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2014 Annual Report
2015 Proxy Statement
CAROLINA FINANCIAL CORPORATION
288 Meeting Street
Charleston, SC 29401
(843) 723-7700
March 26, 2015
Dear Stockholder:
On behalf of the Board of Directors and management of Carolina Financial
Corporation (the “Company”), we cordially invite you to attend the Annual Meeting of
Stockholders. The meeting will be held at 5:00 p.m. on April 29, 2015, at the Marina Inn at
Grande Dunes, 8121 Amalfi Place, Myrtle Beach, South Carolina.
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In addition to the annual stockholder vote on corporate business items, the meeting
will include management’s report to you on the Company’s fiscal 2014 financial and oper-
ating performance.
An important aspect of the meeting process is the stockholder vote on corporate busi-
ness items. We urge you to exercise your rights as a stockholder to vote and participate in this
process. Stockholders are being asked to consider and vote upon the proposal to elect four
directors, to approve an amendment to the Company’s Amended and Restated Certificate
of Incorporation to increase the number of shares of Common Stock the Company is autho-
rized to issue from 10,000,000 shares to 15,000,000 shares, and to ratify the appointment of
the Company’s independent registered public accounting firm. The Board of Directors has
carefully considered these proposals and unanimously recommends that you vote for each of
the nominees and in favor of each of the proposals calling for a “yes” or “no” vote.
We encourage you to attend the meeting in person. Whether or not you attend the
meeting, we hope that you will read the enclosed proxy statement and then complete, sign
and date the enclosed proxy card and return it in the postage prepaid envelope provided.
This will save the Company additional expense in soliciting proxies and will ensure that
your shares are represented. Please note that you may vote in person at the meeting even
if you have previously returned the proxy. If you need assistance in completing your proxy,
please call the Assistant Secretary of the Company at (843) 534-5142.
Thank you for your attention to this important matter.
Sincerely:
Claudius E. Watts, III
Lt. General, USAF (Retired)
Chairman of the Board
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CAROLINA FINANCIAL CORPORATION
288 Meeting Street
Charleston, South Carolina 29401
(843) 723-7700
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 29, 2015
Notice is hereby given that the Annual Meeting of Stockholders (the “Meeting”)
of Carolina Financial Corporation (the “Company”) will be held at the Marina Inn at
Grande Dunes, 8121 Amalfi Place, Myrtle Beach, South Carolina at 5:00 p.m., local time,
on April 29, 2015.
A proxy card and a proxy statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of four directors of the Company;
2. The approval of an amendment to the Company’s Amended and Restated
Certificate of Incorporation to increase the number of shares of Common Stock the
Company is authorized to issue from 10,000,000 shares to 15,000,000 shares; and
3. The ratification of the appointment of Elliott Davis Decosimo, LLC as the in-
dependent registered public accounting firm of the Company for the fiscal year
ending December 31, 2015
Such other matters as may properly come before the Meeting, or any adjournments
thereof.
The Board of Directors is not aware of any other business to come before the
Meeting. However, any action may be taken on the foregoing proposals at the Meeting on
the date specified above or on any date or dates to which the Meeting may be adjourned.
Stockholders of record at the close of business on March 6, 2015 are the stockholders en-
titled to vote at the Meeting and any adjournments thereof.
You are requested to complete and sign the enclosed form of proxy, which is solic-
ited on behalf of the Board of Directors, and to mail it promptly in the enclosed envelope.
The proxy will not be used if you attend and vote at the Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
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M. J. Huggins, III
Executive Vice President and Secretary
Charleston, South Carolina
March 26, 2015
Important: the prompt return of proxies will save the company the expense
of further requests for proxies to ensure a quorum at the meeting. A self-addressed
envelope is enclosed for your convenience. No postage is required if mailed
within the United States.
PROXY STATEMENT
CAROLINA FINANCIAL CORPORATION
288 Meeting Street
Charleston, South Carolina 29401
(843) 723-7700
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 29, 2015
This proxy statement is furnished in connection with the solicitation on behalf of
the Board of Directors of Carolina Financial Corporation (the “Company”), the parent
company of CresCom Bank (the “Bank”), Crescent Mortgage Company (“Crescent Mort-
gage”), which is a direct subsidiary of CresCom Bank, and Carolina Services Corpora-
tion of Charleston (“Carolina Services Corporation”) to be used at the Annual Meeting
of Stockholders of the Company (the “Meeting”) which will be held at the Marina Inn
at Grande Dunes, 8121 Amalfi Place, Myrtle Beach, South Carolina on April 29, 2015,
at 5:00 p.m., local time, and all adjournments of the Meeting. The accompanying Notice
of Annual Meeting and this proxy statement are first being mailed to stockholders on or
about March 26, 2015.
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At the Meeting, stockholders of the Company are being asked to consider and vote
upon the election of four directors, approve an amendment to the Company’s Amended and
Restated Certificate of Incorporation (the “Certificate of Incorporation”) to increase the
number of shares of Common Stock the Company is authorized to issue from 10,000,000
shares to 15,000,000 shares and the appointment of Elliott Davis Decosimo, LLC as the
independent registered public accounting firm for the Company.
Vote Required and Proxy Information
The Board of Directors set March 6, 2015, as the record date for the Meeting.
Stockholders owning the Company’s Common Stock at the close of business on that date
are entitled to vote and to attend the Meeting, with each share entitled to one vote. If you
are a registered stockholder who wishes to vote at the Meeting, you may do so by deliv-
ering your proxy card in person at the Meeting. “Street name” stockholders who wish to
vote at the Meeting will need to obtain a proxy form from the institution that holds their
shares. There were 8,119,264 shares of Common Stock outstanding as of the record date.
A majority of the outstanding shares of Common Stock entitled to vote at the Meeting will
constitute a quorum. We will count abstentions and broker non-votes, which are described
below, in determining whether a quorum exists.
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Many of the Company’s stockholders hold their shares through a stockbroker,
bank, or other nominee rather than directly in their own name. If you hold the Company’s
shares in a stock brokerage account or by a bank or other nominee, you are considered the
beneficial owner of shares held in street name, and these materials are being forwarded to
you by your broker or nominee, which is considered the stockholder of record with respect
to those shares. As the beneficial owner, you have the right to direct your broker or nom-
inee how to vote and are also invited to attend the Meeting. However, since you are not
the stockholder of record, you may not vote these shares in person at the Meeting unless
you obtain a signed proxy from the stockholder of record giving you the right to vote the
shares. Your broker or nominee has enclosed or provided a voting instruction card for you
to use to direct your broker or nominee how to vote these shares.
If a share is represented for any purpose at the Meeting by the presence of the
registered owner or a person holding a valid proxy for the registered owner, it is deemed
to be present for the purposes of establishing a quorum. Therefore, valid proxies which
are marked “Abstain” or “Withhold” or as to which no vote is marked, including broker
non-votes, will be included in determining the number of votes present or represented at
the Meeting.
If you hold your shares in street name, it is critical that you cast your vote if you
want it to count in the election of the Company’s director nominees. In the past, if you held
your shares in street name and you did not indicate how you wanted your shares voted in
the election of directors, your bank or broker was allowed to vote those shares on your
behalf in the election of directors as they felt appropriate. Changes in regulations were
made to take away the ability of your bank or broker to vote your uninstructed shares in
the election of directors and on executive compensation matters on a discretionary basis.
Thus, if you hold your shares in street name and you do not instruct your bank or broker
how to vote in the election of directors, no votes will be cast on your behalf. Further, if you
abstain from voting on a particular proposal, the abstention does not count as a vote in
favor of or against the proposal.
When you sign the proxy card, you appoint Robert G. Clawson and W. Scott Brandon
as your representatives at the Meeting. Messrs. Clawson and Brandon will vote your proxy
as you have instructed them on the proxy card. If you submit a proxy but do not specify
how you would like it to be voted, Messrs. Clawson and Brandon will vote your proxy for
the election to the Board of Directors of all the nominees listed below under “Election
of Directors,” for the amendment to the Company’s Certificate of Incorporation to in-
crease the number of shares of Common Stock the Company is authorized to issue from
10,000,000 shares to 15,000,000 shares, and for the ratification of the appointment of
Elliott Davis Decosimo, LLC as the independent registered public accounting firm for
the Company for the fiscal year ending December 31, 2015. The Company is not aware of
any other matters to be considered at the Meeting. However, if any other matters come
before the Meeting, Messrs. Clawson and Brandon will vote your proxy on such matters in
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accordance with their judgment. A proxy given pursuant to the solicitation may be revoked
at any time before it is voted. Proxies may be revoked by (i) filing with the Secretary of
the Company at or before the Meeting a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a subsequent proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the Meeting, or (iii) attending
the Meeting and voting in person (although attendance at the Meeting will not in and of
itself constitute revocation of a proxy). Any written notice revoking a proxy before the
Meeting should be delivered to M. J. Huggins, III, Secretary, Carolina Financial Corporation,
288 Meeting Street, Charleston, South Carolina 29401.
A majority or more of the outstanding shares of Common Stock entitled to vote at
the Meeting will constitute a quorum. We will include abstentions and broker non-votes
in determining whether a quorum exists. Assuming in each case that a quorum is present:
• With respect to Proposal No. 1, the directors will be elected by a plurality of the
votes of the shares of Common Stock present in person or represented by proxy
at the Meeting and entitled to vote on the election of directors. This means that
the individuals who receive the highest number of votes are selected as direc-
tors up to the maximum number of directors to be elected at the Meeting.
• With respect to Proposal No. 2, the amendment to the Company’s Certificate of
Incorporation requires the approval of a majority of the outstanding shares of
the Company’s Common Stock entitled to vote. Abstentions, and broker non-
votes, and the failure to return a signed proxy will have the effect of a “no” vote
on Proposal No. 2.
• With respect to Proposal No. 3, the proposal will be approved if the number
of shares of Common Stock voted in favor of the matter exceed the number of
shares of Common Stock voted against the matter. Abstentions, broker non-
votes, and the failure to return a signed proxy will have no effect on the out-
come of the vote on this matter.
Any other matters that may be brought before the Meeting will be determined by
a majority of the votes cast.
The Company is paying for the costs of preparing and mailing the proxy materials
and of reimbursing brokers and others for their expenses of forwarding copies of the proxy
materials to its stockholders. Our officers and employees may assist in soliciting proxies
but will not receive additional compensation for doing so. The Company is distributing this
proxy statement on or about March 26, 2015.
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Important Notice of Internet Availability. The proxy statement and the Company’s
2014 Annual Report on Form 10-K are available to the public for viewing under the
Investor Relations section under the Governance Documents tab of the Company’s
website http://www.haveanicebank.com.
In addition, the above items and other filings with the Securities and Exchange
Commission (the “SEC”) are also available to the public on the SEC’s website at
www.sec.gov. Upon written or oral request by any stockholder, we will deliver a copy of
the Company’s 2014 Annual Report on Form 10-K. Only one copy of the Company’s proxy
materials is being delivered to two or more stockholders who share an address. However,
upon written or oral request, we will also promptly deliver a copy of this proxy statement
or the enclosed overview to the Company’s stockholders at a shared address to which a
single copy of the document was delivered. Stockholders should contact M. J. Huggins,
III, Secretary, Carolina Financial Corporation, 288 Meeting Street Charleston, South
Carolina 29401 or at (843) 723-7700 if they wish to receive an additional copy of the
Company’s proxy materials.
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PROPOSAL I - ELECTION OF DIRECTORS
General Information Regarding Election of Directors
The Company’s Board of Directors is presently composed of fifteen members (15).
The directors are divided into three classes. Directors of the Company are generally elected
to serve for a three-year term, which is generally staggered to attempt to provide for the
election of approximately one-third of the directors each year. The Company’s Bylaws
provide for an age limitation in that no person who has reached the age of 75 years may be
elected or appointed to a term of office as a director.
Class I
Class II
Class III
Robert M. Moïse, CPA
Howell V. Bellamy, Jr.
Robert G. Clawson, Jr
David L. Morrow
Jerold L. Rexroad
Claudius E. Watts IV
W. Scott Brandon
Jeffery L. Deal, M.D.
Michael P. Leddy
Thompson E. Penney
Bonum S. Wilson, Jr.
Benedict P. Rosen
G. Manly Eubank
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At the Annual Meeting, stockholders will elect four nominees as Class I directors
to serve a three-year term, expiring at the 2018 Annual Meeting of Stockholders of the
Company. The directors will be elected by a plurality of the votes cast at the Meeting.
This means that the four nominees receiving the highest number of votes will be elected.
Abstentions and broker non-votes with respect to the nominees will not be considered to
be either affirmative or negative votes. Stockholders do not have cumulative voting rights
with respect to the election of directors.
The Board of Directors recommends that you elect Messrs. Moïse, Morrow,
Rexroad and Watts IV as Class I directors.
If you submit a proxy but do not specify how you would like it to be voted, Messrs.
Clawson and Brandon will vote your proxy to elect Messrs. Moïse, Morrow, Rexroad, and
Watts, IV. If any of these nominees are unable or fails to accept nomination or election
(which we do not anticipate), Messrs. Clawson and Brandon will vote instead for a re-
placement to be recommended by the Board of Directors, unless you specifically instruct
otherwise in the proxy.
Information on Nominees
Set forth below is certain information about the nominees, including their name,
period they have served as a director, occupation, and additional information about the
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specific experience, qualifications, attributes, or skills that led to the Board of Directors’
conclusion that such person should serve as a director for the Company.
Robert M. Moïse has served as a member of the Company’s Board of Directors
since 1996. Mr. Moïse is a partner in WebsterRogers LLP in the Charleston office. He
holds Bachelor of Science and Master of Accountancy degrees from the University of
South Carolina and has been admitted to practice before the United States Tax Court.
He serves as Treasurer of the Coastal Council BSA, is the Secretary of the Coastal Boys
Council Board, and a counselor at Camp Happy Days. He is a member of the American
Institute of Certified Public Accountants, serving on their national Tax Practice Respon-
sibilities Committee and is a member of the South Carolina Association of Certified
Public Accountants. Mr. Moïse also continues to serve as a member of the Charleston
County Business License Appeals Board. In his professional practice, Mr. Moïse has,
after leaving the Internal Revenue Service worked with national and local CPA firms and
has concentrated his practice in the tax area with an emphasis on tax controversy matters
and complicated mergers, acquisitions and liquidations for many clients around the state.
Mr. Moïse brings to the board of his 40 years of financial expertise and his business skills.
Mr. Moïse’s finance and accounting expertise also qualify him to serve as Chairman of the
Company’s Audit Committee and to be considered an “audit committee financial expert.”
David L. Morrow has served as an Executive Vice President of the Company
since 2004 and has served as a member of the Company’s Board of Directors since 2001.
Mr. Morrow is also President and Chief Executive Officer of CresCom Bank. He is a grad-
uate of Clemson University with a Bachelor of Science degree and has more than 41 years
of experience in banking and financial institution management in South Carolina. Prior
to founding Crescent Bank, a predecessor to CresCom Bank, he served as President of
Carolina First Savings Bank and also as Executive Vice President and member of the
Board of Directors of Carolina First Bank. He is currently a member of the Board of
Directors for the South Carolina Museum Foundation, a member of the Clemson Univer-
sity Board of Visitors, a member of the Board of Directors for the S.C. Bankers Associ-
ation (SCBA) and a member of the Board of Advisors of the Hollings Cancer Center at
the Medical University of South Carolina. Most recently, Mr. Morrow was also named to
a three-year appointment with the Federal Reserve Community Depository Institutions
Advisory Council (CDIAC), as well as the ABA Community Bankers Council. He is also
a past Board member of the Storm Eye Institute at the Medical University of South
Carolina and a past member of the Board of Directors of Leadership South Carolina.
His 40+ years of experience in financial institute management, including previous service
as a director of a state-wide financial institution and CEO of both predecessor banks of
CresCom Bank, provide a valuable perspective as a director.
Jerold L. Rexroad has served as the Company’s President and Chief
Executive Officer since 2012 and as a director since 2012. Mr. Rexroad also serves
as Senior Executive Vice President and Chief Administrative Officer of the Bank and Chief
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Executive Officer and Chairman of the Board of Crescent Mortgage Company. Mr. Rexroad
joined the Company in May 2008 as Executive Vice President. Mr. Rexroad began his
career in 1982 with Peat, Marwick, Mitchell and Co., a predecessor to the international
accounting firm KPMG LLP, and is a Certified Public Accountant with over 20 years of
experience in financial institution management. He became a KPMG partner in 1994
with responsibilities for all financial institutions in South Carolina. In 1995, Mr. Rexroad
joined Coastal Financial Corporation as Executive Vice President and Chief Financial
Officer. Under his oversight, the bank grew organically from $375 million in total assets to
over $1.8 billion in total assets. Coastal Financial Corporation was sold to BB&T in 2007.
Mr. Rexroad is a member of the American Institute of Certified Public Accountants
and the South Carolina Association of Certified Public Accountants. Mr. Rexroad is
a graduate of Bob Jones University, cum laude. Mr. Rexroad is a director of the Myrtle
Beach Economic Development Corporation. His leadership experience, including over
30 years of experience in public accounting and financial institution management, as
well as his service as the chief financial officer of a public bank holding company, en-
hance his ability to serve on the Company’s Board of Directors. These roles have re-
quired industry expertise combined with operational and global management expertise.
Claudius E. Watts IV (“Bud”) has served as a member of the Company’s Board
of Directors since 2015. Mr. Watts. is a Partner and Managing Director of The Carlyle
Group where he specializes in control equity investments in larger companies fo-
cused on software, software enabled services, semiconductors, and electronic systems.
Mr. Watts established the firm’s Technology Buyout Group in 2004 and led it until 2014.
Mr. Watts led Carlyle’s investments in and currently serves on the Boards of Directors
of CommScope, where he has served as Director since 2011, and Freescale Semicon-
ductor, where he has been a Director since 2006. Previously, Mr. Watts led Carlyle’s
investments in and served on the Boards of Directors of technology companies SS&C
Technologies, Open Link Financial, Open Solutions, and Jazz Semiconductor, as well
as aerospace companies Firth Rixon, Sippican, and CPU Technology. In addition to
his current business activities, Mr. Watts also serves as the Chairman of the Board of
The Citadel Foundation and The Citadel Trust, which manage the primary endowment
funds supporting The Citadel. Prior to joining Carlyle in 2000, Mr. Watts was a Man-
aging Director in the Mergers & Acquisitions group of First Union Securities, Inc. He
joined First Union Securities when First Union acquired Bowles Hollowell Conner &
Co., where Mr. Watts was a principal. Prior to joining Bowles Hollowell, Mr. Watts was
a fighter pilot in the U.S. Air Force. During his service, he was qualified as an instructor
pilot in both the F-16 and A-10 aircraft and served in a number of leadership and opera-
tions management positions in the United States and abroad. Mr. Watts earned a B.S. in
electrical engineering cum laude from The Citadel in Charleston, South Carolina, and an
M.B.A. from the Harvard Graduate School of Business Administration.
