. 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 and when necessary to meet liquidity requirements.
Stockholders’ equity. Our total stockholders’ equity decreased $4.3 million at December 31, 2013 to $49.6 million from $53.9 million at December 31, 2012, primarily from repurchase of preferred stock of $5.0 million, repurchase of a common stock warrant for $1.8 million, and preferred stock dividends declared of $0.7 million which was partially offset by comprehensive income of $2.9 million and stock options exercised of $0.3 million.
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 $19.1 million at December 31, 2013 and $19.0 million at December 31, 2012. Non-performing assets, as a percentage of total assets, was 2.88% and 2.75% at December 31, 2013 and 2012, respectively. There was $0 and $0.03 million in loans 90 days or more past due and still accruing interest at December 31, 2013 and 2012, respectively. Foreclosed real estate and other repossessed assets were $2.3 million and $5.9 million at December 31, 2013 and 2012, respectively. Net loan charge-offs totaled $5.7 million and $4.2 million for the years ended December 31, 2013 and 2012, respectively. Impaired but still performing loans decreased to $12.5 million at December 31, 2013 from $15.0 million at December 31, 2012. 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 “criticized loans” represent adversely classified loans with identified weaknesses and potential or identified losses of principal and/or interest due. Criticized loans decreased to $26.2 million at December 31, 2013 from $37.8 million at December 31, 2012 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, 2013 and 2012.
The decrease in criticized loans in 2013 from 2012 resulted from success in disposing of problem loans, from reduction in new additions to criticized 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 2013 as the seasonally adjusted unemployment rate in North Carolina improved to 6.9% in December 2013 from 9.2% in December 2012. While unemployment rates have declined in 2013, unemployment is still higher than normal and many workers have dropped out of the labor force.
Liquidity and Capital Resources
The objective of our liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses our ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of internally generated funds are principal and interest payments on loans receivable, 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 includes deposits, repurchase agreements, federal funds purchased from banks and advances from the Federal Home Loan Bank of Atlanta.
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. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During 2013, we increased our levels of short-term and long-term liquidity due to the decline in loans. We have also increased our secondary sources of liquidity during 2012 and 2013 as our credit availability for additional advances from the Federal Home Loan Bank and available discount borrowings from the Federal Reserve exceeded $166 million at December 31, 2013.
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, 2013 and 2012, our levels of capital exceeded all applicable published regulatory requirements.
Due to our historical growth, the recent difficult economic environment, increased regulatory capital requirements, and our anticipation of continued growth, we issued $16 million in preferred stock to the United States Treasury under the Capital Purchase Program in January 2009 to increase our capital which could further support future growth and assist us in meeting future regulatory capital requirements. The United States Treasury sold our preferred stock to private investors in 2013, and we subsequently repurchased $5.0 million of the preferred stock from private investors. We also repurchased a warrant for common stock granted to the United States Treasury as part of the Capital Purchase Program for $1.8 million in 2013. As a result of these repurchases, our capital ratios declined slightly during 2013.
Results of Operations for the Years ended December 31, 2013 and 2012
General. We had net income of $4.0 million and $7.5 million for the years ended December 31, 2013 and 2012, respectively. Net income available to common stockholders was $2.9 million, or $0.85 per diluted share, for 2013 compared to $6.3 million, or $1.85 per diluted share, for 2012. Net income available to common stockholders represents net income less preferred stock dividends and related discount accretion. The decrease in net income in 2013 was primarily due to lower net interest income, a higher provision for loan losses, and decreased mortgage banking income. Net interest income, the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, was $22.3 million in 2013 compared to $24.2 million in 2012, a decrease of 7.7%. 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 $14.3 million in 2013 and $19.7 million in 2012. Mortgage banking income decreased approximately $5.5 million, or 30.7%, during 2013 due to higher interest rates and lower originations. Our provision for loan losses was $3.5 million and $2.4 million in 2013 and 2012, respectively. Higher loan charge-offs and slightly higher allowances for loan losses on impaired loans resulted in an increase in the provision for loan losses in 2013. We incurred non-interest expense of $27.6 million in 2013 and $30.2 million in 2012. The decrease in non-interest expense of $2.6 million, or 8.7%, was primarily from decreased incentive compensation due to non attainment of financial goals and lower foreclosed property expenses.
The commercial/retail bank segment reported 2013 net income of $3.2 million compared to $3.5 million in 2012, primarily due to a higher provision for loan losses, partially offset by lower incentive compensation and decreased foreclosed property expense in 2013. Our mortgage division reported net income of $1.1 million in 2013 compared to net income of $4.3 million in 2012 due to lower mortgage originations. The holding company reported a net loss of $0.3 million in 2013 and $0.2 million in 2012 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, 2013 and 2012.
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, 2013, net interest income decreased by $1.9 million or 7.7% to $22.3 million from $24.2 million for the year ended December 31, 2012.
