CAROLINA FINANCIAL
CORPORATION
2013 ANNUAL REPORT
__________________
CAROLINA FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
1
2
3
4
4
5
7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Carolina Financial Corporation
Charleston, South Carolina
We have audited the accompanying consolidated balance sheets of Carolina Financial Corporation and
subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Carolina Financial Corporation and subsidiaries as of December 31,
2013 and 2012, and the results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
Charleston, South Carolina
February 26, 2014
Elliott Davis LLC | www.elliottdavis.com
1
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks ....................................................................................... $
Interest-bearing cash ..............................................................................................
Cash and cash equivalents ...............................................................................
Securities available-for-sale (cost of $166,997 at December 31, 2013 and
At December 31,
2013
2012
(In thousands)
4,489
34,176
38,665
6,499
11,340
17,839
$144,511 at December 31, 2012) ........................................................................
167,535
148,407
Securities held-to-maturity (fair value of $23,547 at December 31, 2013 and
$5,549 at December 31, 2012) ............................................................................
Federal Home Loan Bank stock, at cost .................................................................
Other investments ...................................................................................................
Derivative assets.....................................................................................................
Loans held for sale .................................................................................................
Loans receivable, net of allowance for loan losses of $8,091 at December
31,2013 and $9,520 at December 31, 2012 ........................................................
Premises and equipment, net ..................................................................................
Accrued interest receivable ....................................................................................
Real estate acquired through foreclosure, net .........................................................
Deferred tax assets, net ..........................................................................................
Prepaid FDIC insurance .........................................................................................
Mortgage servicing rights.......................................................................................
Cash value life insurance........................................................................................
Other assets ............................................................................................................
Total assets ...................................................................................................... $
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits .................................................................................. $
Interest-bearing deposits ........................................................................................
Total deposits ..................................................................................................
Short-term borrowed funds ....................................................................................
Long-term debt .......................................................................................................
Derivative liabilities ...............................................................................................
Drafts outstanding ..................................................................................................
Advances from borrowers for insurance and taxes ................................................
Accrued interest payable ........................................................................................
Income taxes payable .............................................................................................
Reserve for mortgage repurchase losses ................................................................
Accrued expenses and other liabilities ...................................................................
Total liabilities ................................................................................................
Commitments and contingencies
Stockholders' equity:
24,554
4,103
1,858
1,412
36,897
535,221
17,585
2,802
6,273
7,419
—
10,908
20,910
5,442
881,584
83,500
614,081
697,581
10,300
74,540
55
2,703
284
311
749
6,109
6,725
799,357
9,166
6,413
1,728
6,542
144,849
501,691
16,397
3,203
6,284
6,782
2,035
12,039
813
4,536
888,724
82,004
571,243
653,247
82,482
64,840
—
3,010
613
1,599
3,459
4,882
7,078
821,210
Preferred stock, par value $.01; 200,000 shares authorized; no shares issued or
outstanding .........................................................................................................
—
—
Common stock, par value $.01; 6,800,000 shares authorized; 4,015,204 and
3,837,984 issued and outstanding at December 31, 2013 and 2012,
respectively .........................................................................................................
Additional paid-in capital .......................................................................................
Retained earnings, restricted ..................................................................................
Accumulated other comprehensive loss, net of tax benefit ....................................
Total stockholders' equity ...............................................................................
Total liabilities and stockholders' equity ................................................................ $
See accompanying notes to consolidated financial statements.
40
22,393
62,169
(2,375)
82,227
881,584
39
22,048
45,752
(325)
67,514
888,724
2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended December 31,
2013
2012
(In thousands, except share data)
Interest income
Loans ...................................................................................................................... $
Debt securities ........................................................................................................
Dividends from FHLB ...........................................................................................
Interest-bearing cash ..............................................................................................
Total interest income ..........................................................................................
Interest expense
Deposits ..................................................................................................................
Short-term borrowed funds ....................................................................................
Long-term debt .......................................................................................................
Total interest expense .........................................................................................
Net interest income ....................................................................................................
Provision for loan losses ............................................................................................
Net interest income after provision for loan losses ................................................
Noninterest income
Net gain on sale of loans held for sale ....................................................................
Deposit service charges ..........................................................................................
Net loss on extinguishment of debt ........................................................................
Net loss on sale of securities ..................................................................................
Other-than-temporary impairment of securities .....................................................
Net unrealized gain on derivatives - interest rate swap ..........................................
Net gain on sale of servicing assets ........................................................................
Net increase in cash value life insurance ................................................................
Mortgage loan servicing income ............................................................................
Other ......................................................................................................................
Total noninterest income ....................................................................................
Noninterest expense
Salaries and employee benefits ..............................................................................
Occupancy and equipment .....................................................................................
Marketing and public relations ...............................................................................
FDIC insurance ......................................................................................................
Provision for mortgage loan repurchase losses ......................................................
Legal expense .........................................................................................................
Other real estate expense, net .................................................................................
Mortgage subservicing expense .............................................................................
Amortization of mortgage servicing rights ............................................................
Settlement of employment agreements ..................................................................
Other ......................................................................................................................
Total noninterest expense ...................................................................................
Income before income taxes ......................................................................................
Income tax expense ....................................................................................................
Net income ............................................................................................................. $
27,731
4,999
111
107
32,948
3,339
239
2,140
5,718
27,230
(860)
28,090
29,914
1,558
(19)
(1,125)
—
428
5,489
374
6,583
884
44,086
23,590
3,450
1,088
588
2,438
926
622
1,862
2,444
2,639
6,325
45,972
26,204
9,386
16,818
Earnings per common share:
Basic ....................................................................................................................... $
Diluted .................................................................................................................... $
4.38
4.25
30,074
5,134
107
41
35,356
4,178
640
2,695
7,513
27,843
2,707
25,136
52,763
1,604
(1,591)
(3,031)
(913)
—
—
2
4,085
605
53,524
25,632
3,274
1,360
1,076
2,189
1,768
1,873
1,249
1,464
227
11,275
51,387
27,273
10,395
16,878
4.40
4.40
Average common shares outstanding:
Basic .......................................................................................................................
Diluted ....................................................................................................................
3,841,230
3,960,247
3,837,984
3,837,984
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years
Ended December 31,
2013
2012
(In thousands)
Net income ..................................................................................................................... $
16,818
16,878
Other comprehensive income (loss), net of tax:
Unrealized gain (losses) on securities, net of tax of $(1,703) and $1,124 for the
years ended December 31, 2013 and 2012, respectively .................................
(2,963)
1,955
Reclassification adjustment for losses included in earnings, net of tax of $411
and $1,106 for the years ended December 31, 2013 and 2012, respectively ...
714
1,925
Reclassification adjustment for other-than-temporary impairment on securitites,
net of tax of $333 for the year ended December 31, 2012 ...............................
—
580
Accretion of unrealized losses on held-to-maturity securities previously
recognized in other comprehensive income net of tax of $114 and $250 for
the years ended December 31, 2013 and 2012, respectively ...........................
199
Other comprehensive income (loss), net of tax ..............................................................
(2,050)
435
4,895
Comprehensive income.................................................................................................. $
14,768
21,773
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Paid-in Retained
Accumulated
Other
Comprehensive
Common Stock
Shares
Amount Capital Earnings Income (Loss) Total
(In thousands, except share data)
Balance, December 31, 2011 ................................ 3,837,984 $
Stock-based compensation expense, net ...........
Net income ........................................................
Other comprehensive income, net of tax ...........
— —
— —
— —
Balance, December 31, 2012 ................................ 3,837,984
Restricted stock awards, net .............................. 172,900
Stock options exercised .....................................
Stock-based compensation expense, net ...........
Net income ........................................................
Dividends paid to stockholders .........................
Other comprehensive loss, net of tax ................
1
4,320 —
— —
— —
— —
— —
39 21,962 28,874
86 —
— 16,878
— —
39 22,048 45,752
(1) —
43 —
303 —
— 16,818
—
(401)
— —
40 22,393 62,169
Balance, December 31, 2013 ................................ 4,015,204 $
See accompanying notes to consolidated financial statements.
(5,220) 45,655
—
86
— 16,878
4,895 4,895
(325) 67,514
— —
43
—
—
303
— 16,818
(401)
—
(2,050) (2,050)
(2,375) 82,227
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended December 31,
2013
2012
(In thousands)
Cash flows from operating activities:
Net income ............................................................................................................... $
16,818
16,878
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses ................................................................................
Deferred tax expense (benefit) ......................................................................
Amortization of unearned discount/premiums on investments, net ...............
Amortization of deferred loan fees ................................................................
Amortization of mortgage servicing rights ....................................................
Loss on sale of available for sale securities, net ............................................
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 .....................................................................
Provision for mortgage loan repurchase losses .............................................
Mortgage loan losses paid, net of recoveries .................................................
Unrealized gain on interest rate swap ............................................................
Stock-based compensation ............................................................................
(Increase) decrease in cash surrender value of bank owned life insurance ....
Depreciation ..................................................................................................
Loss (gain) on disposals of premises and equipment ....................................
Loss (gain) 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 .......................................................
Cash flows provided by (used in) operating activities .................................................
(860)
542
2,318
(4,424)
2,444
1,125
(29,914)
(1,616,594)
1,760,073
19
2,438
(1,211)
(428)
303
(267)
918
(24)
(425)
849
(5,489)
11,036
(6,860)
401
—
2,035
(906)
(1,288)
(3,038)
(353)
129,238
2,707
(657)
1,361
(5,328)
1,464
3,031
(52,763)
(2,313,236)
2,297,381
1,591
2,189
(930)
—
86
161
833
11
227
1,049
—
—
(7,051)
(117)
5,789
1,000
(1,461)
228
3,459
3,445
(38,653)
Continued
5
For the Years
Ended December 31,
2013
2012
(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases .............................................................................................................. $
Maturities, payments and calls .............................................................................
Proceeds from sales ..............................................................................................
(177,284)
51,180
91,653
Activity in held-to-maturity securities:
Purchases ..............................................................................................................
Maturities, payments and calls .............................................................................
Increase in other investments ...................................................................................
Decrease in Federal Home Loan Bank stock ...........................................................
(Increase) decrease 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 ...............................
Purchase of bank owned life insurance ....................................................................
Distribution of bank owned life insurance ...............................................................
Cash flows provided by (used in) investing activities .................................................
Cash flows from financing activities:
Net increase in deposit accounts ..............................................................................
Net (decrease) increase in Federal Home Loan Bank advances ...............................
Net decrease in other short-term borrowed funds ....................................................
Principal repayment of subordinated debt ................................................................
Net decrease in drafts outstanding............................................................................
Net (decrease) increase in advances from borrowers for insurance and taxes .........
Cash dividends paid on common stock ....................................................................
Proceeds from exercise of stock options ..................................................................
Cash flows (used in) provided by financing activities .................................................
Net increase (decrease) in cash and cash equivalents ...............................................
Cash and cash equivalents, beginning of year .............................................................
Cash and cash equivalents, end of year ....................................................................... $
(6,708)
299
(130)
2,310
(32,386)
(2,136)
54
3,727
(20,053)
223
(89,251)
44,334
(47,519)
(4,682)
(10,300)
(307)
(329)
(401)
43
(19,161)
20,826
17,839
38,665
Supplemental disclosure
Cash paid for:
Interest on deposits and borrowed funds .............................................................. $
Income taxes paid, net of (refunds) ......................................................................
7,006
11,556
Noncash 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 ................
—
4,140
8,649
See accompanying notes to consolidated financial statements.
(79,869)
42,618
27,735
—
794
(38)
772
4,858
(1,182)
19
7,944
—
154
3,805
31,444
23,409
(21,252)
(300)
(1,506)
104
—
—
31,899
(2,949)
20,788
17,839
7,285
1,424
87
913
9,407
—
6
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 bank holding company with two wholly-owned subsidiaries, CresCom Bank (the “Bank”) and Carolina
Services Corporation of Charleston (“Carolina Services”). Effective July 31, 2012, Carolina Financial combined its wholly-
owned subsidiary bank, Community FirstBank of Charleston (“Community FirstBank”), with and into its other wholly-
owned subsidiary bank, Crescent Bank. In conjunction with this internal reorganization, Crescent Bank’s name was changed
to CresCom Bank. Crescent Mortgage Company (“Crescent Mortgage”), formerly a wholly-owned subsidiary of Community
FirstBank, became a wholly-owned subsidiary of CresCom Bank. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, CresCom 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, 2013 and 2012, 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, asserted and unasserted legal
claims 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 Bank’s 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 the date the financial statements were
issued and no subsequent events occurred requiring accrual or disclosure except for the following:
On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record as
of February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share data have been retroactively
adjusted in the consolidated balance sheets, earnings per share, and stockholders’ equity disclosures to reflect this stock split
for all periods presented in accordance with generally accepted accounting principles.
7
On January 15, 2014, the Board of Directors declared a $.05 dividend to stockholders of record dated March 26, 2014,
payable on April 11, 2014.