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THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE “FOR” EACH OF THE NOMINEES LISTED IN THIS PROXY STATEMENT.
Retirement of Directors
With the completion of his elected term as Chairman and as a Director of
Carolina Financial Corporation, Lt. General Claudius E. Watts, III will be retiring from the
Board of Directors of Carolina Financial Corporation with the close of the April 29, 2015
Annual Stockholder Meeting. The Company wishes to acknowledge Lt. General Claudius
E. Watts, III for his faithfulness, honor and integrity while serving as Chairman of Carolina
Financial Corporation since April 30, 2008 and CresCom Bank since August 17, 2011. In
addition, the Company wishes to thank him for his outstanding leadership and guidance to
the Board of Directors, the Corporation, the Bank and management through very difficult
economic times, giving unselfishly of his time during his tenure to promote and protect the
interests and well-being of the stockholders of Carolina Financial Corporation.
With the completion of his elected term as a Director of Carolina Financial
Corporation, William H. Alford will be retiring from the Board of Directors of Carolina
Financial Corporation with the close of the April 29, 2015 Annual Stockholder Meeting.
The Company would like to thank Mr. Alford for his service as a Director of Carolina
Financial Corporation and as the former Chairman of Crescent Bank, the predecessor of
CresCom Bank.
Information of Other Directors and Executive Officers
Set forth below is also information about each of the Company’s other directors
and executive officers, including their name, period they have served as a director or exec-
utive officer, occupation, and additional information about the specific experience, qualifi-
cations, attributes, or skills that led to the board’s conclusion that such person should serve
as a director for the Company.
Howell “Skeets” V. Bellamy, Jr. has served as a member of the Company’s Board
of Directors since 2001. Mr. Bellamy is a member of Bellamy, Rutenberg, Copeland,
Epps, Gravely & Bowers, P.A., a full service law firm headquartered in Myrtle Beach,
South Carolina. Mr. Bellamy is a member of the Horry County and American Bar
Associations, the South Carolina Bar Association, the South Carolina Trial Lawyers
Association, the Association of Trial Lawyers of America, and the Fourth Circuit Judicial
Conference, and previously served as President of the Horry County Bar Association.
He also previously served as a director of Anchor Bank. Mr. Bellamy holds a Bachelor
of Arts degree from Davidson College and a Juris Doctor degree from the University of
South Carolina. His extensive legal and previous experience as a director of a state-wide
financial institution gives him useful insights and a valuable understanding of the key
markets the Company serves.
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W. Scott Brandon has served as a member of the Company’s Board of Directors
since 2001. Mr. Brandon is owner and CEO of The Brandon Agency, South Carolina’s
largest independently owned advertising agency. He is also owner of Intellistrand, an in-
ternet marketing company that buys, sells and monetizes intuitive domain names on the
internet as well as Fuel Interactive, South Carolina’s first and largest interactive-only ad-
vertising agency. He is also a co-owner of Merit Associates which operates rental car fran-
chises in Tampa, Florida and Myrtle Beach, SC. He holds a Bachelor of Science degree
in Economics from Davidson College and a Juris Doctor degree from the University of
South Carolina School of Law. Mr. Brandon is a 2012 recipient of The American Adver-
tising Federation’s Silver Medal Award for his outstanding contributions to advertising
and creative excellence. Mr. Brandon currently serves on the Board of Directors for the
Myrtle Beach Area Recovery Council and the Myrtle Beach Regional Economic Devel-
opment Corporation. He is a past member of the Horry-Georgetown Technical College
Board of Visitors, past board member of The E. Craig Wall School of Business Adminis-
tration Board of Visitors, past board member of the American Heart Association (Coastal
Chapter), past board member of the Better Business Bureau, past board member of the
Salvation Army Horry County as well as the Myrtle Beach Haven. He is a current member
of Young Presidents Organization and Chief Executives Organization. Mr. Brandon has
substantial leadership and financial experience as founder of several successful businesses
and is extensively involved in the local community, both of which enhance his ability to
serve on the Company’s Board of Directors.
Jeffery L. Deal, M.D. has served as a member of the Company’s Board of Direc-
tors since 1996. Dr. Deal is an anthropologist and physician and serves as Director of
Health Studies for Water Missions International, a non-profit non-governmental orga-
nization that provides water and sanitation for developing areas. Dr. Deal is a founding
partner of Charleston ENT, and previously served as President of the Medical Staff of
Bon Secours-St. Francis Hospital, Medical Director of a startup medical facility in South
Sudan, and several other related positions. Dr. Deal is a Fellow in the American College
of Surgeons, a Fellow in the American Academy of Otolaryngology - Head and Neck Sur-
gery, and a Fellow in the Royal Society of Tropical Medicine. Dr. Deal is a graduate of the
Medical University of South Carolina and completed his residency at the National Naval
Medical Center in Bethesda, Maryland. He brings to the Board of Directors insights rela-
tive to the challenges and opportunities facing small businesses and healthcare professionals
within the Company’s market areas.
Michael P. Leddy has served as a member of the Company’s Board of Directors
since 2013. Prior to joining the Board of Directors, Mr. Leddy was the President and Chief
Executive Officer of Crescent Mortgage Company from 2008 until 2011. Mr. Leddy has
more than 40 years of mortgage banking experience and was a founding team member in
the formation of Arvida Mortgage, a subsidiary of Walt Disney Productions. Mr. Leddy
was briefly retired from 2011 until he joined the Company’s Board of Directors in 2013.
Mr. Leddy served in the U.S. Navy on board the USS Thomas Jefferson. Mr. Leddy holds
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a Bachelors of Science degree in finance from University of Central Florida and a Juris
Doctor degree from Atlanta Law School. Mr. Leddy’s qualification as a member of the
Board of Directors is primarily attributed to his experience in founding two mortgage
companies and previously holding the position of CEO of Crescent Mortgage Company,
as well as his vast knowledge of the mortgage industry.
Thompson E. “Thom” Penney has served as a member of the Company’s Board
of Directors since 2013. Mr. Penney is the Chairman of the Board and President/CEO
(a position he has held since 1989) of LS3P, a multi-disciplinary firm offering architecture,
planning, and interior architecture services to clients throughout the U. S. With more than
250 personnel throughout the six Southeastern offices, he is responsible for overall firm
management, organizational vision, successful integration of professional services, mar-
keting, and operations of the firm. Mr. Penney has more than 40 years of experience in the
architectural field and under his leadership, LS3P has grown to become a firm consistently
recognized by Engineering News and Record as one of the Top 500 Design Firms and Top
50 Architectural Firms in the United States. A graduate of Clemson University with a
bachelor’s degree (1972) and master’s degree (1974) in architecture, Penney received the
Alumni Distinguished Service Award from Clemson University, was recipient of the AIA
South Carolina Medal of Distinction, its highest honor, and was honored with the Award
for Ethics and Civic Responsibility from The Free Enterprise Foundation. Mr. Penney
generously volunteers his time to his profession and community, having served as National
President of The American Institute of Architects (2003); Chairman of the Charleston
Metro Chamber of Commerce (2008), and is current Co-Chair of the National AIA-AGC
Joint Committee. He is also on the Boards of the South Carolina Aquarium, the Charleston
Regional Development Alliance, the AIA large Firm Roundtable, and is Vice Chair of the
Trident CEO Council. His qualifications as a member of the Board of Directors is attributed
to his business expertise within the Company’s market areas.
Bonum S. Wilson, Jr. has served as a member of the Company’s Board of Directors
since 1996. Mr. Wilson is a venture capitalist, and previously served as President of the
Exchange Club of Charleston and Chairman of the Bishop Gadsden Retirement Center.
Prior to becoming a venture capitalist, Mr. Wilson was the Group Vice President of Latin
America, Asia/Pacific and South Africa for the Carborundum Company, a division of BP
Corporation. Mr. Wilson holds a Bachelor of Science degree in Ceramic Engineering from
Clemson University. Mr. Wilson’s qualification as a member of the Board of Directors is
primarily attributed to his financial expertise and his entrepreneurial skills. Additionally,
Mr. Wilson has founded a successful international company which has required a level of
industry expertise.
Benedict P. Rosen has served as a member of the Company’s Board of Directors
since 2001, and he also serves as a director of Crescent Mortgage Company. Mr. Rosen
retired as Chairman of the Board of Directors for AVX Corporation in July 2008. Pre-
viously, he was President and Chief Executive Officer responsible for AVX’s worldwide
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operations. He served as Senior Director of Kyocera Corporation in Japan for approxi-
mately 12 years before his retirement as CEO of AVX in 2001. Mr. Rosen had been with
AVX for 30 years and had been in the electronic components industry for 43 years. He
was active during this time in establishing a global company with manufacturing and sales
in more than 15 companies around the world. From 1994 to 2001, he served as Repre-
sentative Director of Kyocera Corporation of Japan. Forbes recognized his efforts in help-
ing to make a merger of a Japanese and US company work successfully at a time when
most alliances were fraught with problems He received his Bachelor of Science degree in
Electrical Engineering from Massachusetts Institute of Technology in 1958. He currently
serves as a Director of Carolina Financial Corporation and Crescent Mortgage Company.
Mr. Rosen is on the Board of Sea Mist Resorts, Belle Baruch Foundation and also serves as
Chairman of the Board of Trustees for Brookgreen Gardens. His qualifications as a mem-
ber of the Board of Directors is attributed to his business expertise within the Company’s
market areas.
Robert G. Clawson, Jr. has served as a member of the Company’s Board of Direc-
tors since 1996. Mr. Clawson is a founding member of the law firm of Clawson and Staubes,
LLC, and is a member of the South Carolina State Bar, the American Bar Association,
the Metropolitan Exchange Club, and The Hibernian Society. Mr. Clawson is admitted
to practice law before the South Carolina Supreme Court, the U.S. District Court for
the District of South Carolina, the U.S. Court of Appeals for the Fourth Circuit, the U.S.
Court of Federal Claims, the U.S. Tax Court, and the U.S. Court of International Trade.
Mr. Clawson previously served as President of the South Carolina Municipal Attorneys
Association and the College of Charleston Cougar Club. He is a graduate of the Universi-
ty of North Carolina and the University of South Carolina School of Law. Mr. Clawson’s
qualification as a member of the Board of Directors is primarily attributed to his experi-
ence in founding a successful law practice and his extensive legal experience.
G. Manly Eubank has served as a member of the Company’s Board of Directors
since 1996. Mr. Eubank is Chairman of Palmetto Ford, Inc. and has been in the automotive
business in Charleston for over 44 years. Mr. Eubank previously served as President of the
Charleston Metro Chamber of Commerce and President of the South Carolina Automo-
bile Dealers Association. Mr. Eubank is a graduate of Wofford College. His experience
as the founder of a successful business and his involvement in leadership positions in his
trade organization enhance his ability to serve on the Board of Director.
Other than Messrs. Morrow and Rexroad, for which disclosure is provided above,
the following provides information regarding the Company’s other executive officers:
William A. Gehman, III has served as the Company’s Executive Vice President
and Chief Financial Officer since 2012. Prior to being promoted to Chief Financial officer,
Mr. Gehman was the Company’s Controller from 2008 to 2012. Mr. Gehman is also the
Chief Financial Officer of the Bank, Crescent Mortgage Company and Carolina Services
11
Corporation. Mr. Gehman, a Certified Public Accountant with over 12 years of experi-
ence in financial institutions, spent over nine years with Peat, Marwick, Mitchell & Co.,
after which he joined Coastal Financial Corporation in 2002 as Senior Vice President and
Corporate Controller, where his responsibilities included public and regulatory reporting.
Mr. Gehman is a member of the American Institute of Certified Public Accountants and
the South Carolina Association of Certified Public Accountants. Mr. Gehman is a graduate
of Liberty Baptist College.
M. J. Huggins, III has served as the Company’s Executive Vice President since
2010 and Secretary since 2012. Mr. Huggins is also a founding board member and former
President, Chief Credit Officer and Secretary of Crescent Bank. Prior to joining the Com-
pany and assisting in the founding of the Bank, Mr. Huggins served as Area Executive
and Senior Vice President of Carolina First Bank, responsible for commercial and retail
operations from Georgetown to Myrtle Beach, South Carolina. Prior to his tenure with
Carolina First Bank, Mr. Huggins worked for C & S Bank. Mr. Huggins is a board member
of the Wall College Board of Visitors at Coastal Carolina University and member of the
Community Banker’s Counsel with the South Carolina Banker’s Association. Mr. Huggins
is a graduate of Coastal Carolina University and The Graduate School of Banking at Lou-
isiana State University.
Family and Business Relationships. No director has a family relationship with any
other director or executive officer of the Company, other than Lt. General Watts, III and
Mr. Watts, IV, who are father and son.
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PROPOSAL II — AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK
The Board of Directors of the Company has adopted a resolution proposing an
amendment to the Certificate of Incorporation to increase the number of the Company’s
authorized shares of Common Stock from 10,000,000 shares to 15,000,000 shares. Stock-
holders are being asked to increase the Company’s authorized shares of Common in order
to have shares available for potential transactions.
Reasons for Amendment
The Company’s Certificate of Incorporation currently provides for 10,000,000
shares of authorized Common Stock and 1,000,000 shares of authorized Preferred
Stock, of which 8,119,264 and zero shares, respectively, were issued and outstanding at
the close of business on March 6, 2015. The Board of Directors believe that the num-
ber of authorized but unissued shares of Common Stock is not adequate to enable the
Company, as the need may arise, to take advantage of market conditions and favor-
able opportunities involving the issuance of the Common Stock without the delay and
expense associated with the holding of a special meeting of the Company’s stockhold-
ers. The availability of additional authorized shares will provide the Company with the
flexibility in the future to issue shares of Common Stock for corporate purposes such
as acquisitions, raising additional capital, paying dividends or effecting stock splits,
providing equity incentives to employees, officers and directors, and other general cor-
porate purposes. Other than as permitted or required under the Company’s existing
employee stock plans and outstanding options, the Board of Directors has no imme-
diate plans, understandings, agreements or commitments to issue additional shares of
Common Stock for any purposes.
Effect on Outstanding Common Stock
Authorized but unissued shares of Common Stock may be issued from time to time
upon authorization by the Board of Directors, at such times, to such persons and for such
consideration as the Board of Directors may determine in its discretion and generally
without further approval by stockholders, except as may be required for a particular trans-
action by applicable law, regulation or stock exchange rules. When and if such shares are
issued, they would have the same voting and other rights and privileges as the currently
issued and outstanding shares of Common Stock.
The authorization of the additional shares would not, by itself, have any effect on
the rights of stockholders. However, holders of Common Stock have no preemptive rights
to acquire additional shares of the Common Stock and thus the issuance of additional
shares of Common Stock for corporate purposes other than a stock split or stock dividend
13
would have a dilutive effect on the ownership and voting rights of the stockholders at the
time of issuance.
Increasing the number of authorized shares of Common Stock could adversely af-
fect the ability of third parties to take over or change the control of the Company. It is pos-
sible that an increase in authorized shares could render such an acquisition more difficult
under certain circumstances or discourage an attempt by a third party to obtain control
of the Company by making possible the issuance of shares that would dilute the share
ownership of a person attempting to obtain control or otherwise make it difficult to obtain
any required stockholder approval for a proposed transaction for control. However, the
Board of Directors is not aware of any attempts to take control of the Company and has
not presented this Proposal II with the intent that it be utilized as an anti-takeover device.
The text of Article Four, Paragraph A, as it is proposed to be amended, is set forth
as Exhibit A to this proxy statement. The affirmative vote of a majority of the outstanding
shares of Common Stock entitled to vote hereon is required to approve this amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE “FOR” THE AMENDMENT OF THE CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
14
PROPOSAL III – RATIFICATION OF APPOINTMENT OF THE
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our Audit Committee has appointed Elliott Davis Decosimo, LLC to be the Company’s
independent registered public accounting firm for the fiscal year ending December 31, 2015,
subject to the ratification of the appointment by the Company’s stockholders. Representa-
tives of Elliott Davis Decosimo, LLC are expected to attend the Meeting to respond to ap-
propriate questions and to make a statement if they so desire. Although stockholder ratifi-
cation of the appointment of the registered public accounting firm for the Company is not
required by the Company’s Bylaws or otherwise, the Company is submitting the selection
of Elliott Davis Decosimo, LLC to its stockholders for ratification to permit stockholders
to participate in this important corporate decision. If not ratified, the Audit Committee
will reconsider the selection, although the Audit Committee will not be required to select
a different independent registered public accounting firm.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ELLIOTT DAVIS
DECOSIMO, LLC AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2015.
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CORPORATE GOVERNANCE
Board Leadership Structure and Role in Risk Oversight
The Board of Directors is focused on the Company’s corporate governance practices
and value independent board oversight as an essential component of strong corporate
performance to enhance stockholder value. The Board of Directors’ commitment to inde-
pendent oversight is demonstrated by the fact that the majority of the Company’s directors
are independent.
The Company believes that it is preferable for an independent director to serve
as Chairman of the Board of Directors. The director elected as Chairman, Lt. General
Claudius E. Watts, III, has been one of the Company’s directors since 1996, and is a long-
time resident of the Company’s primary market area. The Company believes it is the Chief
Executive Officer’s responsibility to run the Company and the Chairman’s responsibility
to run the Board of Directors. As directors continue to have more oversight responsibility
than ever before, the Company believes it is beneficial to have an independent Chairman
whose sole job is leading the Board of Directors. In making its decision to have an inde-
pendent Chairman, the Company considered the time that Mr. Rexroad will be required
to devote as Chief Executive Officer of the Company. By having another director serve as
Chairman of the Board of Directors, Mr. Rexroad will be able to focus his entire energy on
running the Company. This will also ensure there is no duplication of effort between the
Chief Executive Officer and the Chairman. The Company believes this structure provides
15
strong leadership for the Board of Directors, while also positioning the Chief Executive
Officer as the leader of the Company in the eyes of the Company’s customers, employees,
and other stakeholders.
Risk oversight is the responsibility of the Board of Directors collectively and in-
dividually. The Board of Directors fulfills this responsibility through a combination of
oversight with respect to direct board reports from management and the delegation of
specific risk monitoring to its committees, which in turn provide reports to the full Board
of Directors at each regular meeting. Notwithstanding the foregoing, the Board of Direc-
tors believes that its role is one of oversight, recognizing that management is responsible
for executing the Company’s risk management policies.
