March 5, 2010
Dear Stockholders,
Carolina Financial Corporation is pleased to report earnings of $7.2 million for fiscal 2009, as compared to
$5.6 million for fiscal 2008, or $3.72 per common share diluted compared to $2.83 per common share
diluted, respectively.
Total assets at December 31, 2009 were stable at $1.1 billion when compared to December 31, 2008.
Loans receivable, net decreased 11.1% to $690.2 million at December 31, 2009 from $776.6 million at
December 31, 2008. Total deposits increased to $761.1 million as of December 31, 2009 from $717.4
million at December 31, 2008, an increase of 6.1%. Stockholders’ equity increased $9.5 million, primarily
due to net income of $7.2 million and an increase in the market value of securities net of tax of $2.0 million.
Net interest income for fiscal 2009 increased 6.4% to $31.7 million, compared to $29.8 million for fiscal
2008. Provision for loan losses of $10.5 million in 2009 compared to $6.4 million in 2008, increased as a
result of an increase in non-performing assets. In addition, the company expensed $5.2 million in 2009
related to other real estate and mortgage loan repurchase losses related to mortgage operations as compared
to $290,000 in 2008. Return on average assets during 2009 was 0.65% while return on average equity was
14.06%.
As anticipated, levels of non-performing assets and credit losses increased further during the year as a result
of the distressed residential real estate markets and economic recession. Non-performing assets at December
31, 2009 increased to $35.7 million compared to $21.0 million at December 31, 2008. While it is difficult
to know the full extent of the economic downturn and the resulting impact on Carolina Financial
Corporation’s credit quality, we expect further increases in non-performing assets, corresponding provisions
and expenses and net charge-offs in 2010.
Our wholesale mortgage operations experienced strong activity during 2009, making a significant
contribution to our year-end earnings. An increase in refinance activity due to lower interest rates coupled
with expanding our own sales efforts in new markets has provided positive results.
We were faced with numerous challenges in 2009 including an increase in non-performing loans, higher
loan loss provisions and a greater level of charge-offs as well as an FDIC special deposit insurance
assessment. Additionally, total FDIC insurance including the special assessment was $2.2 million in 2009
compared to $617,000 in 2008, an increase of $1.6 million. Nevertheless, credit quality issues remain a
major concern and will remain so until the economy meaningfully improves, housing values begin to
stabilize and the unemployment situation recovers.
We are glad to have your support as a significant part of our success, sharing our belief that a service-
oriented banking institution can successfully compete against larger banking organizations. On behalf of our
entire staff and Board of Directors, we thank you for your business, support and trust over the years. I hope
to see you at our Annual Meeting of Shareholders in Charleston on April 28, 2010.
Sincerely,
John D. Russ
President and Chief Executive Officer
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CAROLINA FINANCIAL CORP ORATION
TABLE OF CONTENTS
Letter to Stockholders
Summar y o f Select ed Financial Data
Fi nancial Discussion
Indepe ndent Auditor’s R eport
Consolidated Financial Statements
Consol idated Statements of Financial C onditi on
Consol idated Statements of Operations
Consol idated Statements of C hanges in Stockholders’ Equi t y
and Comprehensive Income ( Loss)
Consol idated Statements of C ash Flows
Notes to Consolidated Financial Statements
Caroli na Financial Corporation’s Officers and Directors
Communit y FirstBank of Charleston’s Officers and Directors
Crescent Bank’s Officers and Directors
Crescent Mortgage Compan y’s Officers and Direct ors
Caroli na Service Corporation’s Officers and Directors
Corporat e In formation
1
4-5
6-19
20
21
22
23
24-2 5
26-5 0
51
52
53
54
55
56
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CAROLINA FINANCIAL CORP ORATION
SUMMARY OF SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial and other data of the Company at and for the periods indicated. The information below
is only a summary and should be read together with the accompanying Financial Discussion, which follows this data, and the consolidated
financial statements presented herein.
Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
2009
$
56,736
25,019
31,717
10,460
21,257
27,938
37,673
11,522
4,353
Net income
$
7,169
For The Years Ended December 31,
2007
2008
(In Thousands)
2006
63,049
33,227
29,822
6,361
23,461
9,227
23,882
8,806
3,256
5,550
65,572
37,285
28,287
1,775
26,512
8,869
22,301
13,080
4,806
56,073
29,711
26,362
2,755
23,607
9,063
20,317
12,353
4,543
8,274
7,810
2005
33,107
15,113
17,994
1,315
16,679
10,049
17,364
9,364
3,378
5,986
Balance Sheet Data:
Total assets
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans held for sale
Loans receivable, net
Allowance for loan losses
Deposits
Short-term borrowed funds
Long-term debt
Stockholders' equity
2009
2008
At December 31,
2007
(In Thousands)
2006
2005
$
1,078,757
17,759
104,401
125,633
12,456
71,233
690,163
13,032
761,108
43,787
203,638
56,138
1,138,994
16,285
120,988
113,689
11,874
28,283
776,621
11,300
717,389
148,090
218,465
46,591
977,139
4,241
157,456
-
10,147
25,030
738,705
10,083
692,100
85,603
137,965
49,535
804,435
8,311
58,091
-
5,689
30,449
661,465
8,406
622,456
15,117
110,465
40,659
661,449
3,715
45,806
-
5,036
54,357
517,621
5,734
479,154
45,363
85,465
31,883
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CAROLINA FINANCIAL CORP ORATION
SUMMARY OF SELECTED FINANCIAL DATA
2009
2008
For The Years Ended December 31,
2007
(In Thousands)
2006
Selected Average Balances:
Total assets
Loans receivable, net
Deposits
Stockholders' equity
Performance Ratios:
Return on average equity
Return on average assets
Average earning assets to average total assets
Average loans receivable, net to average deposits
Average equity to average assets
Net interest margin
Net charge-offs to average loans receivable, net
Non-performing assets to period end loans receivable, net
Allowance for loan losses as a percentage
$
1,098,061
737,448
767,814
50,986
1,090,787
774,183
750,110
47,552
864,497
708,629
665,252
44,823
762,158
608,868
580,472
35,615
14.06%
0.65%
94.70%
96.05%
4.64%
3.05%
1.18%
5.17%
11.67%
0.51%
95.66%
103.21%
4.36%
2.86%
0.66%
2.71%
18.46%
0.96%
95.22%
106.52%
5.18%
3.44%
0.01%
2.18%
21.93%
1.02%
94.83%
104.89%
4.67%
3.65%
0.01%
0.19%
2005
554,675
422,194
397,714
28,098
21.30%
1.08%
94.10%
106.16%
5.07%
3.45%
0.00%
0.15%
of gross loans receivable (end of period)
1.85%
1.44%
1.35%
1.25%
1.10%
Per Share Data:
Book value (end of period)
Basic earnings
Diluted earnings
2009
At or For The Years Ended December 31,
2008
2006
2007
2005
$
29.35
3.75
3.72
24.36
2.95
2.83
27.55
4.61
4.23
22.70
4.51
4.10
18.75
3.53
3.19
Average common shares - basic
Average common shares - diluted
1,912,449
1,924,720
1,883,101
1,960,362
1,794,659
1,954,392
1,729,964
1,902,818
1,693,736
1,876,142
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CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Financial Discussion
Carolina Financial Corporation is not a publicly traded company subject to reporting and disclosure requirements of the Securities and
Exchange Commission (“SEC”) as enumerated in Article 9 of Regulation S-X, Guide 3 or any other requirements for SEC registrants. The
Company also does not have an actively traded market for its stock. The accompanying Financial Discussion is provided to assist the
reader of these consolidated financial statements and is not intended to comply with disclosure requirements of the SEC as enumerated
above.
Discussion of Forward-Looking Statements
The accompanying Financial Discussion contains certain "forward-looking statements" concerning risks and uncertainties about the
financial condition and future operations of Carolina Financial Corporation (the “Company”) and its wholly-owned subsidiary banks,
Community FirstBank of Charleston (“Community FirstBank”) and Crescent Bank, (together, the “Banks”), and its wholly-owned
subsidiary service corporation, Carolina Services Corporation of Charleston (“Carolina Services”). Effective July 27, 2009, Carolina
Financial Corporation contributed 100% of its wholly owned mortgage subsidiary Crescent Mortgage Company (“Crescent Mortgage”) to
Community FirstBank. Crescent Mortgage continues to operate as a wholly owned subsidiary of Community FirstBank. These forward-
looking statements, as defined by federal securities laws, relate to, among others, expectations of the business environment in which the
Company operates, projections of future performance, including operating efficiencies, perceived opportunities in the market, potential
future credit experience, and statements regarding the Company’s mission and vision. These forward-looking statements are based upon
Management’s current expectations, and may, therefore involve risks and uncertainties. Management’s ability to predict results or the
effect of future plans or strategies is inherently uncertain. The Company’s actual results, performance or achievements may differ
materially from those suggested, expressed or implied by forward-looking statements due to a wide range of factors, including, but not
limited to, the general business environment, general economic conditions nationally and within the State of South Carolina, interest rates,
the South Carolina and national real estate markets, the demand for mortgage loans, the credit risk of lending activities, including changes
in the levels of and trends of loan delinquencies and charge-offs, results of examinations by our banking regulators, competitive conditions
between banks and non-bank financial service providers, regulatory changes, changes in federal and state tax matters and other risks. No
assurance can be given that the results of any forward-looking statements will be achieved and actual results could be affected by one or
more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act or other applicable legal provisions.
Risk Factors
The Company operates in a business environment that has inherent risks. In addition to the risks and uncertainties described below, other
risks and uncertainties not currently known to us or that items we currently deem to be immaterial may become material and adversely
affect our business, financial condition and results of operations.
Our business has been adversely affected by downturns in the local economies of our market areas and further downturns could
significantly adversely impact our business.
Our business is directly affected by market conditions, industry and finance trends, legislative and regulatory changes, and changes in
governmental monetary and fiscal policies and inflation, all of which are beyond our control. Currently our markets are experiencing a
prolonged recession and continue to reflect weakness in business and economic conditions that may result in (i) a decrease in the demand
for loans and other products and services offered by the Company, (ii) a further decrease in the value of loan collateral, or (iii) a further
increase in the number of customers and counterparties who become delinquent, file for bankruptcy protection under bankruptcy laws or
default on their loans or other obligations. A further increase in the number of delinquencies, bankruptcies or defaults could result in a
higher level of nonperforming assets, net charge-offs, and provision for loan losses that could adversely impact our results of operations
and financial condition.
Further downturns in the real estate markets in our primary market area could significantly adversely impact our business.
Our business activities and credit exposure are primarily concentrated in Charleston, Dorchester, and Horry counties in South Carolina.
The real estate markets have experienced a significant decline in these markets and these real estate markets may experience further
declines. As of December 31, 2009, substantially all of the Company’s loan portfolio is secured by real estate located in South Carolina. If
real estate values continue to decline, the collateral for these loans will provide less security. As a result, the borrower’s ability to pay, or
the Company’s ability to recover on defaulted loans by selling the underlying collateral, would be diminished.
Higher FDIC insurance premiums adversely affect our earnings.
The FDIC insures deposits for the Banks. The FDIC charges the insured financial institution premiums to maintain the Deposit Insurance
Fund. Current economic conditions have increased the number and severity of bank failures and there are expectations for further bank
failures. The FDIC issued guidelines that increased premiums paid by insured institutions based on certain risk criteria at the covered
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CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
financial institution. As a result, the Company experienced an increase in FDIC premiums in 2009 over 2008 of approximately $1.6
million.
Changes in interest rates could impact our financial condition and results of operations.
The Company’s earnings are significantly dependent on net interest income. The primary source of income is net interest income, which is
the difference between interest earned on interest-bearing assets and interest paid on interest-bearing liabilities. It is expected that we will
periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities
will be more sensitive to changes in market interest rates than our interest-bearing assets, or vice versa. In either event, if market interest
rates should move contrary to our position, this “gap” would negatively impact earnings.
Concern of customers over deposit insurance may cause a decrease in deposits at the Company.
With continued concerns about bank failures, customers are concerned about FDIC insurance coverage on their deposits and may withdraw
deposits from the Company in an effort to ensure that the amount they have on deposit with the Company are fully insured. Decreases in
deposits may adversely affect our funding costs and net income. The FDIC recently increased FDIC insurance limits on both individual
and commercial accounts. Should the FDIC not maintain these increased limits, this could further increase customer concerns.
The fiscal and monetary policy of the federal government and its agencies could have a material adverse effect on our earnings.
The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies determine in large part the cost of
funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. They
also can materially decrease the value of financial instruments that we hold, such as debt securities and mortgage servicing rights. Its
policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal
Reserve Board policies are beyond our control and difficult to predict; consequently, the impact of these changes on our activities and
results of operations is difficult to predict.
Changes in bankruptcy regulations could adversely affect the Company’s business.
As one component to stemming potential foreclosures, the current governmental administration is discussing “bankruptcy cram-downs”,
whereby a judge, under certain guidelines, could unilaterally modify the terms of the contractual debt agreement between the borrower and
the lender. If this or similar legislation becomes effective, the impact could significantly adversely impact the Company’s business.
If the allowance for loan losses is not sufficient to cover actual loan losses, earnings will decrease.
Every loan made by the Company carries a risk that it will not be repaid in accordance with its terms or that any collateral securing it will
not be sufficient to assure payment. This risk is affected by, among other things, cash flows of borrowers, changes in the value of
collateral, borrower credit histories, changes in economic and industry conditions and duration of the loan.
Regulatory agencies, as an integral part of their examination process, review our loans and the allowance for loan losses. Although we
believe that the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict these losses or
whether our allowance will be adequate or that regulators will not require us to increase this allowance. Any of these occurrences could
materially and adversely affect our business, financial condition and profitability.
Our funding sources may prove insufficient to replace deposits and support future growth.
We rely on customer deposits, advances from the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”), and other
borrowings to fund operations. Although the Company has historically been able to replace maturing deposits and advances, if desired, no
assurance can be given that we would be able to replace such funds in the future if the financial condition of the FHLB or programs
sponsored by the FRB or other market conditions were to change. In addition, certain borrowing sources are on a secured basis. Due to
changes applied by rating agencies on bonds, changes in collateral requirements or deteriorating loan quality, outstanding borrowings could
be required to be repaid, incurring prepayment penalties. Our financial flexibility will be severely constrained if we are unable to maintain
access to funding at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support
future operations, our revenues may not increase proportionally to cover these costs.
In addition, the Company’s mortgage company funds mortgage loans held for sale through warehouse lines of credit and purchase and sale
agreements. Due to recent economic conditions, sources of warehouse lending have decreased and could affect Crescent Mortgage’s
ability to fund loans held for sale.
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CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Should we elect or be
required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our
common or preferred stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic
conditions and a number of other factors, many of which are outside of our control, and our financial performance. Accordingly, there is
no assurance that we will have the ability to raise additional capital if needed or on terms acceptable to us. Failure to be able to raise
additional capital could result in the Company not meeting our regulatory capital standards.
If our investment in the Federal Home Loan Bank of Atlanta were impaired in the future, our earnings and stockholders’ equity would
decrease.
We own common stock of the Federal Home Loan Bank of Atlanta. We hold this stock to qualify for membership in the Federal Home
Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. There is no market for our
Federal Home Loan Bank of Atlanta common stock. Recent published reports indicate that certain member banks of the Federal Home
Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels.
In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of
Atlanta, could be substantially diminished. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of
Atlanta common stock could be impaired at some time in the future. If this occurs, it would cause our earnings and stockholders’ equity to
decrease.
If the decline in value of any of our investment securities becomes other-than-temporary, we are required to write down the value of
that security through a charge to earnings.
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current
carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess
whether the decline is other than temporary. If we conclude that the decline is other-than-temporary, we are required to write down the
value of that security through a charge to earnings. Changes in the expected future cash flows of these securities and/or prolonged price
declines may result in our concluding in future periods that the impairment of these securities is other-than-temporary, which would require
a charge to earnings to write down these securities to fair value.
The Company is subject to extensive governmental regulation, which could have an adverse impact on our operations.