The net yield on average interest-earning assets was 3.59% in 2013 and 3.89% in 2012. The interest rate spread was 3.48% in 2013 and 3.78% in 2012. The decrease in the net yield on interest-earning assets and the interest rate spread in 2013 resulted primarily from a shift in assets from higher earning loans held for investment and loans held for sale to lower earning interest bearing deposits and taxable investments.
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.
Net Interest Income and Average Balance Analysis
(1.) Average balances are computed on a daily basis.
(2.) Interest income and yields related to certain investment securities exempt from federal income tax are stated on a fully taxable basis using a 34% federal tax rate, reduced by the nondeductible portion of interest expense.
(3.) Nonaccrual loans are included in the average loan balance.
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.
There was a positive shift in deposit balances to lower cost interest checking, money market and savings from higher cost time certificates, but a negative shift of higher yielding loans held for sale and loans held for investment to interest-bearing deposits and taxable investments during 2013.
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 increased in 2013 to $3.5 million from $2.4 million in 2012, primarily because of higher specific allowances required on impaired loans and higher loan charge-offs in 2013. Declining real estate values and tepid demand for new real estate negatively impacted the ability of many of our borrowers to make loan payments in 2009 through 2013 resulting in significant increases in loan charge-offs, non-performing loans, and impaired loans. 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. The allowance for loan losses was $7.7 million or 1.73% of loans and $9.9 million or 2.15% of loans at December 31, 2013 and 2012, respectively. The increased provision for loan losses in 2013 primarily resulted from higher net loan charge-offs. Loan charge-offs, net of recoveries, were $5.7 million and $4.2 million during 2013 and 2012, respectively. The decline in the ratio of the allowance to loans to 1.73% in 2013 from 2.15% in 2012 resulted primarily from a decrease in the historical loan loss trends used to compute the allowance for loan losses on non impaired loans.
The following table describes the activity relating to our allowance for loan losses for the years indicated:
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, and gain on sale of investments. Non-interest income was $14.3 million and $19.7 million in 2013 and 2012, respectively. Service charges increased 2.6% in 2013 to $1.2 million, primarily from an increase in non-customer ATM fees and from commercial services.
Mortgage banking income, which represents income earned from the origination and sale of residential mortgage loans, decreased to $12.4 million in 2013 from $17.9 million in 2012 due to a 28.5% decrease in loan originations to $898 million in 2013 from $1.23 billion in 2012. The mortgage division originates residential mortgage loans through other banks and brokers in addition to retail loan officers, who are located in five loan production offices and in five 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. Approximately 30% of the mortgage banking gross income recognized in 2013 and 2012 was generated by our retail mortgage loan officers. Netted against mortgage banking income are warranty claim provisions of $0.1 million in 2013 and $1.0 million in 2012. 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. Warranty claim provisions decreased in 2013 from 2012 due to the decrease in originations and due to improved loss trends which were used to update our methodology to more accurately reflect lower estimated future claims. All warranty claims that have been incurred to date are from originations made in 2008 and 2009. 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 $1.4 million and $1.6 million at December 31, 2013 and 2012, respectively. Warranty claims totaled $0.3 million in 2013 and were $0.9 million since establishment of the mortgage division in 2007.
Other non-interest income included $0.4 million from the increase in cash value of life insurance and $0.3 million in investment services income in both 2013 and 2012. Gains on the sale of investments were $0.27 million in 2013 and $0.04 million in 2012.
Non-interest expenses. Non-interest expenses were $27.6 million in 2013 compared to $30.2 million in 2012, a decrease of $2.6 million or 8.7%. The decrease in expenses in 2013 was due primarily to reduction in incentive compensation related to non attainment of certain financial goals and due to a decline in foreclosed property expense. The mortgage division also reduced staffing in late 2013 in response to declining mortgage originations after having increased staffing in late 2012 to handle increasing mortgage originations. The number of full-time equivalent total employees decreased from 208 at December 31, 2012 to 191 at December 31, 2013.
Salaries and employee benefits decreased $0.9 million, or 5.2%, to $17.2 million in 2013 from $18.1 million in 2012 for the following reasons:
· $0.9 million increased salaries and benefits for merit increases, for growth in the retail mortgage division, and expansion of our Winston-Salem office.
· $2.2 million decrease in incentive compensation of which $1.1 million was related to lower originations and lower net income in the mortgage division. The other $1.1 million decline related to the commercial/retail bank’s non attainment of specific EPS levels required to trigger incentives.
· $0.3 million increase in 401(k) matching contributions due to increased employee participation and an increase in supplemental executive retirement benefit accruals related to aging executives.
Foreclosed property expense includes other real estate owned expenses, impairments of other real estate owned, gain (loss) on the sale of other real estate owned, and net rental income from other real estate owned. Foreclosed property expense decreased $1.7 million, or 63.7%, to $1.0 million primarily due to a $0.9 million decline in impairments of other real estate owned to $0.6 million during 2013. Net gains from sale of other real estate owned were $0.07 million in 2013 compared to $0.2 million in losses in 2012. Rental income from foreclosed property also increased to $0.2 million in 2013 from $0.03 million in 2012 due to rentals from a commercial building that was sold in December of 2013. Other real estate owned declined to $2.3 million at December 31, 2013 from $5.9 million at December 31, 2012.