At each regular meeting, the Board of Directors’ standing agenda requires reports
from the Chief Financial Officer and other executive officers, who collectively are respon-
sible for all risk areas. Their agenda items are designed to elicit information with respect
to each of these areas. The Board of Directors does not concentrate the delegation of its
responsibility for risk oversight in a single committee. Instead, each of the Board of Direc-
tors’ committees concentrates on specific risks for which its members have an expertise,
and each committee is required to regularly report to the Board of Directors on its find-
ings. The Company believes this division of responsibility is the most effective approach
for addressing the risks it faces and that the Board of Directors leadership structure sup-
ports this approach.
The Company recognizes that different board leadership structures may be appro-
priate for companies in different situations. The Company will continue to reexamine its
corporate governance policies and leadership structures on an ongoing basis to ensure that
they continue to meet the Company’s needs.
Director Independence
The Board of Directors annually evaluates the independence of its members based
on Item 407(a) of Regulation S-K and NASDAQ Rule 5605(a)(2). In addition, the Board
of Directors annually evaluates the independence of its Audit Committee and Compensa-
tion Committee members based on NASDAQ Rules 5605(c)(2) and (d)(2), respectively.
The Company’s corporate governance guidelines and principles require that a majority
of the Board of Directors be composed of directors who meet the requirements for in-
dependence established by these standards. The Board of Directors has concluded that
the Company has a majority of independent directors and that the Board of Directors
meet the standards of NASDAQ Rule 5605(a)(2). The Board of Directors has also con-
cluded that the members of the Audit Committee meet the standards of NASDAQ Rule
5605(c)(2) and that the members of the Compensation Committee meet the standards of
NASDAQ Rule 5605(d)(2).
16
The Board of Directors has determined that Messrs. Alford, Bellamy, Brandon,
Clawson, Deal, Eubank, Leddy, Moise, Penney, Rosen, Watts, III, Watts, IV, and Wilson
are independent taking into account the matters discussed under “Certain Relationships
and Related Transactions.” Mr. Rexroad, the Company’s President and Chief Executive
Officer, and Mr. Morrow, the Company’s Executive Vice President, are not considered to
be independent as they are also executive officers of the Company.
Meetings and Committees of the Board of Directors
The Board of Directors has standing Executive, Audit, Compensation, Corporate
Governance/Nominating, Finance and Capital Allocation, and Mergers and Acquisitions
Committees. The Board of Directors has not implemented a formal policy regarding
director attendance at the Company’s Annual Meeting of Stockholders, although each
director is expected to attend all Annual Meetings of Stockholders absent unusual or
extenuating circumstances. 15 of the Company’s directors attended the 2013 Annual Meet-
ing of Stockholders.
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Committee Information
Executive Committee
The Executive Committee is responsible for, among other things, exercising
authority on behalf of the Board of Directors when it is otherwise impracticable for the full
Board of Directors to act. The Executive Committee is composed of ten members: Messrs.
Watts, III, Brandon, Deal, Eubank, Moïse, Morrow, Penney, Rexroad, Rosen, and Wilson.
The Executive Committee met five times during the 2014 fiscal year.
The Executive Committee functions are set forth in its charter, which was adopted
on April 24, 2013. A copy of the Executive Committee Charter may be found under the
Investor Relations section under the Governance Documents tab of the Company’s
website, http://www.haveanicebank.com.
Audit Committee
The Audit Committee is responsible for the review of the Company’s annual audit
report prepared by the Company’s independent registered public accounting firm. The
Audit Committee is composed of five members: Messrs. Moïse, Alford, Bellamy, Deal,
and Wilson, each of whom is a non-management Director. The Audit Committee met six
times during the 2014 fiscal year.
The Audit Committee’s review includes a detailed discussion with the indepen-
dent registered public accounting firm and recommendation to the full Board of Directors
concerning any action to be taken regarding the audit. The Audit Committee also has
17
the authority to conduct or authorize investigations into any matters within its scope of
responsibility. The Audit Committee is empowered to:
• appoint, compensate, retain, and oversee the work of any registered public
accounting firm employed by the Company for the purpose of preparing or issu-
ing an audit report or performing other audit, review, or attest services for the
Company, with any such registered public accounting firm reporting directly to
the Audit Committee;
• resolve any disagreements between management and the independent regis-
tered public accounting firm regarding financial reporting;
• pre-approve all external audit services;
• retain independent counsel, accountants, or others to advise the committee or
assist in the conduct of an investigation;
• meet with the Company’s officers, employees, independent registered public
accounting firm, or outside counsel as deemed necessary.
Under its charter, all members of the Audit Committee must be independent
members. Each of the current Audit Committee members is independent under
NASDAQ rules. The Audit Committee Charter provides that at least one member of the
committee shall be a “financial expert,” the financial expert on the Audit Committee is
Robert M. Moïse.
The Audit Committee functions are set forth in its charter, which was adopted on
June 18, 2014. A copy of the Audit Committee Charter may be found under the Inves-
tor Relations section under the Governance Documents tab of the Company’s website,
http://www.haveanicebank.com.
Audit Committee Matters
Report of the Audit Committee of the Board of Directors
The report of the Audit Committee shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Company specifically incorporates the information contained in the report
by reference, and shall not be deemed filed under such acts.
The Audit Committee reviewed and discussed with management the audited finan-
cial statements. The Audit Committee also discussed with its independent registered pub-
lic accounting firm those matters required to be discussed by the independent registered
18
public accounting firm with the Audit Committee under the rules adopted by the Public
Company Accounting Oversight Board (the “PCAOB”). The Audit Committee received
from the independent registered public accounting firm the written disclosures and letters
required by applicable requirements of the PCAOB regarding the firm’s independence
and has discussed with the firm its independence from the Company and its management.
In reliance on the reviews and discussions referred to above, the Audit Committee recom-
mended to the Board of Directors that the audited financial statements be included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for
filing with the SEC.
The report of the Audit Committee is included herein at the direction of its mem-
bers, Moïse, Alford, Bellamy, Deal, and Wilson.
Independent Certified Public Accountants
Elliott Davis Decosimo, LLC was the Company’s independent registered public
accounting firm during the fiscal years ended December 31, 2014 and 2013 and provided
Audit and Audit-related services. For the fiscal years ended December 31, 2014 and
2013, Porter Keadle Moore, LLC provided tax services to the Company. Representatives
of Elliott Davis Decosimo, LLC are expected to be present at the Meeting to respond
to appropriate questions and to make a statement if they so desire. The following table
shows the fees that the Company paid for services performed in the fiscal year ended
December 31, 2014 and 2013:
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Audit Fees
Tax Fees
Audit-related fees
Total
Year Ended
December 31, 2014
Year Ended
December 31, 2013
$
$
177,500
$
93,845
49,515
320,860
$
132,000
102,199
10,500
244,699
Audit Fees. This category includes the aggregate fees billed for professional ser-
vices rendered by the Company’s independent registered public accounting firm during
the 2014 and 2013 fiscal years for the audit of the Company’s annual financial statements
and review of financial statements included in the Company’s initial Registration State-
ment on Form 1 and HUD audits and quarterly reports on Form 10-Q or services that are
normally provided by the accountant in connection with statutory and regulatory filings or
engagements.
Tax Fees. This category includes the aggregate fees billed for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax planning.
19
Audit-related fees. For 2014, audit-related fees consisted of services rendered in
connection with the filing of the Form S-8, Form 10, and the audit of the financial infor-
mation submitted in connection with the Company’s acquisition of branches. For 2013,
audit-related fees consisted of miscellaneous preapproved procedures.
Corporate Governance/Nominating Committee
The Corporate Governance/Nominating Committee is responsible for identifying
potential directors and presenting them for nomination to the Board of Directors. The
Corporate Governance/Nominating Committee is composed of six members: Messrs.
Deal, Clawson, Penney, Rexroad, Rosen, and Wilson. The Corporate Governance/
Nominating Committee met five times during the 2014 fiscal year.
When considering a person to be recommended for nomination as a director, the
Corporate Governance/Nominating Committee considers the skills and background needed
by the Company and possessed by the person, diversity of the Board of Directors, and the
ability of the person to devote the necessary time to service as a director.
The Corporate Governance/Nominating Committee functions are set forth in its
charter, which was adopted on April 24, 2013. A copy of the Corporate Governance/Nom-
inating Charter may be found under the Investor Relations section under the Governance
Documents tab of the Company’s website, http://www.haveanicebank.com.
Compensation Committee
The Compensation Committee is responsible for evaluating the performance of the
Company’s principal officers and employees to determine the compensation and benefits
to be paid to such persons. The Compensation Committee is composed of six members:
Messrs. Penney, Deal, Eubank, Leddy, Rosen, and Wilson. The Compensation Committee
met eight times during the 2014 fiscal year.
In determining the compensation for executive officers, the Compensation Committee
objectives are to encourage the achievement of the Company’s long-range objectives by
providing compensation that directly relates to the performance of the individual and the
achievement of internal strategic objectives. The Compensation Committee believes that
its executive officers’ level of compensation is reasonable based upon the Company’s cor-
porate goals and objectives, the business plan of the Bank, normal and customary levels of
compensation within the banking industry taking into consideration geographic and com-
petitive factors, the Bank’s asset quality, capital level, operations and profitability and the
duties performed and responsibilities held by the officer.
The Compensation Committee functions are set forth in its charter, which was
adopted on June 18, 2014. A copy of the Compensation Committee Charter may be
20
found under the Investor Relations section under the Governance Documents tab of the
Company’s website, http://www.haveanicebank.com.
Finance and Capital Allocation Committee
The Finance and Capital Allocation Committee is responsible for reviewing the
Company’s financial results and accounting policies. The Finance and Capital Allocation
Committee is composed of six members: Messrs. Brandon, Rexroad, Deal, Leddy, Moïse,
and Rosen. The Finance and Capital Allocation Committee met four times during the
2014 fiscal year.
The Finance and Capital Allocation Committee functions are set forth in its char-
ter, which was adopted on April 24, 2013. A copy of the Finance and Capital Allocation
Committee Charter may be found under the Investor Relations section under the Gover-
nance Documents tab of the Company’s website, http://www.haveanicebank.com
Mergers and Acquisitions Committee
The Mergers and Acquisitions Committee is responsible for evaluating potential
merger and acquisition candidates and transactions. The Mergers and Acquisitions Com-
mittee is composed eight members: Messrs. Watts, III, Brandon, Eubank, Moïse, Morrow,
Rexroad, Rosen, and Wilson. The Mergers and Acquisitions Committee met three times
during the 2014 fiscal year.
The Mergers and Acquisitions Committee functions are set forth in its charter,
which was adopted on April 24, 2013. A copy of the Mergers and Acquisitions Committee
Charter may be found under the Investor Relations section under the Governance Docu-
ments tab of the Company’s website, http://www.haveanicebank.com
Stockholder Communications
The Board of Directors have implemented a process for stockholders of the
Company to send communications to the Board of Directors. Any stockholder desiring
to communicate with the Board of Directors, or with specific individual directors, may
so do by writing to M. J. Huggins, III, Secretary, Carolina Financial Corporation, 288
Meeting Street, Charleston, South Carolina 29401. The Secretary has been instructed by
the Board of Directors to promptly forward all such communications to the addressees
indicated thereon.
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
During fiscal 2014, directors of the Company received a retainer fee of $3,500 paid
in cash and 600 shares of the Company’s Common Stock. Those directors not employed
by a subsidiary of the Company received $300 for each committee meeting attended. As
directors of CresCom Bank, Messrs. Alford, Brandon, Clawson, Deal, Eubank, Moise,
Penney, and Wilson received $1,000 per meeting. As directors of Crescent Mortgage Com-
pany, Messrs. Clawson, Moore and Rosen received $1,000 per meeting. The Chairman of
the Company’s Board of Directors received an annual fee of $50,000, paid monthly. Addi-
tionally, the Chairmen of the Company’s Audit, Governance/Nominating, Compensation,
Finance and Capital Allocation and Mergers and Acquisitions Committees each received
a fee of $5,000 per year while the Bank Committee Chairman received $1,000 per year.
2014 DIRECTOR COMPENSATION TABLE
Director Name
Fees Earned or
Paid in
Cash(1)
Stock
Awards
Total
William H. Alford
Howell V. Bellamy, Jr.
W. Scott Brandon
Robert G. Clawson, Jr.
Jeffery L. Deal, M.D.
G. Manly Eubank
Michael P. Leddy
Robert M. Moïse, CPA
Thompson E. Penney
Benedict P. Rosen
Lt. General Claudius E. Watts, III (USAF, Retired)
Bonum S. Wilson, Jr.
John D. Russ(2)
$
$
$
$
$
$
$
$
$
$
$
$
$
17,000 $
4,737 $
21,737
5,000 $
4,737 $
9,737
25,300 $
4,737 $
30,037
31,200 $
4,737 $
35,937
28,600 $
4,737 $
33,337
21,200 $
4,737 $
25,937
37,100 $
4,737 $
41,837
25,900 $
4,737 $
30,637
25,200 $
4,737 $
29,937
22,400 $
4,737 $
27,137
50,000 $
4,737 $
54,737
23,000 $
4,737 $
27,737
— $
4,737 $
4,737
(1) Includes fees, if any, for serving on boards of the Company’s subsidiaries.
(2) John D. Russ retired from the Board of Directors with the 2014 Annual Meeting.
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Security Ownership of Certain Beneficial Owners and Management
The following table shows how many shares of Common Stock are owned by
the directors, the named executive officers, owners of more than 5% of the outstanding
Common Stock, and all directors and executive officers as a group as of March 6, 2015.
Unless otherwise indicated, the mailing address for each beneficial owner is care of Carolina
Financial Corporation, 288 Meeting Street, Charleston, SC 29401.
Name
Directors and Named Executive Officers
Number of
Shares
Beneficially Owned (1)(2)(3)(4)
Percent of
Beneficial
Ownership
William H. Alford
Howell V. Bellamy, Jr.
W. Scott Brandon
Robert G. Clawson, Jr.
Jeffery L. Deal, M.D.
G. Manly Eubank
M. J. Huggins, III
Michael P. Leddy
Robert M. Moïse, CPA
David L. Morrow
Thompson E. Penney
Jerold L. Rexroad
Benedict P. Rosen
Claudius E. Watts, IV
Lt. General Claudius E. Watts, III (USAF - Retired)
Bonum S. Wilson, Jr.
All Directors and Executive Officers as a Group
(16 persons)
33,180
29,600
131,234
124,300
51,260
181,848
66,846
101,200
111,096
154,768
21,200
314,660
62,630
29,808
89,100
132,292
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0.41%
0.36%
1.62%
1.53%
0.63%
2.24%
0.82%
1.25%
1.37%
1.90%
0.26%
3.84%
0.77%
0.37%
1.10%
1.63%
1,635,022
19.90%
(1) Includes shares for which the named person has sole voting and investment power, has shared voting
and investment power with a spouse, holds in an IRA or SEP, or holds in a trust as trustee for the benefit
of himself, unless otherwise indicated in these footnotes.
(2) Includes unvested shares of restricted stock, as to which the directors and executive officers have full vot-
ing privileges. The shares are as follows: Mr. Alford, 400 shares; Mr. Bellamy, 400 shares; Mr. Brandon,
400 shares; Mr. Clawson, 400 shares; Mr. Deal, 400 shares; Mr. Eubank, 400 shares; Mr. Huggins, 28,000
shares; Mr. Moise, 400 shares; Mr. Morrow, 36,000 shares; Mr. Rexroad, 54,295 shares; Mr. Rosen, 400
shares; Lt. General Watts, III, 400 shares; and Mr. Wilson, 400 shares.
23
(3) Includes shares that may be acquired within 60 days of March 6, 2015 by exercising vested stock options
or unvested stock options that will vest within 60 days of March 6, 2015. The shares are as follows:
Mr. Eubank, 320 shares; Mr. Huggins, 8,220 shares; Mr. Moise, 640 shares; Mr. Morrow, 21,916 shares;
Mr. Rexroad, 65,752 shares; and Mr. Wilson, 800 shares.
(4) Excludes shares of Common Stock owned by or for the benefit of family members of the following direc-
tors and executive officers, each of whom disclaims beneficial ownership of such shares: Mr. Clawson,
11,060 shares; Mr. Eubank, 8,000 shares; and Mr. Rexroad, 9,200 shares.
24
Executive Compensation
The following table shows the compensation the Company paid for the years ended
December 31, 2014 and 2013 to its named executive officers during such periods.
Summary Compensation Table
Name and Principal Position
Year
Salary
Bonus
Stock
Awards
(2)
Option
Awards
(3)
All Other
Compensation
(4)
Total
Jerold L. Rexroad (1)
Director, President and Chief
Executive Officer; Chairman
and CEO of Crescent Mortgage
Company; Senior Executive
Vice President and Chief
Administrative Officer of
CresCom Bank
Director, President and Chief
Executive Officer; Chairman
and CEO of Crescent Mortgage
Company; Senior Executive
Vice President and Chief
Administrative Officer of
CresCom Bank
David L. Morrow
Director, Executive Vice
President; Chief Executive
Officer, President and Director
of CresCom Bank
Director, Executive Vice
President; Chief Executive
Officer, President and Director
of CresCom Bank
M. J. Huggins, III
Executive Vice President
and Secretary; President of
Commercial Banking, Secretary
and Director of CresCom Bank
Executive Vice President
and Secretary; President of
Commercial Banking, Secretary
and Director of CresCom Bank
2014 $312,000 $260,000
$ 17,673
—
$ 49,436 $ 639,109
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2013 $306,000 $469,700(1) $529,468(1) $120,000
$ 35,475 $1,460,643
2014 $280,800 $210,600
—
—
$186,932 $ 678,332
2013 $275,400 $175,500
$240,000
$ 40,000
$175,475 $ 906,375
2014 $250,000 $187,500
$164,000
$ 20,276
$ 84,291 $ 706,067
2013 $245,000 $156,250
$ 80,000
$ 10,000
$ 69,750 $ 561,000
(1) Mr. Rexroad’ s 2014 and 2013 bonus compensation arrangement for Crescent Mortgage Company was
for 2.00% and 2.04%, respectively, of the pretax, pre-bonus earnings of Crescent Mortgage Company,
with 40% of such bonus paid in shares of common stock,. Common stock was issued from the 2013
Equity Incentive Plan. In addition, in 2014 and 2013 Mr. Rexroad participated in the CresCom Bank
bonus program.