The banking industry is extensively regulated and supervised under both federal and state law. The Company is subject to the regulation
and supervision of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Company, and the South Carolina
Board of Financial Institutions. These regulations are intended primarily to protect depositors, the public and the FDIC insurance fund, and
not our shareholders. These regulations govern matters ranging from the maintenance of adequate capital to the general business
operations and financial condition of the Company. Any changes in any federal and state law, as well as regulations and governmental
policies, income tax laws and accounting principles, could affect the Company in substantial and unpredictable ways, including ways that
could adversely affect its business, financial condition or results of operations.
The Company is subject to liquidity risk.
The inability of the Company to raise funds through deposits, borrowings, sale of securities or other sources could have a substantial
negative impact on the Company’s liquidity. Factors that could detrimentally impact the Company’s access to liquidity include a decrease
in the level of the Company’s business activity or adverse regulatory action against the Company. The Company’s ability to borrow could
be impaired by such factors as a disruption in the financial markets or negative views and expectations of the prospects for the financial
services industry. Although the Company’s current sources of funds are considered adequate for its current liquidity needs, there can be no
assurance in this regard for the future. If additional debt is needed in the future, there can be no assurance that such debt would be
available or, if available, would be on favorable terms. The ability of the Company to raise capital or borrow in the debt markets has been
negatively affected by recent economic conditions. If additional financing sources are unavailable or not available on reasonable terms, the
Company’s financial condition, results of operations and future prospects could be adversely affected.
The Company’s 2009 earnings have been highly dependent upon the results of the mortgage operations.
There are a number of items that could adversely affect the volumes and margin of the Company’s mortgage operations. These include, but
are not limited to, the Federal Reserve mortgage-backed securities purchase program, aggressively low rates, the housing market recovery,
the status and financial condition of FNMA and FHLMC, proposed changes in the FHA lending requirements, extensive regulatory
changes and liquidity. Should these factors significantly impact production of mortgages, it is likely that the Company’s earnings would be
adversely affected.
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CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
The Company’s mortgage operations are subject to significant repurchase risk.
The Company is exposed to significant repurchase risk on mortgage loan production related to potential reimbursements for loans sold to
third parties for borrower fraud, underwriting and documentation issues, early defaults and prepayments of sold loans. If the Company
experiences significant losses related to repurchase risk, it is possible that the reserve established for such exposure is not adequate. We
believe that the reserve related to repurchase risk is adequate to absorb probable losses, however, we cannot predict these losses or whether
our reserve will be adequate. Any of these occurrences could materially and adversely affect our business, financial condition and
profitability.
Hurricanes, earthquakes and other natural disasters may adversely affect loan portfolios and operations and increase the cost of doing
business.
The Company operates in markets that are susceptible to natural disasters. Large-scale natural disasters may significantly affect loan
portfolios by damaging properties pledged as collateral, affecting the economies our borrowers live in, and by impairing the ability of the
borrower to repay their loans.
Overview
Carolina Financial Corporation, a bank holding company, is a Delaware corporation that was incorporated in 1996 and began operations in
1997. We operate principally through Community FirstBank of Charleston and Crescent Bank, both South Carolina state-chartered banks.
Our assets are approximately $1.1 billion at December 31, 2009.
Our subsidiaries provide a full range of financial services designed to meet the financial needs of our customers, including:
• Commercial and retail banking
• Mortgage banking
• Cash management, and
• Retail investment services and asset management.
Carolina Financial, through Community FirstBank and Crescent Bank, currently conducts business through 10 bank branches located in the
following counties: Charleston (4), Dorchester (2), and Horry (4) in South Carolina. Effective July 27, 2009, Carolina Financial
Corporation contributed 100% of its wholly owned mortgage subsidiary Crescent Mortgage Company (“Crescent Mortgage”) to
Community FirstBank. Crescent Mortgage is located in Dekalb County, Georgia, and originates loans in 40 states.
Comparison of Operating Results for the Years Ended December 31, 2009 and 2008
Net Income. Net income increased $1.6 million, or 29.2%, to $7.2 million, or $3.72 diluted earnings per share, during 2009 compared to
$5.6 million, or $2.83 diluted earnings per share, during 2008. The net increase in net income primarily resulted from increases in net
interest income of $1.9 million to $31.7 million during 2009 compared to $29.8 million during 2008 offset by an increase in provision for
loan losses of $4.1 million to $10.5 million during 2009 compared to $6.4 million during 2008. Noninterest income increased by $18.7
million to $27.9 million during 2009 compared to $9.2 million during 2008. There was also an increase in noninterest expense of $13.8
million to $37.7 million during 2009 compared to $23.9 million during 2008. Income tax expense increased $1.1 million in 2009 over
2008.
Net Interest Income. Net interest income increased $1.9 million, or 6.3%, to $31.7 million during 2009 from $29.8 million during 2008.
This increase is primarily the result of an increase in the Company’s net interest margin to 3.05% in 2009 from 2.86% in 2008, an
improvement of 19 basis points.
The improvement in net interest margin during fiscal 2009 over fiscal 2008 is primarily the result of the mix of interest-bearing liabilities
to lower-rate liabilities and the repricing of higher-rate liabilities, net of the reduction in yield earned on interest-earning assets. The rate
paid on interest-bearing liabilities in 2009 was 2.51% as compared to 3.36% in 2008, a reduction of 85 basis points. During fiscal 2009,
the Company focused on increasing checking and money market deposits and reducing brokered deposits and higher-rate certificates of
deposits. The yield earned on interest-earning assets in 2009 was 5.46% as compared to 6.04% in 2008, a reduction of 58 basis points.
Fiscal 2008 experienced a falling rate environment as evidenced by the reduction in the prime rate. During fiscal 2008 the prime rate
dropped from 7.25% at the beginning of the year to 3.25% by December 31, 2008. During fiscal 2009, the prime rate remained at 3.25%
all year. Accordingly, yields earned on interest-bearing assets and rates paid on interest-bearing liabilities that are tied to the prime rate or
other variable index, reflected a reduction in the interest rates.
Total interest income decreased $6.3 million, or 10.0%, to $56.7 million during 2009 from $63.0 million during 2008. Average loans
receivable, net decreased $36.7 million, or 4.7 %, to $737.4 million during 2009 from $774.2 million during 2008. The yield earned on
loans receivable, net decreased to 5.60% from 6.21% during 2009 and 2008, respectively. At December 31, 2009 and 2008, approximately
65% and 70%, respectively, of the loan portfolio consisted of adjustable rate loans and 35% and 30%, respectively, are fixed rate loans.
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CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Additionally, the Company’s net interest income was adversely affected by the Company’s nonaccrual loans that increased to $27.1 million
at the end of 2009 from $13.9 million at the end of 2008. Lost interest, interest not recorded in the accompanying consolidated statements
of operations related to loans on nonaccrual, loans charged off during the period, and loans transferred to real estate acquired through
foreclosure, totaled approximately $1.6 million and $1.2 for fiscal 2009 and 2008, respectively. The average balance of securities available
for sale decreased $88.4 million, or 45.6%, to $105.3 million during 2009 from $193.6 million during 2008. The yield earned on securities
available for sale decreased to 5.16% from 5.76% during 2009 and 2008, respectively. During 2009 and 2008, the Company transferred
approximately $30.6 million and $112.3 million, respectively, of securities available for sale to securities held to maturity. The average
balance of securities held to maturity increased $107.8 million, or 449.2%, to $131.8 million during 2009 from $24.0 million during 2008.
The yield earned on securities held to maturity decreased to 5.57% from 6.31% during 2009 and 2008, respectively.
Total interest expense decreased $8.2 million, or 24.7%, to $25.0 million during 2009 from $33.2 million during 2008. Average interest-
bearing liabilities increased $8.6 million, or 0.9%, to $996.6 million during 2009 from $988.1 million during 2008. Average money market
balances increased $22.1 million, or 22.5%, to $120.6 million during 2009 from $98.4 million during 2008. In addition, the effective rate
paid on money markets during 2009 was 1.55% compared to 1.90% during 2008. Average short-term borrowings balances decreased
$22.2 million, or 29.1%, to $54.2 million during 2009 from $76.4 million during 2008. The effective rate paid during 2009 on these
borrowings was 2.51% compared to 2.61% during 2008. Average long-term borrowings balances increased $9.5 million, or 4.6%, to
$215.6 million during 2009 from $206.2 million during 2008. The effective rate paid during 2009 on these borrowings was 2.73%
compared to 3.49% during 2008.
Provision for Loan Losses. The provision for loan losses increased $4.1 million to $10.5 million during 2009 compared to $6.4 million
during 2008. The Company had net charge-offs of $8.7 million or 1.28% of average loans receivable, net during 2009 compared to net
charge-offs of $5.1 million or 0.66% of average loans receivable, net during 2008. The allowance for loan losses was 1.85% of net loans
receivable, or $13.0 million at December 31, 2009, an increase of $1.7 million from the allowance for loan losses of $11.3 million or 1.44%
of the loans receivable, at December 31, 2008. The 41 basis point increase in the allowance for loan losses as a percentage of loans
receivable, net is primarily due to the increase in non-performing assets to loans receivable, net to 5.17% at December 31, 2009 from
2.71% at December 31, 2008. An additional cause of the increase is continued review of the risk factors related to the underlying loan
portfolio, including increased delinquencies of construction mortgages, internal loan level risk rating changes, and slowing external
economic conditions in the residential real estate market.
Noninterest Income. Total noninterest income increased $18.7 million, or 202.8%, to $27.9 million during 2009 from $9.2 million during
2008. This increase is primarily attributable to an increase in net gain on sale of loans of $19.4 million, net of a reduction in the gain on
derivatives of $728,000 and an increase in the loss on extinguishment of debt of $659,000.
Net gain on sale of loans held for sale increased $19.4 million, or 423.7%, to $24.0 million during 2009 compared to $4.6 million during
2008. The increase in net gain on sale of loans held for sale is due to increased volume and margin. Loans held for sale originations
increased to $1.7 billion during 2009 compared to $712.8 million during 2008. Margin on loan sales, which includes the gain on sale of
loans, net fee income and the change in market value of the pipeline, was 129.6 basis points during 2009 compared to 64.1 basis points
during 2008.
Net gain on derivatives in 2009 totaled $411,000 compared to $1.1 million during 2008. The decrease in the derivative fair values during
the year ended December 31, 2009 was due to unfavorable movement in mortgage interest rates at year-end resulting in a decrease in the
derivative values.
The Company incurred losses on extinguishment of debt totaling $711,000 and $52,000 in 2009 and 2008, respectively on the prepayment
of certain debt advances with interest rates higher than market at the time of the prepayment.
Noninterest Expense. Total noninterest expense increased $13.8 million, or 57.7%, to $37.7 million during 2009 from $23.9 million
during 2008. This increase is primarily attributable to increases in salaries and employee benefits expense, other real estate expense,
mortgage loan repurchase losses, FDIC insurance and other expenses.
Salaries and employee benefits expense increased a net $5.7 million, or 39.2%, to $20.2 million during 2009 from $14.5 million during
2008. The increase in compensation and benefits in 2009 of $4.8 million over 2008 primarily relates to an increase in the number of
employees at the mortgage company and the related incentives earned during 2009.
Other real estate expense increased $1.8 million during 2009 related to write-downs of other real estate and the additional expenses of
managing other real estate.
Mortgage loan repurchase losses increased $3.1 million during 2009 as the Company provided for exposure on mortgage loan production
related to potential reimbursements for loans sold to third parties for borrower fraud, underwriting and documentation issues, early defaults
and prepayments of sold loans.
- 10 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
FDIC insurance expense increased $1.6 million, or 256.7%, to $2.2 million during 2009 from $617,000 during 2008 primarily due to higher
insurance rates and the FDIC special assessment of $514,000 in the second quarter of 2009.
Other expense increased $1.2 million, or 27.0%, to $5.8 million during 2009 from $4.5 million during 2008 primarily related to the
increased loan volumes at the mortgage company. There were no other individually significant changes.
Income Tax Expense. Income tax expense increased $1.1 million to $4.4 million during 2009 from $3.3 million during 2008. The
increase was due to an increase in income before income taxes in 2009. The Company’s effective tax rate was 37.8% and 37.0% during
2009 and 2008, respectively.
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007
Net Income. Net income decreased $2.7 million, or 32.9%, to $5.6 million, or $2.83 diluted earnings per share, during 2008 compared to
$8.3 million, or $4.23 diluted earnings per share, during 2007. The net decrease in net income resulted from increases in net interest
income of $1.5 million to $29.8 million during 2008 compared to $28.3 million during 2007 offset by an increase in provision for loan
losses of $4.6 million to $6.4 million during 2008 compared to $1.8 million during 2007. Noninterest income increased by $358,000 to
$9.2 million during 2008 compared to $8.9 million during 2007. There was also an increase in noninterest expense of $1.6 million to $23.9
million during 2008 compared to $22.3 million during 2007. Income tax expense decreased $1.6 million in 2008 over 2007.
Net Interest Income. Net interest income increased $1.5 million, or 5.4%, to $29.8 million during 2008 from $28.3 million during 2007.
This increase is a result of an increase in average interest-earning assets of $220.3 million, or 26.8%, to $1.0 billion in 2008 from $823.2
million in 2007, which was predominately funded by an increase in average interest-bearing liabilities of $232.6 million, or 30.8%, to
$988.1 million in 2008 from $755.5 million in 2007. The Company’s net interest margin also decreased 16.9% to 2.9% in 2008 from 3.4%
in 2007. This decrease was due to the Company’s asset sensitive balance sheet. The majority of the Company’s loan portfolio consisting
of adjustable rate loans that are indexed to the Company’s prime rate began to decrease during the second half of 2007 through 2008 and
repriced much more quickly and severely than the Company’s borrowings. In addition, due to national liquidity issues, deposits were very
competitive in local markets and repriced much less than the federal funds rate. From January 1, 2008 to December 31, 2008 the federal
funds rate decreased 4.0% while the Company’s cost of deposits only decreased 1.3%. Additionally, the Company’s net interest margin
was adversely affected by the Company’s nonperforming assets, consisting of nonaccrual loans and real estate acquired through
foreclosure, that were not accruing interest, increasing to $21.0 million at the end of 2008 from $16.1 million at the end of 2007. Lost
interest, interest not recorded in the accompanying consolidated statements of operations related to loans on nonaccrual, loans charged off
during the period, and loans transferred to real estate acquired through foreclosure totaled approximately $1.2 million and $240,000 for
fiscal 2008 and 2007, respectively.
Total interest income decreased $2.5 million, or 3.8%, to $63.0 million during 2008 from $65.6 million during 2007. This decrease is
primarily attributable to the dynamics of average loan and securities balances and the average annual yields earned. Average loans
receivable, net increased $65.6 million, or 9.2%, to $774.2 million during 2008 from $708.6 million during 2007. The yield earned on
loans receivable, net decreased to 6.2% from 8.3% during 2008 and 2007, respectively. Approximately 70% of the loan portfolio consists
of adjustable rate loans and 30% are fixed rate loans. During fiscal 2008 the prime rate dropped from 7.25% at December 31, 2007 to
3.25% at December 31, 2008. Accordingly, loans tied to the prime rate, or other variable index, resulted in a reduction of the interest rates
on these adjustable rate loans. The average balance of securities available for sale increased $121.4 million, or 168.3%, to $193.6 million
during 2008 from $72.2 million during 2007. The yield earned on securities available for sale increased to 5.8% from 5.3% during 2008
and 2007, respectively. At September 30, 2008, the Company transferred approximately $112.3 million of securities available for sale to
securities held to maturity. The average balance of securities held to maturity was $24.0 million with a yield of 6.3%.
Total interest expense decreased $4.1 million, or 10.9%, to $33.2 million during 2008 from $37.3 million during 2007. The decrease in
interest expense is attributable to the dynamics of the average balances of interest-bearing liabilities and the yield paid on those liabilities.