On January 15, 2014, the Company entered into a contract to sell approximately $147.6 million in unpaid principal of loans
serviced for an estimated gain on sale of servicing assets of $767,000. The Company expects to close the servicing sale
during the first quarter of 2014.
On February 21, 2014, the Bank completed the acquisition of the St. George office of First Federal of South Carolina in a
transaction that had been announced on August 28, 2013. The Bank added approximately $24.5 million in deposits and $11.2
million in loans receivable as a result of this branch acquisition.
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, 2013 and 2012 consists of 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 Bank is required to maintain average balances on hand
or with the Federal Reserve Bank. At December 31, 2013 and 2012, these reserve balances amounted to $8.3 million and
$4.7 million, respectively.
Securities
Investment securities are classified into three categories: (a) Held-to-Maturity – debt securities that the Company has positive
intent and ability to hold to maturity, which are reported at amortized cost; (b) Trading – debt and equity securities that are
bought and held principally for the purpose of selling them in the near term, which are reported at fair value, with unrealized
gains and losses included in earnings; and (c) Available-for-Sale – debt and equity securities that may be sold under certain
conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported in
accumulated other comprehensive income.
The Company determines the category of the investment 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. Loans held for sale are recorded at
either fair value, if elected, or the lower of cost or fair value on an individual loan basis. Origination fees and costs for loans
held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of
realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans
held for sale that are recorded at fair value. Fair value is derived from observable current market prices, when available, and
includes loan servicing value. When observable market prices are not available, the Company uses judgment and estimates
fair value using internal models, in which the Company uses its best estimates of assumptions it believes would be used by
market participants in estimating fair value. Adjustments to reflect unrealized gains and losses resulting from changes in fair
value and realized gains and losses upon ultimate sale of the loans are classified as noninterest income in the consolidated
statements of operations.
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.
8
Derivatives
The accounting for changes in fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the unrealized gain or loss on the derivative instrument is
recognized in earnings in the period of change, together with the offsetting unrealized loss or gain on the hedged item
attributable to the risk being hedged as a component of other noninterest income on the consolidated statements of
operations. If the hedged exposure is a cash flows exposure, the effective portion of the gain or loss on the hedged item is
reported initially as a component of accumulated other comprehensive income (loss), net of the tax impact, and subsequently
reclassified into earnings when the hedged transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness, as well as the ineffective portion of the gain or loss on the derivative instrument, are reported in earnings
immediately as a component of other noninterest income on the consolidated statements of operations. If the derivative
instrument is not designated as a hedge, the gain or loss on the derivative instrument is recognized in earnings as a
component of other noninterest income on the consolidated statements of operations in the period of change.
The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the
Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate
mortgage loans to customers (“interest rate lock commitments”) and forward commitments to sell mortgage-backed securities
and individual fixed-rate mortgage loans (“forward commitments”). The Company’s objective in obtaining the forward
commitments is to mitigate the interest rate risk associated with the interest rate lock commitments and the mortgage loans
that are held for sale. Derivatives related to these commitments are recorded as either a derivative asset or a derivative
liability in the balance sheet and are measured at fair value. Both the interest rate lock commitments and the forward
commitments are reported at fair value, with adjustments recorded in current period earnings in net gain on sale of loans held
for sale within noninterest income section of the consolidated statements of operations.
Derivative instruments not related to mortgage banking activities, including interest rate swap agreements, that do not satisfy
the hedge accounting requirements, are recorded at fair value and changes in fair value are recognized in noninterest income
in the consolidated statements of operations.
When using derivatives to hedge fair value and cash flows risks, the Company exposes itself to potential credit risk from the
counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates
as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to
execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated
counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty
risk is determined, the Company would adjust the fair value of the derivative recorded asset balance to consider such risk.
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.
9
Troubled Debt Restructurings (“TDRs”)
The Company designates loan modifications as TDRs when, for economic or legal reasons related to the borrower’s financial
difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date
of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially
classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance is in
accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if
reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are
returned to accrual status when there is economic substance to the restructuring, there is well documented credit evaluation of
the borrower’s financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified
terms, and the borrower has demonstrated repayment performance in accordance with the modified terms for a reasonable
period of time (generally a minimum of six months).
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. 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 in noninterest income.
Amortization of mortgage servicing rights and mortgage servicing costs are charged to expense when incurred.
Nonperforming Assets
Nonperforming assets include loans on which interest is not being accrued, accruing loans that are 90 days or more
delinquent and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of a
borrower’s loan default. Loans are generally placed on nonaccrual status when concern exists that principal or interest is not
fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. Loans past
due 90 days or more may remain on accrual status if management determines that concern over the 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 initially recorded at fair value less estimated selling costs at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less cost to sell. Gains and losses on the sale of assets
acquired through foreclosure and related revenue and expenses of these assets are included in noninterest expense in other
real estate expenses, net.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are
10
credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually
classified as 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. Loans for which the terms have been
modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled
debt restructurings and classified as impaired. These analyses involve a high degree of judgment in estimating the amount of
loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values.
Impaired loans are evaluated for impairment using the discounted cash flow methodology or based on the net realizable value
of the underlying collateral. Impaired loans are individually reviewed on a quarterly basis to determine the level of
impairment.
Factors considered by management in determining impaired loans include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
If a loan has impairment, a portion of the allowance is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from
the collateral. Substantially all loans were considered collateral-dependent as of December 31, 2013 and 2012. For collateral-
dependent loans, the measurement of impairment was based on the net investment of the loan compared to the fair value of
the collateral less estimated selling costs. In most cases, the fair value of the collateral was based on appraised value, when
appropriate, the fair value was based on the probable sales price of the collateral when sale of the collateral was imminent or
contracted sales price if the collateral is subject to a binding sales contract as of the end of the quarter.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The
Company considers the actual loss history experience over the trailing twelve quarters to determine the historical loss
experience used in the general component. This actual loss experience is supplemented with other economic factors based on
the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and
trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for the most recent twelve
quarters; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other
changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other
relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit
concentrations.
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, 2013 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, 2013 was $526,000.
11
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. The
Company’s federal income tax returns were examined for the years 2008 through 2010. No changes were proposed.
Interest and penalties on income tax uncertainties are classified within income tax expense in the statement of operations. The
Company paid $2,700 of penalties and $2,700 of interest during fiscal 2013. The Company paid $1,000 of penalties and $400
interest during fiscal 2012.
It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not. Accordingly, no
reserve was considered necessary.
Drafts Outstanding
The Company invests excess funds on deposit at other banks (including amounts on deposit for payment of outstanding
disbursement checks) on a daily basis in an overnight interest-bearing account. Accordingly, outstanding checks are reported
as a liability.
Reserve for Mortgage Loan Repurchase Losses
The Company sells mortgage loans to various third parties, including government-sponsored entities, under contractual
provisions that include various representations and warranties that typically cover ownership of the loan, compliance with
loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens
against the property securing the loan, and similar matters. The Company may be required to repurchase the mortgage loans
with identified defects, indemnify the investor or insurer, or reimburse the investor for credit loss incurred on the loan
(collectively “repurchase”) in the event of a material breach of such contractual representations or warranties. Risk associated
with potential repurchases or other forms of settlement is managed through underwriting and quality assurance practices and
by servicing mortgage loans to meet investor and secondary market standards.
12
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 was $6.1 million and $4.9 million at December 31, 2013 and 2012, respectively. For the years ended December
31, 2013, and 2012, the Company recorded a provision for mortgage repurchase reserve expense of $2.4 million, and $2.2
million respectively. The provision for mortgage repurchase reserve of $2.4 million during 2013 consisted of $1.0 million for
current year sales and $1.4 million related to changes in estimates of prior year sales. The provision expense for mortgage
repurchase reserve of $2.2 million during 2012 consisted of $1.4 million for current year sales and $800,000 related to
changes in estimates of prior year sales.
The expense is reflected in noninterest expense in the accompanying consolidated statements of operations. In addition, the
Company incurred mortgage repurchase losses, net of recoveries, for the years ended December 31, 2013, and 2012 of $1.2
million and $930,000, respectively which were charged against the reserve amount. 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, requiring
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 comprehensive income. The Company’s other comprehensive income (loss) for the years
ended December 31, 2013, and 2012 and accumulated other comprehensive income (loss) as of December 31, 2013 and 2012
are comprised solely of unrealized gains (losses) on certain investment securities net of the related tax effect.
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 Compensation Plans
The Company issues stock options and restricted stock under various plans to directors, officers and other key employees.
The Company accounts for its stock compensation plans in accordance with ASC Topics 718 and 505. Under those
provisions, the Company has adopted a fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of the award and is recognized on a straight-line
basis over the service period, which is usually the vesting period, taking into account retirement eligibility. As a result,
compensation expense relating to stock options and restricted stock is reflected in net income as part of “salaries and
employee benefits” on the consolidated statements of operations.
Earnings Per Share
Basic earnings per share (“EPS”) represents income available to common stockholders’ divided by the weighted-average
number of shares outstanding during the year. Diluted earnings per share reflects additional shares that would have been
outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to
outstanding stock options, restricted stock (non-vested shares), and warrants, and are determined using the treasury stock
method. Under the treasury stock method, the number of incremental shares is determined by assuming the issuance of stock
for the outstanding stock options and warrants, reduced by the number of shares assumed to be repurchased from the issuance
13
proceeds, using the average market price for the year of the Company's stock. Weighted-average shares for the basic and
diluted EPS calculations have been reduced by the average number of unvested restricted shares.
On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to stockholders of record
dated February 10, 2014, payable on February 28, 2014. As such, all share, earnings per share, and per share data have been
retroactively adjusted to reflect this stock split for all periods presented in accordance with generally accepted accounting
principles.
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 Balance Sheet topic of the ASC was amended in December 2011 for companies with financial instruments and derivative
instruments that offset or are subject to a master netting agreement. The amendments require disclosure of both gross
information and net information about instruments and transactions eligible for offset or subject to an agreement similar to a
master netting agreement. The amendments were effective for reporting periods beginning on or after January 1, 2013 and
required retrospective presentation for all comparative periods presented. Additionally, in January 2013 the FASB clarified
that the amendments apply only to derivatives, repurchase agreements and reverse purchase agreements, and securities
borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in U.S.
GAAP or subject to a master netting arrangement or similar agreement. These amendments did not have a material effect on
the Company’s financial statements.
The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendments address reporting of
amounts reclassified out of accumulated other comprehensive income. Specifically, the amendments do not change the
current requirements for reporting net income or other comprehensive income in financial statements. However, the
amendments do require an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face
of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other
comprehensive income by the respective line items of net income. The amendments will be effective for the Company on a
prospective basis for reporting periods beginning after December 15, 2013. Earlier adoption is permitted. The Company does
not expect these amendments will have a material effect on its financial statements.
In February 2013 the FASB also amended the Financial Instruments topic of the ASC to address the scope and applicability
of certain disclosures to nonpublic companies. The amendments clarify that the requirement to disclose “the level of the fair
value hierarchy within the fair value measurements are categorized in their entirety (Level 1, 2, or 3)” does not apply to
nonpublic entities for items that are not measured at fair value in the statement of financial position but for which fair value is
disclosed. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2013, the FASB issued guidance addressing application of the liquidation basis of accounting. The guidance is
intended to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides
principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared
using the liquidation basis of accounting. The amendments will be effective for entities that determine liquidation is
imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein and
those requirements should be applied prospectively from the day that liquidation becomes imminent. Early adoption is
permitted. The Company does not expect these amendments to have any effect on its financial statements.
In December 2013, the FASB amended the Master Glossary of the FASB Codification to define “Public Business Entity” to
minimize the inconsistency and complexity of having multiple definitions of, or a diversity in practice as to what constitutes,
a nonpublic entity and public entity within U.S. GAAP. The amendment does not affect existing requirements, however will
be used by the FASB, the Private Company Council (“PCC”), and the Emerging Issues Task Force (“EITF”) in specifying
the scope of future financial accounting and reporting guidance. The Company does not expect this amendment to have any
effect on its financial statements.
In January 2014, the FASB amended the Receivables—Troubled Debt Restructurings by Creditors subtopic of the
Codification to address the reclassification of consumer mortgage loans collateralized by residential real estate upon
foreclosure. The amendments clarify the criteria for concluding that an in substance repossession or foreclosure has occurred,
14
and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer
mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective
for the Company’s annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a
modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is
permitted. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed 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, 2013 and 2012 follows:
2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
At December 31,
Amortized
Cost
Fair
Value
(In thousands)
2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale:
Municipal securities ................. $ 39,790
US government agencies .........
5,199
Mortgage-backed securities:
Agency ................................. 68,813
Non-agency .......................... 53,195
Total mortgage-backed
securities ........................... 122,008
Total ..................................... $ 166,997
Securities held-to-maturity:
Municipal securities ................. $ 15,488
Asset-backed securities ............
