2010 AnnuAl RepoRt
March 11, 2011
Dear Shareholder,
Carolina Financial Corporation had a net loss for the year ended December 31, 2010 of $12.6 million or $(6.58) per
share diluted for fiscal 2010, as compared to net income of $7.2 million for fiscal 2009, or $3.72 per share diluted.
Net interest income for the year ended December 31, 2010 decreased $1.9 million, or 6.2%, to $29.8 million from
$31.7 million during the year ended December 31, 2009. The net decrease was primarily due to the Company
shrinking the balance sheet to preserve capital and an increase in non-performing assets (NPAs). The provision for
loan losses for the year ended December 31, 2010 totaled $30.8 million compared to $10.5 million in the prior year.
The increase in the provision is primarily attributable to the deterioration of construction, land development, and
other loans secured by real estate, resulting in an increase in NPAs and severity of losses.
Non-interest income for the year ended December 31, 2010 decreased $6.3 million to $21.6 million from $27.9
million for the prior year. The net decrease is primarily due to a change from a gain on sale of securities to a loss on
sale of securities of $2.9 million, an increase in the loss on extinguishment of debt of $1.8 million and other-than-
temporary impairment of securities of $2.5 million. Also during the year, the Company sold mortgage servicing
rights and realized a gain of $526,000.
Non-interest expense for the year ended December 31, 2010 increased $1.4 million or 3.7%, to $39.1 million from
$37.7 million for the prior year. The increase was primarily attributable to an increase in other expenses related to
legal and other loan collection activities.
Total assets at December 31, 2010 were $930.7 million compared to $1.1 billion at December 31, 2009. Loans
receivable, net decreased 15.4% to $584.0 million at December 31, 2010 from $690.2 million at December 31, 2009.
Total deposits decreased 9.4% to $689.8 million at December 31, 2010 from $761.1 million at December 31, 2009.
Stockholders’ equity decreased $9.6 million, primarily due to a net loss of $12.6 million, offset by an increase on
accumulated other comprehensive income of $2.6 million.
Non-performing assets increased to the highest levels in our history due to distressed coastal real estate markets and
declining real estate values. Non-performing assets were $68.2 million at December 31, 2010 compared to $35.7
million at December 31, 2009. These NPA levels have affected financial performance in many areas of our balance
sheet and earnings statement. Non-accrual loans caused a reduction in net interest income. Provision for loan losses
and corresponding reserves are at their highest levels. Additionally, expenses for attorneys to assist with troubled
debt workouts and foreclosures as well as expenses to maintain foreclosed properties have increased.
However, we continue to enjoy good performance in our wholesale mortgage business. This was a substantial year
in the mortgage industry and we participated in significant levels of mortgage loan production and sales.
Performance in 2010 was comparable to 2009 which had been one of our best years in this business.
While these have been very trying times, your company and subsidiary banks remain well-capitalized. Though
credit issues remain, we have seen indications that NPAs appear to have bottomed and that the economy, and
troubled credits, will start to show improvement. We continue to work towards a capital raise and hope to be able to
discuss investment opportunities with you early in the year.
Thank you for your continued support!
Sincerely,
John D. Russ
President and Chief Executive Officer
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CAROLINA FINANCIAL CORPORATION
TABLE OF CONTENTS
Letter to Stockholders
Summary of Selected Financial Data
Financial Discussion
Report of Independent Certified Public Accountants
Consolidated Financial Statements
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
And Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Carolina Financial Corporation’s Officers and Directors
Community FirstBank of Charleston’s Officers and Directors
Crescent Bank’s Officers and Directors
Crescent Mortgage Company’s Officers and Directors
Carolina Services Corporation’s Officers and Directors
Corporate Information
1
4-5
6-23
24
25
26
27
28-29
30-60
61
62
63
64
65
66
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CAROLINA FINANCIAL CO RPORATION
SUMMARY OF SELECTED FINANCIAL DATA
Set forth below is 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 (loss) after
provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
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
2010
$
46,842
17,077
29,765
30,755
(990)
21,600
39,070
(18,460)
(5,872)
(12,588)
$
For The Years Ended December 31,
2007
2008
2009
(In thousands)
2006
56,736
25,019
31,717
10,460
21,257
27,938
37,673
11,522
4,353
7,169
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
8,274
56,073
29,711
26,362
2,755
23,607
9,063
20,317
12,353
4,543
7,810
2010
2009
At December 31,
2008
(In thousands)
2007
2006
$
930,749
21,415
151,574
9,848
11,129
82,615
583,995
14,263
689,814
57,759
123,339
46,494
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
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CAROLINA FINANCIAL CO RPORATION
SUMMARY OF SELECTED FINANCIAL DATA
2010
For The Years Ended December 31,
2009
2007
2008
(Dollars in thousands)
2006
$
1,018,130
640,646
742,409
50,065
1,114,132
737,448
767,814
51,949
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
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
Non-performing assets to total assets
Non-performing loans to total loans
Allowance for loan losses as a percentage of
loans receivable (end of period)
Allowance for loan losses as a percentage of
nonperforming loans
(25.14)%
(1.24)%
94.24%
86.29%
4.92%
3.10%
4.61%
11.69%
7.33%
9.60%
13.80%
0.64%
94.59%
96.05%
4.66%
3.01%
1.18%
5.17%
3.31%
3.96%
11.67%
0.51%
95.66%
103.21%
4.36%
2.86%
0.66%
2.71%
1.85%
1.77%
18.46%
0.96%
95.22%
106.52%
5.18%
3.44%
0.01%
2.18%
1.40%
2.09%
21.93%
1.02%
94.83%
104.89%
4.67%
3.65%
0.01%
0.19%
0.13%
0.09%
2.38%
1.85%
1.43%
1.35%
1.25%
24.84%
46.83%
81.08%
64.35%
1353.62%
2010
At or For The Years Ended December 31,
2008
2009
2007
2006
Per Share Data:
Book value (end of period)
Basic earnings (loss)
Diluted earnings (loss)
$
24.23
(6.58)
(6.58)
29.35
3.75
3.72
24.36
2.95
2.83
27.55
4.61
4.23
22.70
4.51
4.10
Average common shares - basic
Average common shares - diluted
1,913,240
1,913,240
1,912,449
1,924,720
1,883,101
1,960,362
1,794,659
1,954,392
1,729,964
1,902,818
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CAROLINA FINANCIAL CO RPORATION
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 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 economic downturn 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.
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
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, 2010, 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.
Our Non-Performing Assets Have Increased Recently Which May Negatively Impact Our Earnings.
Our non-performing assets, which consist of nonaccrual loans, accruing loans 90 days or more past due, and real estate
acquired through foreclosure, have increased recently as a result of the recent economic recession and the downturn in the
real estate market in our primary market areas. At December 31, 2010, we had total non-performing assets of $68.2 million
or 7.33% of total assets, compared to $35.7 million or 3.31% of total assets at December 31, 2009. Our non-performing
assets may continue to increase in future periods. Our non-performing assets adversely affect our net income in various
ways. We do not record interest income on non-accrual loans or investments or on real estate owned. We must establish an
allowance for loan losses that reserves for losses inherent in the loan portfolio that are both probable and reasonably
estimable through current period provisions for loan losses, which are recorded as a charge to income. From time to time, we
also write down the other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees
associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to
the other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management,
which can distract them from our overall supervision of operations and other income-producing activities.
We Have Experienced Net Losses For Fiscal 2010 And We May Not Return To Profitability In The Near Future.
We have experienced net losses of $12.6 million for fiscal 2010. The losses have been primarily caused by a significant
increase in non-performing assets, which necessitated a provision for loan losses of $30.8 million for fiscal 2010, compared
to a provision of $10.5 million for fiscal 2009. We charged off $30.8 million of loans during 2010 as compared to $10.5
million of charge offs during 2009. Non-accrual loans (generally loans 90 days or more past due in principal or interest
payments) totaled $57.4 million, or 9.82% of total loans, net at December 31, 2010, compared to $27.1 million, or 3.92% of
total loans, net at December 31, 2009. We also recognized other-than-temporary impairment losses related to our investment
portfolio of $2.5 million in the consolidated statement of operations for fiscal 2010. There were no other-than-temporary
impairment losses in our investment portfolio in fiscal 2009. As a result of these factors and other conditions such as
weakness in our local economy, we may not be able to generate sustainable net income or achieve profitability in the near
future.
Commercial Real Estate Loans, Commercial Business Loans And Construction And Development Loans Increase Our
Exposure To Credit Risks.
At December 31, 2010, our commercial real estate loans totaled $271.7 million, or 46.52% of total loans receivable, net, our
commercial business loans totaled $46.0 million, or 7.87% of total loans receivable, net, and our construction and
development loans totaled $99.5 million, or 17.03% of total loans. Commercial real estate loans and commercial business
loans generally expose us to a greater risk of nonpayment and loss than one-to-four family residential real estate loans
because repayment of such loans often depends on the successful business operations and income stream of the borrowers.
Similarly, construction and development loans expose us to a greater risk of nonpayment and loss because repayment is
dependent upon the successful completion of the project and the ability of the contractor or builder to repay the loan from the
sale of the property or obtaining permanent financing. Additionally, such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to residential real estate loans. Many of our borrowers have more
than one commercial loan or construction and development loan outstanding with us. Consequently, an adverse development
with respect to one loan or one credit relationship may expose us to a significantly greater risk of loss compared to an adverse
development with respect to a one-to-four family residential real estate loan. Finally, if we foreclose on a commercial real
estate, commercial business or construction and development loan, our holding period for the collateral, if any, typically is
longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral.
The risks of commercial and construction and development loans have been exacerbated by the extended recession in
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
commercial real estate and commercial land values, and the downturn in residential construction, particularly in our market
areas. During fiscal 2010, we charged off $3.6 million, $1.1 million and $15.3 million of commercial real estate loans,
commercial business loans and construction and development loans, respectively.
Increases To The Allowance For Loan Losses Would Cause Our Earnings To Decrease.
Our customers may not repay their loans according to the original terms, and the collateral securing the payment of these
loans may be insufficient to repay the remaining principal balance of the loan. Hence, we may experience significant loan
losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments
about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses,
we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our
assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, which would require us to make additions to the allowance. Material additions to the allowance would materially
decrease our net income.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses
or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these
regulatory authorities would have an adverse effect on our results of operations and/or financial condition.
We Could Record Future Losses On Our Holdings Of Investment Securities. In Addition, We May Not Receive Full
Future Interest Payments On These Securities.
We review our held-to-maturity 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 held-to-maturity 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.
We own trust preferred securities with an amortized cost basis of $9.8 million and a fair value of $3.2 million at December
31, 2010. We recognized total pre-tax other-than-temporary impairment of $4.2 million and $-0- for fiscal 2010 and 2009,
respectively, of which $2.5 million and $-0- was credit-related losses recorded through our consolidated statement of
operations as a reduction of non-interest income, and $1.7 million and $-0- was recorded as a decrease to other
comprehensive income, net of tax.
We also own private label mortgage-backed securities in our held-to-maturity portfolio with an amortized cost basis of
$131.8 million and a fair value of $129.0 million at December 31, 2010. We have evaluated these securities and do not
consider them to be other than temporarily impaired at December 31, 2010.
A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an
unrealized loss that exists with respect to our securities portfolio constitutes additional impairment that is other than
temporary, which could result in material losses to us. These factors include, but are not limited to, a continued failure by an
issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an
increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions
and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair
values of securities could decline if the overall economy and the financial condition of some of the issuers continue to
deteriorate and there remains limited liquidity for these securities.
Future Changes In Interest Rates Could Impact Our Financial Condition And Results Of Operations.