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 21.2% in 2013 to $1.5 million primarily from increased loan related legal expenses.
FDIC insurance decreased 38.9% to $0.5 million in 2013 due to a change in the computation of insurance premiums based on assets rather than deposits and from a decline in outstanding deposits.
Income taxes. Income tax expense was $1.6 million, or 28.1% of income before income taxes in 2013, compared to $3.7 million, or 33.2% of income before income taxes in 2012. The more favorable tax rate in 2013 was primarily due to a higher percentage of non-taxable income from municipal securities and from a higher percentage of tax credits to net income before income taxes in 2013.
Financial condition. Total assets were $661.8 million at December 31, 2013, a decrease of 4.3% from total assets of $691.9 million at December 31, 2012. We experienced a material shift in assets from loans held for sale which decreased $103.4 million to $28.4 million at December 31, 2013 to interest-bearing deposits in other banks, bank term deposits, and investment securities which in total increased $97.4 million to $146.8 million at December 31, 2013. The decline in loans held for sale resulted from declining originations in 2013 and from faster funding of loan sales by investors due to the slower mortgage loan activity. We periodically utilize wholesale deposit sources such as broker 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 $25.6 million and $31.3 million in deposits from other depository institutions and $15.9 million and $18.8 million of brokered deposits at December 31, 2013 and December 31, 2012, respectively. The decrease in these sources of deposits in 2013 was planned in an effort to better match our liquidity needs.
Interest-bearing deposits with banks of $58.9 million primarily represent overnight deposits with the Federal Reserve and Federal Home Loan Bank and increased $51.7 million at December 31, 2013 from a year ago due to excess liquidity generated from a decline in loans, both held for sale and held for investment. These deposits averaged $86.9 million during 2013. Bank term deposits of $11.1 million at December 31, 2013 represent FDIC insured certificates of deposits in other banks with maturities from four months to thirty-four months. Investment securities increased $34.6 million in 2013 to $76.8 million at December 31, 2013. Loans held for investment decreased $17.6 million, or 3.8%, to $444.1 million at December 31, 2013, due to loan pay-offs, loan charge-offs, and repossessions of assets from non-performing loans. Prior to 2010, we experienced double digit growth in loans held for investment, but commercial and construction loan demand weakened in 2010, 2011, 2012 and the first six months of 2013 as a result of declining real estate prices and weak economic growth. 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 86.4% of our loans at December 31, 2013 were secured by some form of real estate. At December 31, 2013, loans secured by residential properties in the form of home equity lines and closed end loans comprised 27.3% of our loan portfolio while construction & development loans and commercial real estate loans comprised 11.4% and 47.8% of our loan portfolio, respectively. Another 12.5% of our loan portfolio was commercial and industrial loans with the balance in consumer and other loans.
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 $16.7 million, or 3.8% of loans outstanding, and $13.1 million, or 2.8% of loans outstanding, at December 31, 2013 and 2012, respectively. Our allowance for loan losses was 1.73% and 2.15% of loans outstanding at December 31, 2013 and 2012, respectively. Net loan charge-offs were 1.33% and 0.90% of average loans during 2013 and 2012, respectively.
Investment securities increased to $76.8 million at December 31, 2013 from $42.2 million at December 31, 2012, an increase of 81.8%. 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 80.7% of the investment securities at December 31, 2013 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 declined $3.6 million, or 60.8% to $2.3 million at December 31, 2013 from $5.9 million at December 31, 2012. During 2013, other real estate owned increased $2.1 million from foreclosure and was reduced by sales of $5.2 million and by impairment charges of $0.6 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, 2013 and 2012, our investment portfolio comprised approximately 11.6% and 6.1% 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.
The following table presents maturities and weighted average yields of debt securities at the date indicated:
Analysis of Investment Securities
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 11.4% of the loan portfolio. Commercial real estate loans, secured by nonfarm nonresidential and multifamily properties, represent 47.8% of the loan portfolio and have experienced higher 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
The table that follows shows the loan portfolio at December 31, 2013 by loan type, maturity and whether the interest rate is fixed or variable. Loans on non-accrual have been excluded.
Analysis of Certain Loan Maturities
As of December 31, 2013
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 86.4% and 85.6% of our loan portfolio at December 31, 2013 and 2012, 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 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. 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.
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 increased to $29.3 million at December 31, 2013 from $28.1 million at December 31, 2012, primarily because non-performing loans increased $3.7 million to $16.7 million at December 31, 2013. The increase in non-performing loans was offset partially by a decline in accruing troubled debt restructurings. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $2.1 million at December 31, 2013 from $1.8 million at December 31, 2012. The general allowance, the difference between our allowance for loan losses and the specific portion of the allowance for loan losses, decreased to $5.6 million at December 31, 2013 from $8.2 million at December 31, 2012. These allowances apply to non-impaired loans and were determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.0% on multifamily loans to 3.68% on construction and development loans, to categories of performing loans at each period end. We used the latest twelve quarters to determine the estimated loss ratios inherent in the loan portfolio in both 2013 and 2012.