25
(2) All 2014 and 2013 stock awards were issued from the 2013 Equity Incentive Plan. In fiscal 2014,
Mr. Rexroad was awarded 1,276 common shares related to the Crescent Mortgage Company bonus
compensation plan and Mr. Huggins was awarded 16,000 shares of restricted stock. In fiscal 2013,
Messrs. Rexroad, Morrow and Huggins were awarded 128,000 restricted shares. In addition, as part of
the 2013 Crescent Mortgage Company bonus compensation plan, Mr. Rexroad earned 17,446 shares of
common stock, as well as an additional 5,816 shares of common stock if Crescent Mortgage Company is
profitable in the first six months of fiscal 2014, each of which the Company granted in 2014. The value for
each of these awards is its grant date fair value calculated by multiplying the number of shares subject to
the award by the market price per share on the date such award was granted, computed in accordance
with Financial Accounting Standards Board Accounting Standards Codification Topic 718.
(3) All 2014 and 2013 options awards were issued from the 2013 Equity Incentive Plan. In fiscal 2014,
Mr. Huggins was awarded 5,480 options. In fiscal 2013, Messrs. Rexroad, Morrow and Huggins were
awarded 93,148 options. The value for each of these awards is its grant date fair value calculated by
multiplying the number of shares subject to the award by the market price per share on the date such
award was granted, computed in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718.
(4) All other compensation included the Company’s contributions under the 401(k) Plan and car allowances
paid by the Company to the named executives, as well as for Messrs. Morrow and Huggins, life insurance
premiums and other payments received in connection with their LifeComp Agreements. Life insurance
policies have been purchased on the lives of each of Messrs. Morrow and Huggins under split-dollar
life insurance arrangements, referred to as the LifeComp Agreements, between each executive and the
Bank in order to provide each executive with target retirement and death benefits following termination
of employment. Under the LifeComp Agreements, the Bank pays, among other things, the premiums
on each policy and additional amounts to the executives to cover federal income taxes owed with respect
to their deemed bonuses under the LifeComp Agreements. In 2014 and 2013, the Company allocated
$84,000 and $24,000 in life insurance premiums to Messrs. Morrow and Huggins, respectively, as com-
pensation (an aggregate premium of $108,000). The Company also paid $56,000 and $16,000 in other
compensation to Messrs. Morrow and Huggins, respectively, to cover federal income taxes owed with
respect to the deemed bonuses (aggregate bonuses of $72,000). See “Benefit Plans – Elite LifeComp
Program” below for additional information regarding the LifeComp Agreements between the Bank and
Messrs. Morrow and Huggins.
Incentive Compensation Plan
In fiscal 2013 and 2014, the Board of Directors implemented an incentive compen-
sation plan for Messrs. Morrow and Huggins which was tied to achieving certain earn-
ings and operational targets. For 2013, Messrs. Morrow and Huggins earned $175,500
and $156,250, respectively. For 2014, Messrs. Morrow and Huggins earned $210,600 and
$187,500, respectively.
In fiscal 2013 and 2014, the Board of Directors implemented an incentive compen-
sation plan for Mr. Rexroad that consisted of two components. The CresCom Bank incen-
tive was tied to achieving certain earnings and operational targets. Mr. Rexroad earned
26
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$234,000 and $195,000 for 2014 and 2013, respectively, related to the CresCom Bank
incentive. The Crescent Mortgage Company incentive was based upon pre-tax,
pre-incentive earnings at Crescent Mortgage Company and is paid 60% in cash and 40%
in the Company’s Common Stock. For 2014, Mr. Rexroad earned $43,680 of which $26,007
and $17,673 were paid in cash and Common Stock, respectively. For 2013, Mr. Rexroad
earned $484,168 of which $274,700 and $209,468 was paid in cash and Common Stock,
respectively.
Employment Agreements
The Company has entered into an employment agreement with Mr. Jerold L.
Rexroad, its President and Chief Executive Officer, and the Bank has entered into
employment agreements with Messrs. David L. Morrow and M. J. Huggins, III, its
President/Chief Executive Officer and President of Commercial Banking, respectively.
The employment agreements between the Bank and its two executives are substantially
identical to the employment agreement of Mr. Rexroad, except that Messrs. Morrow and
Huggins also participate in the Elite LifeComp program. Mr. Morrow terminated his par-
ticipation in the Elite LifeComp program as of December 31, 2014 and was paid out his
portion in 2015. Under the employment agreements, Mr. Rexroad currently receives a
base salary of $450,000, Mr. Morrow currently receives a base salary of $375,000, and
Mr. Huggins currently receives a base salary of $255,000.
The employment agreements provide that upon the occurrence of an “Event of
Termination,” as defined in the agreements, the Company or Bank, as applicable, will pay
the executive, beneficiary, or estate, three times the average over the past three years of
the sum of the executive’s annualized base salary, other cash compensation paid to the
executive and contributions made on the executive’s behalf to Company-sponsored employee
benefit plans. If the executive’s employment is terminated without cause as an “Event of
Termination,” the executive agrees that for a period of one year the employee will not
compete with the Company or Bank within 30 miles of the Company’s main office.
The employment agreements also provide that upon the occurrence of a “Change
in Control”, as defined in the agreements, the Company or Bank as applicable, will pay the
executive, beneficiary, or estate 2.99 times the average over the past five years of the sum
of the executive’s “annual compensation”, as defined in the agreements, and contributions
made on the executive behalf to Company-sponsored employee benefit plans.
If an event occurred that triggered an obligation to pay benefits to Messrs.
Rexroad, Morrow and Huggins as of December 31, 2014, Carolina Financial Corporation
and/or the Bank would be required to pay, in the aggregate, (i) approximately $5.5 million,
exclusive of a possible gross-up for additional tax payments, in the event the executive’s
employment terminated in connection with a Change in Control, and (ii) approximately
$6.5 million in the event the executive’s employment terminated without cause upon an
Event of Termination that does not include a Change in Control.
27
Elite LifeComp Program
Life insurance policies have been purchased on the lives of each of Messrs. Morrow
and Huggins under split-dollar life insurance arrangements between each executive and
the Bank in order to provide each executive with target retirement and death benefits fol-
lowing termination of employment. Under the arrangements, referred to as the LifeComp
Agreements, the executives are named as the policy owners, but the Bank pays the pre-
miums on each policy for a period of years and is entitled to recover a death benefit of $1
million under the policy as key man insurance. Until the executive attains an age specified
in such executive’s agreement, the Bank annually pays to each executive an amount that is
deemed to be, initially, a partial premium payment, and later, an incremental increase in
the executive’s interest in the policy’s cash surrender value. Also, during the term of the
executive’s employment, the Bank pays to the executive an amount sufficient to cover the
interest payments owed by the executive to the Company on the loans, and also an addi-
tional amount to cover federal income taxes to which the executive becomes subject upon
payment of bonuses.
Under an addendum to the LifeComp Agreement entered into and effective as
of January 2007, if the executive’s employment with the Bank terminates for reasons
other than for cause or due to a change in control, the Company has agreed to continue
its obligations under the LifeComp Agreement until the date on which the split-dollar life
insurance arrangement is terminated. Pursuant to the agreements with Messrs. Huggins
and Morrow, the termination date is February 27, 2022 and February 27, 2015, respec-
tively. Until such termination date, the addendum requires the Company, or its succes-
sor, to make all premium payments that would become due after the change in control
or event of termination and also to “gross-up” the executive’s income through a series
of bonus payments in order to: (i) facilitate the executive’s payment of his portion of the
premiums, (ii) enable the executive to partially repay the accumulated loan balance on
the deemed loans made by the Bank to the executive to pay the executive’s portion of
said premiums, (iii) cover the deemed interest due on such loans, and (iv) cover federal
income taxes that each executive would owe with respect to the deemed bonuses and in-
terest owed (but not paid) on the loans. Beginning at retirement age (age 64 in the case
of Mr. Morrow and age 60 in the case of Mr. Huggins), the executive is entitled to draw
a retirement benefit from the cash surrender value of the policy for a period of up to 15
years. The annual target retirement benefit payable to Messrs. Morrow and Huggins is
$75,000. In addition, each executive is entitled to a death benefit from the policy of $1
million prior to retirement, and a lesser amount once the executive begins to receive
the retirement benefits under the policy. In the event the executive is terminated for
cause, the executive loses all rights under the agreement. The Company incurred an
aggregate premium of $108,000 in fiscal 2014 and 2013 on the life insurance policies. In
addition, $72,000 in aggregate bonuses was credited to the executives under the terms
of the agreements. On December 31, 2014, Mr. Morrow stopped participating in
the LifeComp plan and was subsequently paid out his portion of the cash surrender
value in 2015.
28
Certain Transactions
The Bank has followed a policy of granting commercial and consumer loans,
and loans secured by one-to four-family real estate to officers, directors and employees.
Loans to directors and executive officers are made in the ordinary course of business and
on the same terms and conditions as those of comparable transactions with the general
public prevailing at the time, in accordance with the Banks’ underwriting guidelines, and
do not involve more than the normal risk of collectability or present other unfavorable
features.
All loans by the Bank to its directors and executive officers are subject to federal
regulations restricting loan and other transactions with affiliated persons of the Bank.
Federal law generally requires that all loans to directors and executive officers be made
on terms and conditions comparable to those for similar transactions with non-affiliates,
subject to limited exceptions. Loans to all directors, executive officers, and their associates
totaled $12.2 million at December 31, 2014, which was 13.1% of the Company’s stock-
holders’ equity at that date. There were no loans outstanding to any director, executive
officer or their affiliates at preferential rates or terms, which in the aggregate exceeded
$100,000 during the year ended December 31, 2014. All loans to directors and officers were
performing in accordance with their terms at December 31, 2014.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive
officers, and 10% stockholders to file reports of holdings and transactions in the Company’s
stock with the SEC. Based on a review of Section 16(a) reports and written representations
from the Company’s directors and executive officers, the Company believes that all of its
directors, executive officers, and 10% stockholders have made all filings required under
Section 16(a) in a timely manner, with the exception of Mr. Rexroad who filed one late
report (Form 4) and Mr. Huggins who filed one late report (Form 4).
Code of Ethics
The Company expects all of its employees to conduct themselves honestly and eth-
ically. The Company has adopted a Code of Ethics that reflects the Company’s policy of
responsible and ethical business practices, and applies to all directors, officers, and em-
ployees of the Company and its subsidiaries. Stockholders and other interested persons
may view the Company’s Codes of Ethics on the Investor Relations section under the
Governance Documents tab of the Company’s website, http://www.haveanicebank.com.
29
Stockholder Proposals for the 2016 Annual Meeting of Stockholders
Stockholders interested in submitting a proposal for inclusion in the proxy state-
ment for the Company’s 2016 Annual Meeting of Stockholders may do so by following
the procedures prescribed in SEC Rule 14a-8. To be eligible for inclusion, stockholder
proposals must be received by the Company’s Chairman of the Board of Directors, Chief
Executive Officer, or Corporate Secretary at 288 Meeting Street Charleston, SC 29401 no
later than November 26, 2015. To ensure prompt receipt by the Company, the proposal
should be sent certified mail, return receipt requested. Proposals must comply with the
Company’s Bylaws related to stockholder proposals in order to be included in the Compa-
ny’s proxy materials.
30
EXHIBIT A
AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
THE COMPANY’S COMMON STOCK
Article FOURTH, Paragraph A of the Company’s Certificate of Incorporation is
hereby deleted in its entirety and replaced with the following*:
FOURTH:
A.
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is sixteen million (16,000,000) consisting of:
1.
2.
One million (1,000,000) shares of Preferred Stock, par value one cent
($.01) per share (the “Preferred Stock”); and
Fifteen million (15,000,000) shares of Common Stock, par value one
cent ($.01) per share (the “Common Stock”).
* The following assumes the amendment to the Company’s Certificate of Incorporation is
approved at the Meeting. If the amendment is approved, then, upon the filing of the Certificate
of Amendment with the Delaware Secretary of State, the number of authorized shares of
Common Stock will be increased accordingly.
E
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A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-10897
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
288 Meeting Street, Charleston,
South Carolina
(Address of principal executive offices)
57-1039637
(I.R.S. Employer Identification No.)
29401
(Zip Code)
(843) 723-7700
(Issuer’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class: Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). No þ Yes ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant (computed by
reference to the price at which the stock was most recently sold) was $61,483,440 as of the last business day of the registrant’s most
recently completed second fiscal quarter.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ
(Do not check if a smaller reporting company)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Outstanding at March 20, 2015
Class
Common Stock, $.01 par value per share
8,124,514 shares
Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on April 29,
2015, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
DOCUMENTS INCORPORATED BY REFERENCE
2014 Form 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
4
28
46
47
48
48
49
51
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . .
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . .
85
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 150
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . 152
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 152
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . 152
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . 152
SIGNATURES
EXHIBIT INDEX
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including information included or incorporated by reference,
contains statements which constitute forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 (the “Securities “Act”) and Section 21E of the Securities Exchange Act of 1934
(the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of op-
eration, plans, objectives, or future performance. These statements are based on many assumptions and
estimates and are not guarantees of future performance. Our actual results may differ materially from
those anticipated in any forward-looking statements, as they will depend on many factors about which we
are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,”
“should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,”
“intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking
statements. Potential risks and uncertainties that could cause our actual results to differ from those an-
ticipated in any forward-looking statements include, but are not limited to, those described below under
“Item 1A- Risk Factors” and the following:
•
•
•
•
•
•
•
our ability to maintain appropriate levels of capital and to comply with our capital ratio
requirements;
examinations by our regulatory authorities, including the possibility that the regulatory
authorities may, among other things, require us to increase our allowance for loan losses or
write-down assets or otherwise impose restrictions or conditions on our operations, including,
but not limited to, our ability to acquire or be acquired;
changes in economic conditions, either nationally or regionally and especially in our primary
market areas, resulting in, among other things, a deterioration in credit quality;
an increase in interest rates, resulting in a decline in our mortgage production and a decrease
in the profitability of our mortgage banking operations;
greater than expected losses due to higher credit losses generally and specifically because
losses in the sectors of our loan portfolio secured by real estate are greater than expected
due to economic factors, including, but not limited to, declining real estate values, increasing
interest rates, increasing unemployment, or changes in payment behavior or other factors;
greater than expected losses due to higher credit losses because our loans are concentrated
by loan type, industry segment, borrower type, or location of the borrower or collateral;
changes in the amount of our loan portfolio collateralized by real estate and weaknesses in
the South Carolina, southeastern North Carolina and national real estate markets;
•
the rate of delinquencies and amount of loans charged-off;
•
the adequacy of the level of our allowance for loan losses and the amount of loan loss
provisions required in future periods;
•
the rate of loan growth in recent or future years;
•
our ability to attract and retain key personnel;
1
2014 Form 10-K •
our ability to retain our existing customers, including our deposit relationships;
•
significant increases in competitive pressure in the banking and financial services industries;
•
adverse changes in asset quality and resulting credit risk-related losses and expenses;
•
changes in the interest rate environment which could reduce anticipated or actual margins;
•
changes in political conditions or the legislative or regulatory environment, including, but
not limited to, the Dodd-Frank Act and regulations adopted thereunder, changes in federal
or state tax laws or interpretations thereof by taxing authorities and other governmental
initiatives affecting the banking and financial service industries;
•
changes occurring in business conditions and inflation;
•
•
increased funding costs due to market illiquidity, increased competition for funding, or
increased regulatory requirements with regard to funding;
our business continuity plans or data security systems could prove to be inadequate, resulting
in a material interruption in, or disruption to, business and a negative impact on results of
operations;
•
changes in deposit flows;
•
changes in technology;
•
changes in monetary and tax policies;
•
•
•
changes in accounting policies, as may be adopted by the regulatory agencies, as well as
the Public Company Accounting Oversight Board and the Financial Accounting Standards
Board;
loss of consumer confidence and economic disruptions resulting from terrorist activities or
other military actions;
our expectations regarding our operating revenues, expenses, effective tax rates and other
results of operations;
•
the general decline in the real estate and lending markets;
•
our anticipated capital expenditures and our estimates regarding our capital requirements;
•
our liquidity and working capital requirements;
•
competitive pressures among depository and other financial institutions;
•
the adequacy of the level of our allowance for loan losses and the amount of loan loss
provisions required in future periods;
2
•
the growth rates of the markets in which we compete;
•
our anticipated strategies for growth and sources of new operating revenues;
•
our current and future products, services, applications and functionality and plans to promote
them;
•
anticipated trends and challenges in our business and in the markets in which we operate;
•
the evolution of technology affecting our products, services and markets;
•
our ability to retain and hire necessary employees and to staff our operations appropriately;
•
management compensation and the methodology for its determination;
•
our ability to compete in our industry and innovation by our competitors;
•
increased cybersecurity risk, including potential business disruptions or financial losses;
•
•
•
acquisition integration risks, including potential deposit attrition, higher than expected costs,
customer loss and business disruption, including, without limitation, potential difficulties in
maintaining relationships with key personnel and other integration related-matters, and the
inability to identify and successfully negotiate and complete additional combinations with
potential merger or acquisition partners or to successfully integrate such businesses into the
Company, including the ability to realize the benefits and cost savings from, and limit any
unexpected liabilities associated with, any such business combinations;
our ability to stay abreast of new or modified laws and regulations that currently apply or
become applicable to our business; and
estimates and estimate methodologies used in preparing our consolidated financial
statements and determining option exercise prices.
If any of these risks or uncertainties materialize, or if any of the assumptions underlying such
forward-looking statements proves to be incorrect, our results could differ materially from those expressed
in, implied or projected by, such forward-looking statements. For information with respect to factors that
could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk
Factors” under Part I, Item 1A of this report. We urge investors to consider all of these factors carefully in
evaluating the forward-looking statements contained in this report. We make these forward-looking as of
the date of this document and we do not intend, and assume no obligation, to update the forward-looking
statements or to update the reasons why actual results could differ from those expressed in, or implied or
projected by, the forward-looking statements.
3
2014 Form 10-K PART I
ITEM 1. BUSINESS
General Overview
Carolina Financial Corporation is a Delaware corporation that was organized in February 1997
to serve as a bank holding company. It operates principally through CresCom Bank, a South Carolina
state-chartered bank. CresCom Bank operates Crescent Mortgage Company, a wholly-owned subsidiary
of CresCom Bank. Except where the context otherwise requires, the “Company”, “we”, “us” and “our”
refer to Carolina Financial Corporation and its consolidated subsidiaries and the “Bank” refers to
CresCom Bank.