Net income is the amount by which net interest income and non-interest income exceeds non-interest expense and the
provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:
•
•
interest income earned on interest-earning assets, such as loans and securities; and
interest expense paid on interest-bearing liabilities, such as deposits and borrowings.
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
A substantial percentage of our interest-earning assets, such as residential and commercial mortgage loans, have longer
maturities than our interest-bearing liabilities, which consist primarily of savings and demand accounts, certificates of deposit
and borrowings. As a result, our net interest income is adversely affected if the average cost of our interest-bearing liabilities
increases more rapidly than the average yield on our interest-earning assets.
The Federal Reserve Board maintained the federal funds rate at the historically low rate of 0.25% during fiscal 2010 and
2009. The federal funds rate has a direct correlation to general rates of interest, including our interest-bearing deposits. Our
mix of asset and liabilities are considered to be sensitive to interest rate changes. In a low rate environment, we may be
susceptible to the payoff or refinance of high rate mortgage loans that could reduce net interest income. On the other hand, if
interest rates rise, net interest income could be reduced because interest paid on interest-bearing liabilities, including deposits
and borrowings, increases more quickly than interest received on interest-earning assets, including loans and mortgage-
backed and related securities. In addition, rising interest rates may negatively affect income because higher rates may reduce
the demand for loans and the value of mortgage-related and investment securities.
We May Not Be Able To Continue To Support The Realization Of Our Deferred Tax Asset.
We calculate income taxes in accordance with ASC 740 Income Taxes (formerly Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes”), which requires the use of the asset and liability method. In accordance
with ASC 740, we regularly assess available positive and negative evidence to determine whether it is more likely than not
that our deferred tax asset balances will be recovered from reversals of deferred tax liabilities, potential utilization of net
operating loss carrybacks, tax planning strategies and future taxable income. At December 31, 2010, our net deferred tax
asset was $10.3 million, for which we have not established a valuation allowance. We recognized the deferred tax asset
because management believes, based on detailed financial projections, that it is more likely than not, we will have sufficient
future earnings to utilize this asset to offset future income tax liabilities. Realization of a deferred tax asset requires us to
apply significant judgment and is inherently speculative because it requires the future occurrence of circumstances that
cannot be predicted with certainty. We cannot assure you that we will achieve sufficient future taxable income as the basis
for the ultimate realization of our deferred tax asset and therefore we may have to establish a full or partial valuation
allowance at some point in the future. If we determine that a valuation allowance is necessary, this would require us to incur
a charge to operations that would adversely affect our capital position. At December 31, 2010, we had $10.3 million of
allowable net deferred tax assets for regulatory capital purposes, which is the amount that is expected to be recovered based
on a two-year net operating loss carryback and the next four quarters calculation. There is no assurance that we will be able
to continue to recognize any, or all, of the deferred tax asset for regulatory capital purposes.
Our Ability To Service The Company’s Debt And Pay Other Obligations Of The Company As They Come Due Is
Substantially Dependent On Capital Distributions From The Banks. These Distributions Are Subject To Regulatory
Limits And Other Restrictions, Including Directives From The FDIC Which Prohibit Distributions By The Banks Without
Prior Regulatory Approval.
Carolina Financial is a bank holding company and relies upon dividends from the Banks to fund a significant portion of its
operations. We use dividends from the Banks to service the Company’s debt obligations (including our outstanding line of
credit and our trust preferred securities), and to otherwise fund the Company’s operations and to meet its obligations. The
ability of the Banks to pay dividends or make other capital distributions to the Company is subject to the regulatory authority
of the FDIC and the South Carolina Board. Because of restrictions set forth in the memorandums of understanding that the
FDIC has imposed on the Banks, the Banks cannot pay dividends to the Company without prior regulatory approval. If the
Banks are unable to pay dividends to the Company, the Company may not be able to service its debts as they come due and,
in such event, our creditors may seek remedies against us that would adversely affect our business and the value of your
shares of Common Stock.
Beginning with the scheduled payment date of December 31, 2010, the Company has deferred the payment of interest on its
outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods).
This and any future deferred distributions will continue to accrue interest. Distributions on the trust preferred securities are
cumulative. Therefore, in accordance with generally accepted accounting principles, the Company will continue to accrue the
monthly cost of the trust preferred securities as it has since issuance. The balance of deferred payments at December 31,
2010 is approximately $47,000. Subsequent to December 31, 2010, the Company deferred an additional $85,000 on its
outstanding subordinated debentures.
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
The Dodd-Frank Wall Street Reform And Consumer Protection Act Could Increase Our Regulatory Compliance Burden
And Associated Costs, Place Restrictions On Certain Products And Services, And Limit Our Future Capital Raising
Strategies.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”). The Dodd-Frank Act will implement significant changes in the financial regulatory landscape and will
impact all financial institutions, including the Company and the Banks. The Dodd-Frank Act will likely increase our
regulatory compliance burden and may have a material adverse effect on us, including by increasing the costs associated with
our regulatory examinations and compliance measures. However, it is too early for us to fully assess the impact of the Dodd-
Frank Act and subsequent regulatory rulemaking processes on our business, financial condition or results of operations.
Among the Dodd-Frank Act’s significant regulatory changes, the act will create a new financial consumer protection agency
that could impose new regulations on us and include its examiners in our routine regulatory examinations conducted by the
Federal Reserve Board of the FDIC, which could increase our regulatory compliance burden and costs and restrict the
financial products and services we offer to our customers. The Dodd-Frank Act will increase regulatory supervision and
examination of bank holding companies and their banking and non-banking subsidiaries, which could increase our regulatory
compliance burden and costs and restrict our ability to generate revenues from non-banking operations. The Dodd-Frank Act
will impose more stringent capital requirements on bank holding companies, which could limit our future capital strategies
and could require us to engage in recapitalization transactions, the cost of which cannot be determined at this time. The
Dodd-Frank Act will also increase regulation of derivatives and hedging transactions, which could limit our ability to enter
into, or increase the costs associated with, interest rate hedging transactions.
We May Be Required To Pay Significantly Higher FDIC Premiums Or Special Assessments That Could Adversely Affect
Our Earnings.
Market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured
deposits. As a result, we may be required to pay significantly higher premiums or additional special assessments that could
adversely affect our earnings. In the second quarter of 2009, the FDIC implemented a special assessment that resulted in
approximately $514,000 of additional expense during the quarter. It is possible that the FDIC may impose additional special
assessments in the future as part of its restoration plan. In addition, on November 12, 2009, the FDIC adopted a rule requiring
banks to prepay, on December 30, 2009, three years’ worth of premiums to replenish the depleted insurance fund. As a result,
the amount of our prepaid assessment was approximately $5.7 million. We are generally unable to control the amount of
premiums that we are required to pay for FDIC insurance. If there is additional bank or financial institution failures, we may
be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future
increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.
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. Its policies 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. Further, our mortgage subsidiary’s loan production volumes are significantly affected by
changes in long-term interest rates. 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.
Our Funding Sources May Prove Insufficient To Replace Deposits And Support Future Growth.
We rely on customer deposits, including brokered 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, regulatory restrictions on brokered
deposits or regulatory restrictions on the pricing of local deposits or other market conditions were to change. In addition,
certain borrowing sources are on a secured basis. Over the last two years, the FHLB has become more restrictive on the
types of collateral it will accept and the amount of borrowings allowed on acceptable collateral. Due to changes applied by
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
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. Since
December 31, 2008, we have decreased our reliance on wholesale funding sources such as brokered deposits and FHLB
advances, and placed greater focus on increasing our core transaction accounts.
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.
The Company Is Subject To Liquidity Risk.
The inability of the Company to raise funds through deposits, including brokered 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.
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,
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.
The Company Is Subject To Extensive Governmental Regulation, Which Could Have An Adverse Impact On Our
Operations.
The banking and mortgage 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 as well as a number of states where our
mortgage subsidiary originates or purchases loans. 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
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
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.
Our Operating Results In Fiscal 2010 and 2009 Have Been Highly Dependent Upon The Results Of Our Mortgage
Subsidiary.
There are a number of items that could adversely affect the volumes and margin of the Company’s mortgage banking
operations. These include, but are not limited to, the Federal Reserve’s monetary policy including its quantitative easing
program, aggressively low rates, reduction in prices paid by the mortgage banking aggregators, aggressive competition, the
housing market recovery, the status and financial condition of Fannie Mae and Freddie Mac, potential changes in Fannie Mae
and Freddie Mac lending guidelines and programs, 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.
Our Mortgage Subsidiary’s Operations Are Subject To Significant Repurchase Risk.
Our mortgage subsidiary 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. The Company continues to receive repurchase requests. The
Company evaluates each request and provides estimated reserves as necessary. 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.
The Value Of Our Loan Servicing Portfolio May Become Impaired In The Future.
As of December 31, 2010, our mortgage subsidiary serviced approximately $877.1 million of loans. At that date, our
mortgage loan servicing rights were recorded as an asset with a carrying value of approximately $5.2 million. We expect that
our loan servicing portfolio will increase in the future. If interest rates decline and the actual and expected mortgage loan
prepayment rates increase, the Company could incur an impairment of its mortgage loan servicing asset.
Hurricanes 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 $930.7 million at December 31, 2010 and $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.
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
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 is qualified
to originate loans in 43 states.
Comparison of Operating Results for the Years Ended December 31, 2010 and 2009
Net Income (Loss). Net inco me decreased $19.8 million, or 275.6%, to a net loss of $12.6 million, or $(6.58) diluted
earnings per share, during the year ended December 31, 2010 compared to net income of $7.2 million, or $3.72 diluted
earnings per share, during the year ended December 31, 2009. The decrease in net income to a net loss primarily resulted
from a decrease in net interest income of $1.9 million and an increase in provision for loan losses of $20.3 million to $30.8
million during the year ended December 31, 2010 compared to $10.5 million during the year ended December 31, 2009. In
addition, noninterest income decreased by $6.3 million to $21.6 million during the year ended December 31, 2010 compared
to $27.9 million during the year ended December 31, 2009. Noninterest expense increased by $1.4 million to $39.1 million
during the year ended December 31, 2010 compared to $37.7 million during the year ended December 31, 2009. Income
taxes reflected a benefit of $5.9 million during fiscal 2010 related to a pre-tax loss of $18.5 million compared to income tax
expense of $4.4 million on pre-tax income of $11.5 million during fiscal 2009.
Net Interest Income. Net interest income decreased $1.9 million, or 6.2%, to $29.8 million during the year ended December
31, 2010 from $31.7 million during the year ended December 31, 2009.
Average interest-earning assets decreased $94.4 million to $959.5 million during the year ended December 31, 2010 as
compared to $1.0 billion during the year ended December 31, 2009 with a corresponding decrease in average yield of 50
basis points during that same period. The reduction is primarily the result of nonperforming assets and a decision by
management to shrink the balance sheet to preserve capital. During that same period, interest-bearing liabilities also
decreased $100.3 million to $909.6 million with a corresponding decrease in the average interest rate paid of 60 basis points.
The reduction in average interest-bearing liabilities was primarily the result of the Company shrinking its balance sheet to
preserve capital. The reduction in the average interest rate paid was due primarily to the re-pricing of liabilities in a falling
rate environment during the period. The overall change in interest-earning assets and interest-bearing liabilities with their
corresponding changes in interest yields earned and interest rates paid resulted in an increase in the net interest margin during
the period of 9 basis points. During the year ended December 31, 2010, the Company also focused on increasing checking
and money market deposits and reducing brokered deposits and higher-rate certificates of deposits.