The general section of our allowance also 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 decreased to $0.7 million at December 31, 2013 from $1.2 million at December 31, 2012, primarily due to positive delinquency trends, lower classified assets, and positive changes in economic conditions.
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
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 non-accrual loans, restructured loans, total nonperforming loans, and nonperforming assets at the dates indicated:
Nonperforming Assets
Nonperforming assets increased slightly in 2013 from 2012, but have decreased substantially from 2009, 2010 and 2011. Although impaired loans increased slightly in 2013 from 2012 as shown below, the quality of the loan portfolio improved in 2013 as evidenced by the declining level of criticized loans to $26.2 million at December 31, 2013 from $37.8 million at December 31, 2012. A breakout of loans by internal loan grades including criticized loans, is shown in Note 3 to the consolidated financial statements. During 2012 and 2013, we decreased our restructured loans to borrowers experiencing financial difficulty as total troubled debt restructurings declined to $15.0 million at December 31, 2013 from $21.3 million at December 31, 2012. Performing restructured loans decreased to $10.4 million at December 31, 2013 from $13.8 million at December 31, 2012. 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, 2013 and December 31, 2012, and net loan charge-offs in 2013 and 2012.
Deposits. The maturity distribution of time deposits of $100,000 or more at December 31, 2013, 2012 and 2011 is presented below. Such deposits may be more volatile and interest rate sensitive than other deposits. Our deposit focus in 2013 centered on increasing lower cost demand accounts and lowering the pricing on time deposits to improve our net interest income which resulted in a decline in time deposits.
Interest rate sensitivity. Interest rate sensitivity management is concerned with the timing and magnitude of re-pricing 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. Prior to 2010, simulation analysis indicated, in the absence of growth or changes in the mix of assets and liabilities, our net interest income generally increased when short-term interest rates rose and declined when short-term interest rates fell. In late 2010, we set our Carolina Bank prime at 4.50% when the Wall Street Journal Prime declined to 3.25% with the expectation that the Carolina Bank prime would not rise again until the Wall Street Journal Prime exceeded 4.50%. Approximately 34.7% of our loans held for investment, or $154.8 million at December 31, 2013, adjust with the Carolina Bank prime. We also implemented floors on a number of our variable rate loans which improves our loan yields in a low interest rate environment. Our net yield on average interest-earning assets decreased to 3.59% in 2013 from 3.89% in 2012 because of a change in asset mix as loans, which have higher yields, decreased while interest-bearing deposits in banks and investments, which have lower yields, increased. Our simulation analysis indicates that our net interest margin will decline approximately 3.9% in one year, if interest rates immediately rise 1% and will not increase above current projected levels until interest rates rise between 3% and 4%. The delay in adjusting our loans tied to the Carolina Bank prime or at floors is the major reason for the potential decline in net interest income as the Wall Street Journal Prime increases. We have also increased our fixed rate loans and investments during 2013 which has increased our interest rate risk.
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.
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.
Capital resources. Carolina Bank Holdings, Inc. and Carolina Bank are subject to various regulatory capital adequacy standards. Under these standards, financial institutions are required to maintain minimum ratios of capital to risk-weighted assets and average total assets. Carolina Bank Holdings, Inc. and Carolina Bank exceeded all minimum published capital requirements, and Carolina Bank met the requirements to be categorized as “well capitalized” at December 31, 2013 and 2012. The capital ratios for Carolina Bank Holdings consolidated and Carolina Bank are detailed in Note 10 to the consolidated financial statements. Included in the regulatory capital of Carolina Bank Holdings, Inc. and Subsidiary is $10.0 million in junior subordinated debentures (“trust preferred securities”) which has been primarily reinvested in the Bank. These trust preferred securities qualify as Tier 1 capital under current regulatory guidelines. Carolina Bank issued $9.3 million in junior 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 junior subordinated debentures lost 20% of their capital status on October 1, 2013 and will lose 20% per year over a four year period beginning in October 2014. On January 9, 2009 we issued $16 million in preferred stock to the United States Treasury under the Capital Purchase Program to help support future growth. The Treasury sold our preferred stock to private investors and we repurchased $5 million of the preferred stock during 2013. The remaining $11.0 million in preferred stock is included in the Tier 1 consolidated capital of Carolina Bank Holdings, Inc. and Subsidiary, and most of this capital was reinvested in Carolina Bank as Tier 1 common capital. Carolina Bank has an internal goal to use its best efforts to maintain Tier 1 capital to average assets above 8% as long as the ratio of classified assets to capital is above 50%, and Carolina Bank has exceeded the goal during all of 2013 with Tier 1 Capital to average assets at 8.86% at December 31, 2013. The ratio of classified assets to capital was also below 50% at December 31, 2013. Carolina Bank Holdings, Inc. is current on interest payments on its trust preferred securities and on its dividend payments on its preferred stock as of December 31, 2013. No common stock dividends are anticipated in the near future.