9,066
Total ..................................... $ 24,554
99
—
(1,390) 38,499 17,630
—
5,175
(24)
252
(113) 17,769
— — —
1,433
826
(317) 69,929 76,775
(89) 53,932 50,106
2,443
1,405
(9) 79,209
(82) 51,429
2,259
2,358
(406) 123,861 126,881
(1,820) 167,535 144,511
3,848
4,100
(91) 130,638
(204) 148,407
30
2,107
2,137
(341) 15,177
8,370
(2,803)
(3,144) 23,547
—
9,166
9,166
— — —
5,549
(4,197)
580
5,549
(4,197)
580
The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial institutions in
pooled issuances.
15
The following table presents unrealized losses related to the trust preferred securities that were recognized within other
comprehensive income at the time of transfer to held-to-maturity as well as the unrealized gains and losses that are not
presented in other comprehensive income for December 31, 2013 and 2012.
At December 31, 2013
Recognized in
OCI
Gross Unrealized
Not Recognized
in OCI
Gross Unrealized
Purchased
Face
Value
Cumulative
OTTI
Carrying
Value
Gains Losses
Amortized
Cost
Gains Losses
Estimated
Fair
Value
Collateralization
Percentage
Held-to-Maturity:
Trust Preferred Securities
Total A-Class ..... $
2,841
Total B-Class ..... 11,804
Total C-Class .....
2,688
$ 17,333
(In thousands)
— 2,841 —
(586)
(2,635) 9,169 — (2,569)
(1,340) 1,348 — (1,137)
(3,975) 13,358 — (4,292)
2,255
(99)
354
6,600 1,190 (2,704)
563 —
9,066 2,107 (2,803)
211
2,510 164% - 164%
94% - 98%
5,086
83% - 83%
774
8,370
At December 31, 2012
Recognized in
OCI
Gross Unrealized
Not Recognized
in OCI
Gross Unrealized
Purchased
Face
Value
Cumulative
OTTI
Carrying
Value Gains Losses
Amortized
Cost
Gains Losses
Estimated
Fair
Value
Collateralization
Percentage
Held-to-Maturity:
Trust Preferred Securities
(In thousands)
Total A-Class ..... $ 3,733
Total B-Class ..... 11,318
2,581
Total C-Class .....
$ 17,632
— 3,733 —
(2,635) 8,683 —
(1,340) 1,241 —
(3,975) 13,657 —
(614)
(2,680)
(1,197)
(4,491)
3,119 —
6,003 405
(230) 2,889 157.2%-157.2%
73.6%-91.8%
75.9%-75.9%
(3,967) 2,441
219
(4,197) 5,549
44 175 —
9,166 580
The pooled trust preferred securities consisted of positions in seven different securities. The underlying issuers in the pools
were primarily financial institutions and to a lesser extent, insurance companies and real estate investment trusts. The
Company owns both senior and mezzanine tranches in pooled trust preferred securities; however, the Company does not own
any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally have some
protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that
redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest
protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine
tranches. Unrealized Losses recognized in other comprehensive income relate to unrealized losses at the time of transfer from
available-for-sale to held-to-maturity and are accreted in accordance with generally accepted accounting principles.
As of December 31, 2013, $1.3 million of the pooled trust preferred securities were investment grade, $1.0 million were split-
rated, and $6.8 million were below investment grade. As of December 31, 2012, $2.0 million of the pooled trust preferred
securities were investment grade, $1.0 million were split-rated, and the remaining $6.2 million were below investment grade.
In terms of risk based capital calculation, the Company allocates additional risk-based capital to the below investment grade
securities.
As of December 31, 2013, senior tranches represent $2.3 million of the Company’s pooled securities, while mezzanine
tranches represented $6.8 million. All of the $6.8 million in mezzanine tranches are still subordinate to senior tranches as the
senior notes have not been paid to a zero balance. As of December 31, 2012, senior tranches represent $3.1 million of the
Company’s pooled securities, while mezzanine tranches represented $6.1 million. All of the $6.1 million in mezzanine
tranches are still subordinate to senior tranches as the senior notes have not been paid to a zero balance.
16
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2013 follows:
2013
Amortized
Cost
Fair
Value
(In thousands)
Securities available-for-sale:
Three to five years ............................................................................ $
Six to ten years..................................................................................
After ten years...................................................................................
Total .................................................................................................. $
—
14,350
152,647
166,997
—
14,235
153,300
167,535
Securities held-to-maturity:
Three to five years ............................................................................ $
Six to ten years..................................................................................
After ten years...................................................................................
Total .................................................................................................. $
989
3,563
20,002
24,554
890
3,413
19,244
23,547
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 2013, the Company sold 56 securities available-for-sale totaling $92.8 million. The Company received gross proceeds
of $91.7 million related to the sale of these securities and recognized gross gains of $473,000 and gross losses of $1.6
million.
During 2012, the Company sold 14 securities available-for-sale totaling $30.8 million. The Company received gross proceeds
of $27.7 million related to the sale of these securities and recognized gross gains of $426,000 and gross losses of $3.5
million.
At December 31, 2013, the Company has pledged $12.3 million of securities for FHLB 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, 2013 are as follows:
Less than 12 Months
Fair
Value
Unrealized
Losses
Amortized
Cost
At December 31, 2013
12 Months or Greater
Fair
Value
(In thousands)
Unrealized
Losses
Amortized
Cost
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
Available-for-sale:
Municipal securities ........... $ 27,108 25,917
US government agencies ...
5,199 5,175
Mortgage-backed securities:
Agency ........................... 27,140 26,823
Non-agency .................... 15,006 14,951
Total mortgage-backed
(1,191)
(24)
3,157 2,958
— —
(199) 30,265 28,875
5,199 5,175
—
(1,390)
(24)
(317)
(55)
— —
3,660 3,626
— 27,140 26,823
(34) 18,666 18,577
(317)
(89)
securities .................... 42,146 41,774
Total ............................... $ 74,453 72,866
(372)
(1,587)
3,660 3,626
6,817 6,584
(34) 45,806 45,400
(233) 81,270 79,450
(406)
(1,820)
Held-to-maturity-
Municipal securities ........... $ 11,945 11,734
Asset-backed securities ......
— —
Total ............................... $ 11,945 11,734
(211)
—
(211)
2,177 2,047
7,398 4,595
9,575 6,642
(130) 14,122 13,781
(2,803)
7,398 4,595
(2,933) 21,520 18,376
(341)
(2,803)
(3,144)
17
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, 2012 are as follows:
Less than 12 Months
Fair
Value
Unrealized
Losses
Amortized
Cost
At December 31, 2012
12 Months or Greater
Fair
Value
(In thousands)
Unrealized
Losses
Amortized
Cost
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
Available-for-sale:
Municipal securities ...... $ 8,554 8,441
Mortgage-backed securities:
Agency ...................... 4,587 4,578
Non-agency ............... 8,491 8,445
Total mortgage-backed
securities ................ 13,078 13,023
Total .......................... $ 21,632 21,464
Held-to-maturity-Asset-
(113) — — — 8,554 8,441
(113)
(9) — — — 4,587 4,578
(36) 10,418 10,336
(46)
1,927 1,891
(9)
(82)
(55)
(168)
1,927 1,891
1,927 1,891
(36) 15,005 14,914
(36) 23,559 23,355
(91)
(204)
backed securities ....... $ — — —
9,082 4,885
(4,197) 9,082 4,885
(4,197)
The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions
warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the
review include estimated future cash flows, length of time and extent to which market value has been less than cost, the
financial condition and near term prospect of the issuer, and our intent and ability to retain the security to allow for an
anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in
earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting
period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of
investments on which OTTI is recognized then becomes the new cost basis of the investment.
At December 31, 2013 and 2012, the Company had 58 and 26, respectively, individual investments available-for-sale that
were in an unrealized loss position. The unrealized losses on the Company’s investments in US government-sponsored
agencies, municipal securities and mortgage-backed securities (agency and non-agency) summarized above were attributable
primarily to changes in interest rates. Management has performed various analyses, including cash flows, and determined that
no OTTI expense was necessary during 2013.
At December 31, 2013, the Company had four trust preferred securities within the held-to-maturity portfolio that were in an
unrealized loss position. The asset-backed securities portfolio is collateralized with trust preferred securities issued by other
financial institutions in pooled issuances.
To determine the fair value, cash flow models for trust preferred securities are provided by a third-party pricing service.
Impairment testing is performed on a quarterly basis using a detailed cash flow analysis for each security. The major
assumptions used during the impairment test are described in the subsequent paragraph.
In 2009, the Company adopted a four year "burst" scenario for its modeled default rates (2010 - 2013) that replicated the
default rates for the banking industry from the four peak years of the Savings and Loan crisis, which then reduced to 0.25%
annually. 2013 was the last year of the elevated default rate. The constant default rate used by the Company is now 0.25%
annually. All issuers that were currently in deferral were presumed to be in default. Additionally, all defaults are assumed to
have a 15% recovery after two years and 1% of the pool is presumed to prepay annually. If this analysis results in a present
value of expected cash flows that is less than the book value of a security (that is, a credit loss exists), an OTTI is considered
to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed
used discount rates equal to the credit spread at the time of purchase for each security and then added the current 3-month
LIBOR forward interest rate curve.
During 2012, the Company recorded OTTI expense of $625,000 related to 4 securities available-for-sale during fiscal 2012.
These 4 securities available-for-sale were subsequently sold during fiscal 2012. In addition, OTTI expense totaling $288,000
was recorded related to 2 held-to-maturity securities during fiscal 2012. There was no OTTI recognized for 2013.
18
The following table presents the cumulative credit related OTTI related to securities held-to-maturity taken as well as the
activity for the period ended December 31, 2013 and 2012 for the trust preferred securities.
At December 31,
2013
2012
(In thousands)
Balance at beginning of year .................................................................................................. $
Additions for credit losses on securities for which OTTI was not previously recognized ......
Additions for additional credit losses on securities for which OTTI was previously
recognized ...........................................................................................................................
Balance at end of year ............................................................................................................. $
3,975
—
—
3,975
3,687
—
288
3,975
Management believes that there are no additional securities other-than-temporarily impaired at December 31, 2013. 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. Management continues to monitor these securities with a high degree
of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that
time indicate some or all of the securities may be sold or are other-than-temporarily impaired, which would require a charge
to earnings in such periods.
The Company, as a member of the Federal Home Loan Bank ("FHLB") of Atlanta, is 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 $4.1 million and $6.4 million at December 31, 2013 and 2012, respectively.
Other investments at December 31, 2013 and 2012 consisted primarily of $465,000 invested in capital stock of statutory
business trusts (See Note 10 – Long-term debt) as well as $1.2 million in a CRA fund.
NOTE 3 – DERIVATIVES
The derivative positions of the Company at December 31, 2013 and 2012 are as follows:
At December 31,
2013
2012
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 ............
Interest rate swaps .......................................................................
$
—
106
878
428
1,412
—
20,516
88,000
20,000
128,516
4,783
1,692
67
—
6,542
289,584
59,177
308,000
—
656,761
Derivative liabilities:
Mortgage loan interest rate lock commitments ........................... $
55
103,614
—
—
The primary uses of derivative instruments are related to the mortgage banking activities of the Company. As such, the
Company holds derivative instruments, which consist of rate lock agreements related to expected funding of fixed-rate
mortgage loans to customers (interest rate lock commitments) and forward commitments to sell mortgage-backed securities
and individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the
interest rate risk associated with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives
related to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet and are
measured at fair value. Both the interest rate lock commitments and the forward commitments are reported at fair value, with
adjustments recorded in current period earnings in net unrealized gain (loss) on derivatives within the noninterest income of
the consolidated statements of operations.
19
Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate
swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with
resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations.
When using derivatives to hedge fair value and cash flow risks, the Company exposes itself to potential credit risk from the
counterparty to the hedging instrument. This credit risk is normally a small percentage of the notional amount and fluctuates
as interest rates change. The Company analyzes and approves credit risk for all potential derivative counterparties prior to
execution of any derivative transaction. The Company seeks to minimize credit risk by dealing with highly rated
counterparties and by obtaining collateralization for exposures above certain predetermined limits. If significant counterparty
risk is determined, the Company would adjust the fair value of the derivative recorded asset balance to consider such risk.
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2013 and 2012 are summarized by category as follows:
2013
Amount
At December 31,
% of Total
Loans
Amount
(Dollars in thousands)
2012
% of Total
Loans
Loans secured by real estate:
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 .................................. $
184,210
23,661
253,035
67,056
3,060
33,938
564,960
21,550
8,091
98
535,221
32.60%
4.19%
44.79%
11.87%
0.54%
6.01%
100.00%
146,333
31,278
240,764
68,113
3,762
38,714
528,964
17,690
9,520
63
501,691
The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:
27.66%
5.91%
45.52%
12.88%
0.71%
7.32%
100.00%
At December 31,
2013
2012
Variable rate loans ................................................. $
Fixed rate loans ......................................................
Total loans outstanding .......................................... $
219,589
323,821
543,410
(Dollars in thousands)
40.41%
59.59%
100.00%
265,657
245,617
511,274
51.96%
48.04%
100.00%
The following table presents activity in the allowance for loan losses. Allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other categories.