Total interest income decreased $9.9 million, or 17.4%, to $46.8 million during the year ended December 31, 2010 from
$56.7 million during the year ended December 31, 2009. Average loans receivable, net decreased $96.8 million, or 13.1%, to
$640.6 million during the year ended December 31, 2010 from $737.4 million during the comparable period in 2009. The
average yield earned on loans receivable, net decreased to 5.42% from 5.60% during the years ended December 31, 2010 and
2009, respectively. At December 31, 2010 and 2009, approximately 60% and 65%, respectively, of the loan portfolio
consisted of adjustable rate loans and 40% and 35%, respectively, are fixed rate loans. Additionally, the Company’s net
interest income was adversely affected by the increase in the average balance of nonaccrual loans that increased to $35.3
million during the year ended December 31, 2010 from $22.4 million during the year ended December 31, 2009. 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 $3.2
million and $1.6 million for the year ended December 31, 2010 and 2009, respectively. The average balance of securities
available for sale increased $1.3 million, or 1.3%, to $106.6 million during 2010 from $105.3 million during 2009. The yield
earned on securities available for sale decreased to 3.76% from 5.16% during the year ended December 31, 2010 and 2009,
respectively. During the year ended December 31, 2009, the Company transferred approximately $30.6 million of securities
available-for-sale to securities held-to-maturity. No securities were transferred from available-for-sale to held-to-maturity
during the year ended December 31, 2010. During 2010, the Company transferred 30 mortgage-backed securities held-to-
maturity totaling $91.5 million to securities available-for-sale and subsequently sold 16 of these securities totaling $63.9
million. The Company received $59.4 million of gross proceeds related to the sale of these securities and recognized gross
gains of $157,000 and gross losses of $4.6 million. The Company’s original intent was to hold these securities to maturity.
However, these securities experienced significant deterioration in the issuer’s creditworthiness. In addition, due to credit
rating agency downgrades in these securities, the risk weights used for regulatory risk-based capital purposes increased.
Accordingly, the Company changed its intent to hold these securities to maturity. Management believes that these held-to-
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
maturity securities were sold under exceptions “a.” and “d.” of ASC 320-10-25-6. As a result, the sale of these securities is
not considered inconsistent with the original intent and classification and, therefore, does not taint the remaining securities
held-to-maturity portfolio. The average balance of securities held-to-maturity decreased $26.1 million, or 19.8%, to $105.7
million during the year ended December 31, 2010 from $131.8 million during the comparable period in 2009. The average
yield earned on securities held-to-maturity decreased to 5.05% from 5.57% during the years ended December 31, 2010 and
2009, respectively.
Total interest expense decreased $7.9 million, or 31.7%, to $17.1 million during the year ended December 31, 2010 from
$25.0 million during the year ended December 31, 2009. Average interest-bearing liabilities decreased $100.3 million, or
9.9%, to $909.6 million during the year ended December 31, 2010 from $1.0 billion during the comparable period in 2009.
Average money market balances increased $55.4 million, or 45.9%, to $176.0 million during the year ended December 31,
2010 from $120.6 million during the comparable period in 2009. In addition, the average interest rate paid on money
markets during the year ended December 31, 2010 decreased to 1.30% compared to 1.55% during the comparable period in
2009. Average certificates of deposit balances decreased $92.2 million, or 16.0%, to $485.1 million during the year ended
December 31, 2010 from $577.4 million during the comparable period in 2009. In addition, the average interest rate paid on
certificates of deposit during the year ended December 31, 2010 decreased to 1.94% compared to 2.73% during the
comparable period in 2009. Average short-term borrowing balances decreased $44.8 million, or 66.4%, to $22.7 million
during the year ended December 31, 2010 from $67.5 million during the comparable period in 2009. The average rate paid
during the year ended December 31, 2010 on these borrowings was 3.12% compared to 2.02% during the comparable period
in 2009. Average long-term borrowing balances decreased $27.1 million, or 12.6%, to $188.5 million during the year ended
December 31, 2010 from $215.6 million during the comparable period in 2009. The average rate paid during the year ended
December 31, 2010 on these borrowings was 2.40% compared to 2.73% during the comparable period in 2009.
Provision for Loan Losses. The provision for loan losses increased $20.3 million to $30.8 million during the year ended
December 31, 2010 compared to $10.5 million during the year ended December 31, 2009. The Company had net charge-offs
of $29.5 million or 4.61% of average loans receivable, net during the year ended December 31, 2010 compared to net charge-
offs of $8.7 million or 1.18% of average loans receivable, net during the comparable period in 2009. The allowance for loan
losses was 2.38% of net loans receivable, or $14.3 million at December 31, 2010, an increase of $1.3 million from the
allowance for loan losses of $13.0 million or 1.85% of the loans receivable, at December 31, 2009. The 53 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 loans to gross loans receivable to 9.60% at December 31, 2010 from 3.96% at December 31, 2009. 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 decreased $6.3 million, or 22.7%, to $21.6 million during the year ended
December 31, 2010 from $27.9 million during the comparable period in 2009. This decrease is primarily attributable to
other-than-temporary impairment of $2.5 million, an increase in the loss on sale of securities of $2.9 million, and an increase
in the loss on extinguishment of debt of $1.8 million.
During the year ended December 31, 2010, the Company had held-to-maturity bonds that experienced other-than-temporary
impairment. Other-than-temporary impairment expense reflected in the accompanying income statement totaled $2.5
million. There was no other-than-temporary impairment during the year ended December 31, 2009.
Net loss on sale of securities during the year ended December 31, 2010 totaled $2.0 million compared to a net gain on sale of
securities of $963,000 during the comparable period in 2009. The increase in the loss on sale of securities during the year
ended December 31, 2010 was due to management’s decision to reduce criticized assets, while taking advantage of improved
market prices on certain securities.
In connection with the Company’s balance sheet management to preserve capital, certain borrowings were prepaid to manage
the related interest rate sensitivity, resulting in a net loss on the extinguishment of debt of $2.5 million and $711,000 during
2010 and 2009, respectively
Noninterest Expense. Total noninterest expense increased $1.4 million, or 3.7%, to $39.1 million during the year ended
December 31, 2010 from $37.7 million during the comparable period in 2009. This increase is primarily attributable to an
increase in other expenses related to legal and other loan collection activities.
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
Income Tax Expense. Income tax expense decreased $10.2 million to a t ax benefit of $5.9 million during the year ended
December 31, 2010 from income tax expense of $4.4 million during the comparable period in 2009. The Company’s
effective tax (benefit) rate was (31.8)% and 37.8% during the years ended December 31, 2010 and 2009, respectively.
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 re-pricing 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. 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 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 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
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CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
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.
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.
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CAROLINA FINANCIAL CO RPORATION
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:
2010
Interest Average
Yield/
Rate
Paid/
Earned
For The Years Ended December 31,
2009
Interest Average
Yield/
Paid/
Rate
Earned
Average
Balance
2008
Interest Average
Yield/
Paid/
Rate
Earned
Average
Balance
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
Average
Balance
$
56,855
640,646
37,212
106,598
105,658
12,029
465
959,463
58,667
(Dollars in thousands)
2,647
34,720
70
4,013
5,334
42
16
46,842
49,294
4.66%
737,448
5.42%
17,522
0.19%
105,265
3.76%
131,760
5.05%
12,153
0.35%
3.44%
465
4.88% 1,053,907
60,225
2,567
41,325
19
5,427
7,341
39
18
56,736
22,973
5.21%
774,183
5.60%
16,412
0.11%
193,616
5.16%
23,991
5.57%
11,474
0.32%
3.87%
802
5.38% 1,043,451
47,336
Total assets
$
1,018,130
1,114,132
1,090,787
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
Total liabilities and
Stockholders' equity
Net interest spread
Net interest margin
Net interest income
138
2,285
19
9,408
708
4,519
17,077
34,160
175,966
3,130
485,126
22,720
188,541
909,643
44,027
14,395
50,065
26,231
0.40%
120,573
1.30%
2,643
0.61%
577,364
1.94%
67,532
3.12%
215,626
2.40%
1.88% 1,009,969
41,003
11,211
51,949
123
1,864
16
15,778
1,361
5,877
25,019
0.47%
1.55%
0.61%
2.73%
2.02%
2.73%
2.48%
24,726
98,448
2,029
580,264
76,455
206,170
988,092
44,643
10,500
47,552
$
1,018,130
1,114,132
1,090,787
3.00%
2.90%
2.68%
3.10%
29,765
3.01%
31,717
2.86%
29,822
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%
(1) Average balances of loans include non-accrual loans.
- 17 -
CAROLINA FINANCIAL CO RPORATION
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:
For The Years Ended December 31,
2010 vs. 2009
Increase (decrease)
due to
Volume
Rate
Rate/
Volume
$
393
(5,452)
21
69
(1,458)
-
-
(6,427)
39
860
3
(2,518)
(903)
(735)
(3,254)
(3,173)
$
(271)
(1,327)
14
(1,464)
(685)
3
(2)
(3,732)
(18)
(301)
-
(4,581)
743
(712)
(4,869)
1,137
(42)
174
16
(19)
136
-
-
265
(6)
(138)
-
729
(493)
89
181
84
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
Net interest income
Loans by Type
2009 vs. 2008
Increase (decrease)
due to
Net
Dollar
Change Volume
(In thousands)
80
(6,605)
51
(1,414)
(2,007)
3
(2)
(9,894)
1,604
(2,283)
28
(5,086)
6,801
24
(26)
1,062
15
421
3
(6,370)
(653)
(1,358)
(7,942)
(1,952)
10
421
4
(110)
(233)
330
422
640
Net
Dollar
Volume Change
Rate/
(234)
225
(26)
531
(797)
(22)
13
(310)
(3)
(79)
-
31
53
(72)
(70)
(240)
1,166
(6,790)
(388)
(5,719)
5,827
(364)
(45)
(6,313)
(43)
(9)
2
(6,205)
(637)
(1,316)
(8,208)
1,895
Rate
(204)
(4,732)
(390)
(1,164)
(177)
(366)
(32)
(7,065)
(50)
(351)
(2)
(6,126)
(457)
(1,574)
(8,560)
1,495
The following table summarizes loans by type and percent of total at the end of the periods indicated:
At December 31,
2010
2009
Real estate loans:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total gross loans receivable
Less:
Undisbursed loans in process
Allowance for loan losses
Deferred fees, net
Total loans receivable, net
% of Total
Loans
Amount
(Dollars in thousands)
% of Total
Loans
22.71%
7.00%
40.77%
20.19%
1.16%
8.17%
100.00%
22.39%
6.28%
44.67%
16.53%
1.01%
9.12%
100.00%
165,054
50,891
296,330
146,736
8,455
59,417
726,883
23,230
13,032
458
690,163
Amount
$
138,482
38,798
276,199
102,195
6,225
56,362
618,261
19,708
14,263
295
583,995
$
- 18 -
CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
Non-Performing and Problem Assets
The following table summarizes non-performing and problem assets at the end of the periods indicated.
At December 31,
2010
2009
(In thousands)
Non-Performing Assets:
Nonaccrual loans-renegotiated loans
Nonaccrual loans-other
Accruing loans 90 days or more delinquent
Real estate acquired through foreclosure, net
Total Non-Performing Assets
$
$
34,829
22,552
48
10,816
68,245
3,505
23,554
771
7,853
35,683
Problem Assets not included in Non-Performing Assets-
Accruing renegotiated loans outstanding less than one year
$
16,344
5,269
Substantially all of the nonaccrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans for fiscal
2010 and 2009 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
re-pricing 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 re-pricing opportunities of interest-earning
assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate
volume 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.