During fiscal 2008 the prime rate dropped from 7.25% at December 31, 2007 to 3.25% at December 31, 2008. Accordingly, deposits and
borrowings, either directly or indirectly tied to the prime rate, or other variable index, resulted in a reduction of the interest rates on these
deposits and borrowings. Average interest-bearing liabilities increased $232.6 million, or 30.8%, to $988.1 million during 2008 from
$755.5 million during 2007. The increase in the average interest-earning assets was funded primarily through certificates of deposit and
borrowings from FHLB and FRB. Average certificate of deposit balances increased $107.6 million, or 22.8%, to $580.3 million during
2008 from $472.7 million during 2007. In addition, the effective yield paid during 2008 was 3.8% compared to 5.1% during 2007.
Average short-term and long-term borrowings balances increased $144.2 million, or 104.1%, to $282.6 million during 2008 from $138.4
million during 2007. The effective yield paid during 2008 on these borrowings was 3.2% compared to 6.0% during 2007.
Provision for Loan Losses. The provision for loan losses increased $4.6 million to $6.4 million during 2008 compared to $1.8 million
during 2007. The Company had net charge-offs of $5.1 million or 0.66% of average loans receivable, net during 2008 compared to net
charge-offs of $98,000 or 0.01% of average loans receivable, net during 2007. The allowance for loan losses was 1.4% of loans receivable,
or $11.3 million, at December 31, 2008, an increase of $1.2 million from the allowance for loan losses of $10.1 million or 1.4% of the
loans receivable, at December 31, 2007. The 0.09% increase in the allowance for loan losses as a percentage of loans receivable, net is
primarily due to the increase in non-performing assets to loans receivable, net to 2.7% at December 31, 2008 from 2.2% at December 31,
- 11 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
2007. An additional cause of the increase is continued review of the risk factors related to the underlying loan portfolio, including
increased delinquencies of construction mortgages, internal loan level risk rating changes, and slowing external economic conditions in the
residential real estate market.
Noninterest Income. Total noninterest income increased $358,000, or 4.0%, to $9.2 million during 2008 from $8.9 million during 2007.
This increase is primarily attributable to an increase in net gain on derivatives of $1.2 million, an increase in sales of non-depository
products of $810,000 and an increase in deposit service charges of $374,000, net of a decrease in the net gain on sale of loans held for sale
of $1.9 million in 2008 compared to 2007.
Net gain on sale of loans held for sale decreased $1.9 million, or 29.2%, to $4.6 million during 2008 compared to $6.5 million during 2007.
The decrease in net gain on sale of loans held for sale was primarily due to decreased volume as originations of loans held for sale
decreased to $712.8 million during 2008 compared to $949.1 million during 2007. The Company’s margin on loan sales was 64.1 basis
points during 2008 compared to 67.3 basis points during 2007.
Deposit service charges increased $374,000, or 34.8%, to $1.4 million during 2008 from $1.1 million during 2007. This increase is
primarily attributable to an increase in commercial NSF charges.
During the latter part of 2007, the Company began offering non-depository products through its relationship with Raymond James
Financial Services (“Raymond James”), including stocks, bonds, mutual funds, annuities, insurance and retirement products. Revenues
from sales of these non-depository products were $867,000 and $57,000 in 2008 and 2007, respectively.
During the fourth quarter of 2007 and the first six months of 2008, the Company restructured part of its securities portfolio to add more
duration in anticipation of falling interest rates and take advantage of higher yields in various investment grade securities. In 2008, the
Banks sold $65.0 million of securities recognizing a $952,000 net gain on sale of available for sale securities. In 2007, the Banks sold
$18.8 million of securities recognizing a $477,000 gain on sale of available for sale securities. The Banks used the proceeds in both years
to purchase various mortgage-backed securities.
Net gain on derivatives in 2008 totaled $1.1 million compared to a $13,000 loss during 2007. The increase in the derivative fair values
during the year ended December 31, 2008 was due to favorable movement in mortgage interest rates resulting in an increase in the
derivative values as well as an increase in the volume of interest rate locks.
Noninterest Expense. Total noninterest expense increased $1.6 million, or 7.1%, to $23.9 million during 2008 from $22.3 million during
2007. This increase is attributable to increases in salaries and employee benefits expense, occupancy and equipment expense, FDIC
insurance and other expenses.
Salaries and employee benefits expense increased a net $376,000, or 2.7%, to $14.5 million during 2008 from $14.1 million during 2007.
During 2008, compensation and benefits increased $1.6 million, offset by a $1.1 million reduction of expense related to a change in the
Company’s short-term disability program. Prior to changing the short-term disability program to a third-party insurance program, the
Company self-insured for short-term disability. Upon termination of the plan, the Company reversed an accrual of approximately $1.1
million into 2008 earnings. The increase in compensation and benefits primarily relates to an increase in commission expense related to the
Raymond James relationship of $379,000, normal annual merit increases and an increase in full-time equivalents at December 31, 2008 to
217 compared to 204 at December 31, 2007.
Occupancy and equipment expense increased $274,000, or 10.0%, to $3.0 million during 2008 from $2.7 million during 2007. The year
over year increase is primarily attributable to an $84,000 increase in ATM expenses for the five ATM machines added during fiscal 2008.
In addition, depreciation increased approximately $96,000 related to additions to property and equipment. Rent expense increased
approximately $60,000 primarily due to acquiring space for the non-depository operations.
FDIC insurance expense increased $151,000, or 32.4%, to $617,000 during 2008 from $466,000 during 2007. The increase is primarily
related to an increase in bank deposits. During 2007, the FDIC started charging deposit insurance assessments to all insured institutions in
order to increase the reserve ratios of the FDIC Deposit Insurance Fund.
Other expense increased $734,000, or 17.9%, to $4.8 million during 2008 from $4.1 million during 2007. The increase is primarily
attributable to an increase in legal and other expenses related to managing nonperforming assets of $201,000, mortgage-banking expenses
related to reimbursements related to early defaults and prepayments of sold loans of $190,000. There were no other individually significant
changes.
Income Tax Expense. Income tax expense decreased $1.6 million to $3.3 million during 2008 from $4.8 million during 2007. The
decrease was due to lower income before income taxes in 2008. The Company’s effective tax rate was 37.0% and 36.7% during 2008 and
2007, respectively.
- 12 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Analysis of Changes in Net Interest Income
The following table shows changes in interest income and interest expense based upon changes in volume and changes in interest rates
during the periods indicated:
2009 vs. 2008
Increase (decrease) due to
Volume
Rate
Rate/
Volume
For The Years Ended December 31,
2008 vs. 2007
Net Dollar
Change
(Dollars In Thousands)
Increase (decrease) due to
Volume
Rate
Rate/
Volume
Net Dollar
Change
Loans held for sale
Loans receivable, net
Interest-bearing cash
Securities available for sale
Securities held to maturity
FHLB stock
Other investments
Interest income
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
Interest expense
$
780
(2,283)
16
(5,086)
6,801
24
(26)
226
10
421
4
(110)
(581)
330
74
Net interest income
$
152
248
(4,732)
(388)
(1,164)
(177)
(367)
(32)
(6,612)
(50)
(351)
(2)
(6,125)
(79)
(1,479)
(8,086)
1,474
138
225
(15)
531
(797)
(22)
13
73
(3)
(79)
(1)
31
23
(68)
(97)
170
1,166
(6,790)
(387)
(5,719)
5,827
(365)
(45)
(6,313)
(43)
(9)
1
(6,204)
(637)
(1,217)
(8,109)
1,796
(401)
5,459
511
6,434
-
306
(2)
12,307
(9)
(706)
1
5,512
3,311
5,500
13,609
(1,302)
(178)
(14,970)
(159)
331
-
(156)
(37)
(15,169)
(117)
(2,242)
(9)
(6,311)
(1,067)
(2,625)
(12,371)
37
(1,385)
(259)
558
1,514
(126)
1
340
4
354
-
(1,436)
(2,006)
(2,211)
(5,295)
(2,798)
5,635
(542)
(10,896)
93
7,323
1,514
24
(38)
(2,522)
(122)
(2,594)
(8)
(2,235)
238
664
(4,057)
1,535
- 13 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Yields on Average Interest-Earning Assets and Rates on Average Interest-Bearing Liabilities
The following table summarizes the Company’s yields on average interest-earning assets and rates on average interest-bearing liabilities
during the periods indicated:
Interest-earning assets:
Loans held for sale
Loans receivable, net (1)
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Other investments
Total interest-earning assets
Non-earning assets
Total assets
Interest-bearing liabilities:
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Average
Balance
$
35,761
737,448
17,038
105,265
131,760
12,153
465
1,039,890
58,170
1,098,060
26,231
120,573
2,643
577,364
54,211
215,626
996,648
41,003
9,422
50,987
Total liabilities and stockholders' equity
$
1,098,060
Net interest spread
Net interest margin
Net interest income
3.05%
(1) Average balances of loans include non-accrual loans.
For The Years Ended December 31,
2009
Interest
Paid/
Earned
Average
Yield/
Rate
Average
Balance
(Dollars In Thousands)
2008
Interest
Paid/
Earned
Average
Yield/
Rate
2,567
41,325
19
5,427
7,341
39
18
56,736
123
1,864
16
15,778
1,361
5,877
25,019
22,973
7.18%
774,183
5.60%
16,412
0.11%
193,616
5.16%
23,991
5.57%
11,474
0.32%
3.87%
802
5.46% 1,043,451
47,336
1,090,787
24,726
98,448
2,029
580,264
76,455
206,170
988,092
44,643
10,500
47,552
1,090,787
2.86%
0.47%
1.55%
0.61%
2.73%
2.51%
2.73%
2.51%
2.95%
1,401
48,115
407
11,146
1,514
403
63
63,049
166
1,873
14
21,983
1,998
7,193
33,227
6.10%
6.21%
2.48%
5.76%
6.31%
3.51%
7.86%
6.04%
0.67%
1.90%
0.69%
3.79%
2.61%
3.49%
3.36%
2.68%
31,717
29,822
- 14 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Loans by Type
The following table summarizes loans by type and percent of total at the end of the periods indicated:
At December 31,
2009
2008
Amount
% of
Total Loans
Amount
% of
Total Loans
(Dollars In Thousands)
Loans Receivable:
Residential mortgage
Commercial mortgage
Construction mortgage
Commercial loans
Consumer loans
Total gross loans receivable
Less:
Undisbursed loans in process
Allowance for loan losses
Deferred fees, net
7.31%
41.46%
2.01%
39.19%
10.03%
100.00%
$
53,094
301,344
14,639
284,889
72,917
726,883
23,230
13,032
458
Loans receivable, net
$
690,163
Non-Performing and Problem Assets
6.87%
38.42%
7.89%
37.17%
9.65%
100.00%
57,682
322,595
66,279
312,099
80,993
839,648
51,000
11,300
727
776,621
The following table summarizes non-performing and problem assets at the end of the periods indicated.
At December 31,
2009
2008
(In Thousands)
Non-Performing Assets
Non-accrual loans-renegotiated loans
Non-accrual loans-other
Accruing loans 90 days or more delinquent
Real estate acquired through foreclosure, net
Total Non-Performing Assets
$
3,505
23,554
771
7,853
35,683
$
-
13,923
13
7,105
21,041
Problem Assets not included in Non-Performing Assets
Accruing renegotiated loans
$
5,269
1,103
Substantially all of the non-accrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans for fiscal 2009 and
2008 are collateralized by real estate. Management believes based on information known and available currently, the probable losses
related to problem assets are adequately reserved in the allowance for loan losses.
Market Risk Management and Interest Rate Risk
The effective management of market risk is essential to achieving the Company’s objectives. As a financial institution, the Company’s
most significant market risk exposure is interest rate risk. The primary objective of managing interest rate risk is to minimize the effect that
changes in interest rates have on net income. This is accomplished through active asset and liability management, which requires the
strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The expected result
of these strategies is the development of appropriate maturity and repricing opportunities in those accounts to produce consistent net
income during periods of changing interest rates. The Banks’ Asset/Liability Management Committees ("ALCO") monitor loan,
investment and liability portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper
fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management process is designed to achieve
relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricing opportunities of interest-
earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate volume
- 15 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
and mix of interest-earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The ALCO also set policy guidelines and establishes long-term strategies with respect to interest
rate risk exposure and liquidity. The ALCO meet regularly to review the Company’s interest rate risk and liquidity positions in relation to
present and prospective market and business conditions, and adopt funding and balance sheet management strategies that are intended to
ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within acceptable standards.
The Company uses interest rate sensitivity analysis to measure the sensitivity of projected net interest income to changes in interest rates.
Management monitors the Company’s interest sensitivity by means of a computer model that incorporates current volumes, average rates
earned and paid, and scheduled maturities, payments of asset and liability portfolios, together with multiple scenarios of prepayments,
repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis shows the effect that the indicated changes in
interest rates would have on net interest income as projected for the next twelve months under the current interest rate environment. The
resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates.
The following table summarizes the Company’s interest rate sensitivity position at the Banks as of December 31, 2009:
Interest Rate Scenario
Change
0.00%
1.00%
2.00%
3.00%
Prime Rate
3.25%
4.25%
5.25%
6.25%
Percentage Change in
Net Interest Income
0.00%
-1.05%
-1.73%
3.25%
The Company also uses derivatives intended to reduce interest rate risk incurred as a result of market movements. These derivatives
primarily consist of mortgage loan interest rate lock commitments, forward mortgage loan sales commitments and options to deliver
mortgage-backed securities. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an
underlying instrument, index or referenced interest rate. The Company uses derivatives primarily to minimize interest rate risk related to
its pipeline of loan interest rate lock commitments issued on residential mortgage loans in the process of origination for sale or loans held
for sale. Forward mortgage loan sales commitments and options to deliver mortgage-backed securities that generally correspond with the
composition of the locked pipeline are used to economically hedge a percentage of the Company’s locked pipeline. The Company’s
Secondary Market Committee has developed a comprehensive hedging policy to monitor the use of derivatives to reduce interest rate risk.
The Company’s derivative positions are classified as trading assets and liabilities, and as such, the changes in the fair market value of the
derivative positions are recognized in the consolidated statement of operations.
The derivative positions of the Company at December 31, 2009 and 2008 are as follows:
2009
Fair
Value
Notional
Value
2008
Fair
Value
Notional
Value
Derivative assets -
Mortgage loan interest rate lock commitments
Forward mortgage loan sales commitments
Derivative liabilities -
$
$
428
1,914
2,342
(In Thousands)
46,588
130,000
1,999
-
1,999
222,994
-
Forward mortgage loan sales commitments
$
891
177,282
959
121,000
- 16 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Liquidity and Financial Condition
The Company’s assets and liabilities are monitored on a daily basis to ensure funds are available to meet liquidity requirements. The
Company also utilizes borrowing facilities in order to maintain adequate liquidity including: the Federal Home Loan Bank of Atlanta
(“FHLB”) advance window, the Federal Reserve Bank (“FRB”), federal funds purchased, and warehouse lines of credit. Periodically, the
Company will use wholesale deposit products, including brokered deposits as well as national certificate of deposit services. Additionally,
the Company has certain investment securities classified as available for sale that are carried at market value with changes in market value,
net of tax, recorded through stockholders’ equity.
Lines of credit with the Federal Home Loan Bank of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be
supported by appropriate collateral to be available. The Banks have pledged approximately $177.8 million of first lien residential mortgage,
second lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios under
blanket lien agreements as collateral for these advances. In addition, the Company has pledged $59.8 million of securities for these
advances. At December 31, 2009, the Banks had maximum FHLB lines of $339.1 million based on FHLB limits. At December 31, 2009,
the Banks pledged collateral totaling $237.6 million to support FHLB advances. At December 31, 2009 the Banks had FHLB advances of
$176.5 million outstanding, with excess collateral pledged to the FHLB that would support additional borrowings of approximately $61.0
million.
Lines of credit with the FRB are based on collateral pledged. The Banks have pledged certain non-mortgage commercial, acquisition and
development, and lot loan portfolios under blanket lien agreements as collateral to the FRB for these advances. At December 31, 2009 the
Banks had lines available with the FRB for $71.6 million. At December 31, 2009 the Banks had no FRB advances outstanding, with excess
collateral pledged to the FRB that would support additional borrowings of approximately $71.6 million.
The mortgage loan warehouse line of credit is an extension of credit facility from a correspondent bank to Crescent Mortgage with a $35.0
million credit limit, of which $15.9 million is still available. The facility is secured by Crescent Mortgage’s residential mortgage loans held
for sale and other assets.