Allowance for loan losses:
At December 31, 2013
Loans Secured by Real Estate
One-
to-four
family
Home
equity
$ 3,193 276
(991) (18)
(168) (28)
1
438
Commercial
real estate
3,315
(317)
(269)
126
Construction
and
Development Consumer
82
(58)
(35)
53
1,792
281
(765)
110
Commercial
business
Unallocated Total
— 9,520
734
(860)
— (1,675)
— 1,106
862
(491 )
(410 )
378
Balance at January 1, 2013 ......
Provision for loan losses ......
Charge-offs ...........................
Recoveries ............................
Balance at
December 31, 2013 ..............
$ 2,472 231
2,855
1,418
42
339
734 8,091
20
At December 31, 2012
Loans Secured by Real Estate
Commercial
real
estate
Construction
and
Development Consumer
Commercial
business
One-to-
four
family
Home
equity
$ 3,978 550
1,520 45
210
(216)
(84)
172
Unallocated Total
— 12,039
— 2,707
1,323
262
(1,169)
446
— (7,190)
— 1,964
Balance at January 1, 2012 ......
Provision for loan losses ......
3,283
1,233
2,695
(137)
Charge-offs ...........................
Recoveries ............................
(2,680) (319)
375 —
(1,432)
231
(1,506)
740
Balance at
December 31, 2012 ..............
$ 3,193 276
3,315
1,792
828
62
— 9,520
Loans Secured by Real Estate
One-to-
four
family
Home
equity
Commercial
real
estate
Construction
and
Development Consumer
(In thousands)
Commercial
business
Unallocated Total
At December 31, 2013:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment .................... $
103 —
55
165
20
6
—
349
Collectively evaluated for
impairment ....................
2,369
$ 2,472
231
231
2,800
2,855
1,253
1,418
22
42
333
339
734
734
7,742
8,091
Loans receivable ending
balances:
Individually evaluated for
impairment .................... $ 6,220
125
17,008
1,493
40
2,560
— 27,446
Collectively evaluated for
impairment .................... 177,516 23,217
Total loans receivable ... $ 183,736 23,342
230,859
247,867
58,611
60,104
2,775
2,815
22,986
25,546
— 515,964
— 543,410
At December 31, 2012:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment .................... $
312 —
359
429
25
273
—
1,398
Collectively evaluated for
impairment ....................
2,881
$ 3,193
276
276
2,956
3,315
1,363
1,792
57
82
589
862
—
—
8,122
9,520
Loans receivable ending
balances:
Individually evaluated for
impairment .................... $ 7,392 —
18,177
3,265
74
3,535
— 32,443
Collectively evaluated for
impairment .................... 138,937 30,710
Total loans receivable ... $ 146,329 30,710
218,053
236,230
60,210
63,475
3,428
3,502
27,493
31,028
— 478,831
— 511,274
21
The following table presents impaired loans individually evaluated for impairment in the segmented portfolio categories as of
December 31, 2013 and 2012. The recorded investment is defined as the original amount of the loan, net of any deferred
costs and fees, less any principal reductions and direct charge-offs. Unpaid principal balance includes amounts previously
included in charge-offs.
At and for the Year Ended December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
Related
Allowance
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family ................................ $
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
With an allowance recorded:
Loans secured by real estate:
One-to-four family ................................
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
Total:
Loans secured by real estate:
One-to-four family ................................
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
$
5,713
125
16,695
1,227
20
2,554
26,334
507
—
313
266
20
6
1,112
6,220
125
17,008
1,493
40
2,560
27,446
7,682
472
17,240
3,887
404
3,599
33,284
607
—
313
266
20
6
1,212
8,289
472
17,553
4,153
424
3,605
34,496
—
—
—
—
—
—
—
103
—
55
165
20
6
349
103
—
55
165
20
6
349
5,783
177
18,761
1,960
23
2,984
29,688
469
—
59
33
26
9
596
6,252
177
18,820
1,993
49
2,993
30,284
184
10
531
13
1
114
853
13
—
20
10
—
—
43
197
10
551
23
1
114
896
22
At and for the Year Ended December 31, 2012
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
Related
Allowance
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family ................................ $
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
With an allowance recorded:
Loans secured by real estate:
One-to-four family ................................
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
Total:
Loans secured by real estate:
One-to-four family ................................
Home equity .........................................
Commercial real estate .........................
Construction and development .............
Consumer loans ........................................
Commercial business loans ......................
$
4,310
—
13,891
658
43
2,419
21,321
3,082
—
4,286
2,607
31
1,116
11,122
7,392
—
18,177
3,265
74
3,535
32,443
7,115
319
14,746
921
427
3,473
27,001
3,282
—
4,286
4,504
31
1,116
13,219
10,397
319
19,032
5,425
458
4,589
40,220
—
—
—
—
—
—
—
312
—
359
429
25
273
1,398
312
—
359
429
25
273
1,398
5,575
257
16,142
5,393
49
2,687
30,103
2,863
—
4,420
3,037
28
1,247
11,595
8,438
257
20,562
8,430
77
3,934
41,698
180
2
945
222
8
143
1,500
19
—
1
9
1
1
31
199
2
946
231
9
144
1,531
The Company is committed to advance up to $230,000 of additional funds in connection with impaired loans as of December
31, 2013. The Company was not committed to advance additional funds in connection with impaired loans as of December
31, 2012.
23
A loan is considered past due if the required principal and interest payment has not been received as of the due date. The
following schedule is an aging of past due loans receivable by portfolio segment as of December 31, 2013 and 2012.
At December 31, 2013
One-to-
four
family
Real estate loans
Commercial
real
estate
Home
equity
30-59 days past due ............................... $
231 —
60-89 days past due ............................... 1,034 —
90 days or more past due ....................... 3,440
125
Total past due ..................................... 4,705
125
273
—
5,074
5,347
Current ................................................... 179,031 23,217 242,520
Total loans receivable ........................ $183,736 23,342 247,867
Construction
and
Development Consumer
(In thousands)
53
—
1,477
1,530
58,574
60,104
—
—
7
7
2,808
2,815
Commercial
business
Total
557
—
1,034
—
431 10,554
431 12,145
25,115 531,265
25,546 543,410
Recorded investment greater than 90
days and still accruing ........................ $ — —
—
—
—
— —
At December 31, 2012
One-to-
four
family
Real estate loans
Commercial
real
estate
Home
equity
30-59 days past due ............................... $
60-89 days past due ...............................
90 days or more past due .......................
Total past due .....................................
300 —
546
611
4,247 —
546
5,158
Current ................................................... 141,171 30,164
Total loans receivable ........................ $ 146,329 30,710
1,142
2,227
5,534
8,903
227,327
236,230
Construction
and
Development Consumer
(In thousands)
173
106
317 —
26
132
3,370
3,502
3,092
3,582
59,893
63,475
Commercial
business
Total
378
21
2,099
3,722
1,136 14,035
1,535 19,856
29,493 491,418
31,028 511,274
Recorded investment greater than 90
days and still accruing ........................ $ — —
—
— —
— —
Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due,
unless the obligation is both well-secured and in the process of collection. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest payments received while the loan are on nonaccrual are applied to the principal balance.
No interest income was recognized on impaired loans subsequent to the nonaccrual status designation. A loan is returned to
accrual status when the borrower makes consistent payments according to contractual terms and future payments are
reasonably assured.
24
The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at December 31, 2013 and 2012.
Loans secured by real estate:
One-to-four family ......................................................................... $
Home equity ..................................................................................
Commercial real estate ..................................................................
Construction and development ......................................................
Consumer loans ................................................................................
Commercial business loans ...............................................................
$
At December 31,
2013
2012
(In thousands)
3,902
125
5,114
1,481
20
437
11,079
4,817
—
5,956
3,251
52
1,172
15,248
There were no loans past due 90 days or more and still accruing at December 31, 2013 or 2012.
The Company uses several metrics as credit quality indicators of current or potential risks as part of the ongoing monitoring
of credit quality of its loan portfolio. The credit quality indicators are periodically reviewed and updated on a case-by-case
basis. The Company uses the following definitions for the internal risk rating grades, listed from the least risk to the highest
risk.
Outstanding: The borrower is typically a long established, well-seasoned company with a significant market position. It
possesses unquestioned asset quality, liquidity, and excellent sales and earnings trends. Leverage, if present, is well below
industry norms. Borrowers appear to have capacity to meet all of its obligations under almost any circumstances. The
borrowing entity’s management has extensive experience and depth.
Excellent: The borrower demonstrates a strong and liquid financial condition based upon current financial information and
qualifies to borrow on an unsecured basis under most circumstances. If borrowing is secured, collateral is readily marketable
and amply margined. Repayment sources are well defined and more than adequate. Credit checks and prior lending
experiences with the company, if any, are fully satisfactory. The borrower’s cash flow comfortably exceeds total current
obligations.
Good: The borrower provides current financial information reflecting a satisfactory financial condition and reasonable debt
service capacity. If borrowing is secured, collateral is marketable, adequately margined at the present time, and expected to
afford coverage to maturity. Repayment sources are considered adequate, and repayment terms are appropriate. Credit checks
and prior experience, if any, are satisfactory. The borrower is usually established and is attractive to other financial
institutions. The borrower’s balance sheet is stable and sales and earnings are steady and predictable.
Acceptable: While clearly an acceptable credit risk to the Company, the borrower will generally demonstrate a higher
leveraged, less liquid balance sheet and capacity to service debt, while steady, may be less well-defined. Repayment terms
may not be appropriate for individual transactions. Borrower is generally acceptable to other financial institutions; however,
secured borrowing is the norm. Collateral marketability and margin are acceptable at the present time but may not continue to
be so. Credit checks or prior experience, if any, reveals some, but not serious, slowness of paying. If a business, its
management experience may be limited or have less depth than a satisfactory borrower. Sensitivity to economic or credit
cycles exists, and staying power could be a problem.
Management Watch: Loans to borrowers with generally acceptable credit strength, but with manageable weaknesses or
uncertainty evident in one or more factors. Earnings may be erratic, with marginal cash flows or declining sales. Borrowers
reflect leveraged financial condition and marginal liquidity. The borrower’s management may be new and a track record of
performance has yet to be developed. Financial information may be incomplete and reliance on secondary repayment sources
may be increasing.
Special Mention: While loans to a borrower in this rating category are currently protected (no loss of principal or interest is
envisioned), they may pose undue or unwarranted credit risks if weaknesses are not checked or corrected. Weaknesses may
be limited to one or several trends or developments. Weaknesses may include one or more of the following: a potentially
over-extended financial condition, a questionable repayment program, an uncertain level of continuing employment or
income, inadequate or deteriorating collateral, inadequate or untimely financial information, management competence or
succession issues, or a high degree of vulnerability to outside forces.
25
Substandard: Assets in this category are inadequately protected by the current creditworthiness and paying capacity of the
obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or weakness that jeopardizes the
liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the
deficiencies are not corrected. Nonaccrual loans, reduced-earnings loans, and loans to borrowers engaged in bankruptcy
proceedings are automatically rated Substandard or lower.
Doubtful: A loan rated Doubtful has all of the weaknesses inherent in one rated Substandard with the added characteristic
that the weakness may make collection or liquidation in full, based on currently existing facts, highly improbable. A Doubtful
rating generally is used when the amount of loss can be projected and that projection exceeds one-third of the balance of
outstanding debt but does not exceed two-thirds of that balance. A Doubtful rating is generally applied when the likelihood of
significant loss is high.
Loss: A Loss rating should be applied when the borrower’s outstanding debt is considered uncollectible or of such little value
that its continuance as a bankable asset is not warranted. This rating does not suggest that there is absolutely no recovery or
salvage value, but that it is not practical or desirable to defer writing off the debt even though a partial recovery may be
affected in the future.
The Company uses the following definitions:
Nonperforming: Loans on nonaccrual status plus loans greater than ninety days past due still accruing interest.
Performing: All current loans plus loans less than ninety days past due.
The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of December 31, 2013 and
2012.
At December 31, 2013
One-to-
four
family
Real estate loans
Commercial
real
estate
Home
equity
Construction
and
Development Consumer
(In thousands)
Commercial
business
Total
Internal Risk Rating Grades:
Acceptable or better ......................... $ 168,441 23,102 189,413
Management Watch .........................
41,856
Special Mention ...............................
10,633
Substandard ......................................
5,965
Total loans receivable ................... $ 183,736 23,342 247,867
9,437
115
1,679 —
125
4,179
38,425
20,138
295
1,246
60,104
2,776
19
—
20
2,815
20,084 442,241
4,739 76,304
286 12,893
437 11,972
25,546 543,410
Performing ....................................... $ 179,834 23,217 242,753
Nonperforming:
90 days or more and still
accruing ..................................... — —
125
125
—
5,114
5,114
Total loans receivable ...................... $ 183,736 23,342 247,867
Nonaccrual ....................................
Total nonperforming .................