- 19 -
CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
The following table summarizes the Company’s interest rate sensitivity position at the Banks as of December 31, 2010:
Interest Rate Scenario
Change
0.00%
1.00%
2.00%
3.00%
Prime Rate
3.25%
4.25%
5.25%
6.25%
Annualized Hypothetical
Percentage Change in
Net Interest Income
0.00%
0.20%
0.90%
6.25%
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, mortgage loan forward 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. Mortgage loan forward 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 Mortgage Company’s Asset/Liability 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, 2010 and 2009 are as follows:
At December 31,
2010
2009
Fair
Value
Notional
Value
Fair
Value
Notional
Value
(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Derivative liabilities:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Liquidity and Financial Condition
$
449
-
1,776
2,225
$
-
173
173
$
197,075
-
175,000
372,075
-
22,842
22,842
-
428
1,914
2,342
891
-
891
-
46,588
130,000
176,588
177,282
-
177,282
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. At December 31, 2010 and December 31, 2009, the Banks have
pledged first lien residential mortgage, second lien residential mortgage, residential home equity line of credit, commercial
mortgage and multifamily mortgage portfolios under blanket lien agreements resulting in approximately $160.0 million and
- 20 -
CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
$177.8 million, respectively, of collateral for these advances. In addition, at December 31, 2010 and December 31, 2009, the
Company has pledged $58.6 million and $59.8 million, respectively, of securities for these advances. At December 31, 2010
and December 31, 2009, the Banks had maximum FHLB lines of $290.6 million and $339.1 million, respectively, based on
FHLB limits. At December 31, 2010 and December 31, 2009, collateral totaling $218.6 million and $237.6 million,
respectively, was pledged to support FHLB advances. At December 31, 2010 and December 31, 2009 the Banks had FHLB
advances of $125.5 million and $176.5 million, respectively, outstanding with excess collateral pledged to the FHLB during
those periods that would support additional borrowings of approximately $93.1 million and $61.1 million, respectively.
Lines of credit with the FRB are based on collateral pledged. The Banks have pledged certain non-mortgage commercial and
consumer, acquisition and development, and lot loan portfolios under blanket lien agreements as collateral to the FRB for
these advances. At December 31, 2010 and December 31, 2009 the Banks had lines available with the FRB for $34.0 million
and $71.6 million, respectively. At December 31, 2010 and December 31, 2009 the Banks had no FRB advances outstanding.
At December 31, 2010 and December 31, 2009, Crescent Mortgage had a mortgage loan warehouse line of credit from a
correspondent with a $35.0 million credit limit, of which $31.0 million and $15.9 million, respectively, is still available. The
facility is secured by Crescent Mortgage’s residential mortgage loans held for sale and other assets.
Effective October 1, 2009, the Company modified a $5.0 million unsecured line of credit with a correspondent bank, of which
$3.0 million was outstanding at December 31, 2010 and December 31, 2009. The unsecured line of credit bears interest at
prime plus 1.50% and the term expires October 1, 2011. In connection with this modification, the Company obtained a $3.0
million subordinated debenture that 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 the year ended December 31, 2010 and 2009, the Company maintained at least a
$500,000 principal balance outstanding on the line of credit. Also as a result of the modification, no additional advances can
be made on this unsecured line of credit. The line of credit also has debt covenants, the more restrictive of which requires the
Company to maintain certain capital ratios, nonperforming asset ratios and return on asset ratios. As of December 31, 2010
and 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 the line of credit, if necessary, by
restructuring the existing loan, obtaining financing from other sources or raising capital. As a result, management does not
believe that default of this covenant will have a material adverse effect 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, 2010, the Company
and the Banks are considered “Well Capitalized” under regulatory capital adequacy guidelines.
- 21 -
CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
The following schedule shows the Company’s and the Banks’ actual capital amounts and ratios at December 31, 2010 and
2009, respectively:
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
At December 31,
2010
2009
Amount
Ratio
Amount
(Dollars in thousands)
Ratio
66,576
87,479
66,576
9.3%
12.2%
6.9%
78,773
101,696
78,773
9.2%
11.9%
7.3%
44,373
54,660
44,373
10.6%
13.0%
7.6%
45,166
55,633
45,166
10.4%
12.8%
7.7%
24,383
34,989
24,383
8.2%
11.8%
6.4%
35,404
47,849
35,404
8.4%
11.4%
7.2%
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and
disclosure of financial information by the Company.
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.
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 non-controlling
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.
In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of
Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and
settlements be provided in the Level 3 reconciliation. The new disclosures are effective for the Company and have been
reflected in the Fair Value note to the financial statements.
In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features
related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other
types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting.
The amendments were effective for the Company on July 1, 2010. These amendments had no impact on the financial
statements.
- 22 -
CAROLINA FINANCIAL CO RPORATION
FINANCIAL DISCUSSION
Stock compensation guidance was updated in April 2010 to address the classification of employee share-based payment
awards with exercise prices dominated in the currency of a market in which a substantial portion of the entity’s equity
securities trade. The guidance states that these awards should not be considered to contain a condition that is not a market,
performance, or service condition. Share based payments that contain conditions related to market performance and service
must be recorded as liabilities. These awards should not be classified as liabilities if they otherwise qualify to be classified as
equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2010. The Company does not expect the update to have an impact on the financial statements.
In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s
allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance
disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its
financial statements for the year ended December 31, 2011.
In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill
impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments
occurring subsequent to adoption should be included in earnings. For nonpublic entities, the amendment is effective for
fiscal years, and interim periods within those years, beginning January 1, 2012; however, nonpublic entities may early adopt
the amendments using the effective date for public entities.
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.
New Federal Legislation
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services
industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and
thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift
Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow
financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage,
and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau
of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to
promulgate consumer protection regulations applicable to all entities offering consumer financial services or products,
including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination
standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively
reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and
results of operations.
- 23 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Carolina Financial Corporation
Charleston, South Carolina
INSERT
INDEPENDENT AUDITOR’S REPORT
We have audited the accompanying consolidated statements of financial condition of Carolina
Financial Corporation and Subsidiaries (the Company) as of December 31, 2010 and 2009, and the
related consolidated statements of operations, changes in stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended December 31, 2010.
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Carolina Financial Corporation and Subsidiaries, as of December
31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2010, in conformity with accounting principles generally accepted
in the United States of America.
Elliott Davis, LLC
Charleston, South Carolina
March 11, 2011
- 24 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2010 AND 2009
ASSETS
Cash and due from banks
Interest-bearing cash
Cash and cash equivalents
Securities available for sale (cost of $153,820 at December 31, 2010 and
$102,119 at December 31, 2009)
Securities held to maturity (fair value of $3,167 at December 31, 2010 and
$105,450 at December 31, 2009)
Federal Home Loan Bank stock, at cost
Other investments
Derivative assets
Loans held for sale
Loans receivable, net of allowance for loan losses of $14,263 at December 31,
2010 and $13,032 at December 31, 2009
Premises and equipment, net
Accrued interest receivable
Real estate acquired through foreclosure, net
Deferred tax assets, net
Income taxes receivable
Prepaid FDIC insurance
Mortgage servicing rights
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
Income taxes 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
Common stock, par value $.01; 6,800,000 shares authorized;
1,918,992 issued and outstanding at December 31, 2010 and
1,912,492 at December 31, 2009
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.
- 25 -
December 31,
2010
2009
$
(In thousands)
3,322
21,415
24,737
2,901
17,759
20,660
151,574
104,401
9,848
11,129
465
2,225
82,615
583,995
16,808
3,483
10,816
10,340
5,420
4,161
5,249
7,884
930,749
$
$
51,509
638,305
689,814
57,759
123,339
173
3,145
396
939
-
8,690
884,255
125,633
12,456
465
2,342
71,233
690,163
17,443
4,550
7,853
10,349
-
5,677
1,797
3,735
1,078,757
37,543
723,565
761,108
43,787
203,638
891
3,117
198
1,484
996
7,400
1,022,619
-
-
19
21,711
29,845
(5,081)
46,494
930,749
$
19
21,320
42,433
(7,634)
56,138
1,078,757
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
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 (loss) 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 (loss) gain on sale of securities
Net loss on other investments
Other-than-temporary impairment of securities
Net loss on sale of real estate acquired through foreclosure
Net gain on derivatives
Net gain on sale of servicing assets
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
Legal expense
Other
Total noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
- 26 -
For the Years Ended December 31,
2010
2008
2009
(In thousands, except share data)
$
37,367
9,364
42
69
46,842
11,850
708
4,519
17,077
29,765
30,755
(990)
23,481
1,765
377
884
(2,536)
(1,955)
-
(2,480)
(108)
601
526
1,045
21,600
20,594
3,439
630
1,798
360
1,725
2,627
1,322
6,575
39,070
(18,460)
(5,872)
(12,588)
$
$
$
(6.58)
(6.58)
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
509
5,252
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
179
4,357
23,882
8,806
3,256
5,550
2.95
2.83
1,913,240
1,913,240
1,912,449
1,924,720
1,883,101
1,960,362
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
(In thousands, except share data)
Balance, December 31, 2007
Exercise of stock options
Restricted stock awards
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
Balance, December 31, 2009
Restricted stock awards
Stock-based compensation expense, net
Net loss
Other comprehensive income (loss):
Unrealized gain on securities,
net of tax of $766
Reclassification adjustment for losses included
in net loss, net of tax benefit of $713
Other comprehensive income
Comprehensive loss
1,798,262
103,950
10,000
-
-
-
-
1,912,212
280
-
-
-
-
1,912,492
6,500
-
-
-
-
$
18
1
-
-
-
-
-
19
-
-
-
-
-
19
-
-
-
-
-
19,717
843
-
365
-
29,714
-
-
-
5,550
-
-
-
-
20,925
5
390
-
35,264
-
-
7,169
-
-
-
-
21,320
-
391
-
42,433
-
-
(12,588)
-
-
-
-
86
-
-
-
-
(9,094)
(609)
(9,703)
(9,617)
-
-
-
2,580
(597)
1,983
(7,634)
-
-
-
1,311
1,242
2,553
Balance, December 31, 2010
1,918,992
$
19
21,711
29,845
(5,081)
See accompanying notes to consolidated financial statements.
Total
49,535
844
-
365
5,550
(9,703)
(4,153)
46,591
5
390
7,169
1,983
9,152
56,138
-
391
(12,588)
2,553
(10,035)
46,494
- 27 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Provision for loan losses
Deferred tax benefit
Amortization of unearned discount/premiums on investments, net
Amortization of deferred loan fees
Amortization of mortgage servicing rights
(Recovery of) provision for mortgage servicing rights impairment
Loss (gain) on sale of available for sale securities, net
Loss on write off of other investments
Gain on sale of loans held for sale, net
Originations of loans held for sale
Proceeds from sale of loans held for sale
Loss on extinquishment of debt
Gain on derivatives, net
Stock-based compensation
Depreciation
Loss on disposals of premises and equipment
Loss on sale of real estate acquired through foreclosure
Write-down of real estate acquired through foreclosure
Gain on sale of servicing assets
Proceeds from the sale of servicing assets
Originations of mortgage servicing assets
Decrease (increase) in:
Accrued interest receivable
Income taxes receivable
Prepaid FDIC insurance
Other assets
Increase (decrease) in:
Accrued interest payable
Income taxes payable
Accrued expenses and other liabilities
For the Years Ended December 31,
2010
2008
2009
(In thousands)
$
(12,588)
7,169
5,550
30,755
(1,470)
1,348
(3,904)
651
-
1,955
-
(23,481)
(1,652,257)
1,667,033
2,536
(601)
391
1,290
3
108
2,063
(526)
1,810
(5,387)
1,067
(6,416)
1,516
(4,149)
(545)
-
1,290
2,492
10,460
(2,019)
(128)
(604)
275
(105)
(963)
-
(23,982)
(1,700,377)
1,681,410
711
(411)
390
1,254
59
26
1,495
-
-
(1,717)
(39)
-
(5,677)
362
(1,279)
2,601
3,532
(27,557)
6,361
(633)
(212)
(831)
103
75
(952)
337
(4,579)
(712,784)
714,110
52
(1,139)
365
1,265
20
55
-
-
-
(118)
936
(222)
-
581
(420)
-
(465)
7,455
Continued
- 28 -
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
For the Years Ended December 31,
2010
2008
2009
(In thousands)
$
(83,078)
41,887
88,898
-
21,633
1,327
65,695
(736)
78
5,813
141,517
(71,294)
(53,536)
-
(15,103)
-
-
(225)
28
198
-
(139,932)
4,077
20,660
24,737
$
(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
(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
$
17,622
2,014
26,298
3,666
33,647
4,050
1,685
-
-
(2,480)
10,947
-
91,512
1,311
-
8,507
30,597
-
2,580
-
7,524
112,343
-
(9,094)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases
Maturities, payments and calls
Proceeds from sales
Activity in held-to-maturity securities:
Purchases
Maturities, payments and calls
(Increase) decrease in Federal Home Loan Bank stock
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
Cash flows from financing activities:
Net increase (decrease) 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
Principal repayment 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
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure
Cash paid for:
Interest on deposits and borrowed funds
Income taxes paid, net of refunds
Non-cash investing and financing activities:
Other-than-temporary impairment reflected through accumulated
other comprehensive income
Other-than-temporary impairment reflected through the statement
of operations
Transfer of loans receivable to real estate acquired through foreclosure
Transfer of available for sale securities to held to maturity securities
Transfer of held to maturity securities to available for sale securities
Unrealized gain (loss) in securities available for sale, net
See accompanying notes to consolidated financial statements.