During 2008, the Company modified a $5.0 million unsecured line of credit with a correspondent bank, of which $3.0 million is outstanding
at December 31, 2009, to be extended to March 31, 2020. In connection with this modification, the Company obtained a $3.0 million
subordinated debenture that, as a condition to the line of credit modification, requires the Company to keep at least a $500,000 principal
balance outstanding on the line of credit until the subordinated debenture is paid in full. If the Company does not maintain the $500,000
balance, there is a $150,000 prepayment penalty. During 2009, the Company has maintained at least a $500,000 principal balance
outstanding on the line of credit. During 2009, the correspondent bank was put into receivership with the Federal Deposit Insurance
Corporation (“FDIC”). As a result, the undrawn $2 million of availability under this unsecured line of credit has been withdrawn by the
FDIC. The line of credit also has debt covenants, the more restrictive of which requires the Company to maintain certain capital ratios and
return on asset ratios. As of December 31, 2009, the Company is not in compliance with all of the covenants. While the lender has not
called the line of credit, it has the right to do so. Accordingly, the Company has developed alternatives to replace this line of credit, if
necessary, by obtaining financing from other sources or by receiving dividends from its subsidiaries in accordance with regulatory
requirements to pay off the debt. As a result, management does not believe that default of this covenant will have a material adverse affect
on the Company’s financial condition or the results of its operations.
Capital Resources
The Company and the Banks are subject to numerous regulatory capital requirements administered by federal banking agencies. If these
capital requirements are not met, regulators can initiate certain mandatory – and possibly additional discretionary – actions that, if
undertaken, could affect operations. Under capital adequacy guidelines and the regulatory framework for corrective action, the Company
and the Banks must meet certain capital guidelines, which involve quantitative measures of the Company’s and the Banks’ assets, liabilities
and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Banks’ capital amounts
and classification are subject to qualitative judgments by the regulators about components, risk weightings and certain other factors.
Quantitative measures set up by regulation to guarantee capital adequacy require the Company and the Banks to sustain minimum amounts
and ratios of Tier 1 capital and total risk based capital to risk-weighted assets and Tier 1 capital to total average assets. The Company and
the Banks are required to maintain minimum Tier 1 capital and total risk based capital to risk weighted assets, and Tier 1 capital to total
average assets of 4%, 8%, and 3%, respectively. To be considered “Well Capitalized”, the Company and the Banks must maintain at least
Tier 1 capital and total risk based capital to risk weighted assets, and Tier 1 capital to total average assets of 6%, 10%, and 5%, respectively.
As of December 31, 2008, the Company and the Banks are considered “Well Capitalized” under regulatory capital adequacy guidelines.
- 17 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
The following schedule shows the Company’s and the Banks’ actual capital amounts and ratios at December 31, 2009 and 2008:
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total average assets)
Community FirstBank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total average assets)
Crescent Bank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total average assets)
Recently Adopted Accounting Standards
2009
2008
Amount
Ratio
Amount
Ratio
(Dollars In Thousands)
$
78,773
101,696
78,773
45,166
55,633
45,166
35,404
47,849
35,404
9.2%
11.9%
7.3%
10.4%
12.8%
7.7%
8.4%
11.4%
7.2%
71,208
94,780
71,208
36,590
46,754
36,590
33,806
47,027
33,806
8.4%
11.2%
6.4%
8.9%
11.3%
6.6%
8.1%
11.3%
6.3%
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and disclosure of financial
information by the Company.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that restructured generally accepted accounting
principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritative nongovernmental
GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standards Codification (“ASC”).
The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been
superseded and all other accounting literature not included are considered nonauthoritative.
The FASB issued new accounting guidance on accounting for transfer of financial assets in June 2009. The guidance limits the
circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking
into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair
value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying special-purpose entity is no longer applicable. The standard is effective for the first
annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the guidance to have any impact
on the Company’s financial statements. The ASC was amended in December 2009 to include this guidance.
In October 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in
contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the shares-lending arrangement occurs.
The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into
the arrangement. The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.
The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial
statements.
In January 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allowed the shareholder
to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid. The amendment
states that the stock portion of the distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation
on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance. The amendment is
effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
Also in January 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes. The amendment provides
that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or a nonprofit activity, (2) a
subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a
group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a
decrease in ownership in transactions related to sales of in-substance real estate or conveyance of oil or gas mineral rights. The update is
effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial
statements.
- 18 -
CAROLINA FINANCIAL CORPORATION
FINANCIAL DISCUSSION
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact
on the Company’s financial position, results of operations or cash flows.
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require the
measurement of financial position and results of operations in terms of historical dollars without consideration of changes in the relative
purchasing power over time due to inflation.
Unlike many other industries, nearly all assets and liabilities of a financial institution are monetary in nature. Therefore, interest rates
usually have a more significant impact on a financial institution’s performance than does the effect of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price of goods and services since such prices are affected by
inflation. We are committed to continuing to actively manage the gap between our interest-sensitive assets and interest-sensitive liabilities.
- 19 -
INSERT
INDEPENDENT AUDITOR’S REPORT
- 20 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2009 AND 2008
ASSETS
Cash and due from banks
Interest-bearing cash
Cash and cash equivalents
Securities available for sale (cost of $102,119 and $125,872 at December 31, 2009 and 2008, respectively)
Securities held to maturity (fair value of $105,450 and $106,485 at December 31, 2009 and 2008, respectively)
Federal Home Loan Bank stock, at cost
Other investments
Derivative assets
Loans held for sale
Loans receivable, net of allowance for loan losses of $13,032 and
$11,300 at December 31, 2009 and 2008, respectively
Premises and equipment, net
Accrued interest receivable
Real estate acquired through foreclosure, net
Deferred tax assets, net
Prepaid FDIC insurance
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities
Drafts outstanding
Advances from borrowers for insurance and taxes
Accrued interest payable
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01; 200,000 shares authorized;
no shares issued or outstanding at December 31, 2009 and 2008
Common stock, par value $.01; 2,800,000 shares authorized; 1,912,492 and 1,912,212
shares issued and outstanding at December 31, 2009 and 2008, respectively
Additional paid-in capital
Retained earnings, restricted
Accumulated other comprehensive income (loss), net of tax
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
- 21 -
2009
2008
(In Thousands)
$
2,901
17,759
20,660
104,401
125,633
12,456
465
2,342
71,233
690,163
17,443
4,550
7,853
10,349
5,677
5,532
25,206
16,285
41,491
120,988
113,689
11,874
465
1,999
28,283
776,621
17,980
4,510
7,105
9,547
-
4,442
$
1,078,757
1,138,994
$
37,543
723,565
761,108
43,787
203,638
891
3,117
198
1,484
8,396
39,952
677,437
717,389
148,090
218,465
959
2,316
158
2,764
2,262
1,022,619
1,092,403
-
19
21,320
42,433
(7,634)
56,138
-
19
20,925
35,264
(9,617)
46,591
$
1,078,757
1,138,994
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
2008
(In Thousands, Except Per Share Data)
2007
Interest income
Loans
Debt securities
Dividends
Interest-bearing cash
Total interest income
Interest expense
Deposits
Short-term borrowed funds
Long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Net gain on sale of loans held for sale
Deposit service charges
Income from ATM and debit card transactions
Income from sales of non-depository products
Net loss on extinguishment of debt
Net gain on sale of available for sale securities
Net loss on other investments
Net gain (loss) on sale of real estate acquired through foreclosure
Net gain (loss) on derivatives
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Marketing and public relations
FDIC insurance
Expense from ATM and debit card transactions
Other real estate expense
Mortgage loan repurchase losses
Other
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
43,892
12,786
39
19
56,736
17,781
1,361
5,877
25,019
31,717
10,460
21,257
23,982
1,584
320
788
(711)
963
-
(26)
411
627
27,938
20,182
3,413
630
2,201
281
1,843
3,362
5,761
37,673
11,522
4,353
$
7,169
$
$
3.75
3.72
49,516
12,660
466
407
63,049
24,036
1,998
7,193
33,227
29,822
6,361
23,461
4,579
1,449
308
867
(52)
952
(337)
(55)
1,139
377
9,227
14,497
3,011
655
617
276
5
285
4,536
23,882
8,806
3,256
5,550
2.95
2.83
60,954
3,823
481
314
65,572
28,995
1,760
6,530
37,285
28,287
1,775
26,512
6,466
1,075
270
57
-
477
-
35
(13)
502
8,869
14,121
2,737
658
466
227
-
-
4,092
22,301
13,080
4,806
8,274
4.61
4.23
1,912,449
1,924,720
1,883,101
1,960,362
1,794,659
1,954,392
- 22 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Balance, December 31, 2006
Exercise of stock options
Stock-based compensation expense, net
Net income
Other comprehensive income:
Unrealized gain on securities, net of tax of $276
Reclassification adjustment for gains included
in net income, net of tax of $174
Other comprehensive income
Comprehensive income
Balance, December 31, 2007
Exercise of stock options
Stock-based compensation expense, net
Net income
Other comprehensive income (loss):
Unrealized loss on securities, net of tax of $5,234
Reclassification adjustment for gains included
in net income, net of tax of $343
Other comprehensive loss
Comprehensive loss
Balance, December 31, 2008
Exercise of stock options
Stock-based compensation expense, net
Net income
Other comprehensive income (loss):
Unrealized gain on securities, net of tax of $1,583
Reclassification adjustment for gains included
in net income, net of tax of $366
Other comprehensive income
Comprehensive income
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
(In Thousands, Except Shares Data)
1,790,862
$
18
19,291
21,440
(90)
40,659
7,400
-
-
-
-
1,798,262
103,950
10,000
-
-
-
-
-
-
-
-
18
1
-
-
-
-
111
315
-
-
-
-
-
8,274
-
-
-
-
-
479
(303)
176
111
315
8,274
176
8,450
19,717
29,714
86
49,535
843
365
-
-
-
-
-
5,550
-
-
-
-
-
(9,094)
(609)
(9,703)
844
365
5,550
(9,703)
(4,153)
1,912,212
19
20,925
35,264
(9,617)
46,591
280
-
-
-
-
-
-
-
-
-
5
390
-
-
-
-
-
7,169
-
-
-
-
-
2,580
(597)
1,983
5
390
7,169
1,983
9,152
Balance, December 31, 2009
1,912,492
$
19
21,320
42,433
(7,634)
56,138
See accompanying notes to consolidated financial statements.
- 23 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2009
2008
(In Thousands)
2007
$
7,169
5,550
8,274
Provision for loan losses
Deferred tax benefit
Amortization of unearned discount/premiums on investments, net
Amortization of deferred loan fees
Gain on sale of available for sale securities
Loss on write off of other investments
Gain on sale of loans held for sale
Originations of loans held for sale
Proceeds from sale of loans held for sale
Loss on extinquishment of debt
Loss (gain) on derivatives
Stock-based compensation
Depreciation
Loss on disposals of premises and equipment
Loss (gain) on sale of real estate acquired through foreclosure
Write-down of real estate acquired through foreclosure
Decrease (increase) in:
Accrued interest receivable
Other assets
Increase (decrease) in:
Accrued interest payable
Accrued expenses and other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases
Maturities, payments and calls
Sales
Activity in held-to-maturity securities:
Purchases
Maturities, payments and calls
Increase in Federal Home Loan Bank stock
Decrease in other investments
Decrease (increase) in loans receivable, net
Purchase of premises and equipment
Proceeds from disposals of premises and equipment
Proceeds from sale of real estate acquired through foreclosure
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposit accounts
Net (decrease) increase in Federal Home Loan Bank advances
Net (decrease) increase in Federal Reserve Bank advances
Net increase (decrease) in other short-term borrowed funds
Procceds from issuance of TLGP debt
Proceeds from issuance of subordinated debt
Net increase (decrease) in drafts outstanding
Net increase in advances from borrowers for insurance and taxes
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
10,460
(2,019)
(128)
(604)
(963)
-
(23,982)
(1,700,377)
1,681,410
711
(411)
390
1,254
59
26
1,495
(39)
(6,862)
(1,279)
6,133
(27,557)
(64,365)
23,759
29,054
(4,052)
24,632
(583)
-
68,092
(807)
32
6,238
82,000
43,719
(47,211)
(91,000)
(2,029)
20,400
-
802
40
5
(75,274)
(20,831)
41,491
$
20,660
- 24 -
6,361
(633)
(212)
(831)
(952)
337
(4,579)
(712,784)
714,110
52
(1,139)
365
1,265
20
55
-
936
419
(420)
(465)
7,455
(175,843)
20,229
64,996
(3,585)
2,829
(1,727)
-
(50,969)
(1,104)
68
636
(144,470)
25,289
29,199
91,000
19,737
-
3,000
(3,390)
11
844
165,690
28,675
12,816
41,491
1,775
(869)
(76)
(1,303)
(477)
-
(6,466)
(949,068)
960,893
-
13
315
1,169
1
(35)
-
18
259
1,723
(1,239)
14,907
(123,677)
6,309
18,834
-
-
(4,458)
48
(78,320)
(2,158)
-
1,075
(182,347)
69,644
95,200
-
2,786
-
-
(5,792)
15
111
161,964
(5,476)
18,292
12,816
Continued
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Supplemental disclosure
Cash paid for:
Interest on deposits and borrowed funds
Income taxes paid, net of refunds
Non-cash investing and financing activities:
Transfer of loans held for sale to loans receivable
Transfer of loans receivable to real estate acquired through foreclosure
Transfer of available for sale securities to held to maturity securities
Unrealized gain (loss) in securities available for sale, net
See accompanying notes to consolidated financial statements.
2009
2008
(In Thousands)
2007
$
26,298
3,666
-
8,507
30,597
2,580
33,647
4,050
-
7,524
112,343
(9,094)
35,562
6,800
60
668
-
479
- 25 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Carolina Financial Corporation (“Carolina Financial” or the “Company”), incorporated under the laws of the State of Delaware, is a multi-
bank holding company with two wholly owned subsidiary banks, Community FirstBank of Charleston (“Community FirstBank”) and
Crescent Bank (together, the “Banks”), and one wholly-owned service corporation, Carolina Services Corporation of Charleston (“Carolina
Services”). Effective July 27, 2009, Carolina Financial contributed 100% of its wholly owned mortgage subsidiary Crescent Mortgage
Company (“Crescent Mortgage”) to Community FirstBank. The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Community FirstBank, Crescent Bank and Carolina Services. In consolidation, all material intercompany
accounts and transactions have been eliminated. The results of operations of the businesses acquired in transactions accounted for as
purchases are included only from the dates of acquisition. All majority-owned subsidiaries are consolidated unless control is temporary or
does not rest with the Company.
At December 31, 2009 and 2008, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with
an aggregate par value of $15,000,000. The principal assets of the Trusts are $15,465,000 of the Company’s subordinated debentures with
identical rates of interest and maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the
Company and are included in other investments in the accompanying consolidated balance sheets. The Trusts are not consolidated
subsidiaries of the Company.
Management’s Estimates
The financial statements are prepared in accordance with generally accepted accounting principles in the United States of America which
require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. 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, including valuation for impaired loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans,
the valuation of securities, the valuation of derivative instruments, the valuation of mortgage servicing rights, the determination of the
reserve for mortgage loan repurchase losses, and deferred tax assets or liabilities. In connection with the determination of the allowance for
loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make
estimates in determining the estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may
be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Banks’ allowances for loan losses and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for loan losses and foreclosed real estate may change materially in the
near term.
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. Nonrecognized 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 March 5, 2010, the date the financial statements were available to be issued and no subsequent events occurred requiring
accrual or disclosure.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash and due from banks and interest-bearing cash with banks. Substantially all of the interest-bearing
cash at December 31, 2009 and 2008 is Federal Home Loan Bank overnight deposits. Cash and cash equivalents have maturities of three
months or less. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value. The Banks are
required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2009 and 2008, these reserve balances
amounted to $1,259,000 and $1,736,000, respectively.