3,902
3,902
58,623
2,795
25,109 532,331
—
1,481
1,481
60,104
—
20
20
2,815
— —
437 11,079
437 11,079
25,546 543,410
26
At December 31, 2012
One-to-
four
family
Real estate loans
Commercial
real
estate
Home
equity
Construction
and
Development Consumer
(In thousands)
Commercial
business
Total
Internal Risk Rating Grades:
Acceptable or better ............................... $123,047 29,871 153,649
50,629
Management Watch ............................... 15,073
375
23,745
Special Mention ..................................... 3,476 —
8,207
464
Substandard ............................................ 4,733
Total loans receivable ......................... $146,329 30,710 236,230
37,694
17,285 —
5,391 —
3,105
35
63,475
3,467 21,974 369,702
5,535 88,897
2,000 34,612
1,519 18,063
3,502 31,028 511,274
Performing ............................................. $141,512 30,710 230,274
Nonperforming:
90 days or more and still accruing ...... — —
Nonaccrual .......................................... 4,817 —
Total nonperforming ....................... 4,817 —
—
5,956
5,956
Total loans receivable ............................ $146,329 30,710 236,230
Troubled Debt Restructurings
60,224
3,450 29,856 496,026
— —
52
52
— —
1,172 15,248
1,172 15,248
3,502 31,028 511,274
3,251
3,251
63,475
The following is a schedule of loans designated as troubled debt restructurings, by portfolio segment, during the years ended
December 31, 2013 and 2012.
Troubled Debt Restructurings:
Loans secured by real estate:
One-to-four family .........................................................
Home equity ..................................................................
Commercial real estate ..................................................
Construction and development ......................................
Consumer loans .................................................................
Commercial business loans ...............................................
During the year ended December 31, 2013
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
(In thousands)
Post-
Modification
Outstanding
Recorded
Investment
— $
—
—
—
—
1
1 $
—
—
—
—
—
6
6
—
—
—
—
—
6
6
27
During the year ended December 31, 2012
Pre-
Modification
Outstanding
Recorded
Investment
(In thousands)
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Troubled Debt Restructurings:
Loans secured by real estate:
One-to-four family ............................................................
Home equity .....................................................................
Commercial real estate .....................................................
Construction and development .........................................
Consumer loans ....................................................................
Commercial business loans ..................................................
—
—
3
—
—
2
5
$
$
—
—
1,362
—
—
158
1,520
—
—
1,362
—
—
158
1,520
During the year ended December 31, 2013, the Bank modified one loan that was considered a trouble debt restructuring. The
Bank extended terms for this loan at a market rate. During the year ended December 31, 2012, the Bank modified five loans
that were considered troubled debt restructurings. We extended the terms for all five of these loans at market rates.
No loans restructured in the twelve months prior to December 31, 2013 or 2012 went into default during the period ended
December 31, 2013 or 2012.
At December 31, 2013, there were $24.1 million in loans designated as troubled debt restructurings of which $16.3 million
were accruing. At December 31, 2012, there were $27.9 million in loans designated as troubled debt restructurings of which
$17.2 million were accruing.
Loans serviced for the benefit of others under loan participation arrangements amounted to $2.3 million and $15.9 million at
December 31, 2013 and 2012, respectively.
Activity in loans to officers, directors and other related parties for the years ended December 31, 2013 and 2012 is
summarized as follows:
At December 31,
2013
2012
(In thousands)
Balance at beginning of year ........................................................ $
New loans ..................................................................................
Repayments ...............................................................................
Balance at end of year .................................................................. $
12,965
3,470
(3,503)
12,932
19,702
4,619
(11,356)
12,965
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.
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.
28
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, 2013 and 2012, the Company
had commitments to extend credit in the amount of $48.6 million and $31.9 million, respectively. At December 31, 2013 and
2012, the Company had standby letters of credit in the amount of $526,000 and $396,000, 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, 2013, 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, 2013 was approximately $526,000.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 2013 and 2012 consists of the following:
Land ......................................................................................... $
Buildings ..................................................................................
Furniture, fixtures and equipment ............................................
Construction in process ............................................................
Total premises and equipment ..............................................
Less: accumulated depreciation ...............................................
Premises and equipment, net ................................................ $
At December 31,
2013
2012
(In thousands)
5,304
11,658
8,023
599
25,584
(7,999)
17,585
5,029
11,277
7,345
44
23,695
(7,298)
16,397
Depreciation expense included in operating expenses for the years ended December 31, 2013 and 2012 amounted to
$918,000 and $833,000, respectively. The construction in process related to technology related equipment that will be
transferred into furniture, fixture and equipment during 2014. Remaining estimated costs for completion of the construction
in process are expected to be approximately $100,000. There was no interest capitalized during fiscal 2013 and 2012.
NOTE 6 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Transactions in other real estate owned for the years ended December 31, 2013 and 2012 are summarized below:
Balance at beginning of year ................................................. $
Additions ............................................................................
Sales ...................................................................................
Write downs .......................................................................
Balance at end of year ............................................................ $
At December 31,
2013
2012
(In thousands)
6,284
4,140
(3,302)
(849)
6,273
6,097
9,407
(8,171)
(1,049)
6,284
29
A summary of the composition of real estate acquired through foreclosure follows:
At December 31,
2013
2012
(In thousands)
Real estate loans:
One-to-four family .............................................................. $
Commercial real estate .......................................................
Construction and development ...........................................
$
959
1,781
3,533
6,273
1,010
1,902
3,372
6,284
NOTE 7 – MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The value of
mortgage servicing rights is included on the Company’s consolidated balance sheets. The unpaid principal balances of loans
serviced for others were $2.0 billion and $2.2 billion, respectively, at December 31, 2013 and 2012.
The economic estimated fair values of mortgage servicing rights were $17.7 million and $18.1 million, respectively, at
December 31, 2013 and 2012. The estimated fair value of servicing rights at December 31, 2013 were determined using
discount rates ranging from 11.66% to 12.66% , prepayment speed assumptions (“PSA”) ranging from 116.6 to 138.2,
depending upon the stratification of the specific servicing right, and a weighted average delinquency rate of .90% as
determined by a third party. The estimated fair value of servicing rights at December 31, 2012 were determined using
discount rates ranging from 11.00% to 15.50%, prepayment speed assumptions (“PSA”) ranging from 114.6 to 145.1,
depending upon the stratification of the specific servicing right, and a weighted average delinquency rate of 1.24% as
determined by a third party.
During 2013 servicing rights related to approximately $972.9 million of unpaid loan principal serviced for others were sold.
The Company received $11.0 million in net proceeds and recognized a gain in the accompanying consolidated statement of
operations of $5.5 million. No servicing rights were sold during 2012.
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, 2013 and 2012:
December 31,
2013
2012
(In thousands)
MSR beginning balance ........................................................... $
Amount capitalized ...............................................................
Amount sold .........................................................................
Amount amortized ................................................................
MSR ending balance ................................................................ $
12,039
6,860
(5,547)
(2,444)
10,908
6,452
7,051
—
(1,464)
12,039
There was no allowance for loss in fair value in mortgage servicing rights for the years ended December 31, 2013 and 2012.
The estimated amortization expense for mortgage servicing rights for MSRs owned at December 31, 2013, for the years
ended December 31, 2014, 2015, 2016, 2017, 2018 and thereafter is $1.1 million, $1.0 million, $990,000, $950,000,
$890,000 and $6.0 million, respectively. The estimated amortization expense is based on current information regarding future
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, 2013 and 2012, servicing related trust funds of approximately $19.9 million, and $27.1 million,
respectively, representing both principal and interest due investors and escrows received from borrowers, are on deposit in
custodial accounts and are included in noninterest-bearing deposits in the accompanying financial statements.
At December 31, 2013 and 2012, the Company had blanket bond and errors and omissions coverages of $5.0 million each.
30
NOTE 8 - DEPOSITS
Deposits outstanding by type of account at December 31, 2013 and 2012 are summarized as follows:
Noninterest-bearing demand accounts ..................................... $
Interest-bearing demand accounts ............................................
Savings accounts ......................................................................
Money market accounts ...........................................................
Certificates of deposit:
Less than $100,000 ...............................................................
$100,000 or more ..................................................................
Total certificates of deposit ......................................................
Total deposits .................................................................... $
At December 31,
2013
2012
(In thousands)
83,500
92,067
17,816
220,915
195,239
88,044
283,283
697,581
82,004
51,490
10,882
207,299
215,549
86,023
301,572
653,247
The aggregate amount of brokered certificates of deposit was $61.8 million and $29.9 million at December 31, 2013 and
2012, respectively. Brokered certificates of deposit are included in the table above under certificates of deposit less than
$100,000. The aggregate amount of institutional certificates of deposit was $40.0 million at December 31, 2013 and 2012.
Interest expenses related to certificates of deposit over $100,000 was $664,000 and $462,000 for the years ended December
31, 2013 and 2012, respectively.
The amounts and scheduled maturities of certificates of deposit at December 31, 2013 and 2012 are as follows:
Maturing within one year ......................................................... $
Maturing one through three years ............................................
Maturing after three years ........................................................
$
At December 31,
2013
2012
(In thousands)
144,119
53,231
85,933
283,283
220,024
44,280
37,268
301,572
The Company has pledged $4.9 million of mortgage-backed securities as of December 31, 2013 to secure public agency
funds.
NOTE 9 – SHORT-TERM BORROWED FUNDS
Short-term borrowed funds at December 31, 2013 and 2012 are summarized as follows:
At December 31,
2013
2012
Balance
Unsecured line of credit ........................................................ $
Short-term FHLB advances ..................................................
Mortgage loan warehouse line of credit ................................
Subordinated debenture, due 2020 ........................................
Total short-term borrowed funds ....................................... $
—
10,000
—
300
10,300
Interest
Balance
Rate
(Dollars in thousands)
2,750
77,500
1,932
300
82,482
—
0.36%
—
2.70%
Interest
Rate
4.75%
0.16%-.82%
2.5%-4.5%
2.81%
31
Lines of credit with the FHLB of Atlanta are based upon FHLB-approved percentages of Bank assets, but must be supported
by appropriate collateral to be available. The Company has 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 $237.3 million of collateral for these advances. In addition, at December 31, 2013,
the Company has pledged $12.3 million of securities for these advances. At December 31, 2013, collateral totaling $249.6
million was pledged to support FHLB advances. At December 31, 2013 the Company had FHLB advances of $67.5 million
outstanding with excess collateral pledged to the FHLB during those periods that would support additional borrowings of
approximately $88.6 million.
Lines of credit with the Federal Reserve Bank (“FRB”) are based on collateral pledged. The Company has pledged certain
non-mortgage commercial, acquisition and development, and lot loan portfolios under blanket lien agreements resulting in
approximately $52.0 million of collateral to the FRB for these advances. At December 31, 2013 the Company had lines
available with the FRB for $38.7 million. At December 31, 2013 the Company had no FRB advances outstanding.
At December 31, 2012, Crescent Mortgage had a mortgage loan warehouse line of credit from a correspondent with a $35.0
million credit limit, of which $33.1 million was still available. The facility was secured by Crescent Mortgage’s residential
mortgage loans held for sale and other assets. During 2013, this credit line was paid in full and not renewed by the Company.
Crescent Mortgage currently is self-funding its mortgage production.
Effective October 1, 2012, the Company modified a $3.0 million unsecured line of credit with a correspondent bank, of
which $2.8 million was outstanding at December 31, 2012. During 2013, the unsecured credit line was paid in full and not
renewed.
The Company has a subordinated debenture totaling $1.9 million that has principal repayments that began in 2010. See Note
10 – Long-Term Debt for additional disclosure.
Certain borrowings were prepaid to manage the cost of funds and related interest rate sensitivity, resulting in a net loss on the
extinguishment of debt of $19,000, and $1.6 million during 2013, and 2012, respectively.
NOTE 10 – LONG-TERM DEBT
Long-term debt at December 31, 2013 and 2012 are summarized as follows:
December 31, 2013
Long-term FHLB advances, due 2015 through 2021 ..................................................... $
Subordinated debentures, due 2016 through 2020 .........................................................
Subordinated debentures issued to Carolina Financial Capital Trust I, due 2032 ..........
Subordinated debentures issued to Carolina Financial Capital Trust II, due 2034 ........
Total long-term debt ................................................................................................... $
Long-term FHLB advances, due 2013 through 2021 ..................................................... $
Subordinated debentures, due 2016 through 2020 .........................................................
Subordinated debentures issued to Carolina Financial Capital Trust I, due 2032 ..........
Subordinated debentures issued to Carolina Financial Capital Trust II, due 2034 ........
Total long-term debt ................................................................................................... $
Balance
Interest
Rate
(Dollars in thousands)
57,500
1,575
5,155
10,310
74,540
0.42%-4.00%
2.70%
3.75%
3.29%
December 31, 2012
Balance
Interest
Rate
(Dollars in thousands)
37,500
11,875
5,155
10,310
64,840
0.52%-4.00%
1.84%-2.81%
3.75%
3.39%
As of December 31, 2013, the principal amounts due on long-term debt in 2014, 2015, 2016, 2017, 2018 and thereafter were
$0, $7.8 million, $10.3 million, $5.3 million, $5.3 million and $45.8 million, respectively. As of December 31, 2013, there
were no principal amounts callable by the FHLB on advances.