- 29 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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, 2010, 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.
Management uses available information to recognize losses on loans and foreclosed real estate. However, 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. Non-recognized
subsequent events are events that provide evidence about conditions that did not exist at the date of the statement of financial
condition but arose after that date. Management has reviewed events occurring through March 11, 2011, 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, 2010 and 2009 is Federal Reserve Bank and 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, 2010 and 2009, these reserve balances amounted to $1.7 million and $1.3
- 30 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
million, respectively. In addition, the mortgage company is required to keep $1.0 million in cash related to its warehouse line
of credit.
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.
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 that approximate a level yield, or noninterest income when the loan is sold. 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, or noninterest income when the loan is sold. 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.
- 31 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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”), Government
National Mortgage Association (“GNMA”) and certain private investors. The fees are based on a 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. Service fee income, net of amortization and servicing costs, is recorded in other income.
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 collectability 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 collectability 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 collectability 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.
- 32 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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, 2010 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, 2010 was $558,000.
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. These expenses are reflected as marketing and public relations in the
accompanying consolidated statements of operations.
Income Taxes
The provision for income taxes is based upon income or loss 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 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
benefits 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 statement of operations.
The Company had no interest or penalties during fiscal 2010, 2009, and 2008.
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.
- 33 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 $5.3 million and $3.0 million at December 31, 2010 and 2009, respectively. 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 (Loss)
Comprehensive income (loss) consists of net income or loss and net unrealized gains (losses) on securities and is presented in
the consolidated statements of changes in stockholders’ equity and comprehensive income (loss). The Company’s other
comprehensive income (loss) for the years ended December 31, 2010, 2009 and 2008 and accumulated other comprehensive
income (loss) as of December 31, 2010 and 2009 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, 2010 and 2009, the Company had three stock-based payment plans for directors, officers and other key
employees, which are described below.
When share options are issued, the fair value at the date of grant of the stock option is estimated using the Black-Scholes
option-pricing model based on certain assumptions. 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. There were no options issued during fiscal 2010 and 2009.
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 2010 and 2008, 6,500 and 10,000 shares, respectively, of non-vested restricted common stock of the
- 34 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Company were granted to non-employees and a key employee of the Company, respectively, at $8.11 per share and $37.57
per share, respectively. As of December 31, 2010, 56,500 shares have been awarded under the plan, of which 36,000 shares
have vested and 20,500 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.
The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately
$391,000, $390,000 and $365,000 during the twelve months ended December 31, 2010, 2009 and 2008, respectively.
A summary of the status of the Company’s stock option plans at December 31, 2010, 2009 and 2008 and changes during the
years then ended is presented below:
At and For the Year Ended December 31,
2009
2008
2010
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Shares
144,980
-
-
-
144,980
Weighted
Average
Exercise
Price
$
15.83
-
-
-
15.83
$
Weighted
Average
Exercise
Price
$
15.86
-
17.57
24.00
15.83
$
Weighted
Average
Exercise
Price
$
12.67
-
8.12
38.50
15.86
$
Shares
249,990
-
(103,950)
(280)
145,760
Shares
145,760
-
(280)
(500)
144,980
Options exercisable at end of year
144,570
$
15.77
142,920
$
15.63
141,050
$
15.49
The following table summarizes information about the options outstanding at December 31, 2010:
Range of Exercise Prices
$ 15.00 to $20.00
$ 20.01 to $25.00
$ 35.00 to $40.00
At December 31, 2010
Options Outstanding
Weighted Avg.
Remaining Years
Contractual Life
1.4
4.5
5.8
1.6
Weighted
Average
Exercise Price
15.15
$
24.00
38.50
15.83
$
Options Exercisable
Number
Outstanding
137,090
5,840
1,640
144,570
Weighted
Average
Exercise Price
15.15
$
24.00
38.50
15.77
$
Number
Outstanding
137,090
5,840
2,050
144,980
There were no options granted during the years ended December 31, 2010, 2009 and 2008. No stock options were exercised
during the year ended December 31, 2010. The total intrinsic value of options exercised was $0, $2,000, and $246,000 during
the twelve months ended December 31, 2010, 2009 and 2008, respectively. Fair values have been retroactively restated for
all stock dividends since the date the option was granted. As of December 31, 2010, there was approximately $412,000 of
total unrecognized compensation cost related to non-vested 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.
- 35 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and
disclosure of financial information by the Company.
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 non-
controlling 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.
In January 2010, fair values guidance was amended to require disclosures for significant amounts transferred in and out of
Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and
settlements be provided in the Level 3 reconciliation. Disaggregation of classes of assets and liabilities is also required. The
new disclosures are effective for the Company for the current year and have been reflected in Note 13 – Estimated Fair Value
of Financial Instruments.
In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features
related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other
types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting.
The amendments were effective for the Company on July 1, 2010. These amendments had no impact on the financial
statements.
Stock compensation guidance was updated in April 2010 to address the classification of employee share-based payment
awards with exercise prices dominated in the currency of a market in which a substantial portion of the entity’s equity
securities trade. The guidance states that these awards should not be considered to contain a condition that is not a market,
performance, or service condition. Share based payments that contain conditions related to market, performance and service
must be recorded as liabilities. These awards should not be classified as liabilities if they otherwise qualify to be classified as
equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2011. The Company does not expect the update to have an impact on the financial statements.
In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s
allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance
disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its
financial statements for the year ended December 31, 2011.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services
industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and
thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift
Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow
financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage,
and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau
- 36 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to
promulgate consumer protection regulations applicable to all entities offering consumer financial services or products,
including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination
standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively
reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and
results of operations.
In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill
impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments
occurring subsequent to adoption should be included in earnings. For nonpublic entities, the amendment is effective for
fiscal years, and interim periods within those years, beginning January 1, 2012; however, nonpublic entities may early adopt
the amendments using the effective date for public entities.
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 re-price 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 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, 2010 and 2009 follows:
2010
At December 31,
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
Amortized
Cost
(In thousands)
2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
21,989
131,831
555
3,146
(5)
(5,942)
22,539
129,035
4,088
98,031
29
2,661
-
(408)
4,117
100,284
Securities available-for-sale:
GNMA
Mortgage-backed securities
Total securities
available for sale
$
153,820
3,701
(5,947)
151,574
102,119
2,690
(408)
104,401
Securities held-to-maturity:
Mortgage-backed securities
Asset-backed securities
Total securities held
to maturity
-
$
9,848
$
9,848
-
-
-
-
(6,681)
-
3,167
111,660
13,973
1,144
-
(13,552)
(7,775)
99,252
6,198
(6,681)
3,167
125,633
1,144
(21,327)
105,450
- 37 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2010 follows:
Amortized
Cost
Fair
Value
(In thousands)
Securities available-for-sale:
Six to ten years
After ten years
Total
Securities held-to-maturity:
Six to ten years
After ten years
Total
$
1,527
152,293
153,820
$
$
$
1,158
8,690
9,848
1,744
149,830
151,574
856
2,311
3,167
The contractual maturity dates of the securities were used for mortgage-backed securities and asset-backed securities. No
estimates were made to anticipate principal repayments.
During 2010, the Company sold 20 securities available-for-sale totaling $26.9 million. The Company received $29.4 million
of gross proceeds related to the sale of these securities and recognized gross gains of $2.5 million.
Also during 2010, the Company transferred 30 mortgage-backed securities held-to-maturity totaling $91.5 million to
securities available-for-sale and subsequently sold 16 of these securities totaling $63.9 million. The Company received $59.4
million of gross proceeds related to the sale of these securities and recognized gross gains of $157,000 and gross losses of
$4.6 million. The Company’s original intent was to hold these securities to maturity. However, these securities experienced
significant deterioration in the issuer’s creditworthiness. In addition, due to credit rating agency downgrades in these
securities, the risk weights used for regulatory risk-based capital purposes increased. Accordingly, the Company changed its
intent to hold these securities to maturity. Management believes that these held-to-maturity securities were sold under
exceptions “a.” and “d.” of ASC 320-10-25-6. As a result, the sale of these securities is not considered inconsistent with the
original intent and classification and, therefore, does not taint the remaining securities held-to-maturity portfolio.
At December 31, 2010, the Company has pledged $58.6 million of securities for these advances. See Note 9 – Short-Term
Borrowed Funds for further discussion.
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, 2010 are as follows:
Less than 12 Months
Fair
Value
Amortized
Cost
Unrealized Amortized
Losses
Cost
Unrealized Amortized
Losses
Cost
Total
Fair
Value
Unrealized
Losses
At December 31, 2010
12 Months or Greater
Fair
Value
(In thousands)
Securities available-for-sale:
GNMA
1,503
Mortgage-backed
$
1,498
(5)
-
-
-
1,503
1,498
(5)
securities
Total
23,448
24,951
$
23,023
24,521
(425)
(430)
30,975
30,975
25,458
25,458
(5,517)
(5,517)
54,423
55,926
48,481
49,979
(5,942)
(5,947)
Securities held-to-maturity:
Asset-backed
securities
$
-
-
-
9,848
3,167
(6,681)
9,848
3,167
(6,681)
- 38 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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:
Less than 12 Months
Fair
Value
Unrealized
Losses
Amortized
Cost
At December 31, 2009
12 Months or Greater
Fair
Value
(In thousands)
Unrealized
Losses
Amortized
Cost
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
Securities available-for-sale:
Mortgage-backed
securities
$
19,847
19,451
(396)
2,531
2,519
(12)
22,378
21,970
(408)
Securities held-to-maturity:
Mortgage-backed
securities
Asset-backed
securities
Total
$
23,228
18,146
(5,082)
70,489
62,019
(8,470)
93,717
80,165
(13,552)
-
23,228
$
-
18,146
-
(5,082)
13,973
84,462
6,198
68,217
(7,775)
(16,245)
13,973
107,690
6,198
86,363
(7,775)
(21,327)
At December 31, 2010 and 2009, the Company had 25 and 14, 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 has recorded other-than-temporary impairment
expense of $2.5 million related to 5 held-to-maturity bonds in the accompanying statement of operations for the year ended
December 31, 2010. Other than these 5 held-to-maturity bonds, management believes that there are no other securities other-
than-temporarily impaired at December 31, 2010. 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 $11.1 million and $12.5 million at December 31, 2010 and 2009, respectively.