We offer a variety of traditional community banking services to individuals and businesses. Our
product line includes loans to small and medium-sized businesses, residential and commercial construction
and development loans, commercial real estate loans, residential mortgage loans, residential lot loans,
home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time
deposit products. We also offer online and bill payment services, wire transfer services, safe deposit box
rentals, debit card and ATM card services, and the availability of a network of ATMs for our customers.
Crescent Mortgage Company, acquired by us in 2003, was founded in February 1993 as a wholesale
and correspondent mortgage lender for community banks in the Southeastern United States. Today,
Crescent Mortgage Company lends in 45 states and has partnered with more than 2,000 community banks,
credit unions, and mortgage brokers. Crescent Mortgage Company is based in Atlanta, Georgia.
The Company is also the holding company for Carolina Services Corporation of Charleston, a
Delaware financial Services Company incorporated in 2002 to provide financial processing services to, and
otherwise support the operations of, the Bank and Crescent Mortgage Company.
In December 2002 and October 2003, respectively, the Company formed Carolina Financial
Capital Trust I and Carolina Financial Capital Trust II, which are special purpose subsidiaries organized in
Delaware for the sole purpose of issuing an aggregate of $15 million of trust preferred securities.
On December 12, 2014, the Bank purchased 13 branches from First Community Bank located in
South Carolina and southeastern North Carolina. In the transaction, the Bank acquired approximately
$215.1 million of deposits, approximately $70.9 million of performing loans, and the bank facilities and
certain other assets of the acquired branches.
Our main office is located at 288 Meeting Street, Charleston, South Carolina 29401.
Our Market Area
Our primary market areas are the South Carolina coast, including the Charleston (Charleston,
Dorchester, and Berkeley Counties) and Myrtle Beach (Horry and Georgetown Counties) market areas,
and the southeastern coastal region of North Carolina, including Bladen, Brunswick, Columbus and New
Hanover Counties. We currently operate 26 branches: seven in the Charleston market, eight in the Myrtle
Beach market, nine in southeastern North Carolina and two in other South Carolina markets. We also
operate loan production offices in Greenville, South Carolina and Wilmington, North Carolina.
4
The following table presents, for each county where we operated as of December 31, 2014, the
number of bank branches operated by the Bank within the county, the approximate amount of deposits
with the Bank in the county as of December 31, 2014 and our approximate deposit market share in the
county at June 30, 2014 (the latest date for which such data is available).
County
Number of Branches Deposits (in millions)
Market Share
Charleston
Horry
Dorchester
Columbus
Brunswick
Bladen
Lancaster
Georgetown
Berkeley (1)
4
7
3
3
5
1
1
1
1
$ 415.4
$ 261.7
$ 113.9
$ 98.1
$ 86.6
$ 24.8
$ 9.9
$ 8.8
N/A
5.08%
5.07%
9.29%
13.30%
5.31%
9.88%
2.18%
0.75%
N/A
(1) - This office opened after June 30, 2014
Our primary markets in Charleston and Dorchester counties are heavily influenced by the diverse
economic mix of the Charleston region. The region is home to the Port of Charleston, one of the busiest
container ports along the Southeast and Gulf Coasts, as well as a number of national and international
manufacturers, including Boeing South Carolina and Robert Bosch LLC. The region also benefits from
a thriving tourism industry. In addition, a number of academic institutions are located within the region,
including the Medical University of South Carolina, The Citadel, The College of Charleston, Charleston
Southern University, Trident Technical College, and The Charleston School of Law. Charleston also hosts
military installations for the U.S. Navy, Marine Corp, U.S. Air Force, U.S. Army, and U.S. Coast Guard.
The Myrtle Beach area, also known as the Grand Strand, is a 60-mile stretch of beaches extending
south from the South Carolina/North Carolina state line (Horry County) to Pawleys Island (Georgetown
County) and is consistently ranked as one of the top vacation destinations in the country. Accordingly,
the economy of the region is dominated by the tourism and retail industries. Our markets in southeastern
North Carolina are contiguous to Horry County, South Carolina and the Grand Strand.
We believe that this diversified economic base of our market areas has reduced, and will
likely continue to reduce, their economic volatility. Our markets have experienced steady economic and
population growth over the past 10 years, and we expect that the area, as well as the business and tourism
industries needed to support it, will continue to grow.
Competition
The banking business is highly competitive, and we experience competition in our market areas
from many other financial institutions. Competition among financial institutions is based on interest rates
offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to
loans, the quality and scope of the services rendered, the convenience of banking facilities, and, in the
case of loans to commercial borrowers, relative lending limits. We compete with commercial banks, credit
unions, savings institutions, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national
and international financial institutions that operate offices in our market areas and elsewhere.
5
2014 Form 10-K
We compete with these institutions both in attracting deposits and in making loans. In addition, we
have to attract our customer base from other existing financial institutions and from new residents. Many
of our competitors are well-established, larger financial institutions, such as SunTrust, Bank of America,
Wells Fargo and BB&T. These institutions offer some services, including extensive and established branch
networks, that we do not provide. In addition, many of our non-bank competitors are not subject to the
same extensive federal regulations that govern bank holding companies and federally insured banks.
Lending Activities
General. We emphasize a range of lending services, including commercial and residential real
estate mortgage loans, real estate construction loans, commercial and industrial loans and consumer loans.
Our customers are generally individuals and small to medium-sized businesses and professional firms that
are located in or conduct a substantial portion of their business in our market areas. We have focused
our lending activities primarily on the professional market, including doctors, dentists, small business to
medium sized owners and commercial real estate developers.
Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting
from uncertainties in the future value of collateral, risks resulting from changes in economic and industry
conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment
risks by adhering to internal credit policies and procedures. These policies and procedures include officer
and customer lending limits, with approval process for larger loans, documentation examination, and
follow-up procedures for any exceptions to credit policies. Our loan approval policies provide for various
levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds the
maximum senior officer’s lending authority, the loan request will be considered by the management loan
committee, or MLC, which is comprised of five members, all of whom are part of the senior management
team of the Bank. The MLC meets weekly to approve loans with total loan commitments exceeding $1.0
million. The loan authority of the MLC is equal to two-thirds of the legal lending limit of the Bank which
is equivalent to the in-house loan limit. Total credit exposure above the in-house limit requires approval
by the majority of the Board of Directors. We do not make any loans to any director, executive officer of
the Bank, or the related interests of each, unless the loan is approved by the full Board of Directors of the
Bank and is on terms not more favorable than would be available to a person not affiliated with the Bank.
Our lending activities are subject to a variety of lending limits imposed by federal law. In general,
the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and
unimpaired surplus. This legal lending limit will increase or decrease as the Bank’s level of capital increases
or decreases. Based upon the capitalization of the Bank at December 31, 2014, the maximum amount we
could lend to one borrower is $17.0 million. However, our internal lending limit at December 31, 2014 is
$11.3 million. The board of directors will adjust the internal lending limit as deemed necessary to continue
to mitigate risk and serve the Bank’s clients. We are able to sell participations in our larger loans to other
financial institutions, which allow us to manage the risk involved in these loans and to meet the lending
needs of our clients requiring extensions of credit in excess of these limits.
Real Estate Mortgage Loans. The principal component of our loan portfolio is loans secured by real
estate mortgages. Real estate loans are subject to the same general risks as other loans and are particularly
sensitive to fluctuations in the value of real estate. Fluctuations in the value of real estate, as well as other
factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness,
and ability to repay the loan. We obtain a security interest in real estate whenever possible, in addition to
any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.
6
These loans generally fall into one of two categories:
•
•
Residential Mortgage Loans and Home Equity Loans. We generally originate and hold short-
term and long-term first mortgages and traditional second mortgage residential real estate
loans. Generally, we limit the loan-to-value ratio on our residential real estate loans to 90%.
We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years.
We also offer a variety of lot loan options to consumers to purchase the lot on which they
intend to build their home. The options available depend on whether the borrower intends
to begin building within 12 months of the lot purchase or at an undetermined future date.
We also offer traditional home equity loans and lines of credit. Our underwriting criteria for,
and the risks associated with, home equity loans and lines of credit are generally the same
as those for first mortgage loans. Home equity loans typically have terms of 10 years or less.
We generally limit the extension of credit to 90% of the available equity of each property,
although we may extend up to 100% of the available equity.
Commercial Real Estate. Commercial real estate loans generally have terms of five years or
less, although payments may be structured on a longer amortization basis. We evaluate each
borrower on an individual basis and attempt to determine their business risks and credit pro-
file. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the loan-to-value ratio, established
by independent appraisals, does not exceed 80%. We also generally require that a borrower’s
cash flow exceed 120% of monthly debt service obligations. In order to ensure secondary
sources of payment and liquidity to support a loan request, we typically review all of the per-
sonal financial statements of the principal owners and require their personal guarantees.
Real Estate Construction and Development Loans. We offer fixed and adjustable rate residential
and commercial construction loan financing to builders and developers and to consumers who wish to
build their own home. The term of construction and development loans generally is limited to 18 months,
although payments may be structured on a longer amortization basis. Most loans will mature and
require payment in full upon the sale of the property. We believe that construction and development loans
generally carry a higher degree of risk than long-term financing of existing properties because repayment
depends on the ultimate completion of the project and usually on the subsequent sale of the property.
Specific risks include:
•
cost overruns;
• mismanaged construction;
•
•
•
•
•
inferior or improper construction techniques;
economic changes or downturns during construction;
a downturn in the real estate market;
rising interest rates which may prevent sale of the property; and
failure to sell completed projects in a timely manner.
We attempt to reduce risk associated with construction and development loans by obtaining
personal guarantees and by keeping the maximum loan-to-value ratio at or below 65%-85% of the lesser
7
2014 Form 10-K of cost or appraised value, depending on the project type. Generally, we do not have interest reserves built
into loan commitments but require periodic cash payments for interest from the borrower’s cash flow.
Commercial Loans. We make loans for commercial purposes in various lines of businesses, including
the manufacturing industry, service industry, and professional service areas. Commercial loans are
generally considered to have greater risk than first or second mortgages on real estate because they may
be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely
to decrease than real estate.
Equipment loans typically will be made for a term of 10 years or less at fixed or variable rates,
with the loan fully amortized over the term and secured by the financed equipment. Generally, we limit
the loan-to-value ratio on these loans to 75% of cost. Working capital loans typically have terms not
exceeding one year and usually are secured by accounts receivable, inventory, or personal guarantees of
the principals of the business. For loans secured by accounts receivable or inventory, principal will typically
be repaid as the assets securing the loan are converted into cash, and in other cases principal will typically
be due at maturity. Trade letters of credit, standby letters of credit, and foreign exchange will generally be
handled through a correspondent bank as agent for the Bank.
Our Charleston and Myrtle Beach markets have provided limited opportunities for us to develop
a commercial and industrial (“C&I”) loan portfolio. The Company’s primary markets are generally con-
centrated in real estate lending. However, in order to diversify our lending portfolio, the Company began a
syndicated loan program in 2014 to purchase nationally syndicated C&I loans to retain in the loan portfolio.
These loans typically have terms of seven years and are tied to a floating rate index such as LIBOR or prime.
To effectively manage this new line of lending, the Company hired an experienced senior lending executive
with relevant experience to lead and manage this area of the loan portfolio and engaged a consulting firm
that specializes in syndicated loans.
Consumer Loans. We make a variety of loans to individuals for personal and household purposes,
including secured and unsecured installment loans and revolving lines of credit. Consumer loans are
underwritten based on the borrower’s income, current debt level, past credit history, and the availability
and value of collateral. Consumer rates are both fixed and variable, with negotiable terms. Our installment
loans typically amortize over periods up to 72 months. Although we typically require monthly payments
of interest and a portion of the principal on our loan products, we will offer consumer loans with a single
maturity date when a specific source of repayment is available. Consumer loans are generally considered
to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if
they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value
than real estate.
Mortgage Banking Activities
As summarized below, our mortgage banking segment is comprised of two primary businesses:
correspondent lending and loan servicing.
Correspondent Lending. Our mortgage banking operations are conducted mainly through the Bank’s
wholesale mortgage origination subsidiary, Crescent Mortgage Company, which is headquartered in Atlanta,
Georgia. These operations consist of the purchase of mortgage loans and table funded originations as well
as the sale and servicing of a variety of residential mortgage loan products. Crescent Mortgage Company
lends in 45 states and partners with over 2,000 community banks, credit unions, and quality mortgage
brokers. Crescent Mortgage Company focuses on originating residential real estate loans, some of which
8
conform to Federal Housing Administration (FHA), Veterans Affairs (VA) and Rural Development
standards (RD). Loans originated that meet FHA standards qualify for the FHA’s insurance program
whereas loans that meet VA and RD standards are guaranteed by their respective federal agencies.
Mortgage loans that do not qualify under these programs are commonly referred to as conven-
tional loans. Conventional real estate loans could be conforming and non-conforming. Conforming loans
are residential real estate loans that meet the standards for sale under the Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) programs whereas
loans that do not meet those standards are referred to as non-conforming residential real estate loans. In
addition, Crescent Mortgage Company offers certain jumbo mortgage products which meet underwriting
requirements of certain correspondent lenders. The Company’s strategy is to grow market share through
superior service and competitive pricing and high quality mortgage products. Crescent Mortgage
Company generally sells mortgages it acquires to a number of investors like FNMA and FHLMC or major
banking correspondents.
Our mortgage banking profitability depends on maintaining sufficient volume of loan origina-
tions. Changes in the level of interest rates, competition and the local economy affect the number of loans
originated and the amount of loan sales and loan fees earned.
Loan Servicing. We retain the rights to service loans, and collect a servicing fee for loans we sell
on the secondary market, as part of our mortgage banking activities. These rights are known as mortgage
servicing rights, or MSRs, where the owner of the MSR acts on behalf of the mortgage loan owner and
has the contractual right to receive a stream of cash flows in exchange for performing specified mortgage
servicing functions. These duties typically include, but are not limited, to performing loan administration,
collection, and default activities, collection and remittance of loan payments, responding to customer
inquiries, accounting for principal and interest, holding custodial (impound) funds for the payment of
property taxes and insurance premiums, counseling delinquent mortgagors, modifying loans, supervising
foreclosures, and property dispositions. Crescent Mortgage Company uses a third party sub-servicer to
perform the servicing duties and responsibilities for which we pay a fee.
Deposit Products
We offer a full range of deposit services that are typically available in most banks and savings
institutions, including checking accounts, commercial accounts, savings accounts and other time deposits of
various types, ranging from daily money market accounts to longer-term certificates of deposit. Transaction
accounts and time deposits are tailored to and offered at rates competitive to those offered in our primary
market areas. In addition, we offer certain retirement accounts. We solicit accounts from individuals,
businesses, associations, organizations and governmental authorities. We believe that our branch infra-
structure will assist us in obtaining deposits from local customers in the future. Our retail customer deposits
were $842.1 million at December 31, 2014, or 87.3% of our total deposits.
Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”). As an “emerging growth company,” we may take advantage of some or
all of the reduced disclosure and other requirements that are otherwise applicable generally to public
companies. These provisions include:
9
2014 Form 10-K •
only two years of audited financial statements in addition to any required unaudited interim
financial statements with correspondingly reduced “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” disclosure;
•
reduced disclosure about our executive compensation arrangements;
•
•
no requirement that we solicit non-binding advisory votes on executive compensation or
golden parachute arrangements; and
exemption from the auditor attestation requirement in the assessment of our internal control
over financial reporting.
As a result, the information that we provide to our stockholders may be different from the infor-
mation that you might receive from other public reporting companies in which you hold equity interests.
Section 107 of the JOBS Act also provides that an emerging growth company can take advan-
tage of the extended transition period provided in the Securities Act for complying with new or revised
accounting standards. In other words, an emerging growth company can elect to delay the adoption of
certain accounting standards until those standards would otherwise apply to private companies. We have
irrevocably elected not to avail ourselves of this extended transition period for complying with new or
revised accounting standards and, as a result, we will adopt new or revised accounting standards on the
relevant dates on which adoption of such standards is required for other companies.
We could remain an emerging growth company for up to five years, or until the earliest of (i) the
last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we
become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if
the market value of our common stock held by non-affiliates exceeds $700 million as of the last business
day of our most recently completed second fiscal quarter, (iii) the date on which we have issued more than
$1 billion in non-convertible debt during the preceding three-year period and (iv) the last day of the fiscal
year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to
an effective registration statement under the Securities Act. At this time, we expect to remain an “emerging
growth company” for the foreseeable future.
Employees
As of March 18, 2015, we had 394 total employees, including 372 full-time employees.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and federal banking laws and regu-
lations that impose restrictions on and provide for general regulatory oversight of their operations. These
laws and regulations generally are intended to protect consumers and depositors and not stockholders. The
following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes
in applicable laws or regulations may have a material effect on our business and prospects. Our operations
may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict
the effect that fiscal or monetary policies, economic control or new federal or state legislation may have on
our business and earnings in the future.
10
The following discussion is not intended to be a complete list of all the activities regulated by the
banking laws or of the impact of those laws and regulations on our operations. It is intended only to briefly
summarize some material provisions.
Recent Legislative and Regulatory Initiatives to Address the Financial and Economic Crises
Markets in the United States and elsewhere experienced extreme volatility and disruption begin-
ning in the latter half of 2007 from which they have not fully recovered. These circumstances exerted sig-
nificant downward pressure on prices of equity securities and virtually all other asset classes, and resulted
in substantially increased market volatility, severely constrained credit and capital markets, particularly
for financial institutions, and caused an overall loss of investor confidence. Loan portfolio performances
deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in
the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part
to falling home prices and increasing foreclosures and unemployment, have created strains on financial
institutions. Many borrowers were unable to repay their loans, and the collateral securing these loans, in
some cases, declined below the loan balance. In response to the challenges facing the financial services
sector, the following regulatory and governmental actions were enacted.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed into law The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), which, among other things, changes the oversight and
supervision of financial institutions, includes new minimum capital requirements, creates a new federal
agency to regulate consumer financial products and services and implements changes to corporate gover-
nance and compensation practices. The Dodd-Frank Act is focused in large part on the financial services
industry, particularly bank holding companies with consolidated assets of $50 billion or more, and contains
a number of provisions that will affect us, including:
Minimum Leverage and Risk-Based Capital Requirements. Under the Dodd-Frank Act, the appropriate
Federal banking agencies are required to establish minimum leverage and risk-based capital requirements
on a consolidated basis for all insured depository institutions and bank holding companies, which can be no
less than the currently applicable leverage and risk-based capital requirements for depository institutions.
As a result, the Bank will be subject to at least the same capital requirements and must include the same
components in regulatory capital.