Securities
Investment securities are classified into three categories: (a) Held to Maturity – debt securities that the Company has positive intent and
ability to hold to maturity, which are reported at amortized cost; (b) Trading – debt and equity securities that are bought and held principally
for the purpose of selling them in the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and
(c) Available for Sale – debt and equity securities that may be sold under certain conditions, which are reported at fair value, with unrealized
gains and losses excluded from earnings and reported in accumulated other comprehensive income as a separate component of stockholders’
equity, net of income taxes.
- 26 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The Company determines investment and mortgage-backed securities classification at the time of purchase. If a security is transferred from
available for sale to held to maturity, the fair value at the time of transfer becomes the held to maturity security’s new cost basis. Premiums
and discounts on securities are accreted and amortized as an adjustment to interest yield over the estimated life of the security using a
method which approximates a level yield. Dividends and interest income are recognized when earned. Unrealized losses on securities,
reflecting a decline in value judged by the Company to be other than temporary, are charged to income in the consolidated statements of
operations.
The cost basis of securities sold is determined by specific identification. Purchases and sales of securities are recorded on a trade date basis.
Loans Held for Sale
The Company’s residential mortgage lending activities for sale in the secondary market are comprised of accepting residential mortgage loan
applications, qualifying borrowers to standards established by investors, funding residential mortgage loans and selling mortgage loans to
investors under pre-existing commitments. Funded residential mortgages held for sale to investors are reported at the lower of aggregate
cost or estimated fair value. Net unrealized losses, if any, are recognized in a valuation allowance by charges to operations. Gains or losses
realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the
carrying value of the loans sold, adjusted for any servicing asset or liability retained. Gains and losses on sales of loans are included in
noninterest income.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors. Derivatives related to these
commitments are recorded as either assets or liabilities in the balance sheet and are measured at fair value. Changes in the fair value of the
derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and
whether the derivative qualifies for hedge accounting. The Company does not currently engage in any activities that qualify for hedge
accounting. Accordingly, changes in fair values of these derivative instruments are included in noninterest income in the consolidated
statements of operations.
Loans Receivable, Net
Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net
of any unearned income, charge-offs, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased
loans. The net amount of nonrefundable loan origination fees, commitment fees and certain direct costs associated with the lending process
are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate a level yield.
Discounts and premiums on purchased loans are amortized to interest income over the estimated life of the loans using methods that
approximate a level yield. Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans.
A loan is 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. Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the
collateral if the loan is collateral-dependent. When the fair value of the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a specific reserve allocation that is a component of the allowance for loan losses. A loan is charged-off
against the allowance for loan losses when all meaningful collection efforts have been exhausted and the loan is viewed as uncollectible in
the immediate or foreseeable future.
Loan origination and commitment fees, net of related costs are amortized in interest income over the contractual life of the loan using a
method that approximates the level yield method, adjusted for prepayments, or noninterest income when the loan is sold.
Mortgage Servicing Rights, Fees and Costs
The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage
servicing rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities
based on the lower of cost or market.
Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the
mortgage servicing rights is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.
The Company evaluates potential impairment of mortgage servicing rights based on the difference between the carrying amount and current
estimated fair value of the servicing rights. In determining impairment, the Company aggregates all servicing rights and stratifies them into
tranches based on predominant risk characteristics of interest rate, loan type and investor type. If impairment exists, a valuation allowance is
established for any excess of amortized cost over the current estimated fair value by a charge to income. If the Company later determines
that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase
to income.
Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with the Federal National Mortgage
Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and certain private investors. The fees are based on a
- 27 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
contractual percentage of the outstanding principal balance of the loans serviced and are recorded as income when received. The
amortization of mortgage servicing rights is netted against loan servicing fee income. Mortgage servicing costs are charged to expense when
incurred.
Nonperforming Assets
Nonperforming assets include loans on which interest is not being accrued, accruing loans that are 90 days or more delinquent and
foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of a borrower’s loan default. Loans are
generally placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal
or interest becomes 90 days past due, whichever occurs first. Loans past due 90 days or more may remain on accrual status if management
determines that concern over the collectibility of principal and interest is not significant. When loans are placed on nonaccrual status,
interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction
to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are removed from
nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of
principal or interest.
Assets acquired as a result of foreclosure are carried at the lower of cost or fair value less estimated selling costs. If cost exceeds fair value
less estimated selling costs at the time of foreclosure, the asset is written down to fair value less estimated selling costs with the difference
being charged against the allowance for loan losses. Generally, such properties are appraised annually, and the carrying value, if greater
than the fair value less estimated selling costs, is adjusted with a charge to noninterest expense. Routine maintenance costs and declines in
market value are included in noninterest expense. Net gains or losses on sale are included in noninterest income.
Allowance for Loan Losses
The allowance for loan losses is Management’s estimate of probable credit losses inherent in the loan portfolio at the balance sheet date.
Management determines the allowance based on an ongoing evaluation. This evaluation is inherently subjective because it requires material
estimates and is based on evaluations of the collectibility of loans. Impaired loans, including nonaccrual loans, loans past due 90 or more
days and still accruing, troubled-debt restructured loans, and loans in excess of a defined threshold that are not paying in accordance with
contractual terms, are evaluated for specific impairment. The specific reserves are determined on a loan-by-loan basis based on
Management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any
underlying collateral. Management’s estimate of losses in the remainder of the portfolio is based on certain observable data that
Management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends;
collateral values; portfolio aging; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the
findings of internal credit quality assessments and results from external bank regulatory examinations.
While Management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may
be necessary if economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators,
based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made
in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
Guarantees
Standby letters of credit obligate the Company to meet certain financial obligations of its customers, under the contractual terms of the
agreement, if the customers are unable to do so. Payment is only guaranteed under these letters of credit upon the borrower’s failure to
perform its obligations to the beneficiary. The Company can seek recovery of the amounts paid from the borrower; however, these standby
letters of credit are generally not collateralized. Commitments under standby letters of credit are usually one year or less. At December 31,
2009, the Company had recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts
are not considered material. The maximum potential amount of undiscounted future payments related to standby letters of credit at
December 31, 2009 was $910,000.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the
asset’s estimated useful life. Estimated lives range up to forty years for buildings and improvements and up to ten years for furniture,
fixtures and equipment. Maintenance and repairs are charged to expense as incurred. Improvements that extend the lives of the respective
assets are capitalized. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are
removed from the respective accounts and the resulting gain or loss is reflected in income.
Advertising
The Company expenses advertising costs as incurred.
Income Taxes
The provision for income taxes is based upon income before taxes for financial statement purposes, adjusted for nontaxable income and
nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining
income for income tax purposes and for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax
- 28 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases. In
the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with the
cumulative effects included in the current year’s income tax provision.
Positions taken by the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of
uncertain tax positions are initially recognized in the financial statements only when it is more likely than not the position will be sustained
upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax
benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and
all relevant facts. The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely
than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse
impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain tax positions have
been recorded.
Interest and penalties on income tax uncertainties are classified within income tax expense in the income statement. The Company had no
interest or penalties during fiscal 2009, 2008 and 2007.
Drafts Outstanding
The Company invests excess funds on deposit at other banks (including amounts on deposit for payment of outstanding disbursement
checks) on a daily basis in an overnight interest-bearing account. Accordingly, outstanding checks are reported as a liability.
Reserve for Mortgage Loan Repurchase Losses
The Company sells mortgage loans to various third parties, including government-sponsored entities, under contractual provisions that
include various representations and warranties that typically cover ownership of the loan, compliance with loan criteria set forth in the
applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, and
similar matters. The Company may be required to repurchase the mortgage loans with identified defects, indemnify the investor or insurer,
or reimburse the investor for credit loss incurred on the loan (collectively “repurchase”) in the event of a material breach of such
contractual representations or warranties. Risk associated with potential repurchases or other forms of settlement is managed through
underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.
The Company establishes mortgage repurchase reserves related to various representations and warranties that reflect management’s
estimate of losses based on a combination of factors. Such factors incorporate estimated levels of defects on internal quality assurance,
default expectations, historical investor repurchase demand and appeals success rates, reimbursement by correspondent and other third
party originators, and projected loss severity. The Company establishes a reserve at the time loans are sold and continually updates the
reserve estimate during the estimated loan life. The reserve for repurchases, included in Accrued expenses and other liabilities in the
accompanying consolidated statements of financial condition, was $3.0 million at December 31, 2009 and $183,000 at December 31, 2008.
To the extent that economic conditions and the housing market do not recover or future investor repurchase demand and appeals success
rates differ from past experience, the Company could continue to have increased demands and increased loss severities on repurchases,
causing future additions to the repurchase reserve.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated
statements of changes in stockholders’ equity and comprehensive income. The Company’s other comprehensive income for the years
ended December 31, 2009, 2008 and 2007 and accumulated other comprehensive income as of December 31, 2009 and 2008 are comprised
solely of unrealized gains (losses) on certain investment securities.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company entered into off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under revolving credit agreements, and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded.
Stock-Based Compensation
At December 31, 2009, the Company had three stock-based payment plans for directors, officers and other key employees, which are
described below.
- 29 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The fair value at the date of grant of the stock option is estimated using the Black-Scholes option-pricing model based on assumptions
noted in a table below. The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual
term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are generally based on
historical volatilities. The expected term of share options granted is generally derived from historical experience. Compensation expense is
recognized on a straight-line basis over the stock option vesting period. The expense recognition of employee awards resulted in net
expense of approximately $390,000, $365,000 and $315,000 during the twelve months ended December 31, 2009, 2008 and 2007,
respectively.
The Company adopted the 2006 Recognition and Retention Plan under which an aggregate of 60,000 shares have been reserved for
issuance by the Company upon the grant of non-vested common stock. The plan provides for the grant of stock to key employees and
Directors of the Company and its subsidiaries. The non-vested common stock vests ratably over a five-year period. During 2008, 10,000
shares of non-vested common stock of the Company were granted to a key employee of the Company at $37.57 per share. As of December
31, 2009, 50,000 shares have been awarded under the plan, of which 26,000 shares have vested. At December 31, 2009, 24,000 shares are
unvested.
Additionally, the Company has adopted the 1998 Stock Option Plan and the 2002 Stock Option Plan under which an aggregate of 7,590
shares and 138,750 shares, respectively, have been reserved for issuance by the Company upon the grant of stock options or limited rights.
The plans provide for the grant of options to key employees and Directors as determined by a Stock Option Committee. The options vest
ratably over a five-year period and have a ten-year term, both of which begin at the date of grant. The aggregate options available and the
option exercise prices have been adjusted to reflect the issuance of a 15% stock dividend during 1998 and the issuance of a 10% stock
dividend during 2000.
A summary of the status of the Company’s stock option plans at December 31, 2009, 2008 and 2007 and changes during the years then
ended is presented below:
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
2009
2008
2007
Weighted
Average
Exercise Price
$
15.86
-
17.57
24.00
Shares
145,760
-
(280)
(500)
Weighted
Average
Exercise Price
12.67
$
-
8.12
38.50
Shares
249,990
-
(103,950)
(280)
Weighted
Average
Exercise Price
12.74
$
-
15.00
15.00
Shares
257,590
-
(7,400)
(200)
Outstanding at end of year
144,980
$
15.83
145,760
$
15.86
249,990
$
12.67
Options exercisable at end of year
142,920
$
15.63
141,050
$
15.49
242,450
$
12.23
The following table summarizes information about the options outstanding at December 31, 2009:
Range of Exercise Prices
$ 15.00 to $20.00
$ 20.00 to $25.00
$ 35.00 to $40.00
Options Outstanding
Options Exercisable
Number
Outstanding
137,090
5,840
2,050
Weighted Avg.
Remaining Years
Contractual Life
2.4
5.5
6.8
Weighted
Average
Exercise Price
$
15.15
24.00
38.50
Number
Outstanding
137,090
4,600
1,230
Weighted
Average
Exercise Price
15.15
24.00
38.50
$
144,980
2.6
$
15.83
142,920
$
15.63
There were no options granted during the years ended December 31, 2009, 2008 and 2007. The total intrinsic value of options exercised
during the twelve months ended December 31, 2009, 2008 and 2007 was $2,000, $246,000, and $32,000, respectively.
Fair values have been retroactively restated for all stock dividends since the date the option was granted. As of December 31, 2009, there
was approximately $751,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements.
Unrecognized cost is projected to be recognized over a weighted average period of approximately two years.
The Company generally issues authorized but previously unissued shares to satisfy option exercises.
- 30 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Reclassification
Certain reclassifications of accounts reported for previous periods have been made in these consolidated financial statements. Such
reclassifications had no effect on stockholders’ equity or the net income as previously reported.
Recently Adopted Accounting Standards
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and disclosure of financial
information by the Company.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that restructured generally accepted accounting
principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritative nongovernmental
GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standards Codification (“ASC”).
The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been
superseded and all other accounting literature no included is considered nonauthoritative.
The FASB issued new accounting guidance on accounting for transfer of financial assets in June 2009. The guidance limits the
circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking
into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair
value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying special-purpose entity is no longer applicable. The standard is effective for the first
annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the guidance to have any impact
on the Company’s financial statements. The ASC was amended in December 2009 to include this guidance.
In October 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in
contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the shares-lending arrangement occurs.
The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into
the arrangement. The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.
The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial
statements.
In January 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allowed the shareholder
to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid. The amendment
states that the stock portion of the distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation
on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance. The amendment is
effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
Also in January 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes. The amendment provides
that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or a nonprofit activity, (2) a
subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a
group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a
decrease in ownership in transactions related to sales of in-substance real estate or conveyance of oil or gas mineral rights. The update is
effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial
statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact
on the Company’s financial position, results of operations or cash flows.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit
risk is the risk of default on the loan portfolio or certain securities that results from borrowers’ inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of
real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from
period to period. Periodic examinations by the regulatory agencies may subject the Company to further changes with respect to asset
- 31 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to
them at the time of their examination.
NOTE 2 - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities available for sale and held to
maturity at December 31, 2009 and 2008 follows:
Fair
Value
-
107,472
13,516
-
(2,345)
(3,791)
(6,136)
120,988
(8,062)
(60)
104,796
1,689
(8,122)
106,485
2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
2009
Gross
Gross
Amortized
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
Amortized
Cost
Securities available for sale:
GNMA
Mortgage-backed securities
Asset-backed securities
$
4,088
98,031
-
Total securities available for sale
$
102,119
Securities held to maturity:
Mortgage-backed securities
Asset-backed securities
$
111,660
13,973
Total securities held to maturity
$
125,633
29
2,661
-
2,690
1,144
-
1,144
-
(408)
-
(408)
(In Thousands)
4,117
100,284
-
-
108,565
17,307
104,401
125,872
(13,552)
(7,775)
99,252
6,198
(21,327)
105,450
111,940
1,749
113,689
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2009 follows:
Amortized
Cost
(In Thousands)
Securities available for sale:
One year to five years
Six to ten years
After ten years
Total
Securities held to maturity:
Six to ten years
After ten years
Total
$
4,135
3,358
94,626
102,119
404
125,229
125,633
$
$
$
-
1,252
-
1,252
918
-
918
Fair
Value
4,137
3,448
96,816
104,401
415
105,035
105,450
The contractual maturity dates of the securities was used for mortgage-backed securities and asset-backed securities. No estimates were
made to anticipate principal repayments.