Other investments at December 31, 2010 and 2009 consisted of $465,000 invested in capital stock of statutory business trusts
(See Note 10 – Long-term debt).
- 39 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE 3 – DERIVATIVES
The derivative positions of the Company at December 31, 2010 and 2009 are as follows:
At December 31,
2010
2009
Fair
Value
Notional
Value
Fair
Value
Notional
Value
(In thousands)
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Derivative liabilities:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
$
449
-
1,776
2,225
$
-
173
173
$
197,075
-
175,000
372,075
-
22,842
22,842
-
428
1,914
2,342
891
-
891
-
46,588
130,000
176,588
177,282
-
177,282
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, mortgage loan forward 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. Mortgage loan forward 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.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2010 and 2009 are summarized by category as follows:
Real estate loans:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total gross loans receivable
Less:
Undisbursed loans in process
Allowance for loan losses
Deferred fees, net
Total loans receivable, net
At December 31,
2010
2009
% of Total
Loans
Amount
(Dollars in thousands)
% of Total
Loans
22.71%
7.00%
40.77%
20.19%
1.16%
8.17%
100.00%
22.39%
6.28%
44.67%
16.53%
1.01%
9.12%
100.00%
165,054
50,891
296,330
146,736
8,455
59,417
726,883
23,230
13,032
458
690,163
Amount
$
138,482
38,798
276,199
102,195
6,225
56,362
618,261
19,708
14,263
295
583,995
$
- 40 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:
At December 31,
2010
2009
(Dollars in thousands)
Variable rate loans
Fixed rate loans
Total gross loans
$
$
358,549
240,004
598,553
59.90%
40.10%
100.00%
456,128
247,525
703,653
64.82%
35.18%
100.00%
Activity in the allowance for loan losses for the years ended December 31, 2010, 2009 and 2008 are as follows:
Balance at beginning of year
Provision for loan losses
Charge-offs
Recoveries
Balance at end of year
2010
$
13,032
30,755
(29,786)
262
14,263
$
At December 31,
2009
(In thousands)
11,300
10,460
(9,442)
714
13,032
2008
10,083
6,361
(5,190)
46
11,300
The following is a summary of information pertaining to impaired and nonaccrual loans at December 31:
At December 31,
2010
2009
(In thousands)
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
$
$
55,817
18,478
74,295
45,735
23,244
68,979
Valuation allowance related to impaired loans
$
4,271
3,827
Nonaccrual loans-renegotiated loans
Nonaccrual loans-other
Total nonaccrual loans
$
$
34,829
22,552
57,381
Total loans past due 90 days and still accruing interest
Accruing renegotiated loans
$
$
48
16,344
3,505
23,554
27,059
771
5,269
2010
At December 31,
2009
(In thousands)
2008
Average of impaired loans during the year
Average of non-accrual loans during the year
$
76,732
35,324
44,393
22,355
17,046
16,490
Total impaired loans at December 31, 2010 and 2009 of $74.3 million and $69.0 million, respectively, reflect partial charge-
offs of $14.5 million and $4.9 million, respectively.
Substantially all of the non-accrual loans, accruing loans 90 days or more delinquent and accruing renegotiated loans for the
years ended December 31, 2010 and 2009 are collateralized by real estate. Management believes based on information
- 41 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
known and available currently, the probable losses related to problem assets are adequately reserved in the allowance for loan
losses. A summary of the composition of loans on non-accrual follows:
At December 31,
2010
2009
(In thousands)
Real estate loans:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
$
$
17,552
350
21,298
16,543
85
1,553
57,381
11,921
231
2,578
11,740
21
568
27,059
The company recognized interest income of $7,500, $4,000 and $0 on loans that are past due 90 days and still accruing during
the years ended December 31, 2010, 2009 and 2008, respectively. The Company had $51.2 million and $8.8 million of
restructured loans as of December 31, 2010 and 2009, respectively.
The Company’s net interest income was adversely affected by the increase in the average balance of nonaccrual loans that
increased to $35.3 million during the year ended December 31, 2010, compared to $22.4 million and $17.0 million during the
years ended December 31, 2009 and 2008, respectively. 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 $3.2 million, $1.6 million and $1.2 million for the years ended December
31, 2010, 2009 and 2008, respectively
Loans serviced for the benefit of others under loan participation arrangements amounted to approximately $33.5 million and
$32.4 million at December 31, 2010 and 2009, respectively.
Activity in loans to officers, directors and other related parties for the years ended December 31, 2010 and 2009 is
summarized as follows:
At December 31,
2010
2009
(In thousands)
Balance at beginning of year
New loans
Repayments
Balance at end of year
$
$
21,357
12,122
(10,558)
22,921
20,584
9,044
(8,271)
21,357
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 collectability.
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 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, 2010 and 2009, the Banks had
commitments to extend credit in the amount of $36.3 million and $50.1 million, respectively. At December 31, 2010 and
2009, the Banks had standby letters of credit in the amount of $558,000 and $910,000, respectively.
- 42 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 2010 and 2009 consists of the following:
At December 31,
2010
2009
Land
Buildings
Furniture, fixtures and equipment
Construction in process
Total premises and equipment
Less: accumulated depreciation
Premises and equipment, net
(In thousands)
5,029
11,277
7,698
25
24,029
(7,221)
16,808
5,040
11,277
7,123
25
23,465
(6,022)
17,443
$
$
Depreciation expense included in operating expenses for the years ended December 31, 2010, 2009 and 2008 amounted to
$1.3 million, $1.2 million, and $1.3 million, respectively. There was no interest capitalized during fiscal 2010 and 2009.
NOTE 6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Transactions in other real estate owned for the years ended December 31, 2010 and 2009 are summarized below:
At December 31,
2010
2009
Balance at beginning of year
Additions
Sales
Write downs
Balance at end of year
(In thousands)
7,853
10,947
(5,921)
(2,063)
10,816
7,105
8,507
(6,264)
(1,495)
7,853
$
$
A summary of the composition of real estate acquired through foreclosure follows:
At December 31,
2010
2009
(In thousands)
Real estate loans:
One-to-four family
Commercial real estate
Construction and development
- 43 -
$
1,887
299
8,630
10,816
$
766
284
6,803
7,853
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 $877.1 million and $282.5 million, respectively, at December 31, 2010 and 2009.
The economic estimated fair values of mortgage servicing rights were $9.8 million and $3.1 million, respectively, at December
31, 2010 and 2009. The estimated fair value of servicing rights at December 31, 2010 were determined using discount rates
ranging from 9.50% to 18.46%, prepayment speed assumptions (“PSA”) ranging from 118.0 to 576.2, depending upon the
stratification of the specific servicing right, and a weighted average delinquency rate of 0.90% as determined by a third party.
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
servicing right, and a weighted average delinquency rate of 3.89% as determined by a third party.
During 2010, servicing rights related to approximately $191.8 million of unpaid loan principal serviced for others were sold.
The Company received $1.8 million in proceeds and recognized a gain in the accompanying consolidated statement of
operations of $526,000.
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, 2010 and 2009:
At December 31,
2010
2009
MSR beginning balance
Amount capitalized
Amount sold
Amount amortized
Recovery for loss in fair value
MSR ending balance
(In thousands)
1,797
5,387
(1,284)
(651)
-
5,249
250
1,717
-
(275)
105
1,797
$
$
Activity in the allowance for loss in fair value in mortgage servicing rights for the years ended December 31, 2010 and 2009
are as follows:
Balance at beginning of year
Provision for loss in fair value
Impairment recoveries
Balance at end of year
At December 31,
2010
2009
(In thousands)
-
$
-
-
$
-
105
-
(105)
-
The estimated amortization expense for mortgage servicing rights for the years ended December 31, 2011, 2012, 2013, 2014,
2015 and thereafter is $714,000, $640,000, $564,000, $493,000, $428,000 and $2.41 million, 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, 2010 and 2009, servicing related trust funds of approximately $5.1 million, and $401,000, 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, 2010 and 2009, the Company had blanket bond coverage of $5.0 million and errors and omissions coverage
of $5.0 million.
- 44 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE 8 - DEPOSITS
Deposits outstanding by type of account at December 31, 2010 and 2009 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
At December 31,
2010
2009
(In thousands)
$
51,509
34,555
3,722
192,243
402,630
4,424
731
407,785
689,814
$
37,543
31,710
2,824
155,019
465,140
67,389
1,483
534,012
761,108
The aggregate amount of certificates of deposit, excluding brokered deposits, with a minimum denomination of $100,000 was
$35.7 million and $118.9 million at December 31, 2010 and 2009, respectively. The aggregate amount of brokered certificates
of deposit was $45.2 million and $115.7 million at December 31, 2010 and 2009, respectively. The aggregate amount of
institutional certificates of deposit was $50.6 million and $32.2 million at December 31, 2010 and 2009, respectively.
The amounts and scheduled maturities of certificates of deposit at December 31, 2010 and 2009 are as follows:
At December 31,
2010
2009
(In thousands)
Maturing within one year
Maturing one through three years
Maturing after three years
$
$
322,049
80,575
5,161
407,785
425,397
105,422
3,193
534,012
The Company has pledged $1.5 million of U.S. government agencies and corporations’ securities available for sale as of
December 31, 2010, respectively, to secure public agency funds.
NOTE 9 – SHORT-TERM BORROWED FUNDS
Short-term borrowed funds at December 31, 2010 and 2009 are summarized as follows:
At December 31,
2010
Interest
Rate
Balance
(Dollars in thousands)
2009
Interest
Rate
Balance
Unsecured line of credit
Short-term FHLB advances
Mortgage loan warehouse line of credit
Subordinated debenture, due 2020
Total short-term borrowed funds
$
3,000
50,500
3,959
300
57,759
$
4.75%
0.19%-3.70%
3.5%-5.50%
2.74%
3,000
21,500
19,062
225
43,787
4.75%
0.36%-2.72%
5.25%-8.50%
2.75%
- 45 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 first lien residential mortgage, second
lien residential mortgage, residential home equity line of credit, commercial mortgage and multifamily mortgage portfolios
under blanket lien agreements resulting in approximately $160.0 million of collateral for these advances. In addition, at
December 31, 2010, the Company has pledged $58.6 million of securities for these advances. At December 31, 2010, the
Banks had maximum FHLB lines of $290.6 million based on FHLB limits. At December 31, 2010, collateral totaling $218.6
million was pledged to support FHLB advances. At December 31, 2010 the Banks had FHLB advances of $125.5 million
outstanding with excess collateral pledged to the FHLB during those periods that would support additional borrowings of
approximately $93.1 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 resulting in approximately $34.0 million of
collateral to the FRB for these advances. At December 31, 2010 the Banks had lines available with the FRB for $34.0 million.
At December 31, 2010 the Banks had no FRB advances outstanding.
At December 31, 2010, Crescent Mortgage had a mortgage loan warehouse line of credit from a correspondent with a $35.0
million credit limit, of which $31.0 million is still available. The facility is secured by Crescent Mortgage’s residential
mortgage loans held for sale and other assets.