Deposit Insurance Modifications. The Dodd-Frank Act modifies the FDIC’s assessment base
upon which deposit insurance premiums are calculated. The new assessment base will equal our average
total consolidated assets minus the sum of our average tangible equity during the assessment period. The
Dodd-Frank Act also permanently raises the standard maximum insurance amount to $250,000.
Creation of New Governmental Authorities. The Dodd-Frank Act creates various new governmental
authorities such as the Financial Stability Oversight Council and the Consumer Financial Protection
Bureau, or CFPB, an independent regulatory authority housed within the Federal Reserve. The CFPB has
broad authority to regulate the offering and provision of consumer financial products. The CFPB officially
came into being on July 21, 2011, and rulemaking authority for a range of consumer financial protection
laws (such as the Truth in Lending Act, the Electronic Funds Transfer Act and the Real Estate Settlement
Procedures Act, among others) transferred from the Federal Reserve and other federal regulators to the
CFPB on that date. The Dodd-Frank Act gives the CFPB authority to supervise and examine depository
institutions with more than $10 billion in assets for compliance with these federal consumer laws. The
authority to supervise and examine depository institutions with $10 billion or less in assets for compliance
11
2014 Form 10-K with federal consumer laws will remain largely with those institutions’ primary regulators. However, the
CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer
potential enforcement actions against such institutions to their primary regulators. The CFPB also has
supervisory and examination authority over certain nonbank institutions that offer consumer financial
products. The Dodd-Frank Act identifies a number of covered nonbank institutions, and also authorizes
the CFPB to identify additional institutions that will be subject to its jurisdiction. Accordingly, the CFPB
may participate in examinations of the Bank, which currently has assets of less than $10 billion, and could
supervise and examine our other direct or indirect subsidiaries that offer consumer financial products or
services. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regula-
tions that are stricter than those regulations promulgated by the CFPB, and state attorneys general are
permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
The Dodd-Frank Act also authorized the CFPB to establish certain minimum standards for the
origination of residential mortgages, including a determination of the borrower’s ability to repay. Under
the Dodd-Frank Act, financial institutions may not make a residential mortgage loan unless they make a
“reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan.
The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure but provides a full or partial
safe harbor from such defenses for loans that are “qualified mortgages.” On January 10, 2013, the CFPB
published final rules to, among other things, specify the types of income and assets that may be considered
in the ability-to-repay determination, the permissible sources for verification, and the required methods of
calculating the loan’s monthly payments. Since then the CFPB made certain modifications to these rules.
The rules extend the requirement that creditors verify and document a borrower’s “income and assets” to
include all “information” that creditors rely on in determining repayment ability. The rules also provide
further examples of third-party documents that may be relied on for such verification, such as government
records and check-cashing or funds-transfer service receipts. The rules took effect January 10, 2014. The
rules also define “qualified mortgages,” imposing both underwriting standards - for example, a borrower’s
debt-to-income ratio may not exceed 43% - and limits on the terms of their loans. Points and fees are
subject to a relatively stringent cap, and the terms include a wide array of payments that may be made in
the course of closing a loan. Certain loans, including interest-only loans and negative amortization loans,
cannot be qualified mortgages.
Executive Compensation and Corporate Governance Requirements. The Dodd-Frank Act requires
public companies to include, at least once every three years, a separate non-binding “say on pay” vote
in their proxy statement by which stockholders may vote on the compensation of the company’s named
executive officers. In addition, if such companies are involved in a merger, acquisition, or consolidation,
or if they propose to sell or dispose of all or substantially all of their assets, stockholders have a right to
an advisory vote on any golden parachute arrangements in connection with such transaction (frequently
referred to as “say-on-golden parachute” vote). Other provisions of the Dodd-Frank Act may impact our
corporate governance. For instance, the Dodd-Frank Act requires the SEC to adopt rules:
•
•
prohibiting the listing of any equity security of a company that does not have an independent
compensation committee; and
requiring all exchange-traded companies to adopt clawback policies for incentive compen-
sation paid to executive officers in the event of accounting restatements based on material
non-compliance with financial reporting requirements.
The Dodd-Frank Act also authorizes the SEC to issue rules allowing stockholders to include their
own nominations for directors in a company’s proxy solicitation materials. Many provisions of the Dodd-Frank
12
Act require the adoption of additional rules to implement the changes. In addition, the Dodd-Frank Act
mandates multiple studies that could result in additional legislative Action. Governmental intervention and
new regulations under these programs could materially and adversely affect our business, financial condition
and results of operations.
Basel Capital Standards
In December 2010, the Basel Committee on Banking Supervision, or BCBS, an international
forum for cooperation on banking supervisory matters, announced the “Basel III” capital standards, which
substantially revised the existing capital requirements for banking organizations. Modest revisions were
made in June 2011. The Basel III standards operate in conjunction with portions of standards previously
released by the BCBS and commonly known as “Basel II” and “Basel 2.5.” On June 7, 2012, the Federal
Reserve, the OCC, and the FDIC requested comment on these proposed rules that, taken together, would
implement the Basel regulatory capital reforms through what we refer to herein as the “Basel III capital
framework.”
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 began to phase in on January 1, 2014 for advanced
approaches banking organizations, and on January 1, 2015 for other covered banking organizations, including
the Company and the Bank. The requirements in the rule will be fully phased in by January 1, 2019.
The rule imposes higher risk-based capital and leverage requirements than those currently in
place. Specifically, the rule imposes the following minimum capital requirements:
•
•
•
•
•
a new common equity Tier 1 risk-based capital ratio of 4.5%;
a Tier 1 risk-based capital ratio of 6% (increased from the current 4% requirement);
a total risk-based capital ratio of 8% (unchanged from current requirements);
a leverage ratio of 4%; and
a new supplementary leverage ratio of 3% applicable to advanced approaches banking organi-
zations, resulting in a leverage ratio requirement of 7% for such institutions.
Under the rule, Tier 1 capital is redefined to include two components: common equity Tier 1 capital
and additional Tier 1 capital. The new and highest form of capital, common equity Tier 1 capital, consists
solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income,
and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital
includes other perpetual instruments historically included in Tier 1 capital, such as non-cumulative perpetual
preferred stock. The rule permits bank holding companies with less than $15 billion in total consolidated
13
2014 Form 10-K assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued
before May 19, 2010 in Tier 1 capital, but not in common equity Tier 1 capital, subject to certain restrictions.
Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has
disqualified from Tier 1 capital treatment.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments
to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its
minimum risk-based capital requirements. This buffer must consist solely of Tier 1 common equity, but
the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital). The
capital conservation buffer will be phased in incrementally over time, becoming fully effective on January
1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets.
The current capital rules require certain deductions from or adjustments to capital. The final rule
retains many of these deductions and adjustments and also provides for new ones. As a result, deductions
from common equity Tier 1 capital will be required for goodwill (net of associated deferred tax liabilities);
intangible assets such as non-mortgage servicing assets and purchased credit card relationships (net of
associated deferred tax liabilities); deferred tax assets that arise from net operating loss and tax credit
carryforwards (net of any related valuations allowances and net of deferred tax liabilities); any gain on
sale in connection with a securitization exposure; any defined benefit pension fund net asset (net of any
associated deferred tax liabilities) held by a bank holding company (this provision does not apply to a
bank or savings association); the aggregate amount of outstanding equity investments (including retained
earnings) in financial subsidiaries; and identified losses. Savings associations also must deduct investments
in certain subsidiaries. Other deductions will be necessary from different levels of capital.
Additionally, the rule provides for the deduction of three categories of assets: (i) deferred tax assets
arising from temporary differences that cannot be realized through net operating loss carrybacks (net of
related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated
deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common
stock of unconsolidated financial institutions (net of associated deferred tax liabilities). The amount in
each category that exceeds 10% of common equity Tier 1 capital must be deducted from common equity
Tier 1 capital. The remaining, non-deducted amounts are then aggregated, and the amount by which this
total amount exceeds 15% of common equity Tier 1 capital must be deducted from common equity Tier 1
capital. Amounts of minority investments in consolidated subsidiaries that exceed certain limits and invest-
ments in unconsolidated financial institutions may also have to be deducted from the category of capital to
which such instruments belong.
Accumulated other comprehensive income (“AOCI”) is presumptively included in common equity
Tier 1 capital and often would operate to reduce this category of capital. The rule provides a one-time
opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of
this treatment of AOCI. The rule also has the effect of increasing capital requirements by increasing the
risk weights on certain assets, including high volatility commercial real estate, mortgage servicing rights
not includable in common equity Tier 1 capital, equity exposures, and claims on securities firms, that are
used in the denominator of the three risk-based capital ratios.
The ultimate impact of the Basel III rule on the Company and the Bank is currently being
reviewed and is dependent upon when certain requirements of the rule will be fully phased in. While the
rule contains several provisions that would affect the mortgage lending business, at this point we cannot
determine the ultimate effect that the rule will have upon our earnings or financial position.
14
Proposed Legislation and Regulatory Action
From time to time, various legislative and regulatory initiatives are introduced in Congress and
state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or
contract the powers of bank holding companies and depository institutions or proposals to substantially
change the financial institution regulatory system. Such legislation could change banking statutes and the
operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other financial institutions.
We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of operations of the Company.
A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have
a material effect on the business of the Company.
Volcker Rule
Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank holding
company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities:
“proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred
to as “covered funds.” On December 10, 2013, our primary federal regulators, the Federal Reserve and
the FDIC, together with other federal banking agencies and the SEC and the Commodity Futures Trading
Commission, finalized a regulation to implement the Volcker Rule. The deadline for compliance with the
Volcker Rule is July 21, 2015.
Proprietary trading includes the purchase or sale as principal of any security, derivative, commodity
future, or option on any such instrument for the purpose of benefitting from short-term price movements
or realizing short-term profits. Exceptions apply, however. Trading in U.S. Treasuries, obligations or other
instruments issued by a government sponsored enterprise, state or municipal obligations, or obligations of
the FDIC is permitted. A banking entity also may trade for the purpose of managing its liquidity, provided
that it has a bona fide liquidity management plan. Trading activities as agent, broker or custodian; through
a deferred compensation or pension plan; as trustee or fiduciary on behalf of customers; in order to satisfy
a debt previously contracted; or in repurchase and securities lending agreements are permitted. Additionally,
the Volcker Rule permits banking entities to engage in trading that takes the form of risk-mitigating
hedging activities.
The covered funds that a banking entity may not sponsor or hold on ownership interest in are,
with certain exceptions, funds that are exempt from registration under the Investment Company Act of
1940 because they either have 100 or fewer investors or are owned exclusively by “qualified investors”
(generally, high net worth individuals or entities). Wholly owned subsidiaries, joint ventures and acquisition
vehicles, foreign pension or retirement funds, insurance company separate accounts (including
bank-owned life insurance), public welfare investment funds, and entities formed by the FDIC for the
purpose of disposing of assets are not covered funds, and a bank may invest in them. Most securitizations
also are not treated as covered funds.
The regulation as issued on December 10, 2013, treated collateralized debt obligations backed by
trust preferred securities as covered funds and accordingly subject to divestiture. In an interim final rule
issued on January 14, 2014, the agencies exempted collateralized debt obligations, or CDOs, issued before
May 19, 2010, that were backed by trust preferred securities issued before the same date by a bank with
15
2014 Form 10-K total consolidated assets of less than $15 billion or by a mutual holding company and that the bank holding
the CDO interest had purchased before December 10, 2013, from the Volcker Rule prohibition. This
exemption does not extend to CDOs backed by trust-preferred securities issued by an insurance company.
Carolina Financial Corporation
The Company owns 100% of the outstanding capital stock of the Bank, and therefore is considered
to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “BHCA”). As a
result, the Company is primarily subject to the supervision, examination and reporting requirements of the
Board of Governors of the Federal Reserve (the “Federal Reserve”) under the BHCA and its regulations
promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, the
Company also is subject to the South Carolina Banking and Branching Efficiency Act.
Permitted Activities. Under the BHCA, a bank holding company is generally permitted to engage
in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in
the following activities:
•
•
•
banking or managing or controlling banks;
furnishing services to or performing services for our subsidiaries; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a
proper incident to the business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:
•
factoring accounts receivable;
• making, acquiring, brokering or servicing loans and usual related activities;
•
•
•
•
•
•
•
•
leasing personal or real property;
operating a non-bank depository institution, such as a savings association;
trust company functions;
financial and investment advisory activities;
conducting discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
16
•
acting as agent or broker in selling credit life insurance and other types of insurance in
connection with credit transactions; and
•
performing selected insurance underwriting activities.
As a bank holding company we also can elect to be treated as a “financial holding company,”
which would allow us to engage in a broader array of activities. In summary, a financial holding company
can engage in activities that are financial in nature or incidental or complimentary to financial activities,
including insurance underwriting, sales and brokerage activities, providing financial and investment advi-
sory services, underwriting services and limited merchant banking activities. We have not sought financial
holding company status but may elect such status in the future as our business matures. If we were to elect
financial holding company status, each insured depository institution we control would have to be well
capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act
(discussed below).
The Federal Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that the bank holding company’s continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.
Change in Control. In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval
prior to any person or company acquiring “control” of a bank holding company. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a
bank holding company. Following the relaxing of these restrictions by the Federal Reserve in September
2008, control will be rebuttably presumed to exist if a person acquires more than 33% of the total equity
of a bank or bank holding company, of which it may own, control or have the power to vote not more than
15% of any class of voting securities.
Source of Strength. There are a number of obligations and restrictions imposed by law and regu-
latory policy on bank holding companies with regard to their depository institution subsidiaries that are
designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the
depository institution becomes in danger of defaulting under its obligations to repay deposits. In accordance
with Federal Reserve policy, the Company is required to act as a source of financial strength to the Bank
and to commit resources to support the Bank in circumstances in which it might not otherwise do so. Under
the Federal Deposit Insurance Corporate Improvement Act of 1991, or FDICIA, to avoid receivership of its
insured depository institution subsidiary, a bank holding company is required to guarantee the compliance
of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercap-
italized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution fails to comply with such capital
restoration plan.
Under the BHCA, the Federal Reserve may require a bank holding company to terminate any
activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon
the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial
soundness or stability of any depository institution subsidiary of a bank holding company. Further, federal
17
2014 Form 10-K bank regulatory authorities have additional discretion to require a bank holding company to divest itself
of any bank or non-bank subsidiaries if the agency determines that divestiture may aid the depository
institution’s financial condition.
In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act, FDIA, require
insured depository institutions under common control to reimburse the FDIC for any loss suffered or rea-
sonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution
in danger of default. The FDIC’s claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company, but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository
institutions.
The FDIA also provides that amounts received from the liquidation or other resolution of any
insured depository institution by any receiver must be distributed (after payment of secured claims) to pay
the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability,
subordinated liability, general creditor or stockholder. This provision would give depositors a preference
over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Bank.
Further, any capital loans by a bank holding company to a subsidiary bank are subordinate in right
of payment to deposits and certain other indebtedness of the subsidiary bank. In the event of a bank holding
company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee
and entitled to priority payment.
Capital Requirements. The Federal Reserve imposes certain capital requirements on the bank
holding company under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying”
capital to risk-weighted assets. These requirements are essentially the same as those that apply to the
Bank and are described below under “CresCom Bank.” Subject to our capital requirements and certain
other restrictions, we are able to borrow money to make a capital contribution to the Bank, and these
loans may be repaid from dividends paid from the Bank to the Company. We are also able to raise capital
for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
Dividends. Since the Company is a bank holding company, its ability to declare and pay dividends
is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal
Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank
holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only
out of current earnings and only if the prospective rate of earnings retention by the bank holding company
appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The
Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength
to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to
those banks during periods of financial stress or adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.
Further, under the prompt corrective action regulations, the ability of a bank holding company to pay
dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could
affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
18
In addition, since the Company is a legal entity separate and distinct from the Bank and does not
conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends
to it, which is also subject to regulatory restrictions as described below in “CresCom Bank – Dividends.”
South Carolina State Regulation. As a South Carolina bank holding company under the South
Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to
regulation by the South Carolina Board of Financial Institutions (the “SCBFI”). We are not required to
obtain the approval of the SCBFI prior to acquiring the capital stock of a national bank, but we must notify
them at least 15 days prior to doing so. We must obtain approval from the SCBFI prior to engaging in the
acquisition of branches, a South Carolina state chartered bank, or another South Carolina bank holding
company.
CresCom Bank
The Bank’s primary federal regulator is the FDIC. In addition, the Bank is regulated and exam-
ined by the SCBFI. Deposits in the Bank are insured by the FDIC up to a maximum amount of $250,000,
pursuant to the provisions of the Dodd-Frank Act.
The SCBFI and the FDIC regulate or monitor virtually all areas of the Bank’s operations, including:
•
•
•
•
•
•
security devices and procedures;
adequacy of capitalization and loss reserves;
loans;
investments;
borrowings;
deposits;
• mergers;
•
•
•
•
•
•
issuances of securities;
payment of dividends;
interest rates payable on deposits;
interest rates or fees chargeable on loans;
establishment of branches;
corporate reorganizations;
• maintenance of books and records; and
•
adequacy of staff training to carry on safe lending and deposit gathering practices.
19
2014 Form 10-K The FDIC requires that the Bank maintain specified ratios of capital to assets and imposes lim-
itations on the Bank’s aggregate investment in real estate, bank premises, and furniture and fixtures. Two
categories of regulatory capital are used in calculating these ratios: Tier 1 capital and total capital. Tier 1
capital generally includes common equity, retained earnings, a limited amount of qualifying preferred
stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other
intangible assets, such as core deposit intangibles, and certain other assets. Total capital generally consists
of Tier 1 capital plus Tier 2 capital, which includes the allowance for loan losses, preferred stock that did
not qualify as Tier 1 capital, certain types of subordinated debt and a limited amount of other items.
The Bank is required to calculate three ratios: the ratio of Tier 1 capital to risk-weighted assets,
the ratio of total capital to risk-weighted assets, and the “leverage ratio,” which is the ratio of Tier 1 capital
to assets on a non-risk-adjusted basis. For the two ratios of capital to risk-weighted assets, certain assets,
such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and
consumer loans, have a 100% risk weighting. Some assets, notably purchase-money loans secured by first-
liens on residential real property, are risk-weighted at 50%. Assets also include amounts that represent the
potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These
potential assets are assigned to risk categories in the same manner as funded assets. The total assets in
each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the
capital calculations.