32
At December 31, 2013 and 2012, 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
3.29% to 3.75% at December 31, 2013 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 deferred the payment of interest on its
outstanding trust preferred securities for an indefinite period which can be no longer than twenty consecutive quarterly
periods. At December 31, 2012, the Company deferred these payments for nine quarters and had eleven quarters of deferral
available. These as well as any future deferred distributions continue to accrue interest. Distributions on the trust preferred
securities are cumulative. Therefore, in accordance with generally accepted accounting principles, the Company continued to
accrue the monthly cost of the trust preferred securities as it has since issuance. The balance of deferred payments at
December 31, 2012 was approximately $1.2 million. During 2013, the Company cured all deferred payments and interest and
resumed scheduled payments on the trust preferred securities.
As currently defined by the FRB, the Company had $15.0 million of long-term debt that qualified as Tier 1 capital at
December 31, 2013 and 2012, respectively. The Company had $975,000 and $7.3 million of long-term debt that qualified as
Tier 2 capital at December 31, 2013 and 2012, respectively.
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 carry forwards. 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, 2013 and 2012 consists of the following:
Current income tax expense
Federal .................................................................................. $
State ......................................................................................
Deferred income tax expense (benefit)
Federal ..................................................................................
State ......................................................................................
Total income tax expense ........................................................ $
For the Years
Ended December 31,
2013
2012
(In thousands)
7,673
1,171
8,844
754
(212)
542
9,386
9,900
1,152
11,052
(599)
(58)
(657)
10,395
33
A reconciliation from expected Federal tax expense to actual income tax expense for the years ended December 31, 2013 and
2012 using the base federal tax rates of 35% follows:
Computed federal income taxes ................................................. $
State income tax, net of federal benefit .....................................
Tax exempt interest ....................................................................
Other, net ...................................................................................
Total income tax expense ....................................................... $
For the Years
Ended December 31,
2013
2012
(In thousands)
9,171
623
(305)
(103)
9,386
9,546
757
(47)
139
10,395
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, 2013 and 2012:
At December 31,
2013
2012
Deferred tax assets:
Loan loss reserve .................................................................. $
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 repurchase losses ...............................
OREO write-downs ..............................................................
Stock based compensation ....................................................
Reserve for miscellaneous losses ..........................................
Other .....................................................................................
Valuation allowance .............................................................
Total gross deferred tax assets ..........................................
Deferred tax liabilities:
(In thousands)
2,810
1,365
—
95
220
2,291
466
121
375
716
8,459
(172)
8,287
Depreciation .........................................................................
Loan fees ..............................................................................
Total gross deferred tax liabilities .....................................
Deferred tax assets, net ..................................................... $
(633)
(235)
(868)
7,419
3,499
187
803
95
214
1,827
413
98
387
35
7,558
(271)
7,287
(368)
(137)
(505)
6,782
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 $1.2
million and $2.8 million, respectively, for the years ended December 31, 2013 and 2012, 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 $656,000 of deferred tax benefit and $1.5 million of deferred tax, respectively, for the years ended
December 31, 2013 and 2012, respectively, is reflected as a deferred income tax expense 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. The Company’s federal income tax returns were
examined for the years 2008 through 2010. No changes were proposed.
34
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease certain 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, 2013, and 2012 totaled $653,000, and $595,000, 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 .................................................................................................................... $
604
421
353
252
252
265
2,147
In the course of ordinary business, the Bank is, from time to time, named a party to legal actions and proceedings, primarily
related to the collection of loans and foreclosed assets. In accordance with generally accepted accounting principles, the
Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are
both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish
reserves.
During 2012, the Company had disputes over employment agreements with two former executive officers. The Company
incurred expenses related to the settlement of the disputed employment agreements of $2.6 million and $227,000 for the
periods ended December 31, 2013 and 2012, respectively. All amounts related to the settlement of these agreements have
expensed as of December 31, 2013.
NOTE 13 – SHARE-BASED COMPENSATION
Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is
measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value
of stock options, while the market price of the Company's common stock at the date of grant is used as the fair value of
restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting
period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting,
compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
As stated in Note 1, On January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to
stockholders of record dated February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share
data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with generally accepted
accounting principles.
The Company has adopted the 2002 Stock Option Plan under which an aggregate of 277,500 shares have been reserved for
issuance by the Company upon the grant of stock options or limited rights, of which 11,160 are outstanding. The plan
provided for the grant of options to key employees and Directors as determined by the Board of Directors. No additional
options can be awarded under this plan. 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 Company adopted the 2006 Recognition and Retention Plan under which an aggregate of 120,000 shares of common
stock have been reserved for issuance by the Company. 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. No
restricted common stock of the Company was granted during fiscal 2012 and 2013 from this plan. As of December 31, 2013,
a total of 113,000 shares have been awarded under the plan, of which 107,800 shares have vested and 5,200 shares are
unvested.
35
The Company has adopted a 2013 Equity Incentive Plan under which an aggregate of 500,000 shares of common stock have
been reserved for issuance by the Company. The plan provides for the grant of stock options and restricted stock awards to
our officers, employees, directors, advisors, and consultants. The options are granted at an exercise price at least equal to the
fair value of the common stock at the date of grant and expire ten years from the date of the grant. The vesting period for both
option grants and restricted stock grants will vary based on the timing of the grant. As of December 31, 2013 a total of
178,900 shares were issued as restricted stock and 52,054 as stock options.
The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately
$303,000, and $86,000 during the twelve months ended December 31, 2013, and 2012, respectively.
Information regarding the 2013 grants as well as other relevant disclosure related to the share-based compensation plans of
the Company is presented below.
Stock Options
Activity in the Company's stock option plans is summarized in the following table. All information has been retroactively
adjusted for stock splits.
At and For the Years Ended December 31,
2013
2012
Weighted
Average
Exercise
Price
Shares
Outstanding at beginning of year ...........
Granted ...............................................
Exercised ............................................
Forfeited or expired ............................
Outstanding at end of year .....................
16,480 $
52,054
(4,320)
(1,000)
63,214 $
11.65
10.00
10.15
(12.00)
10.40
Weighted
Average
Exercise
Price
7.82
—
—
(7.50)
11.65
Shares
280,960
—
—
(264,480)
16,480
Options exercisable at end of year .........
11,560 $
12.19
16,480
11.65
The aggregate intrinsic value of 63,214 and 16,480 stock options outstanding at December 31, 2013 and 2012 was $346,000
and $0, respectively.
Information pertaining to options outstanding at December 31, 2013, is as follows:
At December 31, 2013
Options Outstanding
Weighted Avg.
Remaining Years
Contractual Life
Number
Outstanding
56,054
6,160
1,000
63,214
8.7 $
1.5
2.8
7.9 $
Weighted
Average
Exercise Price
10.00
12.00
19.25
10.34
Exercise Prices
$10.00 ..............
$12.00 ..............
$19.25 ..............
Options Exercisable
Number
Outstanding
Weighted
Average
Exercise Price
10.00
12.00
19.25
12.19
4,000 $
6,160
1,400
11,560 $
36
At December 31, 2012
Options Outstanding
Weighted Avg.
Remaining Years
Contractual Life
Number
Outstanding
8,000
7,080
1,400
16,480
1.3 $
2.5
3.8
2.0 $
Weighted
Average
Exercise Price
10.00
12.00
19.25
11.65
Exercise Prices
$10.00 ............
$12.00 ............
$19.25 ............
Options Exercisable
Number
Outstanding
Weighted
Average
Exercise Price
10.00
12.00
19.25
11.65
8,000 $
7,080
1,400
16,480 $
The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the
options' vesting period. The following weighted-average assumptions were used in valuing options issued during 2013:
Dividend yield ..................................................................................................
Expected life .....................................................................................................
Expected volatility ............................................................................................
Risk-free interest rate ........................................................................................
2013
0%
6.5 years
35%
1.04%
As of December 31, 2013, there was $125,000 of total unrecognized compensation cost related to non-vested stock option
grants under the plans. The cost is expected to be recognized over a weighted-average period of 1.3 years as of December 31,
2013. No options vested during the years end December 31, 2013 or 2012.
Restricted Stock
The Company from time-to-time also grants shares of restricted stock to key employees and non-employee directors. These
awards help align the interests of these employees and directors with the interests of the stockholders of the Company by
providing economic value directly related to increases in the value of the Company's stock. The value of the stock awarded is
established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total
value of such awards, ratably over the vesting period of the stock grants.
All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting
date, as described below, would terminate any interest in non-vested shares. Prior to vesting of the shares, as long as
employed by the Company, the key employees and non-employee directors will have the right to vote such shares and to
receive dividends paid with respect to such shares. All restricted shares will fully vest in the event of change in control of the
Company.
Nonvested restricted stock for the year ended December 31, 2013 is summarized in the following table. All information has
been retroactively adjusted for stock splits.
Restricted stock
Nonvested at January 1 ..........................................................
Granted ..................................................................................
Vested ....................................................................................
Forfeited .................................................................................
Nonvested at December 31 ....................................................
Shares
11,600
178,900
(10,300)
(6,000)
174,200
$
$
Weighted
Average
Grant-Date
Fair Value
4.06
10.59
6.31
10.00
10.58
37
The vesting schedule of these shares as of December 31, 2013 is as follows:
2014 ........................................................................................................................
2015 ........................................................................................................................
2016 ........................................................................................................................
2017 ........................................................................................................................
2018 ........................................................................................................................
Thereafter ...............................................................................................................
Shares
37,900
37,900
35,300
60,300
2,800
—
174,200
As of December 31, 2013, there was $972,000 of total unrecognized compensation cost related to nonvested restricted stock
granted under the plans. The cost is expected to be recognized over a weighted-average period of 3.39 years as of
December 31, 2013. The total fair value of shares vested during the years ended December 31, 2013 and 2012 was
approximately $100,832 and $0, respectively.
NOTE 14 – 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.
The Company determines the fair value of its financial instruments based on the fair value hierarchy established under ASC
820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the financial instrument's fair value measurement in its entirety. There are three levels of inputs that
may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:
Level 1 Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be
valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid
and are actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active
markets, quoted prices in markets that are not active, or model-based valuation techniques for which all significant
assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities
include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and
derivative contracts whose value is determined by using a pricing model with inputs that are observable in the
market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored
agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies,
obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored
enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity
investments that invest in publicly traded companies are also considered Level 2 assets.
38
Level 3 Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and
liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
models and similar techniques, and may also include the use of market prices of assets or liabilities that are not
directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion
of the fair value being derived from unobservable assumptions that reflect The Company's own estimates for
assumptions that market participants would use in pricing the asset or liability. This category primarily includes
collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity
investments.
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 approximates 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.
FHLB stock and other non-marketable equity securities - The carrying amount of these financial instruments approximates
fair value.
Mortgage loans held for sale – Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or
fair value on an individual loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market
are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination
fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair
value is derived from observable current market prices, when available, and includes loan servicing value. When observable
market prices are not available, the Company uses judgment and estimates fair value using internal models, in which the
Company uses its best estimates of assumptions it believes would be used by market participants in estimating fair value.
Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.
Loans receivable - For variable rate loans that reprice frequently and have no significant change in credit risk, estimated fair
values are based on carrying values and are classified as Level 2. 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 and are classified as Level 2. 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 and are classified as Level 2. Estimated fair
values on impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Impaired loans not requiring a specific charge against the allowance represent loans for which the fair value of the expected
repayments or collateral meet or exceed the recorded investment in the loan. At December 31, 2013 and 2012, substantially
all of the total impaired loans were evaluated based on the fair value of the underlying collateral. Loans which are deemed to
be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair
values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.
Accrued interest receivable - The fair value approximates the carrying value.
Mortgage servicing rights - 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.
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.
39
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 asset and liabilities – The primary use of derivative instruments are related to the mortgage banking activities of
the Company. The Company's wholesale mortgage banking subsidiary enters into interest rate lock commitments related to
expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to
the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting
guidance. As such, The Company records its interest rate lock commitments and forward loan sales commitments at fair
value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance
sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to
extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when
the borrowers "lock-in" a specified interest rate within the time frames established by the mortgage banking subsidiary.
Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date
of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments
to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third party investors. The
forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the
interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the
date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair
value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on
an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is
derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net
future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from
inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided
by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates.
Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a
mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary's historical experience, conversion ratios
for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will
or will not close, historical performance review of loan-level data provides the basis for determining the appropriate hedge
ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out
experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment
through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The
expected fall-out ratios (or conversely the "pull-through" percentages) are applied to the determined fair value of the unclosed
mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized
based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The
fair value of the forward sales contracts to investors considers the market price movement of the same type of security
between the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.
Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate
swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with
resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values
for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives
with fair values based on quoted market prices are recurring Level 1.
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.
Off-balance sheet financial instruments – Contract values and fair values for off-balance sheet, credit-related financial
instruments are based on estimated fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and counterparties’ credit standing.
40
The carrying amount and estimated fair value of the Company's financial instruments at December 31, 2013 and 2012 are as
follows:
Carrying
Amount
Total
At December 31, 2013
Fair Value
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 ......................