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 change risk weights for certain on and off balance sheet assets and require deductions from capital for certain types of assets. We are currently evaluating the new Basel III capital requirements but believe we will be in compliance prior to the effective dates.
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. Since our Carolina Bank prime rate, which is used to price most of our commercial variable rate loans, is currently higher than the Wall Street Journal prime rate, we do not expect our Carolina Bank prime rate to increase until the Wall Street Journal prime has increased more than 1.25%.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 8.
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
We have audited the accompanying consolidated balance sheets of Carolina Bank Holdings, Inc. and Subsidiary (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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 their 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, 2013 and 2012, 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, PLLC
Charlotte, North Carolina
March 21, 2014
Elliott Davis PLLC | www.elliottdavis.com
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 2013 and 2012
See accompanying notes to consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 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 four locations in Greensboro and an office in Asheboro, Burlington, High Point and Winston-Salem. 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, Hillsborough, Raleigh, and Sanford.
The following is a description of the significant accounting and reporting policies that the Holding Company and Bank (collectively the “Company”) follows 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. 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. 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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 $964,000 and $1,729,000 at December 31, 2013 and 2012, 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, 2013 and 2012 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, in years prior to 2013, also sold mortgage-backed securities on a forward basis to hedge some of its origination commitments to borrowers. Forward sale mortgage backed securities and the value of the estimated loan commitments that were hedged are also accounted for at fair value. Assumptions related to the closing ratio of loan commitments and the projected profit from loan sales were used to estimate the fair value of hedged loan 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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 2012 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 three years from the most recent two years, adjusted for certain subjective factors. 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 2013 and 2012 were $5,731,000 and $4,209,000, 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.
(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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 1 - Summary of significant accounting policies (continued)
(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. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods. 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.
(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 (Director Plan) and two incentive stock option plans for management and employees (Employee Plans). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights to employees and directors. An aggregate of 500,000 shares of the Company’s common stock have been reserved for issuance under the terms of the Omnibus Plan. No awards have been made under the Omnibus Plan since inception.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 1 - Summary of significant accounting policies (continued)
The Company adopted Accounting for Stock-Based Compensation in 2006 under the modified prospective application method. The fair value of options granted in 2007 under the Employee Plans was $178,000, of which $0 and $36,000 was expensed in 2013 and 2012, respectively. As of December 31, 2013, there was no unrecognized compensation cost related to non-vested share-based compensation.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2007: dividend yield of 0%, expected volatility of 32%, risk-free interest rate of 3.90%, and weighted average expected lives of eight years. The weighted average fair value per share of options granted for the year ended December 31, 2007 was $5.28.
Following is a summary of stock options outstanding under both plans, adjusted for the stock splits that have occurred in prior years:
All options under the Director plan expired in 2011. At December 31, 2013, all options under the Employee Plan were exercisable at a weighted average exercise price of $10.25. The range of exercise prices at December 31, 2013 for the Employee Plans was $8.83 - $11.65. The weighted average remaining contractual term for the Employee Plans was 25 months.
The aggregate intrinsic value of all stock options and of exercisable options at December 31, 2013 was $43,000 for the Employee Plan.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 1 - Summary of significant accounting policies (continued)
(l) Reclassification
Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the 2013 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 2013 and 2012, the Commercial/Retail bank, the Mortgage division, and the holding company. The Mortgage division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. The Mortgage Division added a retail mortgage loan production office in July 2010 and another four retail mortgage loan production offices during 2012 and 2013. Retail mortgage loan officers are also located in five of eight full service bank offices. Financial performance for 2013 and 2012 and selected balance sheet information at December 31, 2013 and 2012 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.
(p) Impact of recently adopted accounting standards
In January 2013, the FASB issued ASU No. 2013-01 Balance Sheet: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The ASU clarifies that ordinary trade receivables are not in the scope of ASU No. 2011-11. The amendments apply only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in U.S. GAAP or subject to an enforceable master netting arrangement or similar agreement. The amendments were effective for the Company for interim and annual reporting periods beginning January 1, 2013 and required retrospective presentation for all comparative periods presented. These amendments did not have a material impact on the Company’s consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 1 - Summary of significant accounting policies (continued)
In February 2013, the FASB issued ASU No. 2013-02 on the topic of Comprehensive Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, in certain circumstances the amendments do require an entity to present, either on the face of the statement where net income is presented or in the notes, the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. The amendments were effective for the Company on a prospective basis beginning January 1, 2013. These amendments did not have a material effect on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11 on the topic of Income Taxes. The amendments eliminate the diversity in practice regarding presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under the provisions of the ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset unless certain criteria are met. The amendments will be effective for the Company on a prospective basis for interim and annual reporting periods beginning January 1, 2014. Early adoption and retrospective application are permitted. These amendments are not expected to have a material effect on the Company’s statement of financial position.