The current minimum capital ratios for both the Company and the Bank are generally 8% for
total capital, 4% for Tier 1 capital and 4% for leverage. To be eligible to be classified as “well capitalized,”
the Bank must generally maintain a total capital ratio of 10% or more, a Tier 1 capital ratio of 6% or more,
and a leverage ratio of 5% or more. Certain implications of the regulatory capital classification system are
discussed in greater detail below. See additional discussion related to Basel III above.
All insured institutions must undergo regular on-site examinations by their appropriate banking
agency. The cost of examinations of insured depository institutions and any affiliates may be assessed
by the appropriate federal banking agency against each institution or affiliate as it deems necessary or
appropriate. Insured institutions are required to submit annual reports to the FDIC, their federal regulatory
agency, and state supervisor when applicable. The FDIC has developed a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities,
to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any
other report of any insured depository institution. The federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository institution holding companies
relating, among other things, to the following:
•
•
•
•
•
•
internal controls;
information systems and audit systems;
loan documentation;
credit underwriting;
interest rate risk exposure; and
asset quality.
20
Prompt Corrective Action. As an insured depository institution, the Bank is required to comply with
the capital requirements promulgated under the Federal Deposit Insurance Act and the prompt corrective
action regulations thereunder, which set forth five capital categories, each with specific regulatory conse-
quences. Under these regulations, the categories are:
•
•
•
•
•
Well Capitalized - The institution exceeds the required minimum level for each relevant cap-
ital measure. A well capitalized institution is one (i) having a total capital ratio of 10% or
greater, (ii) having a Tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio
of 5% or greater and (iv) that is not subject to any order or written directive to meet and
maintain a specific capital level for any capital measure.
Adequately Capitalized - The institution meets the required minimum level for each relevant
capital measure. No capital distribution may be made that would result in the institution be-
coming undercapitalized. An adequately capitalized institution is one (i) having a total capital
ratio of 8% or greater, (ii) having a Tier 1 capital ratio of 4% or greater and (iii) having a lever-
age capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution
is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity
and Sensitivity to market risk) rating system.
Undercapitalized - The institution fails to meet the required minimum level for any relevant
capital measure. An undercapitalized institution is one (i) having a total capital ratio of less
than 8% or (ii) having a Tier 1 capital ratio of less than 4% or (iii) having a leverage capital
ratio of less than 4%, or if the institution is rated a composite 1 under the CAMELS rating
system, a leverage capital ratio of less than 3%.
Significantly Undercapitalized - The institution is significantly below the required minimum
level for any relevant capital measure. A significantly undercapitalized institution is one
(i) having a total capital ratio of less than 6% or (ii) having a Tier 1 capital ratio of less than
3% or (iii) having a leverage capital ratio of less than 3%.
Critically Undercapitalized - The institution fails to meet a critical capital level set by the appro-
priate federal banking agency. A critically undercapitalized institution is one having a ratio of
tangible equity to total assets that is equal to or less than 2%.
If the FDIC determines, after notice and an opportunity for hearing, that the bank is in an unsafe
or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category
(other than critically undercapitalized) and require the submission of a plan to correct the unsafe or
unsound condition.
If a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory
approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75
basis points over interest paid on deposits of comparable size and maturity in such institution’s normal
market area for deposits accepted from within its normal market area, or national rate paid on deposits
of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover,
the FDIC generally prohibits a depository institution from making any capital distributions (including
payment of a dividend) or paying any management fee to its parent holding company if the depository
institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject
to growth limitations (an undercapitalized institution may not acquire another institution, establish addi-
tional branch offices or engage in any new line of business unless determined by the appropriate federal
21
2014 Form 10-K banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines
that the proposed action will further the purpose of prompt corrective action) and are required to submit
a capital restoration plan. The agencies may not accept a capital restoration plan without determining,
among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring
the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the
depository institution’s parent holding company must guarantee that the institution will comply with the
capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of
an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as
undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such institution as of the time it fails
to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as
significantly undercapitalized.
Significantly undercapitalized categorized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock to become categorized as
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from cor-
respondent banks. The appropriate federal banking agency may take any action authorized for a signifi-
cantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital
restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically
undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs
and for loss of its charter to conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company con-
trolling that institution or any other person having control of the institution if, after making the payment,
the institution would be undercapitalized. In addition, an institution cannot make a capital distribution,
such as a dividend or other distribution that is in substance a distribution of capital to the owners of the
institution if following such a distribution the institution would be undercapitalized. Thus, if payment of
such a management fee or the making of such would cause a bank to become undercapitalized, it could not
pay a management fee or dividend to the bank holding company.
As of December 31, 2014, the Bank was deemed to be “well capitalized.”
As further described above under “Recent Legislative and Regulatory Initiatives to Address the
Financial and Economic Crises – Basel Capital Standards,” the Basel Committee released in June 2011 a
revised framework for the regulation of capital and liquidity of internationally active banking organizations.
The new framework is generally referred to as “Basel III”. As discussed above, when fully phased in, Basel
III will require certain bank holding companies and their bank subsidiaries to maintain substantially more
capital, with a greater emphasis on common equity. On July 7, 2013, the Federal Reserve adopted a final
rule implementing the Basel III standards and complementary parts of Basel II and Basel 2.5. 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 requirements in the rule began to phase in on January 1, 2014 for advanced
approaches banking organizations, and on January 1, 2015 for other covered banking organizations, including
the Company and the Bank. The requirements in the rule will be fully phased in by January 1, 2019.
Standards for Safety and Soundness. The Federal Deposit Insurance Act also requires the federal
banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards
for all insured depository institutions relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well
22
as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required
standards. These guidelines set forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions before capital becomes impaired.
Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by
the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Regulatory Examination. The FDIC also requires the Bank to prepare annual reports on the Bank’s
financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum
standards and procedures.
All insured institutions must undergo regular on-site examinations by their appropriate banking
agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the
appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and
state supervisor when applicable. The FDIC has developed a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of
any insured depository institution. The federal banking regulatory agencies prescribe, by regulation, stan-
dards for all insured depository institutions and depository institution holding companies relating, among
other things, to the following:
•
•
•
•
•
•
internal controls;
information systems and audit systems;
loan documentation;
credit underwriting;
interest rate risk exposure; and
asset quality.
Transactions with Affiliates and Insiders. The Company is a legal entity separate and distinct from
the Bank and its other subsidiaries. Various legal limitations restrict the Bank from lending or otherwise
supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject to
Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.
Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit
to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions
is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates
combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to
amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to
purchase low quality assets from an affiliate.
23
2014 Form 10-K The Dodd-Frank Act expanded the definition of affiliate for purposes of quantitative and qualitative
limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository
institution or its affiliates. The Dodd-Frank Act applies Section 23A and Section 22(h) of the Federal
Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and
securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any
such transactions with affiliates must be fully secured. Covered transactions between a bank and a financial
subsidiary are now fully subject to all of the restrictions in Section 23A. The Dodd-Frank Act also prohibits
an insured depository institution from purchasing an asset from or selling an asset to an insider unless the
transaction is on market terms and, if representing more than 10% of capital, is approved in advance by
the disinterested directors.
Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging
in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or
at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks
from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries
as affiliates. The regulation also limits the amount of loans that can be purchased by a bank from an
affiliate to not more than 100% of the bank’s capital and surplus.
The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors,
certain principal stockholders, and their related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with unrelated third parties and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to
its stockholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the
Bank’s payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to
limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the SCBFI,
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 SCBFI. The
FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion consti-
tutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under
certain circumstances.
Branching. Under current South Carolina law, the Bank may open branch offices throughout
South Carolina with the prior approval of the SCBFI. In addition, with prior regulatory approval, the Bank
is able to acquire existing banking operations in South Carolina. Furthermore, federal legislation permits
interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching
by banks, and interstate merging by banks. The Dodd-Frank Act removes previous state law restrictions on
de novo interstate branching in states such as South Carolina. This change permits out-of-state banks to
open de novo branches in states where the laws of the state where the de novo branch to be opened would
permit a bank chartered by that state to open a de novo branch.
Anti-Tying Restrictions. Under amendments to the BHCA and Federal Reserve regulations, a bank
is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a
24
bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for
these on the condition that (i) the customer obtain or provide some additional credit, property, or services
from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain
some other credit, property, or services from a competitor, except to the extent reasonable conditions are
imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank
may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains
two or more traditional bank products; and certain foreign transactions are exempt from the general rule.
A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with
electronic benefit transfer services.
Community Reinvestment Act. The Community Reinvestment Act, or CRA, requires that the FDIC
evaluate the record of the Bank in meeting the credit needs of its local community, including low and
moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on our Bank.
The Gramm-Leach-Bliley Act, or GLBA, made various changes to the CRA. Among other changes,
CRA agreements with private parties must be disclosed and annual CRA reports must be made available
to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial
holding company and no new activities authorized under the GLBA may be commenced by a holding
company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory
CRA rating in its latest CRA examination.
On June 4, 2012, the as of date of the most recent examination, the Bank received a “satisfactory”
CRA rating.
Financial Subsidiaries. Under the GLBA, subject to certain conditions imposed by their respective
banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that
may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain
activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on
financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be
deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital
adequacy. In addition, the GLBA imposes new restrictions on transactions between a bank and its financial
subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates. The
Company has one financial subsidiary, Carolina Services Corporation of Charleston.
Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and
regulations designed to protect consumers. Interest and other charges collected or contracted for by the
Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations
are also subject to federal laws applicable to credit transactions, such as:
•
•
the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide infor-
mation to enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it serves;
25
2014 Form 10-K •
•
•
•
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies;
the Fair Debt Collection Act, governing the manner in which consumer debts may be collect-
ed by collection agencies; and
the rules and regulations of the various federal agencies charged with the responsibility of imple-
menting such federal laws.
The deposit operations of the Bank also are subject to:
•
•
the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of con-
sumer financial records and prescribes procedures for complying with administrative subpoe-
nas of financial records; and
the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to imple-
ment that Act, which governs automatic deposits to and withdrawals from deposit accounts and
customers’ rights and liabilities arising from the use of automated teller machines and other
electronic banking services.
Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs
that include established internal policies, procedures, and controls; a designated compliance officer; an
ongoing employee training program; and testing of the program by an independent audit function. The
Company and the Bank are also prohibited from entering into specified financial transactions and account
relationships and must meet enhanced standards for due diligence and “knowing your customer” in their
dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable
steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to
report any suspicious transactions, and recent laws provide law enforcement authorities with increased
access to financial information maintained by banks. Anti-money laundering obligations have been
substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006.
Bank regulators routinely examine institutions for compliance with these obligations and are required to
consider compliance in connection with the regulatory review of applications. The regulatory authorities
have been active in imposing cease and desist orders and money penalty sanctions against institutions
found to be violating these obligations.
USA PATRIOT Act/Bank Secrecy Act. Financial institutions must maintain anti-money laundering
programs that include established internal policies, procedures, and controls; a designated compliance
officer; an ongoing employee training program; and testing of the program by an independent audit function.
The USA PATRIOT Act, amended, in part, the Bank Secrecy Act and provides for the facilitation of
information sharing among governmental entities and financial institutions for the purpose of combating
terrorism and money laundering by enhancing anti-money laundering and financial transparency laws,
as well as enhanced information collection tools and enforcement mechanics for the U.S. government,
including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to
promote cooperation among financial institutions, regulators, and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and
26
businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for trans-
actions exceeding $10,000; and (iv) filing suspicious activities reports if a bank believes a customer may
be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations
and are required to consider compliance in connection with the regulatory review of applications.
Under the USA PATRIOT Act, the Federal Bureau of Investigation can send to the banking regu-
latory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank can
be requested to search its records for any relationships or transactions with persons on those lists. If the
Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control, or OFAC, which is a division of the Treasury, is responsible
for helping to ensure that United States entities do not engage in transactions with “enemies” of the United
States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our
banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or
engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on
an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank
has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any
notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and cus-
tomer files. The Bank performs these checks utilizing software, which is updated each time a modification
is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked
Persons.
Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic condi-
tions and the monetary and fiscal policies of the United States government and its agencies. The Federal
Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve
have major effects upon the levels of bank loans, investments and deposits through its open market opera-
tions in United States government securities and through its regulation of the discount rate on borrowings
of member banks and the reserve requirements against member bank deposits. It is not possible to predict
the nature or impact of future changes in monetary and fiscal policies.
Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. As insurer, the FDIC imposes deposit insurance premi-
ums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions.
It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the bank’s regulatory authority an opportunity
to take such action, and may terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
FDIC insured institutions are required to pay a Financing Corporation assessment to fund the
interest on bonds issued to resolve thrift failures in the 1980s. The Financing Corporation quarterly
assessment for the fourth quarter of 2013 equaled 1.085 basis points for each $100 of average consolidated
total assets minus average tangible equity. These assessments, which may be revised based upon the level
of deposits, will continue until the bonds mature in the years 2017 through 2019.
27
2014 Form 10-K The FDIC may terminate the deposit insurance of any insured depository institution, including
the Bank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time of the termination, less sub-
sequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is not aware of any practice, condition or violation that might lead to termination
of the Bank’s deposit insurance.
Incentive Compensation. In June 2010, the Federal Reserve, the FDIC and the OCC issued a
comprehensive final guidance on incentive compensation policies intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of such
organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have
the ability to materially affect the risk profile of an organization, either individually or as part of a group, is
based upon the key principles that a banking organization’s incentive compensation arrangements should
(i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective internal controls and risk management, and
(iii) be supported by strong corporate governance, including active and effective oversight by the organi-
zation’s board of directors.
ITEM 1A. RISK FACTORS
Our business is subject to certain risks, including those described below. If any of the events
described in the following risk factors actually occurs then our business, results of operations and financial
condition could be materially adversely affected. More detailed information concerning these risks is
contained in other sections of this report, including “Part I, Item 1: Business” and “Part II, Item 7: Manage-
ment’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business
Negative developments in the financial industry, the domestic and international credit markets, and the economy in
general pose significant challenges for our industry and us and could adversely affect our business, financial condition
and results of operations.
Negative developments that began in the latter half of 2007 and that have continued since then
in the global credit and securitization markets have resulted in unprecedented volatility and disruption
in the financial markets and a general economic downturn, both nationally and in our South Carolina
markets. The economy’s recovery from these negative developments has been slow and inconsistent in
many markets, including some in the Carolinas. As a result of this “credit crunch,” commercial as well as
consumer loan portfolio performances deteriorated at many institutions, and the competition for deposits
and quality loans has increased significantly. In addition, the values of real estate collateral supporting
many commercial loans and home mortgages have declined and may continue to decline. As a result, we
may face the following risks:
•
economic conditions that negatively affect housing prices and the job market may cause the
credit quality of our loan portfolios to deteriorate;
28
•
•
•
•
market developments that affect consumer confidence may cause adverse changes in payment
patterns by our customers, causing increases in delinquencies and default rates on loans and
other credit facilities;
the processes that we use to estimate our allowance for loan and lease losses and reserves
may no longer be reliable because they rely on judgments, such as forecasts of economic con-
ditions, that may no longer be capable of accurate estimation;
the value of our securities portfolio may decline; and
we face increased regulation of our industry, and the costs of compliance with such regulation
may increase.
These conditions or similar ones may continue to persist or worsen, causing us to experience
continuing or increased adverse effects on our business, financial condition, results of operations and the
price of our common stock.
Our mortgage banking profitability could be significantly reduced if we are not able to originate and resell a high
volume of mortgage loans.
Mortgage production, especially refinancing activity, typically declines in a rising interest rate
environment. During 2009-2013, there was a period of historically low interest rates; however, the low
interest rate environment likely will not continue indefinitely. During the third quarter of 2013, mortgage
interest rates began to rise and, as a result, mortgage production began to slow. Nationally, 2014 mort-
gage originations decreased approximately 50% from 2013 levels, resulting in a significant reduction in
origination revenues and operating margins. Because we sell a substantial portion of the mortgage loans
we originate, the profitability of our mortgage banking business depends in large part upon our ability to
aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to
our dependence on the interest rate environment, we are dependent upon (i) the existence of an active
secondary market and (ii) our ability to profitably sell loans or securities into that market. As our level of
mortgage production declines, the profitability from our mortgage operations will depend upon our ability
to reduce our costs commensurate with the reduction of revenue from our mortgage operations.
Our ability to originate and sell mortgage loans readily is dependent upon the availability of an
active secondary market for single-family mortgage loans, which in turn depends in part upon the con-
tinuation of programs currently offered by the government sponsored entities, or GSEs, and other insti-
tutional and non-institutional investors. These entities account for a substantial portion of the secondary
market in residential mortgage loans. Because the largest participants in the secondary market are
government-sponsored enterprises whose activities are governed by federal law, any future changes in
laws that significantly affect the activity of the GSEs could, in turn, adversely affect our operations. In
September 2008, the GSEs were placed into conservatorship by the U.S. government. Although to date the
conservatorship has not had a significant or adverse effect on our operations, it remains unclear whether these
events or further changes would significantly and adversely affect our operations. The government and oth-
ers have provided options to reform the GSEs, but the results of any such reform, and their impact on us, are
difficult to predict. To date, no reform proposal has been enacted. In addition, our ability to sell mortgage
loans readily is dependent upon our ability to remain eligible for the programs offered by the GSEs and other
institutional and non-institutional investors. Our ability to remain eligible to originate and securitize govern-
ment insured loans may also depend on having an acceptable peer-relative delinquency ratio for FHA loans
and maintaining a delinquency rate with respect to Ginnie Mae pools that are below Ginnie Mae guidelines.
29
2014 Form 10-K Any significant impairment of our eligibility with any of the GSEs would materially adversely
affect our operations. Further, the criteria for loans to be accepted under such programs may be changed
from time-to-time by the sponsoring entity which could result in a lower volume of corresponding loan
originations. The profitability of participating in specific programs may vary depending on a number of
factors, including our administrative costs of originating and purchasing qualifying loans and our costs of
meeting such criteria.
An increase in our nonperforming assets would adversely impact our earnings.
Our nonperforming assets may increase in future periods. Nonperforming assets adversely affect
our net income in various ways. We do not record interest income on non-accrual loans or investments or
on real estate owned. We must establish an allowance for loan losses that reserves for losses inherent in
the loan portfolio that are both probable and reasonably estimable through current period provisions for
loan losses, which are recorded as a charge to income. From time to time, we also write down the other
real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated
with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance
related to the other real estate owned. Further, the resolution of nonperforming assets requires the active
involvement of management, which can distract them from our overall supervision of operations and other
income-producing activities.