Mortgage servicing rights.........................
Financial liabilities:
Deposits ....................................................
Short-term borrowed funds ......................
Long-term debt .........................................
Derivative liabilities .................................
Accrued interest payable ..........................
4,489
34,176
167,535
24,554
4,103
1,858
1,412
36,897
535,221
2,802
10,908
697,581
10,300
74,540
55
311
4,489
34,176
167,535
23,547
4,103
1,858
1,412
37,041
524,142
2,802
17,718
696,674
10,300
71,462
55
311
Level 1
(In thousands)
4,489
34,176
—
—
—
—
428
—
—
—
—
—
—
—
—
—
Level 2
Level 3
—
—
167,535
15,177
—
—
984
37,041
497,045
2,802
17,718
696,674
10,300
71,462
55
311
—
—
—
8,370
4,103
1,858
—
—
27,097
—
—
—
—
—
—
—
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 ......................
Mortgage servicing rights.........................
Financial liabilities:
Deposits ....................................................
Short-term borrowed funds ......................
Long-term debt .........................................
Derivative liabilities .................................
Accrued interest payable ..........................
Carrying
Amount
6,499
11,340
148,407
9,166
6,413
1,728
6,542
144,849
501,691
3,203
12,039
653,247
82,482
64,840
—
1,599
At December 31, 2012
Fair Value
Total
6,499
11,340
148,407
5,549
6,413
1,728
6,542
149,151
502,735
3,203
18,165
Level 1
(In thousands)
6,499
11,340
—
—
—
—
—
—
—
—
—
654,090
82,480
58,874
—
1,599
—
—
—
—
—
Level 2
Level 3
—
—
148,407
—
—
—
6,542
149,151
471,690
3,203
18,165
654,090
82,480
58,874
—
1,599
—
—
—
5,549
6,413
1,728
—
—
31,045
—
—
—
—
—
—
—
41
At December 31,
2013
2012
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
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 ...............................................
Interest rate swaps ..........................................
38,595
526
—
20,516
88,000
20,000
(In thousands)
—
—
31,916
396
—
106
878
428
289,584
59,177
308,000
—
—
—
4,783
1,692
67
—
Derivative liabilities -
Mortgage loan interest rate lock
commitments ...............................................
103,614
55
—
—
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.
Following is a description of valuation methodologies used for assets recorded at fair value on a recurring and non-recurring
basis.
Investment Securities Available-for-sale
Measurement is on a recurring basis upon quoted market prices, if available. If quoted market 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 prepayment assumptions, projected credit losses, and liquidity. At December 31, 2013 and
2012, the Company’s investment securities available-for-sale are recurring Level 2.
Mortgage loans held for sale
Mortgage loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value on an individual
loan basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of
the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized
in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is derived from
observable current market prices, when available, and includes loan servicing value. When observable market prices are not
available, the Company uses judgment and estimates fair value using internal models, in which the Company uses its best
estimates of assumptions it believes would be used by market participants in estimating fair value. Mortgage loans held for
sale are classified within Level 2 of the valuation hierarchy.
Brokered Deposit
Fair Value accounting was elected for a brokered deposit entered into during 2013 as part of the Company’s interest rate risk
management. Fair value of the brokered deposit is derived from quoted market prices. If quoted market 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 prepayment assumptions, projected credit losses, and liquidity.
Impaired Loans
Loans that are considered impaired are recorded at fair value on a non-recurring basis. Once a loan is considered impaired,
the fair value is measured using one of several methods, including collateral liquidation value, market value of similar debt
and discounted cash flows. Those impaired loans not requiring a specific charge against the allowance represent loans for
which the fair value of the expected repayments or collateral meet or exceed the recorded investment in the loan. At
42
December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying
collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the
underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to
be Level 3 inputs.
Derivative Assets and Liabilities
The primary use of derivative instruments is related to the mortgage banking activities of the Company. The Company's
wholesale mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential
mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans
that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, The Company
records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that
would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of
business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a
fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a
specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest
rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To
mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage
banking subsidiary enters into best efforts forward sales contracts with third party investors. The forward sales contracts lock
in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments
to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are
derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock
commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be
exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of
related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to
servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee
fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private
investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies
fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out
ratio assumptions are based on the mortgage subsidiary's historical experience, conversion ratios for similar loan
commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not
close, historical performance review of loan-level data provides the basis for determining the appropriate hedge ratios. In
addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to
determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan
origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-
out ratios (or conversely the "pull-through" percentages) are applied to the determined fair value of the unclosed mortgage
pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on
interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair
value of the forward sales contracts to investors considers the market price movement of the same type of security between
the trade date and the balance sheet date. These instruments are defined as Level 2 within the valuation hierarchy.
Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate
swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with
resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. Fair values
for these instruments are based on quoted market prices, when available. As such, the fair value adjustments for derivatives
with fair values based on quoted market prices in an active market are recurring Level 1.
Other Real Estate Owned (OREO)
OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based upon independent
appraisals or management’s estimation of the collateral and is considered a Level 3 measurement. When the OREO value is
based upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the
measurement is considered a Level 3 measurement.
43
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2013 and 2012:
Quoted market
price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable
inputs
(Level 3)
December 31, 2013
Available-for-sale investment securities:
Municipal securities .......................................................
US government agencies ................................................
Mortgage-backed securities:
$
Agency ........................................................................
Non-agency .................................................................
Loans held for sale .............................................................
Derivative assets:
Mortgage loan interest rate lock commitments ..............
Mortgage loan forward sales commitments ...................
Mortgage-backed securities forward sales
commitments ..............................................................
Interest rate swaps ..........................................................
Brokered deposits ..............................................................
Derivative liabilities:
Mortgage loan interest rate lock commitments ..............
Total ...............................................................................
$
December 31, 2012
Available-for-sale investment securities:
Municipal securities .......................................................
US government agencies ................................................
Mortgage-backed securities:
$
Agency ........................................................................
Non-agency .................................................................
Loans held for sale .............................................................
Derivative assets:
Mortgage loan interest rate lock commitments ..............
Mortgage loan forward sales commitments ...................
Mortgage-backed securities forward sales
commitments ..............................................................
Total ...............................................................................
$
—
—
—
—
—
—
—
—
428
—
—
428
—
—
—
—
—
—
—
—
—
38,499
5,175
69,929
53,932
37,041
—
106
878
—
4,948
55
210,563
17,769
—
79,209
51,429
149,151
4,783
1,692
67
304,100
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2013 and 2012:
Quoted market
price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable
inputs
(Level 3)
December 31, 2013
Impaired loans:
Loans secured by real estate:
One-to-four family .................................................. $
Home equity ............................................................
Commercial real estate ............................................
Construction and development ................................
Consumer loans ..........................................................
Commercial business loans.........................................
Real estate owned:
One-to-four family ......................................................
Commercial real estate ...............................................
Construction and development ...................................
Total ............................................................................... $
December 31, 2012
Impaired loans:
Loans secured by real estate:
One-to-four family .................................................. $
Home equity ............................................................
Commercial real estate ............................................
Construction and development ................................
Consumer loans ..........................................................
Commercial business loans
Real estate owned:
One-to-four family ......................................................
Commercial real estate ...............................................
Construction and development ...................................
Total ............................................................................... $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,117
125
16,953
1,328
20
2,554
959
1,781
3,533
33,370
7,080
—
17,818
2,836
49
3,262
1,010
1,902
3,372
37,329
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.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2013 and
December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
Impaired Loans
Real estate owned
December 31, 2013 and 2012
Valuation Technique
Appraisal Value
Significant
Observable Inputs
Appraisals and or sales of
comparable properties
Significant Unobservable
Inputs
Appraisals discounted 10% to 20% for
sales commissions and other holding costs
Appraisal Value/
Comparison Sales/
Other estimates
Appraisals and or sales of
comparable properties
Appraisals discounted 10% to 20% for
sales commissions and other holding costs
45
NOTE 15 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of these instruments. The Company uses the same
credit policies in making commitments as for on-balance sheet instruments. At December 31, 2013 and 2012, the Company
had commitments to extend credit in the amount of $48.6 million and $31.9 million, respectively. At December 31, 2013 and
2012, the Company had standby letters of credit in the amount of $526,000 and $396,000, respectively.
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, 2013, 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, 2013 was approximately $526,000.
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.
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, 2013 and 2012, the
Company’s outstanding mortgage interest rate lock commitments totaled $103.6 and $289.6 million, respectively. The
Company uses mortgage loan forward sales commitments and mortgage-backed securities forward sales commitments that
generally correspond with the composition of the locked pipeline to economically hedge a percentage of the Company’s
pipeline of mortgage loan interest rate lock commitments and loans held for sale. At December 31, 2013 and 2012, the
Company’s outstanding mortgage loan forward sales commitments totaled $20.5 million and $59.2 million, respectively. At
December 31, 2013 and 2012, the Company’s outstanding mortgage-backed securities forward sales commitments totaled
$88.0 million and $308.0 million, respectively. The Company’s derivative positions are marked to market as shown in Note 3
- Derivatives.
Derivative instruments not related to mortgage banking activities, including financial futures commitments and interest rate
swap agreements that do not satisfy the hedge accounting requirements are recorded at fair value and are classified with
resultant changes in fair value being recognized in noninterest income in the consolidated statement of operations. As of
December 31, 2013, the Company’s outstanding interest rate swap totaled $20.0 million. The interest rate swap was entered
into by the Company during 2013. As such, there was no amount outstanding for interest rate swaps during 2012. 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:
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 .................................................................................................................... $
At December 31,
2013
2012
(In thousands)
190,934
115,413
12,120
318,467
174,680
122,498
9,172
306,350
46
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan that covers substantially all employees of CresCom Bank, Carolina Services (“CFC
Participants”) and Crescent Mortgage (“CMC Participants”). Participants may contribute up to the maximum allowed by the
regulation. During fiscal 2013 and 2012, the Company matched 75% of an employee’s contribution up to 6.00% of the
participant’s compensation of the CFC Participants and the CMC Participants. For the years ended December 31, 2013, and
2012, the Company made matching contributions of $500,000 and $461,000, respectively.
The Company has an arrangement with two executives whereby the Company made payments to an insurance company on
behalf of the executives. The advance is treated as a loan to the executive 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, 2013 and 2012 is $535,000 and $813,000, respectively. The executive is
entitled to the increase in cash value above the Company’s original cash value insurance contributions. The executive pays
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. 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 executive pays the insurance
premiums, the insurance proceeds would be taxable to the Company.
The Company incurred an aggregate premium of $108,000 and $133,000 paid on behalf of the executives for the period
ended December 31, 2013 and 2012, respectively.
NOTE 17 - EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average
number of common shares outstanding plus the weighted average number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Diluted earnings per share include the effects of
outstanding stock options and restricted stock 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 and vesting
were used to acquire shares of common stock at the average market price during the reporting period.
As stated in Note 1, on January 15, 2014, the Board of Directors of the Company declared a two-for-one stock split to
stockholders of record dated February 10, 2014, payable on February 28, 2014. All share, earnings per share, and per share
data have been retroactively adjusted to reflect this stock split for all periods presented in accordance with generally accepted
accounting principles.
The following is a summary of the reconciliation of average shares outstanding for the years ended December 31, 2013 and
2012:
December 31,
2013
2012
Basic
Diluted
Basic
Diluted
Weighted average shares outstanding ......................
Effect of dilutive securities ......................................
Average shares outstanding .....................................
3,841,230
—
3,841,230
3,841,230
119,017
3,960,247
3,837,984
—
3,837,984
3,837,984
—
3,837,984
The average market price used in calculating the dilutive securities under the treasury stock method for the years ended
December 31, 2013 and 2012 was $13.15 and $7.56, respectively. For the years ended December 31, 2013 and 2012, 71,274
and 16,480 option shares, respectively, 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 were deemed not
to be dilutive. 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 a valuation model.
47
NOTE 18 - CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
The Company and the Bank 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 Bank’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and
the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory methods. The Company’s and the Bank’s capital
amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting and
other factors. As of December 31, 2013, the most recent notification from federal banking agencies categorized the Company
and the Bank as “well capitalized” under the regulatory framework. In order to be considered “adequately capitalized”, the
Company and the Bank 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 4%, respectively. In order to be considered “well capitalized”, the
Company and the Bank 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, 2013, there have been no
events or conditions that management believes have changed the Company’s or the Bank’s regulatory capital categories.
The actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Company and
the Bank at December 31, 2013 and 2012 are as follows:
Required to be
Categorized
Adequately
Capitalized
Actual
Amount Ratio
Amount Ratio
Required to be
Categorized
Well Capitalized
Amount Ratio
(Dollars in thousands)
December 31, 2013
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets) ........... $ 99,602 15.42% 25,834
Total risk based capital (to risk weighted
4.00% N/A N/A
assets) .......................................................... 108,650 16.82% 51,668
Tier 1 capital (to total average assets) ............ 99,602 11.15% 35,732
8.00% N/A N/A
4.00% N/A N/A
CresCom Bank
Tier 1 capital (to risk weighted assets) ........... 98,301 15.26% 25,763
Total risk based capital (to risk weighted
4.00% 38,645
6.00%
assets) .......................................................... 107,327 16.66% 51,526
Tier 1 capital (to total average assets) ............ 98,301 11.01% 35,706
8.00% 64,408 10.00%
5.00%
4.00% 44,632
December 31, 2012
Carolina Financial Corporation
$ 82,839 13.11% 25,266
Tier 1 capital (to risk weighted assets) ........... 98,030 15.52% 50,532
Total risk based capital (to risk weighted
4.00% N/A N/A
8.00% N/A N/A
assets) .......................................................... 82,839
9.65% 34,322
4.00% N/A N/A
Tier 1 capital (to total average assets)
CresCom Bank
85,537 13.57% 25,222
Tier 1 capital (to risk weighted assets) ........... 100,714 15.97% 50,445
Total risk based capital (to risk weighted
4.00% 37,833
6.00%
8.00% 63,056 10.00%
assets) .......................................................... 85,537 10.01% 34,171
4.00% 42,713
5.00%
Tier 1 capital (to total average assets)
48
A South Carolina state bank may not pay dividends from capital. All dividends must be paid out of undivided profits then on
hand, after deducting expenses, including reserves for losses and bad debts. Unless otherwise instructed by the South
Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina state banking regulations to
pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South
Carolina Board of Financial Institutions. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the
Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. The FRB may also prevent
the payment of a dividend by the Bank if it determines that the payment would be an unsafe and unsound banking practice.
On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework and, on July 9, 2013, the OCC
also adopted a final rule and the FDIC adopted the same provisions in the form of an “interim” final rule. The rule will apply
to all national and state banks and savings associations and most bank holding companies and savings and loan holding
companies, which we collectively refer to herein as “covered” banking organizations. Bank holding companies with less than
$500 million in total consolidated assets are not subject to the final rule, nor are savings and loan holding companies
substantially engaged in commercial activities or insurance underwriting. In certain respects, the rule imposes more stringent
requirements on “advanced approaches” banking organizations—those organizations with $250 billion or more in total
consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The
requirements in the rule will begin to phase on January 1, 2014, for advanced approaches banking organizations, and on
January 1, 2015, for other covered banking organizations. The requirements in the rule will be fully phased in by January 1,
2019.
Management expects to comply with the final rules when issued and effective. To prepare for the implementation of the new
capital rules, management continues to build capital through retained earnings and is evaluating strategies to maximize the
Company’s capital under the Basel III NPR.
During the year ended December 31, 2013, the Company paid dividend payments of $401,000 to stockholders. There were no
dividend payments in 2012.
NOTE 19 – SUPPLEMENTAL SEGMENT INFORMATION
The Company has three reportable segments: community banking, wholesale mortgage banking (“mortgage banking”) and
other. The community banking segment provides traditional banking services offered through CresCom 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 generated 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.
49
The following tables present selected financial information for the Company’s reportable business segments for the years
ended December 31, 2013 and 2012:
Eliminations
For the Year Ended December 31, 2013
Community
Banking
Mortgage
Banking
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) ......................................... $
31,200
4,965
26,235
(900)
2,678
—
17,724
4,853
7,236
2,273
4,963
Assets ........................................................... $
Loans receivable, net ...................................
Loans held for sale .......................................
Deposits .......................................................
Borrowed funds ...........................................
873,104
532,616
753
701,110
69,376
1,637
84
1,553
40
41,332
488
22,452
1,037
19,844
7,441
12,403
61,846
3,374
36,144
—
—
For the Year Ended December 31, 2012
Community
Banking
Mortgage
Banking
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) ......................................... $
33,524
6,377
27,147
2,707
(2,668)
—
22,198
4,853
(5,279)
(1,869)
(3,410)
Assets ........................................................... $
Loans receivable, net ...................................
Loans held for sale .......................................
Deposits .......................................................
Borrowed funds ...........................................
874,354
501,445
117,803
655,486
127,176
1,801
397
1,404
—
56,133
618
23,445
1,099
33,611
12,603
21,008
54,204
853
27,046
—
1,932
Other
(In thousands)
17
675
(658)
—
76
5,812
5,360
—
(130)
(219)
89
Other
(In thousands)
18
748
(730)
—
59
5,813
5,744
—
(602)
(183)
(419)
88,344
—
—
—
18,365
Total
32,948
5,718
27,230
(860)
44,086
—
45,972
—
26,204
9,386
16,818
881,584
535,221
36,897
697,581
84,840
Total
35,356
7,513
27,843
2,707
53,524
—
51,387
—
27,273
10,395
16,878
94
(6)
100
—
—
(6,300)
436
(5,890)
(746)
(109)
(637)
13
(9)
22
—
—
(6,431)
—
(5,952)
(457)
(156)
(301)
(128,178)
(607)
—
(2,239)
(151)
888,724
501,691
144,849
653,247
147,322
101,497
—
—
—
15,465
(154,863)
(769)
—
(3,529)
(1)
Eliminations
50
NOTE 20 - 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 subsidiary ...................................................................
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 ............................................ $
Carolina Financial Corporation
Condensed Statements of Operations
Dividend income from non-bank subsidiaries .................................................. $
Dividend income from banking subsidiary .......................................................
Interest income..................................................................................................
Total income ..............................................................................................
Interest expense ................................................................................................
General and administrative expenses ................................................................
Total expenses ...........................................................................................
Income (loss) before income taxes and equity in undistributed earnings of
subsidiaries ....................................................................................................
Income tax benefit ............................................................................................
Income (loss) before equity in undistributed earnings of subsidiaries ..............
Equity in undistributed earnings of CresCom Bank .........................................
Equity in undistributed earnings of Carolina Services ......................................
Total equity in undistributed earnings of subsidiaries ...............................
Net income ........................................................................................................ $
At December 31,
2013
2012
(In thousands)
334
95,928
971
465
1
165
97,864
172
—
15,465
82,227
97,864
439
85,213
643
465
1
213
86,974
1,245
2,750
15,465
67,514
86,974
For the Years
Ended December 31,
2013
2012
(In thousands)
—
4,400
17
4,417
670
435
1,105
3,312
(414)
3,726
12,764
328
13,092
16,818
150
—
18
168
739
451
1,190
(1,022)
(398)
(624)
17,297
205
17,502
16,878
51
Carolina Financial Corporation
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income .................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:....................................................................................................
Equity in undistributed earnings in subsidiaries ........................................
Stock-based compensation.........................................................................
Decrease in other assets .............................................................................
(Decrease) increase in other liabilities .......................................................
Net cash provided by operating activities ..................................................
Cash flows from financing activities:
Principal repayment of short term debt .........................................................
Proceeds from exercise of stock options .......................................................
Cash dividends paid on common stock .........................................................
Net cash used in financing activities ..........................................................
Net increase (decrease) in cash and cash equivalents .......................................
Cash and cash equivalents, beginning of year ...........................................
Cash and cash equivalents, end of year ..................................................... $
For the Years
Ended December 31,
2013
2012
(In thousands)
16,818
16,878
(13,092)
303
171
(1,197)
3,003
(2,750)
43
(401)
(3,108)
(105)
439
334
(17,502)
86
298
504
264
(200)
—
(200)
64
375
439
52
INSERT CAROLINA FINANCIAL CORP LOGO HERE
INSERT CAROLINA FINANCIAL CORP LOGO HERE
INSERT CAROLINA FINANCIAL CORP LOGO HERE
288 Meeting Street
Charleston, SC 29401
288 Meeting Street
INSERT CAROLINA FINANCIAL CORP LOGO HERE
Charleston, SC 29401
288 Meeting Street
INSERT CRESCOM BANK LOGO HERE
Charleston, SC 29401
288 Meeting Street
INSERT CRESCOM BANK LOGO HERE
Charleston, SC 29401
DOWNTOWN CHARLESTON
288 Meeting Street
Charleston, SC 29401
DOWNTOWN CHARLESTON
288 Meeting Street
Charleston, SC 29401
DOWNTOWN CHARLESTON
MOUNT PLEASANT
288 Meeting Street
1492 Stuart Engals Boulevard
Charleston, SC 29401
DOWNTOWN CHARLESTON
Mt. Pleasant, SC 29464
MOUNT PLEASANT
288 Meeting Street
1492 Stuart Engals Boulevard
Charleston, SC 29401
Mt. Pleasant, SC 29464
MOUNT PLEASANT
MYRTLE BEACH
1492 Stuart Engals Boulevard
991 38th Avenue North
Mt. Pleasant, SC 29464
MOUNT PLEASANT
Myrtle Beach, SC 29577
MYRTLE BEACH
1492 Stuart Engals Boulevard
991 38th Avenue North
Mt. Pleasant, SC 29464
Myrtle Beach, SC 29577
MYRTLE BEACH
LITCHFIELD/PAWLEYS ISLAND
991 38th Avenue North
13021 Ocean Highway
Myrtle Beach, SC 29577
MYRTLE BEACH
Pawleys Island, SC 29585
LITCHFIELD/PAWLEYS ISLAND
991 38th Avenue North
13021 Ocean Highway
Myrtle Beach, SC 29577
Pawleys Island, SC 29585
LITCHFIELD/PAWLEYS ISLAND
13021 Ocean Highway
Pawleys Island, SC 29585
LITCHFIELD/PAWLEYS ISLAND
13021 Ocean Highway
Pawleys Island, SC 29585
INSERT CRESCOM BANK LOGO HERE
WEST ASHLEY
884 Orleans Road
INSERT CRESCOM BANK LOGO HERE
Charleston, SC 29407
WEST ASHLEY
884 Orleans Road
Charleston, SC 29407
WEST ASHLEY
SUMMERVILLE
884 Orleans Road
200 North Cedar Street
Charleston, SC 29407
WEST ASHLEY
Summerville, SC 29483
SUMMERVILLE
884 Orleans Road
200 North Cedar Street
Charleston, SC 29407
Summerville, SC 29483
SUMMERVILLE
200 North Cedar Street
Summerville, SC 29483
SUMMERVILLE
200 North Cedar Street
Summerville, SC 29483
ST. GEORGE
5561 West Memorial Highway
St. George, SC 29477
ST. GEORGE
5561 West Memorial Highway
St. George, SC 29477
N. Myrtle Beach, SC 29582
NORTH MYRTLE BEACH
700 Main Street
N. Myrtle Beach, SC 29582
NORTH MYRTLE BEACH
700 Main Street
N. Myrtle Beach, SC 29582
NORTH MYRTLE BEACH
700 Main Street
N. Myrtle Beach, SC 29582
700 Main Street
NORTH MYRTLE BEACH
CONWAY
CONWAY
2069 East Highway 501
Conway, SC 29526
2069 East Highway 501
Conway, SC 29526
CONWAY
CONWAY
2069 East Highway 501
Conway, SC 29526
2069 East Highway 501
Conway, SC 29526
JAMES ISLAND
430 Folly Road
James Island, SC 29412
JAMES ISLAND
430 Folly Road
James Island, SC 29412
JAMES ISLAND
NORTH CHARLESTON
430 Folly Road
8485 Dorchester Road
James Island, SC 29412
JAMES ISLAND
North Charleston, SC 29420
NORTH CHARLESTON
430 Folly Road
8485 Dorchester Road
James Island, SC 29412
North Charleston, SC 29420
NORTH CHARLESTON
GARDEN CITY
8485 Dorchester Road
2636 Hwy. 17 Business
North Charleston, SC 29420
NORTH CHARLESTON
Garden City, SC 29576
GARDEN CITY
8485 Dorchester Road
2636 Hwy. 17 Business
North Charleston, SC 29420
Garden City, SC 29576
GARDEN CITY
2636 Hwy. 17 Business
Garden City, SC 29576
GARDEN CITY
2636 Hwy. 17 Business
Garden City, SC 29576
ALL LOCATIONS
800-600-5938
haveanicebank.com
ALL LOCATIONS
800-600-5938
haveanicebank.com
ALL LOCATIONS
800-600-5938
haveanicebank.com
ALL LOCATIONS
800-600-5938
haveanicebank.com
ST. GEORGE
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5561 West Memorial Highway
St. George, SC 29477
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ST. GEORGE
5561 West Memorial Highway
St. George, SC 29477
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HOME OFFICE
5901 Peachtree Dunwoody Road NE
Building C, Suite 250
HOME OFFICE
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Atlanta, GA 30328
5901 Peachtree Dunwoody Road NE
770.392.1611
Building C, Suite 250
HOME OFFICE
crescentmortgage.com
Atlanta, GA 30328
5901 Peachtree Dunwoody Road NE
770.392.1611
Building C, Suite 250
HOME OFFICE
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance
crescentmortgage.com
Atlanta, GA 30328
Corporation.
5901 Peachtree Dunwoody Road NE
770.392.1611
Building C, Suite 250
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance
crescentmortgage.com
Atlanta, GA 30328
Corporation.
770.392.1611
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance
crescentmortgage.com
Corporation.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.