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, 2013. None of these new standards had or is expected to have a material impact on the Company’s consolidated financial statements.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 2 - Securities
A summary of the amortized cost and estimated fair values of securities available-for-sale and held-to-maturity follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 2 - Securities (continued)
The scheduled maturities of debt securities available-for-sale and held-to-maturity at December 31, 2013 were as follows:
Municipal securities, mortgage-backed securities and unrestricted stock were sold during 2013 and 2012 for gains totaling $272,000 and $37,000, respectively.
At December 31, 2013, securities with a carrying value of approximately $4,622,000 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, 2013, five corporate debt securities with $4,411,000 in fair value, four mortgage-backed with $10,024,000 in fair value, and sixteen municipal securities with $19,126,000 in fair value had total unrealized losses of $967,000. 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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 2 - Securities (continued)
Information pertaining to securities with gross unrealized losses at December 31, 2013 and 2012, by category and length of time that individual securities have been in a continuous loss position, follows:
Note 3 - Loans and allowance for loan losses
The following is a description of loan categories and related risks 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. Many of the properties being constructed are pre-sold but some are for speculative purposes with repayment dependent on the sale of completed construction to the final users of the property. This portfolio has experienced the highest losses during the most recent economic downturn and generally has the highest risk of our loan portfolio.
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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 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, 2013 and 2012 were as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The activity in the allowance for loan losses for 2013 and 2012 is summarized as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 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, 2013 and 2012, the total recorded investment in impaired loans amounted to approximately $29,268,000 and $28,110,000, respectively. Of these impaired loans, $16,731,000 and $13,067,000 were on non-accrual at December 31, 2013 and 2012, respectively.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The recorded investment and related information for impaired loans is summarized as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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.
⋅
Criticized - Adversely classified loans with identified weaknesses, and potential or identified losses of principal and/or interest due.
The following is a breakdown of loans by the general categories of the internal rating system:
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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The following is a summary of non-accrual loans at December 31, 2013 and 2012:
During 2013 and 2012, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with generally accepted accounting principles to determine whether they should be reported as troubled debt restructurings.
The Company 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, 2013 totaled $460,000.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The following tables present troubled debt restructurings as of December 31, 2013 and 2012:
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 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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The following tables present newly restructured loans that occurred during 2013 and 2012:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 3 - Loans and allowance for loan losses (continued)
The following table represents financing receivables modified as troubled debt restructurings and with a payment default occurring within 12 months of the restructure date, during the years ended December 31, 2013 and 2012:
TDRs with a payment default occurring within 12 months of restructure
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 $5,804,000 and $8,878,000 at December 31, 2013 and 2012, respectively. During 2013, new loans were $929,000 and repayments were $4,034,000, 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 other borrowers.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 4 - Premises and equipment
Premises and equipment at December 31, 2013 and 2012 were as follows:
No interest was capitalized in 2013 or 2012. Depreciation expense was $837,000 in 2013 and $881,000 in 2012.
Note 5 - Deposits
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $61,169,000 and $102,297,000 at December 31, 2013 and 2012, 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 $3,810,000 and $3,713,000 at December 31, 2013 and 2012, respectively.
At December 31, 2013, the scheduled maturities of time deposits were as follows:
The Company periodically utilizes broker deposits to lower its funding costs or to meet certain asset/liability objectives. Broker deposits totaled $15,906,000 and $18,800,000 at December, 31, 2013 and 2012, respectively.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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, 2013 and 2012:
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 $122.7 million were pledged to the Federal Home Loan Bank at December 31, 2013. The contractual maturities of these advances are as follows:
Credit availability for additional advances from the Federal Home Loan Bank was $61,608,000 at December 31, 2013. The Company had a discount borrowing line of $104,666,000 at December 31, 2013 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 each month as pledged loan amounts and collateral values fluctuate.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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.
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 being amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.
Note 8 - Income taxes
The Company does not have an accrual for uncertain tax positions as of December 31, 2013 and 2012, 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 2008 and 2009, and adjustments were primarily timing differences. With limited exceptions, income tax returns prior to 2010 are not subject to examination by the taxing authorities.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 8 - Income taxes (continued)
The provision for income tax expense (benefit) consisted of the following for the years ended December 31:
A reconciliation of reported income tax expense for the years ended December 31, 2013 and 2012 to the amount of tax expense computed by multiplying income before taxes by the statutory federal income tax rate of 34% follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 8 - Income taxes (continued)
The primary components of deferred income taxes which are included in other assets are as follows:
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 to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock at a price of $6.71 per share to the U.S. Treasury as part of the preferred stock transaction. In accordance with applicable accounting principles, the preferred stock and common stock warrant were valued independently and their relative fair market values were allocated to the $16 million received. Under the relative value method, $14,159,000 was allocated to the preferred stock and $1,841,000 to the common stock warrant. The discount of $1,841,000 on the preferred stock is accreted over five years using the effective yield method, thereby increasing preferred stock dividends. The accretion of discount was $371,000 and $396,000 in 2013 and 2012, respectively. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to 9% per annum after the fifth year if not called by the Company.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 9 - Preferred stock (continued)
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 for $1.8 million in April 2013. The Company retired 5,006 shares of its outstanding preferred stock for $4,958,000 in August 2013 and currently has 10,994 shares outstanding at $10,994,000.