Effective October 1, 2009, the Company modified a $5.0 million unsecured line of credit with a correspondent bank, of which
$3.0 million was outstanding at December 31, 2010 and December 31, 2009. The unsecured line of credit bears interest at
prime plus 1.50% and the term expires October 1, 2011. In connection with this modification, the Company obtained a $3.0
million subordinated debenture that 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 the year ended December 31, 2010 and 2009, the Company maintained at least a
$500,000 principal balance outstanding on the line of credit. Also as a result of the modification, no additional advances can
be made on this unsecured line of credit. The line of credit also has debt covenants, the more restrictive of which requires the
Company to maintain certain capital ratios, nonperforming asset ratios and return on asset ratios. As of December 31, 2010
and 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 the line of credit, if necessary, by
restructuring the existing loan, obtaining financing from other sources or raising capital. As a result, management does not
believe that default of this covenant will have a material adverse effect on the Company’s financial condition or the results of
its operations.
The Company has a subordinated debenture totaling $3.0 million that has principal repayments that began in 2010. See Note
10 – Long-Term Debt for additional disclosure.
In addition, at December 31, 2010, the Banks had $7.2 million available under federal funds purchase line agreements with
correspondent banks.
In connection with the Company’s balance sheet management to preserve capital, certain borrowings were prepaid to manage
the related interest rate sensitivity, resulting in a net loss on the extinguishment of debt of $2.5 million, $711,000 and $52,000
during 2010, 2009 and 2008, respectively
- 46 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE 10 – LONG-TERM DEBT
Long-term debt at December 31, 2010 and 2009 are summarized as follows:
December 31, 2010
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
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
$
Balance
Interest
Rate
(Dollars in thousands)
75,000
20,399
12,475
5,155
10,310
123,339
0.00% - 4.23%
2.74%
1.79% - 2.74%
3.75%
3.34%
$
December 31, 2009
Balance
Interest
Rate
(Dollars in thousands)
$
$
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%
As of December 31, 2010, the principal amounts due on long-term debt in 2011, 2012, 2013, 2014, 2015 and thereafter were
$57.8 million, $30.7 million, $15.3 million, $5.3 million, $5.3 million and $66.7 million, respectively. As of December 31,
2010, the principal amounts callable by the FHLB on advances in 2011, 2012, 2013, 2014 and 2015 were $35.0 million, $5.0
million, $5.0 million, and $0 million, respectively.
Long-term FHLB borrowings include two advances totaling $35.0 million that currently have a rate of zero percent. These
two advances have a one-time call feature at the FHLB’s option during the first quarter of 2011. If the advances are not
called, both advances then convert to ten year fixed rate advances at 4.00%.
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, 2010 and 2009, 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
3.34% to 3.75% at December 31, 2010 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.
Beginning with the scheduled payment date of December 31, 2010, the Company has deferred the payment of interest on its
outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods).
- 47 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
This and any future deferred distributions will continue to accrue interest. Distributions on the trust preferred securities are
cumulative. Therefore, in accordance with generally accepted accounting principles, the Company will continue to accrue the
monthly cost of the trust preferred securities as it has since issuance. The balance of deferred payments at December 31,
2010 is approximately $47,000. Subsequent to December 31, 2010, the Company deferred an additional $85,000 on its
outstanding subordinated debentures.
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, 2010 and 2009, respectively. The Company had $11.9 million and $12.2 million of long-term debt
that qualified as Tier 2 capital at December 31, 2010 and 2009, respectively.
The Company has $3.0 million outstanding on an unsecured line of credit with a correspondent bank. See Note 9 – Short-
Term Borrowed Funds for additional disclosure.
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.
Income tax expense for the years ended December 31, 2010, 2009 and 2008 consists of the following:
Current income tax expense (benefit)
Federal
State
Deferred income tax expense (benefit)
Federal
State
Total income tax expense (benefit)
For the Year Ended December 31,
2010
2008
2009
(In thousands)
5,776
596
6,372
(4,837)
435
(4,402)
3,565
324
3,889
$
(1,433)
(37)
(1,470)
(5,872)
$
(2,248)
229
(2,019)
4,353
(551)
(82)
(633)
3,256
A reconciliation from expected Federal tax expense to actual income tax expense for the years ended December 31, 2010,
2009 and 2008, using the base federal tax rates of 34%, 35% and 34%, respectively, follows:
For the Year Ended December 31,
2010
2008
2009
(In thousands)
4,033
311
(38)
47
4,353
(6,276)
263
(16)
157
(5,872)
2,994
300
43
(81)
3,256
$
$
Computed federal income taxes (benefit)
State income tax, net of federal benefit
Change in valuation allowance
Other, net
Total income tax expense (benefit)
- 48 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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, 2010 and 2009:
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
Deferred tax assets, net
At December 31,
2010
2009
$
(In thousands)
4,104
101
2,938
28
97
206
1,928
993
222
271
10,888
(148)
10,740
(283)
(44)
(73)
(400)
10,340
$
4,431
157
4,417
26
101
106
1,031
353
230
218
11,070
(106)
10,964
(360)
(123)
(132)
(615)
10,349
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 deferred income tax (benefit) related to the unrealized gains and losses on debt and equity securities of
$53,000 and $2.1 million, respectively, for the years ended December 31, 2010 and 2009, respectively, was recorded directly
to stockholders’ equity as a component of accumulated other comprehensive income. The balance of the change in the net
deferred tax asset of $1.5 million and $2.0 million, respectively, for the years ended December 31, 2010 and 2009,
respectively, is reflected as a deferred income tax benefit in the consolidated statement of operations.
The valuation allowances relate to state net operating loss carry-forwards. It is management’s belief that the realization of the
remaining net deferred tax assets is more likely than not.
At December 31, 2010, income tax returns from 2009, 2008 and 2007 remain subject to review by tax authorities.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease its office facilities under non-cancellable 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, 2010, 2009 and 2008 totaled $719,000, $807,000 and $524,000, respectively.
Minimum rental commitments (in thousands) under the leases are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
After Year 5
Total
$
564
581
598
434
120
183
2,480
$
- 49 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
The Company is not a defendant in any lawsuits. One of its banking subsidiary's is a plaintiff in one lawsuit and a defendant
in two lawsuits arising out of the normal course of business. The lawsuits are in their discovery phases and management does
not have sufficient information with which to estimate potential ranges of loss, if any. Accordingly, no accrual related to these
lawsuits has been recorded in accompanying statement of financial condition at December 31, 2010.
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 are estimated 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 amounts 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.
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 re-price 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.
- 50 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 amounts of these commitments are 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.
- 51 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
The carrying amount and estimated fair value of the Company's financial instruments at December 31, 2010 and 2009 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
Off-Balance Sheet Financial Instruments:
Commitments to extend credit
Standby letters of credit
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Derivative liabilities:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
At December 31,
2010
2009
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
3,322
21,415
151,574
9,848
11,129
465
2,225
82,615
583,995
3,483
(In thousands)
3,322
21,415
151,574
3,167
11,129
465
2,225
82,999
588,935
3,483
2,901
17,759
104,401
125,633
12,456
465
2,342
71,233
690,163
4,550
689,814
57,759
123,339
173
939
691,166
57,917
128,168
173
939
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
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
$
36,296
558
197,075
-
175,000
-
22,842
(In thousands)
-
-
449
-
1,776
50,100
910
-
46,588
130,000
-
173
177,282
-
-
-
-
428
1,914
891
-
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.
- 52 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2010 and 2009:
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable inputs
(Level 3)
December 31, 2010:
Available-for-sale investment securities:
GNMA
Mortgage-backed securities
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage-backed securities forward sales commitments
Derivative liabilities-
-
$
-
-
Mortgage loan forward sales commitments
Total
-
$
-
December 31, 2009:
Available-for-sale investment securities:
GNMA
Mortgage-backed securities
Derivative assets:
-
$
-
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
-
-
Derivative liabilities-
Mortgage loan interest rate lock commitments
Total
-
$
-
22,539
129,035
449
1,776
173
153,972
4,117
100,284
428
1,914
891
107,634
-
-
-
-
-
-
-
-
-
-
-
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2010 and 2009:
December 31, 2010:
Impaired loans
Real estated owned
Total
December 31, 2009:
Impaired loans
Real estated owned
Total
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable inputs
(Level 3)
-
$
-
$
-
$
-
-
$
-
70,024
10,816
80,840
65,152
7,853
73,005
-
-
-
-
-
-
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.
- 53 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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, 2010 and 2009, the Banks had
commitments to extend credit in the amount of $36.3 million and $50.1 million, respectively. At December 31, 2010 and
2009, the Banks had standby letters of credit in the amount of $558,000 and $910,000, 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, 2010, 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, 2010 was approximately $558,000.
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, 2010 and 2009, the
Company’s outstanding mortgage interest rate lock commitments totaled $197.1 million and $177.3 million, respectively.
The Company uses forward mortgage loan sales commitments and mortgage-backed securities forward 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, 2010 and 2009, the Company’s
outstanding forward mortgage loan sales commitments totaled $22.8 million and $46.6 million, respectively. At December
31, 2010 and 2009, the Company’s outstanding mortgage-backed forward sales commitments totaled $175.0 million and
$130.0 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. A summary of commercial real estate credit
concentrations follows:
At December 31,
2010
2009
(In thousands)
Commercial real estate loans, excluding owner occupied
and unfunded commitments
Loans secured by owner occupied commercial real estate
Unfunded commitments of commercial real estate
Total
NOTE 15 - EMPLOYEE BENEFIT PLANS
$
$
236,408
130,879
7,222
374,509
288,640
135,546
7,187
431,373
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 fiscal 2010 and 2009, the Company matched 75% of an employee’s contribution up to 6.00% of the participant’s
- 54 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
compensation of the CFC Participants and the CMC Participants. For the years ended December 31, 2010, 2009 and 2008,
the Company made matching contributions of $448,000, $370,000 and $289,000, 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, 2010 and 2009 is $1.4 million and $1.6 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 would be taxable to the Company.
NOTE 16 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) 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 (loss) 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, 2010, 2009
and 2008:
2010
December 31,
2009
2008
Basic
Diluted
Basic
Diluted
Basic
Diluted
Weighted average shares outstanding
Effect of dilutive securities - stock options
Average shares outstanding
1,913,240
-
1,913,240
1,913,240
-
1,913,240
1,912,449
-
1,912,449
1,912,449
12,271
1,924,720
1,883,101
-
1,883,101
1,883,101
77,261
1,960,362
The average market price used in calculating the dilutive securities under the treasury stock method for the years ended
December 31, 2010, 2009 and 2008 was $14.90, $17.53 and $44.92, respectively. For the year ended December 31, 2010,
144,980 option shares were excluded from the calculation of diluted earnings per share 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 2009 and 2008, 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 either on a very limited number of transactions or on an internal valuation model.
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, 2010, 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
- 55 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
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 6%, 10%, and 5%, respectively. Since December 31, 2010, 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, 2010 and 2009 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 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)
At December 31,
2010
2009
Amount
Ratio
Amount
(Dollars in thousands)
Ratio
66,576
87,479
66,576
9.3%
12.2%
6.9%
78,773
101,696
78,773
9.2%
11.9%
7.3%
44,373
54,660
44,373
10.6%
13.0%
7.6%
45,166
55,633
45,166
10.4%
12.8%
7.7%
24,383
34,989
24,383
8.2%
11.8%
6.4%
35,404
47,849
35,404
8.4%
11.4%
7.2%
Any future dividend payments by the Company will be made primarily from dividends received from the Banks. 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, 2010, the Banks had no retained net profits
available for dividends.