The gross unrealized losses and fair value of the Company’s investments available for sale with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2009 are as follows:
- 32 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Less than 12 Months
12 Months or Greater
Amortized
Cost
Fair
Value
Unrealized
Losses
Amortized
Cost
Fair
Value
Unrealized
Losses
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
(In Thousands)
$
19,847
19,451
(396)
2,531
2,519
(12)
22,378
21,970
(408)
$
23,228
-
$
23,228
18,146
-
18,146
(5,082)
-
(5,082)
70,489
13,973
84,462
62,019
6,198
(8,470)
(7,775)
93,717
13,973
68,217
(16,245)
107,690
80,165
6,198
86,363
(13,552)
(7,775)
(21,327)
Securities available for sale:
Mortgage-backed
securities
Securities held to maturity:
Mortgage-backed
securities
Asset-backed securities
Total
The gross unrealized losses and fair value of the Company’s investments available for sale and held to maturity with unrealized losses that
are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, at December 31, 2008 are as follows:
Less than 12 Months
Fair
Value
Amortized
Cost
Unrealized
Losses
12 Months or Greater
Fair
Value
Amortized
Cost
Unrealized
Losses
Securities available for sale:
Mortgage-backed
securities
Asset-backed securities
$
10,306
6,011
9,913
4,899
Total
$
16,317
14,812
(In Thousands)
(393)
(1,112)
(1,505)
27,230
10,288
25,278
7,609
37,518
32,887
(1,952)
(2,679)
(4,631)
Securities held to maturity:
Mortgage-backed
securities
Asset-backed securities
Total
$
62,535
-
$
62,535
55,195
-
55,195
(7,340)
-
(7,340)
27,666
1,749
26,944
1,689
29,415
28,633
(722)
(60)
(782)
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
37,536
16,299
53,835
90,201
1,749
91,950
35,191
12,508
47,699
82,139
1,689
83,828
(2,345)
(3,791)
(6,136)
(8,062)
(60)
(8,122)
At December 31, 2009 and 2008, the Company had 14 and 42, respectively, individual investments available for sale that were in an
unrealized loss position. The unrealized losses on the Company’s investments in mortgage-backed securities and asset-backed securities
summarized above were attributable primarily to credit quality, credit rating changes and liquidity. Management has performed various
analyses, including cash flows, and believes that the securities are not other-than-temporarily impaired at December 31, 2009. The
Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities
before recovery of their amortized cost.
The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are required to own capital stock in the FHLB of Atlanta
based generally upon a membership-based requirement and an activity based requirement. FHLB capital stock is pledged to secure FHLB
advances. No secondary market exists for this stock, and it has no quoted market price. However, redemption through the FHLB of this
stock has historically been at par value. The Company’s investment in FHLB capital stock was $12.5 million and $11.9 million at
December 31, 2009 and 2008, respectively.
Other investments at December 31, 2009 and 2008 consisted of $465,000 invested in capital stock of statutory business trusts (See Note 10 –
Long-term debt).
NOTE 3 – DERIVATIVES
The derivative positions of the Company at December 31, 2009 and 2008 are as follows:
- 33 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
2009
2008
Fair
Value
Notional
Value
Fair
Value
Notional
Value
Derivative assets -
Mortgage loan interest rate lock commitments
Forward mortgage loan sales commitments
Derivative liabilities -
$
$
428
1,914
2,342
(In Thousands)
46,588
130,000
1,999
-
1,999
222,994
-
Forward mortgage loan sales commitments
$
891
177,282
959
121,000
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2009 and 2008 are summarized by category as follows:
Residential mortgage
Commercial mortgage
Construction mortgage
Commercial loans
Consumer loans
Total loans
Less:
Undisbursed loans in process
Allowance for loan losses
Deferred fees, net
Loans receivable, net
2009
2008
(In Thousands)
$
53,094
301,344
14,639
284,889
72,917
726,883
23,230
13,032
458
36,720
690,163
$
57,682
322,595
66,279
312,099
80,993
839,648
51,000
11,300
727
63,027
776,621
The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:
2009
2008
(In Thousands)
Variable rate loans
Fixed rate loans
Total gross loans
$
$
456,128
247,525
703,653
Activity in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as follows:
2009
2008
(In Thousands)
2007
Balance at beginning of year
Provision for loan losses
Charge-offs
Recoveries
Balance at end of year
$
$
11,300
10,460
(9,442)
714
13,032
10,083
6,361
(5,190)
46
11,300
583,103
205,545
788,648
8,406
1,775
(243)
145
10,083
- 34 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The following is a summary of information pertaining to impaired and nonaccrual loans at December 31:
2009
2008
(In Thousands)
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
Valuation allowance related to impaired loans
Average of impaired loans during the year
Total nonaccrual loans
Total loans past due 90 days and still accruing interest
$
$
45,735
23,244
68,979
$
3,827
44,393
27,059
771
8,802
6,708
15,510
1,180
19,932
13,923
13
Substantially all of the non-accrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans for fiscal 2009 and
2008 are collateralized by real estate. Management believes based on information known and available currently, the probable losses
related to problem assets are adequately reserved in the allowance for loan losses.
The company recognized interest income of $4,000, $0 and $0 on loans that are past due 90 days and still accruing during the year ended
December 31, 2009, 2008 and 2007, respectively. The Company had $8.9 million and $1.1 million of restructured loans as of December 31,
2009 and 2008, respectively.
Loans serviced for the benefit of others under loan participation arrangements amounted to approximately $32,443,000 and $35,112,000 at
December 31, 2009 and 2008, respectively.
Activity in loans to officers, directors and other related parties for the years ended December 31, 2009 and 2008 is summarized as follows:
2009
2008
(In Thousands)
Balance at beginning of year
New loans
Repayments
Balance at end of year
$
$
20,584
9,044
(8,271)
21,357
18,586
9,951
(7,953)
20,584
In management’s opinion, related party loans are made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with an unrelated person and generally do not involve more than the normal risk of
collectibility.
In the normal course of business, to meet the financing needs of its customers, the Company is a party to financial instruments with off-
balance-sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the
contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as
it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management’s credit evaluation.
- 35 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 2009 and 2008 consists of the following:
2009
2008
(In Thousands)
Land
Buildings
Furniture, fixtures and equipment
Construction in process
Total premises and equipment
Less: accumulated depreciation
Premises and equipment, net
$
5,040
11,277
7,123
25
23,465
(6,022)
17,443
$
5,040
11,277
7,023
25
23,365
(5,385)
17,980
Depreciation expense included in operating expenses for the years ended December 31, 2009, 2008 and 2007 amounted to $1.2 million, $1.3
million, and $1.2 million, respectively. There was no interest capitalized during fiscal 2009 and 2008.
NOTE 6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Transactions in other real estate owned for the years ended December 31, 2009 and 2008 are summarized below:
2009
2008
(In Thousands)
Balance, beginning of year
Additions
Sales
Write downs
Balance, end of year
$
$
7,105
8,507
(6,264)
(1,495)
7,853
272
7,524
(691)
-
7,105
NOTE 7 – MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying statement of financial condition. The value of mortgage servicing
rights is included in other assets on the Company’s statement of financial condition. The unpaid principal balances of loans serviced for
others were $282.5 million and $45.3 million, respectively, at December 31, 2009 and 2008.
The estimated fair values of mortgage servicing rights were $3.1 million and $250,000, respectively, at December 31, 2009 and 2008. The
estimated fair value of servicing rights at December 31, 2009 were determined using discount rates ranging from 9.50% to 17.29%,
prepayment speed assumptions (“PSA”) ranging from 135.5 to 423.6, depending upon the stratification of the specific right, and a weighted
average delinquency rate of 3.89% as determined by a third party. The estimated fair value of servicing rights at December 31, 2008 were
determined using discount rates ranging from 10.0% to 20.81%, prepayment speed assumptions (“PSA”) ranging from 194 to 1,455,
depending upon the stratification of the specific right, and a weighted average delinquency rate of 4.23% as determined by a third party.
The following summarizes the activity in mortgage servicing rights, along with the aggregate activity in the related valuation allowances, for
the years ended December 31, 2009 and 2008:
2009
2008
(In Thousands)
MSR beginning balance
Amount capitalized
Amount amortized
Recovery (provision) for loss in fair value
MSR ending balance
- 36 -
$
250
1,717
(275)
105
1,797
$
310
118
(103)
(75)
250
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Activity in the allowance for loss in fair value in mortgage servicing rights for the years ended December 31, 2009 and 2008 are as follows:
Balance at beginning of year
Provision for loss in fair value
Impairment recoveries
Balance at end of year
2009
2008
(In Thousands)
105
$
-
(105)
$
-
30
75
-
105
The estimated amortization expense for mortgage servicing rights for the years ended December 31, 2010, 2011, 2012, 2013, 2014 and
thereafter is $235,000, $215,000, $190,000, $165,000, $144,000 and $848,000, respectively. The estimated amortization expense is based
on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in
the volume of prepayments and economic factors.
At December 31, 2009 and 2008, servicing related trust funds of approximately $401,000 and $489,000, respectively, representing both
principal and interest due investors and escrows received from borrowers, are on deposit in affiliated trust bank custodial accounts and are
included in noninterest-bearing deposits in the accompanying financial statements. At December 31, 2009 and 2008, the Company had
blanket bond coverage of $5.0 million and errors and omissions coverage of $5.0 million.
NOTE 8 - DEPOSITS
Deposits outstanding by type of account at December 31, 2009 and 2008 are summarized as follows:
Noninterest-bearing demand accounts
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit
1.00% to 2.99%
3.00% to 4.99%
5.00% to 7.99%
Total certificates of deposit
Total deposits
2009
2008
(In Thousands)
$
37,543
31,710
2,824
155,019
465,140
67,389
1,483
534,012
761,108
$
39,952
24,902
2,252
81,451
181,576
385,464
1,792
568,832
717,389
The aggregate amount of certificates of deposit, excluding brokered deposits, with a minimum denomination of $100,000 was $118.9
million and $141.3 million at December 31, 2009 and 2008, respectively. The aggregate amount of brokered certificates of deposit was
$115.7 million and $246.0 million at December 31, 2009 and 2008, respectively.
The amounts and scheduled maturities of certificates of deposit at December 31, 2009 and 2008 are as follows:
2009
2008
(In Thousands)
Maturing within one year
Maturing one through three years
Maturing after three years
$
$
425,397
105,422
3,193
534,012
521,394
46,633
805
568,832
The Company has pledged $11.8 million of U.S. government agencies and corporations’ securities available for sale as of December 31,
2009 to secure public agency funds.
- 37 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 9 – SHORT-TERM BORROWED FUNDS
Short-term borrowed funds at December 31, 2009 and 2008 are summarized as follows:
2009
2008
Balance
Interest Rate
Balance
Interest Rate
Unsecured line of credit
Short-term FHLB advances
Short-term FRB advances
Mortgage loan warehouse line of credit
Subordinated debenture, due 2020
Total short-term borrowed funds
$
3,000
21,500
-
19,062
225
43,787
$
(In Thousands)
4.75%
0.36%-2.715%
-
5.25%-8.50%
2.75%
3,000
33,000
91,000
21,090
-
148,090
2.75%
0.00% - 4.38%
0.50%
3.48%
-
Lines of credit with the Federal Home Loan Bank of Atlanta are based upon FHLB approved percentages of Bank assets, but must be
supported by appropriate collateral to be available. The Banks have pledged approximately $177.8 million first lien residential mortgage,
second lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios under a
blanket lien agreement as collateral to the FHLB for these advances. In addition, the Company has pledged $59.8 million of securities for
these advances. At December 31, 2009, the Banks had maximum FHLB lines of $339.1 million based on FHLB limits. At December 31,
2009, the Banks pledged collateral totaling $237.6 million to support FHLB advances. At December 31, 2009 the Banks had FHLB
advances of $176.5 million outstanding, with excess collateral pledged to the FHLB that would support additional borrowings of
approximately $61.0 million.
Lines of credit with the FRB are based on collateral pledged. The Banks pledged $139.9 million of non-mortgage commercial, acquisition
and development, and lot loan portfolios under blanket lien agreements as collateral to the FRB for these advances. At December 31, 2009
the Banks had lines available with the FRB for $71.5 million. At December 31, 2009 the Banks had no FRB advances outstanding.
The mortgage loan warehouse line of credit is an extension of credit facility to Crescent Mortgage with a $35.0 million credit limit, of
which $15.9 million is still available. The facility is secured by certain Crescent Mortgage’s residential mortgage loans held for sale and its
other assets.
The Company has $3.0 million outstanding on an unsecured line of credit with a correspondent bank. See Note 10 – Long-Term Debt for
additional disclosure.
The Company has a subordinated debenture totaling $3.0 million that has principal repayments beginning in 2010. See Note 10 – Long-
Term Debt for additional disclosure.
In addition, the Banks had $11.2 million available under federal funds purchase line agreements with correspondent banks.
NOTE 10 – LONG-TERM DEBT
Long-term debt at December 31, 2009 and 2008 are summarized as follows:
December 31, 2009
Balance
Interest Rate
(In Thousands)
Long-term FHLB advances, due 2011 through 2021
TLGP, due 2012
Subordinated debentures, due 2016 through 2020
Subordinated debentures issued to Carolina Financial Capital Trust I, due 2032
Subordinated debentures issued to Carolina Financial Capital Trust II, due 2034
Total long-term debt
- 38 -
$
$
155,000
20,398
12,775
5,155
10,310
203,638
0.00% - 4.23%
2.74%
1.78% - 2.75%
3.75%
3.33%
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
December 31, 2008
Balance
Interest Rate
(In Thousands)
Long-term FHLB advances, due 2010 through 2021
Subordinated debentures, due 2016 through 2020
Subordinated debentures issued to Carolina Financial Capital Trust I, due 2032
Subordinated debentures issued to Carolina Financial Capital Trust II, due 2034
Total long-term debt
$
$
190,000
13,000
5,155
10,310
218,465
1.40% - 4.23%
6.21% - 6.32%
5.50%
7.80%
As of December 31, 2009, the principal amounts due on long-term debt in 2010, 2011, 2012, 2013, 2014 and thereafter were $0, $42.8
million, $43.2 million, $20.3 million, $5.3 million and $92.1 million, respectively. As of December 31, 2009, the principal amounts
callable by the FHLB on advances in 2010, 2011, 2012, 2013, 2014 and thereafter were $12.5 million, $55.0 million, $5.0 million, $5.0
million, and $0, respectively.
During 2009 the Company issued $20.4 million of indebtedness under the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary
Liquidity Guarantee Program (“TLGP”). The FDIC guarantees the debt until its maturity in 2012.
At December 31, 2009 and 2008, statutory business trusts (“Trusts”) created by the Company had outstanding trust preferred securities with
an aggregate par value of $15.0 million. The trust preferred securities have floating interest rates ranging from 5.50% to 7.80% at
December 31, 2009 and maturities ranging from December 31, 2032 to January 7, 2034. The principal assets of the Trusts are $15.5
million of the Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The Trusts
have issued $465,000 of common securities to the Company.
The trust preferred securities, the assets of the Trusts and the common securities issued by the Trusts are redeemable in whole or in part
beginning on or after December 31, 2008, or at any time in whole but not in part from the date of issuance on the occurrence of certain
events. The obligations of the Company with respect to the issuance of the trust preferred securities constitutes a full and unconditional
guarantee by the Company of the Trusts’ obligations with respect to the trust preferred securities. Subject to certain exceptions and
limitations, the Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of
distribution payments on the related trust preferred securities.
As currently defined by the Federal Reserve Board, the Company had $15.0 million of long-term debt that qualified as Tier 1 capital at
December 31, 2009 and 2008. The Company had $12.2 million and $13.0 million of long-term debt that qualified as Tier 2 capital at
December 31, 2009 and 2008, respectively.
During 2008, the Company modified a $5.0 million unsecured line of credit with a correspondent bank, of which $3.0 million is
outstanding at December 31, 2009, to be extended to March 31, 2020. In connection with this modification, the Company obtained a $3.0
million subordinated debenture that, as a condition to the line of credit modification, requires the Company to keep at least a $500,000
principal balance outstanding on the line of credit until the subordinated debenture is paid in full. If the Company does not maintain the
$500,000 balance, there is a $150,000 prepayment penalty. During 2009, the Company has maintained at least a $500,000 principal
balance outstanding on the line of credit. During 2009, the correspondent bank was put into receivership with the FDIC. As a result, the
undrawn $2 million of availability under this unsecured line of credit has been withdrawn by the FDIC. The line of credit also has debt
covenants, the more restrictive of which requires the Company to maintain certain capital ratios and return on asset ratios. As of December
31, 2009, the Company is not in compliance with all of the covenants. While the lender has not called the line of credit, it has the right to
do so. Accordingly, the Company has developed alternatives to replace this line of credit, if necessary, by obtaining financing from other
sources, raising capital or by receiving dividends from its subsidiaries to pay off the debt. As a result, management does not believe that
default of this covenant will have a material adverse affect on the Company’s financial condition or the results of its operations.