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 10 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 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). The Bank has an internal goal to use its best efforts to maintain its ratio of Tier 1 capital to average assets above 8% as long as the ratio of classified assets to capital is above 50%. At December 31, 2013, management believes that the Company and the Bank met all capital adequacy requirements.
As of December 31, 2013, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 10 - Regulatory matters (continued)
The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012 are presented in the table that follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 11 - Commitments and Contingencies
In the normal course of business, the Company is party to a number of 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, five loan production offices, and two branch facilities under operating leases. Total future minimum lease payments, excluding renewal options, at December 31, 2013, under the leases are as follows:
Total lease expense was approximately $555,000 in 2013 and $462,000 in 2012.
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, 2013 and 2012, pre-approved but unused lines of credit for loans totaled approximately $159,756,000 and $118,608,000. In addition, the Company had $1,701,000 and $1,904,000 in performance standby letters of credit at December 31, 2013 and 2012, 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.
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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 12 - Derivatives and financial instruments (continued)
The Mortgage Division of the Company began hedging a portion of its governmental mortgage loans, primarily FHA and VA loans, in October 2010 by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement.
The table below provides the carrying values of derivative instruments at December 31, 2013 and 2012:
Prior to October 2010 and during the last eleven months of 2013, the Company sold residential mortgage loans only on a best efforts basis whereby optional commitments to sell mortgage loans were consummated at approximately the same time that optional commitments were given to borrowers to originate the loans.
The below presents the aggregate fair value and aggregate unpaid principal of loans held for sale at December 31, 2013 and 2012:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 12 - Derivatives and financial instruments (continued)
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, 2013 and 2012, 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.
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 $645,000 in 2013 and $542,000 in 2012.
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 2013 and 2012. 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, 2013, deferred directors’ fees of $1,347,000 had been used to purchase 229,896 shares of the Company’s stock held by the trust after distribution of shares to retiring directors. Deferred directors’ fees of $29,000 were also remitted to the trust before December 31, 2013 to purchase stock in 2014.
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 $993,000 in 2013 and $870,000 in 2012 related to this plan. At December 31, 2013 and 2012, other liabilities include $4,508,000 and $3,515,000, respectively, for this supplemental retirement plan.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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 and loans held for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
When measuring fair value, valuation techniques should be appropriate in the circumstances and consistently applied. A hierarchy is used to prioritize valuation inputs into the following three levels to determine fair value:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - observable inputs other than the quoted prices included in Level 1.
Level 3 - unobservable inputs.
Fair Value on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, 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.
Loans Held for Sale
The Company opted to account for loans held for sale at fair value which is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to recurring fair value adjustments as Level 2 valuation.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 14 - Fair value of financial statements (continued)
Interest Rate Lock Commitments
The Mortgage Division of the Company hedges some of its residential mortgage loans held for sale by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement. The significant unobservable input used in the Level 3 fair value measurement of the Company’s Interest Rate Lock Commitments (IRLCs) on hedged loans held for sale is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate. Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing if in a loss position. The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The closing ratio is computed by management using historical data.
The fair value of interest rate lock commitments is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing between the commitment date and period end, typically month end. The Company classifies interest rate lock commitments as Level 3. Gain on interest rate lock commitments for the period is included in mortgage banking income of non-interest income on the Consolidated Statements of Income. There have been no changes in valuation techniques for years ended December 31, 2013 and 2012; however, the Mortgage Division discontinued hedging during early 2013 due to economic factors. All loans are currently sold on a “best efforts” basis where optional commitments are made with investors to sell loans shortly after optional commitments are consummated to originate loans with borrowers. Below is a summary of activity related to interest rate lock commitments for the years ended December 31, 2013 and 2012.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 14 - Fair value of financial statements (continued)
Assets measured at fair value on a recurring basis at December 31, 2013 and 2012 are summarized below.
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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 14 - Fair value of financial statements (continued)
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, liquidation value, discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At December 31, 2013 and 2012, 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 impaired loan as nonrecurring Level 3 within the valuation hierarchy.
Assets measured at fair value on a non-recurring basis at December 31, 2013 and 2012 are summarized below:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 14 - Fair value of financial statements (continued)
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, 2013, the significant unobservable inputs used in the fair value measurements were as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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.
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, 2013, there were no fair value adjustments related to $14,810,000 of securities held-to-maturity.
Net non-impaired loans held for investment: For 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 13.5 years in 2013 and 11.0 years in 2012. The trust preferred debt was issued at favorable rates in 2004, and current rates are approximately 3% higher when available. The increase in remaining term in 2013 is attributed to inclusion of trust preferred securities as Tier 1 capital for banks less than $5 billion in assets under the new Basel III capital guidelines.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of financial instruments at December 31, 2013 and 2012. 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.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 14 - Fair value of financial statements (continued)
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
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, 2013 and 2012 follows:
There were stock options and warrants covering 82,434 shares in 2013 and 150,167 shares in 2012 that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise prices exceeded the average market prices.