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, 2010, 2009 and 2008:
- 56 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Community Mortgage
Banking
Banking
Other
(In thousands)
Eliminations
Total
For the Year Ended December 31, 2010
Interest income
Interest expense
Net interest income (expense)
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)
Net income (loss)
$
45,955
15,914
30,041
30,755
(4,073)
-
18,694
4,852
(28,333)
(9,632)
(18,701)
$
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$
917,791
583,666
67,732
690,969
158,675
891
467
424
-
24,631
-
14,600
960
9,495
3,608
5,887
29,669
529
14,883
-
3,959
18
718
(700)
-
1,042
5,812
5,776
-
378
152
226
71,063
-
-
-
18,665
(22)
(22)
-
-
-
(5,812)
-
(5,812)
-
-
-
46,842
17,077
29,765
30,755
21,600
-
39,070
-
(18,460)
(5,872)
(12,588)
(87,774)
(200)
-
(1,155)
(201)
930,749
583,995
82,615
689,814
181,098
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)
Net income (loss)
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
Community
Banking
Mortgage
Banking
Other
(In thousands)
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)
-
-
-
56,736
25,019
31,717
10,460
27,938
-
37,673
-
11,522
4,353
7,169
(91,836)
(400)
-
(2,430)
(401)
1,078,757
690,163
71,233
761,108
247,425
$
55,296
23,283
32,013
10,460
4,014
-
18,038
3,840
3,689
1,348
2,341
$
$
1,051,233
690,563
43,412
763,538
209,899
- 57 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Community
Banking
Mortgage
Banking
Other
(In thousands)
Eliminations
Total
For the Year Ended December 31, 2008
Interest income
Interest expense
Net interest income (expense)
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)
Net income (loss)
$
62,064
31,488
30,576
6,361
4,304
-
14,186
3,780
10,553
3,853
6,700
$
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$
1,111,268
776,802
6,684
719,655
327,001
960
539
421
-
5,260
-
4,939
756
(14)
(5)
(9)
26,827
156
21,599
-
21,090
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)
-
-
-
63,049
33,227
29,822
6,361
9,227
-
23,882
-
8,806
3,256
5,550
(75,621)
(337)
-
(2,266)
(338)
1,138,994
776,621
28,283
717,389
366,555
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
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
At December 31,
2010
2009
(In thousands)
$
311
63,675
490
465
9
143
65,093
$
895
72,627
372
465
502
127
74,988
385
3,000
15,465
56,138
74,988
134
3,000
15,465
46,494
65,093
$
- 58 -
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Carolina Financial Corporation
Condensed Statements of Operations
2010
Dividend income from bank subsidiaries
Dividend income from non-bank subsidiaries
Interest income
Gain on sale of securities available for sale
Other income
Total income
Interest expense
General and administrative expenses
Total expenses
For the Year
Ended December 31,
2009
(In thousands)
900
1,000
23
-
$
300
18
1,042
-
1,360
697
653
1,350
2008
-
-
40
-
300
340
1,210
755
1,965
(1,625)
(552)
(1,073)
3,108
3,592
(9)
(68)
6,623
5,550
-
126
2,049
704
805
1,509
540
(464)
1,004
1,894
1,598
2,881
(208)
6,165
7,169
Income (loss) before income taxes and equity in undistributed earnings
(losses) of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings (losses) of Community FirstBank
Equity in undistributed earnings (losses) of Crescent Bank
Equity in undistributed earnings (losses) of Crescent Mortgage
Equity in undistributed earnings (losses) of Carolina Services
Total equity in undistributed earnings (losses) of subsidiaries
Net income (loss)
10
(99)
109
(793)
(12,021)
-
117
(12,697)
(12,588)
$
Carolina Financial Corporation
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in undistributed earnings (losses) in subsidiaries
Gain on sale of securities available for sale
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
Proceeds from the sale of securities available for sale
Equity investment in bank subsidiaries
Net cash provided by (used in) financing activities
Cash flows from financing activities -
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
Cash and cash equivalents, end of year
- 59 -
For the Year
Ended December 31,
2009
(In thousands)
2008
2010
$
(12,588)
7,169
5,550
12,697
(1,042)
391
144
(251)
(649)
-
1,065
(1,000)
65
-
-
(584)
895
311
$
(6,165)
-
390
(8)
(508)
878
(35)
-
(700)
(735)
5
5
148
747
895
(6,623)
-
365
39
(111)
(780)
-
-
-
-
844
844
64
683
747
CAROLINA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE 20 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below represent the quarterly results of operations for the years ending December 31, 2010, 2009 and 2008
respectively:
For the Year Ended December 31, 2010
First
Second
Third
Fourth
(In thousands, except per share data)
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income (loss) after provision for loan losses
Noninterest income
Noninterest expense
Loss before taxes
Income tax benefit
Net loss
Basic earnings (losses) per share
Diluted earnings (losses) 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
- 60 -
$
12,563
4,708
7,855
4,940
2,915
5,184
8,442
(343)
(88)
(255)
(0.14)
(0.14)
$
$
$
12,242
4,580
7,662
9,630
(1,968)
5,432
9,102
(5,638)
(2,037)
(3,601)
(1.88)
(1.88)
11,657
4,158
7,499
8,030
(531)
7,658
10,563
(3,436)
(885)
(2,551)
(1.33)
(1.33)
10,380
3,631
6,749
8,155
(1,406)
3,326
10,963
(9,043)
(2,862)
(6,181)
(3.23)
(3.23)
For the Year Ended December 31, 2009
First
Second
Third
Fourth
(In thousands, except per share data)
$
14,587
6,992
7,595
1,661
5,934
5,354
7,901
3,387
1,249
2,138
1.12
1.12
$
$
$
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
For the Year Ended December 31, 2008
First
Second
Third
Fourth
(In thousands, except per share data)
$
16,694
9,476
7,218
1,280
5,938
3,192
6,227
2,903
1,068
1,835
1.01
0.94
$
$
$
15,612
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
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.
Robert M. Moïse, CPA, CVA
Partner
WebsterRogers, LLP
Howell (Skeets) V. Bellamy, Jr.
Member
Bellamy, Rutenberg, Copeland, Epps,
Gravely & Bowers, P. A.
W. Scott Brandon
President
The Brandon Agency
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
M. J. Huggins, III
President and Secretary
Crescent Bank
David L. Morrow
Chief Executive Officer
Community FirstBank and
Crescent Bank
Robert C. KenKnight
Retired
Crescent Mortgage Company
Benedict P. Rosen
Retired
AVX Corporation
Bonum S. Wilson, Jr.
Venture Capitalist
John D. Russ
President and Chief Executive Officer
Carolina Financial Corporation
Lt. Gen. Claudius E. Watts, III
Chairman
(USAF - Retired)
Past President, The Citadel
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CAROLINA FINANCIAL CORPORATION
COMMUNITY FIRSTBANK
OFFICERS
John D. Russ
Chairman
Gail A. Brown
Vice President
Senior Consumer Lending
A. Taylor Clarkson, III
Senior Vice President
Summerville City Executive
William A. Gehman III
Vice President and Controller
Richard Pierce
Vice President and Branch Manager
Meeting Street and West Ashley
Robert L. Tennyson
Vice President
Commercial Banking
Michael J. Wood
Vice President
Commercial Lending
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. Gen. Claudius E. Watts, III
(USAF - Retired)
Past President, The Citadel
David L. Morrow
Chief Executive Officer
Brian L. Canady
Senior Vice President
Retail Sales Manager
Andrew J. DeMasi
Vice President
Commercial Banking
Harlod E. Jervey, III
Executive Vice President
Business Development
Jerry L. Rexroad
Senior Vice President
Chief Investment Officer
Robert H. Warrick
Senior Vice President
Senior Credit Officer
Frank J. Cole, Jr.
President, Treasurer, Secretary and
Chief Financial Officer
Ellen M. Cavanaugh
Vice President
Loan Administration
Mary D. Garcia
Senior Vice President
Senior Commercial Lender
Linda H. Kennedy
Vice President
Commercial Banking
Leon G. Runey
Vice President
Commercial Banking
Elizabeth D. Williams
Vice President and Branch Manager
Summerville
Frank J. Cole, Jr.
Executive Vice President, Secretary and
Chief Financial Officer
Carolina Financial Corporation
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
Jeffery L. Deal, M.D.
Founding Member, Charleston ENT (Retired)
Director of Health Services
Robert M. Moïse, CPA, CVA
Partner
WebsterRogers, LLP
John M. Settle
Vice Chairman
Community FirstBank
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
M. J. Huggins, III
President and Secretary
Brian L. Canady
Senior Vice President
Retail Sales Manager
Michael L. Evans
Vice President
Commercial Lending
E. Hayden Hamilton, Jr.
Vice President
Raymond James Financial Services
Travis A. Minter
Senior Vice President
Crescent Mortgage Group
M. Wayne Staton
Senior Vice President
Conway City Executive
Frank J. Cole, Jr.
Executive Vice President and
Chief Financial Officer
Jean E. Chestnut
Vice President
Commercial Lending
Charles J. Fehlig, Jr.
Executive Vice President
Commercial Lending
G. Timothy Hoag
Vice President
Commercial Banking
F. Ross Rankin
Senior Vice President
North Myrtle Beach City Executive
OFFICERS
David L. Morrow
Chief Executive Officer
Shawn M. Campman
Vice President
Consumer Lending
Marshall K. Cooper
Vice President
Commercial Lending
William A. Gehman III
Vice President and
Controller
Frederick W. Jasper, Jr.
Senior Vice President
Garden City Executive
Jerry L. Rexroad
Senior Vice President
Chief Investment Officer
BOARD OF DIRECTORS
William H. Alford
Vice President and Secretary
A & I, Inc.
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
W. Scott Brandon
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
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 Screen Printing and Embroidery
NORTH MYRTLE BEACH ADVISORY BOARD
Dr. Robert DeGrood
President
Southern Surgical, P.A.
John Harrison
Retired Executive
Exxon Corporation
Jacqui Isbil
Owner
Umberto's at Coquina Harbor
Dr. Garnett Ramsbottom
President
North Myrtle Beach Family Practice
Ray E. Skidmore, Jr.
President
Fox Fire Communities
Dr. William T. Davis
Carolina Family Dental, P.A.
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CAROLINA FINANCIAL CORPORATION
CRESCENT MORTGAGE COMPANY
OFFICERS
Michael P. Leddy
President and Chief Executive Officer
Jerry L. Rexroad
Chairman
Parthiv J. Dave
Vice President
Secondary Marketing
Michael A. Perkins
Vice President
Underwriting Manager
Patricia J. Anthony
Vice President
Credit/Risk Manager
David T. Attaway
Vice President
Secondary Marketing
Fowler C. Williams
Executive Vice President
National Sales Manager
BOARD OF DIRECTORS
Frank J. Cole, Jr.
Executive Vice President and
Chief Financial Officer
Carolina Financial Corporation
Michael P. Leddy
President and Chief Executive Officer
Crescent Mortgage Company
Benedict P. Rosen
Retired
AVX Corporation
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
Robert C. KenKnight
Retired
Crescent Mortgage Company
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 SERVICES CORPORATION
OFFICERS
Richard M. Arrington
Vice President
Item Processing
Frank J. Cole, Jr.
Executive Vice President
John C. Heinemann, III
Vice President
Information Technology
Sandra Lewis
Executive Vice President
Operations
John D. Russ
Chairman
President and Chief Executive Officer
Sherry G. Schoolfield
Vice President
Compliance Manager
BOARD OF DIRECTORS
Frank J. Cole, Jr.
Executive Vice President and
Chief Financial Officer
Carolina Financial Corporation
M. J. Huggins, III
President and Secretary
Crescent Bank
John D. Russ
President and Chief Executive Officer
Carolina Financial Corporation
Joseph C. Bonacci, II
Senior Vice President
Human Resources
William A. Gehman III
Vice President and Controller
Jamin M. Hujik
Vice President
Special Assets Group
James Potasky
Vice President
Internal Audit Manager
Sara Sowell
Vice President
Loan Review
Harvey L. Glick
President and Chief Executive Officer
Insight Bank
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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5901 Peachtree Dunwoody Road
Building C, Suite 250
Atlanta, GA 30328
770.392.1611
crescentexpress.net