NOTE 11 - INCOME TAXES
Deferred tax assets are recognized for future deductible amounts resulting from differences in the financial statement and tax bases of assets
and liabilities and operating loss carryforwards. A valuation allowance is then established to reduce that deferred tax asset to the level that
it is "more likely than not" that the tax benefit will be realized. The realization of a deferred tax benefit by the Company depends upon
having sufficient taxable income of an appropriate character in the future periods.
- 39 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Income tax expense for the years ended December 31, 2009, 2008 and 2007 consists of the following:
Current income tax expense
Federal
State
Deferred income tax expense (benefit)
Federal
State
2009
2008
(In Thousands)
2007
$
5,776
596
6,372
(2,248)
229
(2,019)
3,565
324
3,889
(551)
(82)
(633)
3,256
5,210
465
5,675
(801)
(68)
(869)
4,806
Total income tax expense
$
4,353
A reconciliation from expected Federal tax expense to actual income tax expense for the years ended December 31, 2009, 2008 and 2007,
using the base federal tax rates of 35%, 34% and 35%, respectively, is as follows:
2009
2008
(In Thousands)
2007
Computed federal income taxes
State income tax, net of federal benefit
Change in valuation allowance
Other, net
Total income tax expense
$
$
4,033
311
(38)
47
4,353
2,994
300
43
(81)
3,256
4,578
262
38
(72)
4,806
The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
liabilities at December 31, 2009 and 2008:
Deferred tax assets:
Loan loss reserve
Loan fees
Unrealized loss on securities available for sale
Tax vs. book gain on loans held for sale
Debt issuance costs
Net operating loss carryforwards
Reserve for mortgage loan buy-back
OREO write-downs
Securities yield adjustments
Other
Valuation allowance
Total gross deferred tax assets
Deferred tax liabilities:
Depreciation
Stock-based compensation
Short-term disability accrual
Total gross deferred tax liabilities
2009
2008
(In Thousands)
$
4,431
157
4,417
26
101
106
1,031
353
230
218
11,070
(106)
10,964
(360)
(123)
(132)
(615)
Deferred tax assets, net
$
10,349
- 40 -
4,071
240
5,528
50
106
203
62
-
-
92
10,352
(203)
10,149
(102)
(254)
(246)
(602)
9,547
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
A portion of the annual change in the net deferred income tax asset relates to unrealized gains and losses on debt and equity securities. The
related 2009 and 2008 deferred income tax benefit of $2.1 million and $5.6 million, respectively, was recorded directly to stockholders’
equity as a component of accumulated other comprehensive income. The balance of the 2009 and 2008 change in the net deferred tax asset
of $2.0 million and $633,000, respectively, is reflected as a deferred income tax benefit in the consolidated statement of operations.
The 2009 and 2008 valuation allowances related to state net operating loss carryforwards. It is management’s belief that the realization of
the remaining net deferred tax assets is more likely than not.
At December 31, 2009, income tax returns from 2008, 2007 and 2006 remain subject to review by tax authorities.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease its office facilities under noncancellable operating lease agreements expiring on various
dates through June 2020. The Company’s rental expense for its office facilities for the years ended December 31, 2009, 2008 and 2007
totaled $807,000, $524,000 and $507,000, respectively. Minimum rental commitments (in thousands) under the leases are as follows:
2010
2011
2012
2013
2014
Thereafter
Total
$
517
482
495
507
339
292
$
2,632
NOTE 13 – ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Current accounting literature requires disclosures about the fair value of all financial instruments whether or not recognized in the balance
sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized through immediate settlement of the instrument. Certain items are
specifically excluded from disclosure requirements, including the Company’s stock, premises and equipment, accrued interest receivable
and payable and other assets and liabilities.
The fair value of a financial instrument is an amount at which the asset or obligation could be exchanged in a current transaction between
willing parties, other than in a forced sale. Fair values estimates are made at a specific point in time based on relevant market information
and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors.
The Company has used Management’s best estimate of fair value based on the above assumptions. Thus the fair values presented may not
be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses
that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.
Cash and due from banks - The carrying amount of these financial instruments approximate fair value. All mature within 90 days and
present no anticipated credit concerns.
Interest-bearing cash - The carrying amount of these financial instruments approximate fair value.
Securities available for sale and securities held to maturity – Fair values for investment securities available for sale and securities held to
maturity are 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.
Federal Home Loan Bank stock and other non-marketable equity securities - The carrying amount of these financial instruments
approximate fair value.
- 41 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Derivative assets – Fair values are based on quoted market prices, where available. If quoted market prices are not available, estimated fair
values are based on quoted market prices of comparable instruments.
Loans held for sale and loans receivable, net - For variable-rate loans that reprice frequently and have no significant change in credit risk,
estimated fair values are based on carrying values. Estimated fair values for certain mortgage loans, credit card loans, and other consumer
loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan
characteristics. Estimated fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Estimated fair values for
impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Accrued interest receivable - The fair value approximates the carrying value.
Deposits - The estimated fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at
the reporting date. The estimated fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using
rates currently offered for deposits of similar remaining maturities.
Short-term borrowed funds - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-
term borrowings maturing within 90 days approximate their fair values. Estimated fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing
arrangements.
Long-term debt - The estimated fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on
the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Derivative liabilities - Fair values are based on quoted market prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Commitments to extend credit – The carrying amount of these commitments is considered to be a reasonable estimate of fair value because
the commitments underlying interest rates are based upon current market rates.
Accrued interest payable - The fair value approximates the carrying value.
- 42 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The carrying amount and estimated fair value of the Company's financial instruments at December 31, 2009 and 2008 are as follows:
Financial assets:
Cash and due from banks
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Other investments
Derivative assets
Loans held for sale
Loans receivable, net
Accrued interest receivable
Financial liabilities:
Deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities
Accrued interest payable
2009
Carrying
Amount
Fair
Value
2008
Carrying
Amount
Fair
Value
(In Thousands)
$
2,901
17,759
104,401
125,633
12,456
465
2,342
71,233
690,163
4,550
761,108
43,787
203,638
891
1,484
2,901
17,759
104,401
105,450
12,456
465
2,342
71,682
699,069
4,550
731,567
45,599
209,359
891
1,484
25,206
16,285
120,988
113,689
11,874
465
1,999
28,283
776,621
4,510
717,389
148,090
218,465
959
2,764
25,206
16,285
120,988
106,485
11,874
465
1,999
28,823
766,178
4,510
721,736
148,095
230,856
959
2,764
Off-Balance Sheet Financial Instruments:
Commitments to extend credit
Standby letters of credit
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
$
$
50,100
910
-
$
$
-
85,100
3,400
-
-
In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value
disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable
inputs are classified as Level 3.
Assets and liabilities that are carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the
quality and reliability of the information used to determine fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 Unobservable inputs that are not corroborated by market data.
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2009 and 2008:
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant other
unobservable inputs
(Level 3)
December 31, 2009
Available-for-sale investment securities
Mortgage-backed securities
Asset-back securities
Total
December 31, 2008
Available-for-sale investment securities
Mortgage-backed securities
Asset-back securities
Total
-
$
-
-
$
-
-
$
-
-
$
-
4,117
100,284
-
104,401
-
107,472
13,516
120,988
-
-
-
-
-
-
-
-
- 43 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2009 and 2008:
December 31, 2009
Impaired loans
Real estated owned
Total
December 31, 2008
Impaired loans
Real estated owned
Total
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant other
unobservable inputs
(Level 3)
-
$
-
$
-
-
$
-
$
-
68,979
7,853
76,832
15,510
7,105
22,615
-
-
-
-
-
-
The Company predominantly lends with real estate serving as collateral on a substantial majority of loans. Loans that are deemed to be
impaired are primarily valued at fair values of the underlying real estate collateral.
NOTE 14 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making
commitments as for on-balance sheet instruments. At December 31, 2009 and 2008, the Banks had commitments to extend credit in the
amount of $50.1 million and $85.1 million, respectively. At December 31, 2009 and 2008, the Banks had standby letters of credit in the
amount of $910,000 and $3.4 million, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. Since
commitments may expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include
inventory, property and equipment, residential real estate and income producing commercial properties.
Standby letters of credit obligate the Company to meet certain financial obligations of its customers, if, under the contractual terms of the
agreement, the customers are unable to do so. Payment is only guaranteed under these letters of credit upon the borrower’s failure to
perform its obligations to the beneficiary. The Company can seek recovery of the amounts paid from the borrower and the letters of credit
are generally not collateralized. Commitments under standby letters of credit are usually one year or less. At December 31, 2009, the
Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not
considered material. The maximum potential of undiscounted future payments related to standby letters of credit at December 31, 2009 was
approximately $910,000.
The Company uses derivatives primarily to neutralize interest rate risk related to its pipeline of interest rate lock commitments issued on
residential mortgage loans in the process of origination for sale. At December 31, 2009 and 2008, the Company’s outstanding mortgage
interest rate lock commitments totaled $223.9 million and $223.0 million, respectively. The Company uses forward mortgage loan sales
commitments that generally correspond with the composition of the locked pipeline to hedge a percentage of the Company’s pipeline of
mortgage loan interest rate lock commitments and loans held for sale. At December 31, 2009 and 2008, the Company’s outstanding
forward mortgage loan sales commitments totaled $130.0 million and $121.0 million, respectively. The Company’s derivative positions are
marked to market as shown in Note 3 - Derivatives.
Management closely monitors its credit concentrations and attempts to diversify the portfolio within its market area. The Company’s
markets are concentrated along coastal South Carolina. At December 31, 2009, the Company has approximately $612.9 million of
commercial real estate loan exposure.
- 44 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan that covers substantially all employees of Community FirstBank, Crescent Bank, and Carolina
Services (“CFC participants”). During 2004, the Company added Crescent Mortgage (“CMC Participants”) as a separate group that
participated in the plan. Participants may contribute up to the maximum allowed by the regulation. During 2008, and 2007 the Company
matched 75% of an employee’s contribution up to 6.00% of the participant’s compensation of the CFC Participants and matched 50% of an
employee’s contribution up to 4.00% of the participant’s compensation of the CMC Participants. During 2009, the Company matched 75%
of an employee’s contribution up to 6.00% of the participant’s compensation of the CFC Participants and the CMC Participants. For the
years ended December 31, 2009, 2008 and 2007, the Company made matching contributions of $370,000, $289,000 and $290,000,
respectively.
The Company has an arrangement with four executives whereby the Company paid a lump sum payment to an insurance company on
behalf of the executives. The advance is treated as a loan to the executives and the cash surrender value of the payment to the insurance
company is included in other assets in the accompanying consolidated statements of financial condition. The cash surrender value of the
advance at December 31, 2009 and 2008 is $1.6 million and $1.7 million, respectively. The executives are entitled to the increase in cash
value above the Company’s original cash value insurance contributions. The executives pay the Company imputed interest on the loan
balance and the increase in the cash value is recorded as compensation to the executives. The insurance policy premiums are paid in full by
the executives. Generally, each executive is entitled to receive a $1.0 million death benefit and the Company will receive a $1.8 million
death benefit. Since the executives pay the insurance premiums, the insurance proceeds will be taxable to the Company.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding
plus the weighted average number of additional common shares that would have been outstanding if the dilutive potential common shares
had been issued. Diluted earnings per share include the effects of outstanding stock options issued by the Company if dilutive. The
number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such
exercises were used to acquire shares of common stock at the average market price during the reporting period.
The following is a summary of the reconciliation of average shares outstanding for the years ended December 31, 2009, 2008 and 2007:
2009
2008
2007
Basic
Diluted
Basic
Diluted
Basic
Diluted
Weighted average shares outstanding
1,912,449
1,912,449
1,883,101
1,883,101
1,794,659
1,794,659
Effect of dilutive securities:
Stock options
-
12,271
-
77,261
-
159,733
Average shares outstanding
1,912,449
1,924,720
1,883,101
1,960,362
1,794,659
1,954,392
The average market price used in calculating the dilutive securities under the treasury stock method for the years ended December 31, 2009,
2008 and 2007 was $17.53, $44.92 and $50.40, respectively. For fiscal 2009, 42,703 option shares were excluded from the calculation of
diluted earnings per share at some time during the period because the exercise prices were greater than the average market price of the
common shares, and therefore would have been anti-dilutive. For fiscal years 2008 and 2007, there were no options excluded from the
calculation of diluted earnings per share. The Company does not have an actively traded market for its shares and, accordingly, the average
market price used in calculating dilutive securities is based on a very limited number of transactions.
NOTE 17 - CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
The Company and the Banks are subject to various federal and state regulatory requirements, including regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions that if undertaken
could have a direct material effect on the Company’s and the Banks’ financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve
quantitative measures of the Company’s and the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory
methods. The Company’s and the Banks’ capital amounts and classifications are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors. As of December 31, 2009, the most recent notification from federal banking agencies
categorized the Company and the Banks as “well capitalized” under the regulatory framework. In order to be considered “adequately
capitalized”, the Company and the Banks are required to maintain minimum Tier 1 capital and total risk based capital to risk weighted
assets and Tier 1 capital to total average assets of 4%, 8%, and 3%, respectively. In order to be considered “well capitalized”, the Company
and the Banks are required to maintain minimum Tier 1 capital and total risk based capital to risk weighted assets and Tier 1 capital to total
- 45 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
average assets of 6%, 10%, and 5%, respectively. Since December 31, 2009, there have been no events or conditions that management
believes have changed the Company’s or the Banks’ regulatory capital categories.
The actual capital amounts and ratios for the Company and the Banks at December 31, 2009 and 2008 are as follows:
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total avg assets)
Community FirstBank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total avg assets)
Crescent Bank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted assets)
Tier 1 capital (to total avg assets)
2009
2008
Amount
Ratio
Amount
Ratio
(Dollars In Thousands)
$
78,773
101,696
78,773
45,166
55,633
45,166
35,404
47,849
35,404
9.2%
11.9%
7.3%
10.4%
12.8%
7.7%
8.4%
11.4%
7.2%
71,208
94,780
71,208
36,590
46,754
36,590
33,806
47,027
33,806
8.4%
11.2%
6.4%
8.9%
11.3%
6.6%
8.1%
11.3%
6.3%
Any future dividend payments by the Company will be made primarily from dividends received from the Banks and Crescent Mortgage.
Under applicable federal law, the Banks are restricted to total dividend payments in any calendar year to net profits of that year combined
with retained net profits for the two preceding years. At December 31, 2009, the Banks had $18.0 million of retained net profits free of
such restriction.
NOTE 18 – SUPPLEMENTAL SEGMENT INFORMATION
The Company has three reportable segments: community banking, mortgage banking and other. The community banking segment provides
traditional banking services offered through Community FirstBank and Crescent Bank. The mortgage banking segment provides mortgage
loan origination and servicing offered through Crescent Mortgage. The other segment provides managerial and operational support to the
other business segments through Carolina Services and Carolina Financial.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company
evaluates performance based on net income.
The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions were to third parties, that is, at
current market prices.
The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately
because each segment has different types and levels of credit and interest rate risk.