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 16 - Operating segments
The Company is considered to have three principal business segments in 2013 and 2012, the Commercial/Retail Bank, the Mortgage Division, and the Holding Company. The Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the mortgage division in July 2010. Financial performance for 2013 and 2012, reflective of inter-company eliminations, and selected balance sheet information, reflective of inter-company eliminations, at December 31, 2013 and 2012 for each segment is as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 17 - Condensed financial statements of parent company
Financial information pertaining to Carolina Bank Holdings, Inc. is as follows:
CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
December 31, 2013 and 2012
Note 17 - Condensed financial statements of parent company (continued)
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.
ITEM 9.
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.
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, 2013. 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 (1992). 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, 2013. In making this assessment, it used the criteria set forth by the COSO in Internal Control-Integrated Framework (1992). Based on that assessment, management believes that, as of December 31, 2013, the company’s internal control over financial reporting is effective based on those criteria.
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 2013. 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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to pages 8-10 and 13-20 of the Proxy Statement.
ITEM 12.
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.
The following table sets forth certain information with respect to the Company’s equity compensation plans at December 31, 2013.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Incorporated by reference to pages 8 and 20 of the Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Incorporated by reference to pages 21-22 of the Proxy Statement.
PART IV
ITEM 15.
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, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
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)
4.4
Form of Stock Certificate for Series A Preferred Stock(11)
10.1
Employment Agreement of Robert T. Braswell(4)
10.2
Employment Agreement of T. Allen Liles(5)
10.3
Employment Agreement of Gunnar N. R. Fromen(5)
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 Gunnar N.R. Fromen(5)
10.11
Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck(5)
10.12
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell(9)
Exhibit
Number
Description
10.13
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles(9)
10.14
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Gunnar N.R. Fromen(9)
10.15
Carolina Bank Directors’ Deferral Plan(9)
10.16
Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett(5)
10.17
Director Retirement Agreement Between Carolina Bank and Gary N. Brown(5)
10.18
Director Retirement Agreement Between Carolina Bank and George E. Carr, III(5)
10.19
Director Retirement Agreement Between Carolina Bank and James E. Hooper(5)
10.20
Director Retirement Agreement Between Carolina Bank and D. Wayne Thomas(5)
10.21
Amended and Restated Declaration of Trust of Carolina Capital Trust(10)
10.22
Guarantee Agreement(10)
10.23
Form of Bonus Recovery Agreement(12)
10.24
Form of Golden Parachute Payment Waiver Agreement(12)
10.25
2009 Omnibus Stock Ownership and Long Term Incentive Plan(13)
10.26
Employment Agreement of Phillip B. Carmac (15)
21.1
Subsidiaries (Filed herewith)
23.1
Consent of Elliott Davis, 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 2014 Annual Meeting of Shareholders(14)
99.2
Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)
99.3
Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)
(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).
(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 January 13, 2009 with the Securities and Exchange Commission).
(12)
Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed February 5, 2010 with the Securities and Exchange Commission).
(13)
Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed March 5, 2010 with the Securities and Exchange Commission).
(14)
Filed with the Securities and Exchange Commission Pursuant to Rule 14a-6.
(15)
Incorporated by reference to Form 10-K of Carolina Bank Holdings, Inc. (Filed March 29, 2011 with the Securities and Exchange Commission).
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.
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.
EXHIBIT INDEX
Exhibit
Number
Description
3.1
Articles of Incorporation of Registrant *
3.3
Bylaws of Registrant*
4.1
Form of Stock Certificate*
4.2
Indenture*
4.4
Form of Stock Certificate for Series A Preferred Stock*
10.1
Employment Agreement of Robert T. Braswell*
10.2
Employment Agreement of T. Allen Liles*
10.3
Employment Agreement of Gunnar N. R. Fromen*
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 Gunnar N.R. Fromen*
10.11
Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck*
10.12
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell*
10.13
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles*
10.14
Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Gunnar N.R. Fromen*
10.15
Carolina Bank Directors’ Deferral Plan*
10.16
Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett*
10.17
Director Retirement Agreement Between Carolina Bank and Gary N. Brown*
10.18
Director Retirement Agreement Between Carolina Bank and George E. Carr, III*
10.19
Director Retirement Agreement Between Carolina Bank and James E. Hooper*
10.20
Director Retirement Agreement Between Carolina Bank and D. Wayne Thomas*
10.21
Amended and Restated Declaration of Trust of Carolina Capital Trust*
10.22
Guarantee Agreement*
10.23
Form of Bonus Recovery Agreement*
10.24
Form of Golden Parachute Waiver Agreement*
10.25
2009 Omnibus Stock Ownership and Long Term Incentive Plan*
10.26
Employment Agreement of Phillip B. Carmac*
21.1
Subsidiaries (Filed herewith)
23.1
Consent of Elliott Davis, 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 2014 Annual Meeting of shareholders**
99.2
Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)
99.3
Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)
* Incorporated by reference.
** To be filed with the Securities and Exchange Commission pursuant to Rule 14a-6.