The following tables present selected financial information for the Company’s reportable business segments for the years ended December
31, 2009, 2008 and 2007 (In Thousands):
- 46 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
For the Year Ended December 31, 2009
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
Noninterest income from external customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Community
Banking
$
55,296
23,283
32,013
10,460
4,014
-
18,038
3,840
3,689
1,348
Net income (loss)
$
2,341
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
For the Year Ended December 31, 2008
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income (expense) from
external customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
$
1,051,233
690,563
43,412
763,538
209,899
Community
Banking
$
62,064
31,488
30,576
6,361
4,304
-
14,186
3,780
10,553
3,853
Net income (loss)
$
6,700
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$
1,111,268
776,802
6,684
719,655
327,001
Mortgage
Banking
Other
Eliminations
Total
1,431
1,037
394
-
23,924
-
14,211
582
9,525
3,594
5,931
35,607
-
27,821
-
19,062
23
713
(690)
-
-
4,422
5,424
-
(1,692)
(589)
(1,103)
83,753
-
-
-
18,865
(14)
(14)
-
-
-
(4,422)
-
(4,422)
-
-
-
(91,836)
(400)
-
(2,430)
(401)
56,736
25,019
31,717
10,460
27,938
-
37,673
-
11,522
4,353
7,169
1,078,757
690,163
71,233
761,108
247,425
Mortgage
Banking
Other
Eliminations
Total
72
1,247
(1,175)
-
(337)
4,536
4,757
-
(1,733)
(592)
(1,141)
76,520
-
-
-
18,802
(47)
(47)
-
-
-
(4,536)
-
(4,536)
-
-
-
(75,621)
(337)
-
(2,266)
(338)
63,049
33,227
29,822
6,361
9,227
-
23,882
-
8,806
3,256
5,550
1,138,994
776,621
28,283
717,389
366,555
960
539
421
-
5,260
-
4,939
756
(14)
(5)
(9)
26,827
156
21,599
-
21,090
- 47 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
For the Year Ended December 31, 2007
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
Noninterest income from external customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Community
Banking
$
65,042
35,332
29,710
1,775
3,495
-
12,902
3,924
14,604
5,329
Net income (loss)
$
9,275
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$
970,440
738,638
22,361
693,780
203,751
Mortgage
Banking
Other
Eliminations
Total
468
365
103
-
5,374
-
5,129
372
(24)
(8)
(16)
5,969
404
2,669
-
1,353
120
1,646
(1,526)
-
-
4,296
4,270
-
(1,500)
(515)
(985)
70,206
-
-
-
18,802
(58)
(58)
-
-
-
(4,296)
-
(4,296)
-
-
-
(69,476)
(337)
-
(1,680)
(338)
65,572
37,285
28,287
1,775
8,869
-
22,301
-
13,080
4,806
8,274
977,139
738,705
25,030
692,100
223,568
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for the parent company are presented below:
Carolina Financial Corporation
Condensed Statements of Financial Condition
December 31, 2009 and 2008
Assets:
Cash and cash equivalents
Investment in bank subsidiaries
Investment in non-bank subsidiaries
Investment in unconsolidated statutory business trusts
Securities available for sale
Other assets
Total assets
Liabilities and stockholders' equity:
Accrued expenses and other liabilities
Short-term debt
Long-term debt
Stockholders' equity
Total liabilities and stockholders' equity
2009
2008
$
(In Thousands)
895
72,627
372
465
502
127
74,988
385
3,000
15,465
56,138
74,988
$
747
60,779
3,681
465
-
6
65,678
622
3,000
15,465
46,591
65,678
- 48 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Carolina Financial Corporation
Condensed Statements of Operations
For the Years Ended December 31, 2009, 2008 and 2007
2007
2009
$
900
1,000
23
126
2,049
2008
(In Thousands)
-
-
40
300
340
Net income
$
7,169
Carolina Financial Corporation
Condensed Statements of Cash Flows
For the Years Ended December 31, 2009, 2008 and 2007
2009
2008
(In Thousands)
2007
$
7,169
5,550
8,274
Dividend income from bank subsidiaries
Dividend income from non-bank subsidiaries
Interest income
Other income
Total income
Interest expense
General and administrative expenses
Total expenses
Loss before income taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of Community FirstBank
Equity in undistributed earnings of Crescent Bank
Equity in undistributed earnings (losses) of Crescent Mortgage
Equity in undistributed (losses) earnings of Carolina Services
Total equity in undistributed earnings of subsidiaries
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings in subsidiaries
Stock-based compensation
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of securities available for sale
Equity investment in bank subsidiaries
Net cash used in financing activities
Cash flows from financing activities:
Proceeds from issuance of short-term borrowed funds
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
1,500
150
58
372
2,080
1,607
666
2,273
(193)
(643)
450
3,410
4,366
(16)
64
7,824
8,274
1,210
755
1,965
(1,625)
(552)
(1,073)
3,108
3,592
(9)
(68)
6,623
5,550
(6,623)
365
39
(111)
(780)
-
-
-
-
844
844
64
683
747
(7,824)
315
93
340
1,198
-
(3,000)
(3,000)
2,000
111
2,111
309
374
683
704
805
1,509
540
(464)
1,004
1,894
1,598
2,881
(208)
6,165
(6,165)
390
(8)
(508)
878
(35)
(700)
(735)
-
5
5
148
747
Cash and cash equivalents, end of year
$
895
- 49 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 20 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below represent the quarterly results of operations for the years ending December 31, 2009, 2008 and 2007 respectively:
First
Second
Third
Fourth
(In Thousands, Except Per Share Data)
2009
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
First
Second
Third
Fourth
(In Thousands, Except Per Share Data)
2008
14,458
6,626
7,832
2,206
5,626
8,469
10,097
3,998
1,525
2,473
1.29
1.29
14,039
5,950
8,089
2,516
5,573
5,624
9,049
2,148
813
1,335
0.70
0.70
13,652
5,451
8,201
4,077
4,124
8,491
10,626
1,989
766
1,223
0.64
0.61
15,612
8,311
7,301
607
6,694
2,473
6,488
2,679
979
1,700
0.89
0.87
15,401
7,725
7,676
1,524
6,152
1,713
5,152
2,713
1,012
1,701
0.89
0.86
15,342
7,715
7,627
2,950
4,677
1,849
6,015
511
197
314
0.16
0.16
16,598
9,293
7,305
445
6,860
2,267
5,548
3,579
1,311
2,268
1.26
1.16
17,210
9,751
7,459
270
7,189
2,245
5,908
3,526
1,297
2,229
1.24
1.14
16,393
9,657
6,736
680
6,056
2,388
5,640
2,804
1,032
1,772
0.99
0.91
First
Second
Third
Fourth
(In Thousands, Except Per Share Data)
2007
$
$
$
$
$
$
$
$
$
14,587
6,992
7,595
1,661
5,934
5,354
7,901
3,387
1,249
2,138
1.12
1.12
16,694
9,476
7,218
1,280
5,938
3,192
6,227
2,903
1,068
1,835
1.01
0.94
15,371
8,584
6,787
380
6,407
1,969
5,205
3,171
1,166
2,005
1.12
1.02
$
$
$
- 50 -
CAROLINA FINANCIAL CORPORATION
CAROLINA FINANCIAL CORPORATION
OFFICERS
John D. Russ
President and Chief Executive Officer
Frank J. Cole, Jr.
Executive Vice President, Secretary and Chief Financial Officer
David L. Morrow
Executive Vice President
William A. Gehman, III
Vice President and Controller
M. J. Huggins, III
Executive Vice President and Assistant Secretary
Jerry L. Rexroad
Executive Vice President
BOARD OF DIRECTORS
William H. Alford
Vice President and Secretary
A & I, Inc.
Robert G. Clawson, Jr., Esq.
Member
Clawson and Staubes, LLC
G. Manly Eubank
Chairman
Palmetto Ford, Inc.
Frank E. Lucas
Chairman
LS3P Associates, LTD
Benedict P. Rosen
Retired
AVX Corporation
Bonum S. Wilson, Jr.
Venture Capitalist
Howell (Skeets) V. Bellamy, Jr.
Member
Bellamy, Rutenberg, Copeland, Epps,
Gravely & Bowers, P.A.
Frank J. Cole, Jr.
Executive Vice President, Secretary and
Chief Financial Officer
Carolina Financial Corporation
M. J. Huggins, III
President and Secretary
Crescent Bank
Robert M. Moïse, CPA, CVA
Partner
WebsterRogers, LLP
John D. Russ
President and Chief Executive Officer
Carolina Financial Corporation
W. Scott Brandon
President
The Brandon Agency
Jeffery L. Deal, M.D.
Founding Member, Charleston ENT
(Retired)
Director of Health Services
Water Missions International
Robert C. KenKnight
Retired
Crescent Mortgage Company
David L. Morrow
Chief Executive Officer
Community FirstBank and
Crescent Bank
Lt. Gen. Claudius E. Watts, III
Chairman
(USAF – Retired)
Past President, The Citadel
- 51 -
CAROLINA FINANCIAL CORPORATION
COMMUNITY FIRSTBANK
OFFICERS
John D. Russ
Chairman
Gail A. Brown
Vice President
Senior Consumer Lender
Andrew J. DeMasi
Vice President
Commercial Banking
William A. Gehman III
Vice President and Controller
Richard Pierce
Vice President and Branch Manager
Meeting Street
Robert L. Tennyson
Vice President
Commercial Banking
BOARD OF DIRECTORS
Robert G. Clawson, Jr., Esq.
Member
Clawson and Staubes, LLC
G. Manly Eubank
Chairman
Palmetto Ford, Inc.
David L. Morrow
Chief Executive Officer
Community FirstBank and Crescent Bank
Lt. General Claudius E. Watts, III
(USAF – Retired)
Past President
The Citadel
David L. Morrow
Chief Executive Officer
Ellen M. Cavanaugh
Vice President
Loan Administration
Doug Driggers
Vice President and Branch Manager
West Ashley
Harold E. Jervey, III
Executive Vice President
Business Development
Leon G. Runey
Vice President
Commercial Banking
Robert H. Warrick
Senior Vice President
Senior Credit Officer
Frank J. Cole, Jr.
President, Treasurer, Secretary and
Chief Financial Officer
A. Taylor Clarkson, III
Senior Vice President
Summerville City Executive
Mary D. Garcia
Senior Vice President
Senior Commercial Lender
Linda H. Kennedy
Vice President
Commercial Banking
Barbara W. Schoppe
Vice President
West Ashley
Elizabeth D. Williams
Vice President and Branch Manager
Summerville
Frank J. Cole, Jr.
Executive Vice President, Secretary and
Chief Financial Officer
Carolina Financial Corporation
Jeffery L. Deal, M.D.
Founding Member, Charleston ENT (Retired)
Director of Health Services
Water Missions International
Frank E. Lucas
Chairman
LS3P Associates, LTD
John D. Russ
Chairman
President and Chief Executive Officer
Carolina Financial Corporation
Bonum S. Wilson, Jr.
Venture Capitalist
Robert M. Moïse, CPA, CVA
Partner
WebsterRogers, LLP
John M. Settle
Vice Chairman
SUMMERVILLE ADVISORY BOARD
Dr. Ron Givens
Partner
Lowcountry Women’s Specialists
Dr. Robert S. Randall
Member
Dental Associates of Summerville, LLC
Jack Kersting
President
Mr. K’s Piggly Wiggly
Jan Waring-Woods
Partner
Dixon, Hughes PLLC
Johnny Linton
Special Counsel
Duffy & Young
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CAROLINA FINANCIAL CORPORATION
CRESCENT BANK
OFFICERS
David L. Morrow
Chief Executive Officer
Jean E. Chestnut
Vice President
Charles J. Fehlig, Jr.
Executive Vice President
G. Timothy Hoag
Vice President
F. Ross Rankin
Senior Vice President
BOARD OF DIRECTORS
William H. Alford
Vice President and Secretary
A & I, Inc.
M. J. Huggins, III
President and Secretary
Marshall K. Cooper
Vice President
William A. Gehman
Vice President and Controller
Frederick W. Jasper, Jr.
Senior Vice President
M. Wayne Staton
Senior Vice President
Howell (Skeets) V. Bellamy, Jr.
Member
Bellamy, Rutenberg, Copeland, Epps,
Gravely & Bowers, P.A.
Mary Eleanor Eaddy
President
The Wordsmith, Inc.
Special Asst. to the President of CCU
M. J. Huggins, III
President and Secretary
Crescent Bank
Frank J. Cole, Jr.
Executive Vice President and
Chief Financial Officer
Michael L. Evans
Vice President
E. Hayden Hamilton, Jr.
Vice President
Travis A. Minter
Senior Vice President
W. Scott Brandon
Vice Chairman
President
The Brandon Agency
Daniel H. Isaac, Jr.
President
A & I, Inc.
Daniel W. R. Moore, Sr.
President
DM Development Co., Inc.
Benedict P. Rosen
Chairman
Retired
AVX Corporation
Advisory Boards
North Myrtle Beach
Dr. Robert DeGrood
President – Southern Surgical, P.A.
David L. Morrow
Chief Executive Officer
Community FirstBank and Crescent Bank
Edward L. Proctor, Jr., M.D.
Partner
Diagnostic Pathology, P.A.
Steve C. Taylor
President
Native Sons Screenprinting and Embroidery
Conway
Joseph O. Burroughs, Jr.
Partner – Singleton, Burroughs, and Young
Law Firm
South Strand
A. Carroll Atkisson
President – Affordable Suites of America, Inc.
John Harrison
Retired Executive, Exxon Corporation
Dr. Robert J. Farrar, Jr., DMD
Family and Cosmetic Dentistry
Gary F. Fette
President – Fette Realty, LLC and Socastee
Management, LLC
Jacqui Isbil
Owner – Umberto’s at Coquina Harbor
Mrs. Fran B. Gilbert
Assoc. VP for Development CCU
William B. Wilhelm
Broker Associate – Surfside Realty Company, Inc.
Dr. Garnett Ramsbottom
President – North Myrtle Beach Family
Practice
George M. Hearn, Jr.
Partner – Hearn, Brittan and Martin Law
Firm
Ray E. Skidmore, Jr.
President – Fox Fire Communities
Christopher S. Huggins, CPA
Smith, Sapp, Bookhout, Crumpler and
Callihan, P.A.
Dr. William T. Davis
Carolina Family Dental, PA
Dr. Ronald Ingle
President – Coastal Carolina University
James J. Johnson
Retired
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CAROLINA FINANCIAL CORPORATION
CRESCENT MORTGAGE COMPANY
OFFICERS
Michael P. Leddy
President and Chief Executive Officer
Patricia J. Anthony
Vice President
Credit/Risk Manager
John S. Kaminer
Vice President
Secondary Marketing
Fowler C. Williams
Executive Vice President
National Sales Manager
Jerry L. Rexroad
Chairman
Parthiv J. Dave
Vice President
Secondary Marketing
Michael A. Perkins
Vice President
Underwriting Manager
Kelly A. Byers
Chief Financial Officer
William F. Fowler
Vice President
Operations Manager
Jemille Y. Robinson
Senior Vice President
Quality Control and Post Closing
Manager
BOARD OF DIRECTORS
Frank J. Cole, Jr.
Executive Vice President, Secretary and Chief Financial Officer
Carolina Financial Corporation
Robert C. KenKnight
Retired
Crescent Mortgage Company
Michael P. Leddy
President and Chief Executive Officer
Crescent Mortgage Company
Benedict P. Rosen
Retired
AVX Corporation
Jerry L. Rexroad
Chairman
Executive Vice President
Carolina Financial Corporation
John D. Russ
President and Chief Executive Officer
Carolina Financial Corporation
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CAROLINA FINANCIAL CORPORATION
CAROLINA SERVICE CORPORATION
OFFICERS
Joseph Bonacci
Senior Vice President
Human Resources
Frank J. Cole, Jr.
Executive Vice President
Robert W. Haile, Jr.
Vice President
Treasurer
Jamin M. Hujik
Vice President
Special Assets Group
James Potasky
Vice President
Internal Auditor
Sara Sowell
Vice President
Loan Review
Brian L. Canady
Senior Vice President
Retail Sales Manager
William A. Gehman III
Vice President and Controller
John Heinemann
Vice President
Information Technology
Sandra Lewis
Senior Vice President
Operations
John D. Russ
Chairman
President and Chief Executive Officer
Richard A. Tripp
Vice President
Compliance
BOARD OF DIRECTORS
Frank J. Cole, Jr.
Executive Vice President, Secretary and Chief Financial Officer
Carolina Financial Corporation
Harvey L. Glick
Bank Consultant
M. J. Huggins, III
President and Assistant Secretary
Crescent Bank
John D. Russ
Chairman
President and Chief Executive Officer
Carolina Financial Corporation
David L. Morrow
Chief Executive Officer
Community FirstBank and Crescent Bank
Donald B. Shackelford
Bank Consultant
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CAROLINA FINANCIAL CORPORATION
CORPORATE INFORMATION
STOCK TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016
800-866-1340
SPECIAL COUNSEL
Luse Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 780
Washington, D.C. 20015
INDEPENDENT AUDITORS
Elliott Davis, LLC
1901 Main Street, Suite 1650
P. O. Box 2227
Columbia, SC 29202-2227
DISCLAIMER
This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
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