We could record other-than-temporary impairment on our securities portfolio. In addition, we may not receive full
future interest payments on these securities.
We review our 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, 2014, the Company had 26 individual securities available-for-sale in an unreal-
ized loss position. In addition, the Company had four individual investments held to maturity that were in
unrealized loss in held-to-maturity consisting of pooled trust preferred securities. The Company believes,
based on industry analyst reports and third-party OTTI evaluations, that the deterioration in the value of
these securities is attributable to a combination of the lack of liquidity in these securities, credit ratings and
credit quality concerns. There are three additional asset-backed securities classified as held-to-maturity
securities that had OTTI expense recorded in prior years, but did not incur OTTI expense during fiscal
2014 or 2013. Other than these three held-to-maturity securities, management believes that there are no
other securities other-than-temporarily impaired at December 31, 2014. 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.
30
A number of factors or combinations of factors could require us to conclude in one or more future
reporting periods that an unrealized loss that exists with respect to our securities portfolio constitutes
additional impairment that is other than temporary, which could result in material losses to us. These factors
include, but are not limited to, a continued failure by an issuer to make scheduled interest payments, an
increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration
of the unrealized loss without an improvement in value or changes in market conditions and/or industry or
issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair
values of securities could decline if the overall economy and the financial condition of some of the issuers
continue to deteriorate and there remains limited liquidity for these securities.
We may not be able to continue to support the realization of our deferred tax asset.
We calculate income taxes in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which requires the use of the asset
and liability method. In accordance with this, we regularly assess available positive and negative evidence
to determine whether it is more likely than not that our deferred tax asset balances will be recovered from
reversals of deferred tax liabilities, potential utilization of net operating loss carrybacks, tax planning strat-
egies and future taxable income. At December 31, 2014, our net deferred tax asset was $4.7 million, for
which we have not established a valuation allowance. We recognized the deferred tax asset because man-
agement believes, based on earnings and detailed financial projections, that it is more likely than not that
we will have sufficient future earnings to utilize this asset to offset future income tax liabilities. Realization
of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it
requires the future occurrence of circumstances that cannot be predicted with certainty. There can be no
assurance that we will achieve sufficient future taxable income as the basis for the ultimate realization of
our deferred tax asset and therefore we may have to establish a full or partial valuation allowance at some
point in the future. If we determine that a valuation allowance is necessary, this would require us to incur
a charge to operations that would adversely affect our capital position.
At December 31, 2014, we had $4.7 million of allowable net deferred tax assets for regulatory
capital purposes, which is the amount that is expected to be recovered based on a two-year net operating
loss carryback and the next four quarters calculation. There is no assurance that we will be able to continue
to recognize any, or all, of the deferred tax asset for regulatory capital purposes.
We may be terminated as a servicer of mortgage loans, be required to repurchase a mortgage loan or reimburse
investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our
servicing obligations, including our obligations with respect to mortgage loan foreclosure actions.
We act as servicer for approximately $1.9 billion of mortgage loans owned by third parties as of
December 31, 2014. As a servicer for those loans we have certain contractual obligations, including fore-
closing on defaulted mortgage loans or, to the extent applicable, considering alternatives to foreclosure
such as loan modifications or short sales. If we commit a material breach of our obligations as servicer,
we may be subject to termination as servicer if the breach is not cured within a specified period of time
following notice, causing us to lose servicing income.
In some cases, we may be contractually obligated to repurchase a mortgage loan or reimburse the
investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan. If
we have increased repurchase obligations because of claims that we did not satisfy our obligations as a ser-
vicer, or increased loss severity on such repurchases, we may have a significant reduction to net servicing
income within our mortgage banking noninterest income. We may incur costs if we are required to, or if
31
2014 Form 10-K we elect to, re-execute or re-file documents or take other action in our capacity as a servicer in connection
with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action
is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in
the foreclosure process, we may have liability to the borrower and/or to any title insurer of the property
sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally
or otherwise reimbursable to us. In addition, if certain documents required for a foreclosure action are
missing or defective, we could be obligated to cure the defect or repurchase the loan. We may incur liability
to securitization investors relating to delays or deficiencies in our processing of mortgage assignments or
other documents necessary to comply with state law governing foreclosures. The fair value of our mort-
gage servicing rights may be negatively affected to the extent our servicing costs increase because of higher
foreclosure costs. We may be subject to fines and other sanctions imposed by federal or state regulators
as a result of actual or perceived deficiencies in our foreclosure practices or in the foreclosure practices
of other mortgage loan servicers. Any of these actions may harm our reputation or negatively affect our
home lending or servicing business.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which
could harm liquidity, results of operations and financial condition.
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are
required to make customary representations and warranties to purchasers, guarantors and insurers,
including the government sponsored enterprises, about the mortgage loans and the manner in which they
were originated. Whole loan sale agreements require repurchase or substitute mortgage loans, or indem-
nification of buyers against losses, in the event we breach these representations or warranties. In addition,
we may be required to repurchase mortgage loans as a result of early payment default of the borrower on
a mortgage loan. With respect to loans that are originated through our broker or correspondent channels,
the remedies available against the originating broker or correspondent, if any, may not be as broad as
the remedies available to purchasers, guarantors and insurers of mortgage loans against us. We face
further risk that the originating broker or correspondent, if any, may not have financial capacity to perform
remedies that otherwise may be available. Therefore, if a purchaser, guarantor or insurer enforces its
remedies against us, we may not be able to recover losses from the originating broker or correspondent. If
repurchase and indemnity demands increase and such demands are valid claims and are in excess of our
provision for potential losses, our liquidity, results of operations and financial condition may be adversely
affected.
Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.
Making loans and other extensions of credit is an essential element of our business. Although
we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and
other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors,
including:
•
•
•
•
the duration of the credit;
credit risks of a particular customer;
changes in economic and industry conditions; and
in the case of a collateralized loan, risks resulting from uncertainties about the future value
of the collateral.
32
We attempt to maintain an appropriate allowance for loan losses to provide for potential losses
in our loan portfolio. We periodically determine the amount of the allowance based on consideration of
several factors, including:
•
•
•
•
•
an ongoing review of the quality, mix, and size of our overall loan portfolio;
our historical loan loss experience;
evaluation of economic conditions;
regular reviews of loan delinquencies and loan portfolio quality; and
the amount and quality of collateral, including guarantees, securing the loans.
There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs
in future periods will exceed our allowance for loan losses and that additional increases in the allowance
for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our
net income, and possibly our capital.
Federal and state regulators periodically review our allowance for loan losses and may require us
to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different
than those of our management. Any increase in the amount of our provision or loans charged-off as
required by these regulatory agencies could have a negative effect on our operating results.
We may have higher loan losses than we have allowed for in our allowance for loan losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable
losses caused by customer loan defaults. The allowance for loan losses may not be adequate to cover actual
loan losses, and in this case additional and larger provisions for loan losses would be required to replenish
the allowance. Provisions for loan losses are a direct charge against income.
We establish the amount of the allowance for loan losses based on historical loss rates, as well as
estimates and assumptions about future events. Because of the extensive use of estimates and assump-
tions, our actual loan losses could differ, possibly significantly, from our estimate. We believe that our
allowance for loan losses is adequate to provide for probable losses, but it is possible that the allowance
for loan losses will need to be increased for credit reasons or that regulators will require us to increase this
allowance. Either of these occurrences could materially and adversely affect our earnings and profitability.
A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate
market could hurt our business.
A significant portion of our loan portfolio is secured by real estate. The real estate collateral in
each case provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. A weakening of the real estate market in our
primary market areas could result in an increase in the number of borrowers who default on their loans
and a reduction in the value of the collateral securing their loans, which in turn could have an adverse
effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to
satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely
33
2014 Form 10-K affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which could be
exacerbated by potential climate change and may cause uninsured damage and other loss of value to real
estate that secures these loans, may also negatively impact our financial condition.
We have a concentration of credit exposure in commercial real estate and challenges faced by the commercial real estate
market could adversely affect our business, financial condition, and results of operations.
As of December 31, 2014, we had approximately $317.9 million in loans outstanding to borrowers
whereby the collateral securing the loan was commercial real estate, representing approximately 40.8%
of our total loans outstanding as of that date. Approximately 56.7%, or $176.8 million, of this real estate
are owner-occupied properties. Commercial real estate loans are generally viewed as having more risk of
default than residential real estate loans. They are also typically larger than residential real estate loans
and consumer loans and depend on cash flows from the owner’s business or the property to service the
debt. Cash flows may be affected significantly by general economic conditions, and a downturn in
the local economy or in occupancy rates in the local economy where the property is located could increase
the likelihood of default. Because our loan portfolio contains a number of commercial real estate loans
with relatively large balances, the deterioration of one or a few of these loans could cause a significant
increase in our level of nonperforming loans. An increase in nonperforming loans could result in a loss of
earnings from these loans, an increase in the related provision for loan losses and an increase in charge-offs,
all of which could have a material adverse effect on our financial condition and results of operations.
The banking regulators are giving commercial real estate lending greater scrutiny, and may
require banks with higher levels of commercial real estate loans to implement more stringent underwriting,
internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of
allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2014, commercial business loans comprised 10.6% of our total loan portfolio. Our
commercial business loans are originated primarily based on the identified cash flow and general liquidity
of the borrower and secondarily on the underlying collateral provided by the borrower and/or repayment
capacity of any guarantor. The borrower’s cash flow may be unpredictable, and collateral securing these
loans may fluctuate in value. Although commercial business loans are often collateralized by equipment,
inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is
often an insufficient source of repayment because accounts receivable may be uncollectible and inventories
may be obsolete or of limited use. In addition, business assets may depreciate over time, may be difficult to
appraise, and may fluctuate in value based on the success of the business. Accordingly, the repayment of
commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and
secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor.
Further downturns or a slower recovery in the real estate markets in our primary market areas could significantly
adversely impact our business.
Our business activities and credit exposure are primarily concentrated in Charleston, Dorchester,
and Horry counties in South Carolina. The Company’s primary markets in Charleston and Dorchester
counties are heavily influenced by the Port of Charleston, the military, the medical industry and national
and international industries. The Company’s primary market areas in Horry County and adjacent counties
in North Carolina are heavily influenced by tourism, retirement living, and retail. The real estate markets
34
have experienced a significant decline in these markets in recent years and, if these economic drivers
experience further downturns or recover more slowly than expected, real estate in the Company’s
markets may experience further declines. If real estate values in our markets decline, the collateral for
these loans will provide less security. As a result, the borrower’s ability to pay, or the Company’s ability to
recover on defaulted loans by selling the underlying collateral, would be diminished.
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.
Most of our commercial business and commercial real estate loans are made to small business or
middle market customers. These businesses generally have fewer financial resources in terms of capital
or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If
general economic conditions in the markets in which we operate negatively impact this important customer
sector, our results of operations and financial condition and the value of our common stock may be adversely
affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may
not have experienced a complete business or economic cycle. Furthermore, the deterioration of our
borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material
adverse effect on our financial condition and results of operations.
We face strong competition for customers, which could prevent us from obtaining customers and may cause us to pay
higher interest rates to attract customers.
The banking business is highly competitive, and we experience competition in our markets from
many other financial institutions. We compete with commercial banks, credit unions, savings and loan
associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance
companies, money market funds, and other mutual funds, as well as other super-regional, national, and
international financial institutions that operate offices in our primary market areas and elsewhere. We
compete with these institutions both in attracting deposits and in making loans. In addition, we have to
attract our customer base from other existing financial institutions and from new residents. Many of our
competitors are well-established, larger financial institutions. These institutions offer some services, such
as extensive and established branch networks, that we do not provide. There is a risk that we will not be
able to compete successfully with other financial institutions in our markets, and that we may have to pay
higher interest rates to attract deposits, resulting in reduced profitability. In addition, competitors that are
not depository institutions are generally not subject to the extensive regulations that apply to us.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse
effect on our future earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to appli-
cable limits. The amount of a particular institution’s deposit insurance assessment is based on that institu-
tion’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is
assigned based on its capital levels and the level of supervisory concern the institution poses to its regula-
tors. Recent market developments and bank failures significantly depleted the FDIC’s Deposit Insurance
Fund and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and
the enactment of the Dodd-Frank Act, banks are now assessed deposit insurance premiums based on the
bank’s average consolidated total assets, and the FDIC has modified certain risk-based adjustments, which
increase or decrease a bank’s overall assessment rate. This has resulted in increases to the deposit insur-
ance assessment rates and thus raised deposit premiums for many insured depository institutions. If these
increases are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special
assessments or increases in deposit insurance premiums may be required. We are generally unable to
35
2014 Form 10-K control the amount of premiums that we are required to pay for FDIC insurance. If there are additional
bank or financial institution failures, we may be required to pay even higher FDIC premiums than the
recently increased levels. Any future additional assessments, increases or required prepayments in FDIC
insurance premiums could reduce our profitability, may limit our ability to pursue certain business oppor-
tunities or otherwise negatively impact our operations.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or
estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosure in conformity with accounting prin-
ciples generally accepted in the United States requires us to make judgments, assumptions and estimates
that affect the amounts reported in our consolidated financial statements and accompanying notes. Our
critical accounting policies, which are included in the section captioned “Management’s Discussion and
Analysis of Results of Operations and Financial Condition”, describe those significant accounting policies
and methods used in the preparation of our consolidated financial statements that we consider “critical”
because they require judgments, assumptions and estimates that materially affect our consolidated financial
statements and related disclosures. As a result, if future events differ significantly from the judgments,
assumptions and estimates in our critical accounting policies, those events or assumptions could have a
material impact on our consolidated financial statements and related disclosures.
Our funding sources may prove insufficient to replace deposits and support future growth.
We rely on customer deposits, including brokered deposits, advances from the Federal Home Loan
Bank of Atlanta (the “FHLB”) and the Federal Reserve, and other borrowings to fund operations. Although
the Company has historically been able to replace maturing deposits and advances, if desired, no assurance
can be given that we would be able to replace such funds in the future if the financial condition of the FHLB
or programs sponsored by the Federal Reserve, regulatory restrictions on brokered deposits or regulatory
restrictions on the pricing of local deposits or other market conditions were to change. In addition, certain
borrowing sources are on a secured basis. The FHLB has become more restrictive on the types of collat-
eral it will accept and the amount of borrowings allowed on acceptable collateral. Due to changes applied
by rating agencies on bonds, changes in collateral requirements or deteriorating loan quality, outstanding
borrowings could be required to be repaid, incurring prepayment penalties. Our financial flexibility will be
severely constrained if we are unable to maintain access to funding at acceptable interest rates. Finally, if we
are required to rely more heavily on more expensive funding sources to support future operations, our rev-
enues may not increase proportionally to cover these costs. In addition, Crescent Mortgage Company funds
mortgage loans held for sale through a purchase and sale agreement with the Bank. A decline in economic
conditions could affect Crescent Mortgage Company’s ability to fund loans held for sale.
Our operating results have been highly dependent upon the results of our mortgage subsidiary, Crescent Mortgage
Company.
There are a number of items that could adversely affect the volumes and margin of the Company’s
mortgage banking operations. These include, but are not limited to, the Federal Reserve’s monetary policy
including its quantitative easing program, aggressively low rates, reduction in prices paid by the mortgage
banking aggregators, aggressive competition, the housing market recovery, the status and financial condi-
tion of Fannie Mae and Freddie Mac, potential changes in Fannie Mae and Freddie Mac lending guidelines
and programs, proposed changes in the FHA lending requirements, extensive regulatory changes and
liquidity. Should these factors significantly impact production of mortgages, it is likely that the Company’s
earnings would be adversely affected.
36
Our mortgage subsidiary’s operations are exposed to significant repurchase risk.
Crescent Mortgage Company is exposed to significant repurchase risk on mortgage loan produc-
tion related to potential reimbursements for loans sold to third parties for borrower fraud, underwriting
and documentation issues, early defaults and prepayments of sold loans. If the Company experiences
significant losses related to repurchase risk, it is possible that the reserve established for such exposure
is not adequate. The Company continues to receive repurchase requests. The Company evaluates each
request and provides estimated reserves as necessary. We believe that the reserve related to repurchase
risk is adequate to absorb probable losses; however, we cannot predict these losses or whether our reserve
will be adequate. Any of these occurrences could materially and adversely affect our business, financial
condition and profitability.
The value of our loan servicing portfolio may become impaired in the future.
As of December 31, 2014, Crescent Mortgage Company serviced approximately $1.9 billion of
loans. At that date, our mortgage loan servicing rights were recorded as an asset with a carrying value
of approximately $10.2 million. We expect that our loan servicing portfolio will increase in the future.
If interest rates decline and the actual and expected mortgage loan prepayment rates increase or other
factors that cause a reduction of the valuation of our mortgage servicing asset, the Company could incur
an impairment of its mortgage loan servicing asset.
Hurricanes and other natural disasters may adversely affect loan portfolios and operations and increase the cost of
doing business.
The Company operates in markets that are susceptible to hurricanes and other natural disasters.
Large-scale natural disasters may significantly affect loan portfolios by damaging properties pledged as
collateral, affecting the economies our borrowers live in, and by impairing the ability of the borrower to
repay their loans.
Changes in prevailing interest rates may reduce our profitability.
Our results of operations depend in large part upon the level of our net interest income, which is
the difference between interest income from interest-earning assets, such as loans and investment securi-
ties, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Depending on the
terms and maturities of our assets and liabilities, we believe it is more likely than not a significant change
in interest rates could have a material adverse effect on our profitability. Many factors cause changes in
interest rates, including governmental monetary policies and domestic and international economic and
political conditions. While we intend to manage the effects of changes in interest rates by adjusting the
terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial
condition and results of operations could suffer.
We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and
adversely affect our prospects.
Jerold L. Rexroad, the Company’s President and Chief Executive Officer, has extensive and
long-standing ties within our primary markets. Mr. Rexroad has substantial experience in banking
operations, wholesale mortgage operations, investment securities, and mergers and acquisitions. If we lose
the services of Mr. Rexroad he would be difficult to replace and our business and development could be
materially and adversely affected.
37
2014 Form 10-K David L. Morrow, the Bank’s President and Chief Executive Officer, also has extensive and
long-standing ties within our primary markets and substantial commercial lending experience within our
Charleston and Myrtle Beach markets. If we lose the services of Mr. Morrow, he would be difficult to
replace and our business and development could be materially and adversely affected.
Our success also depends, in part, on our continued ability to attract and retain experienced loan
originators, as well as other management personnel. Competition for personnel is intense, and we may not
be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel, or
the loss of the services of several of such key personnel, could adversely affect our business strategy and
seriously harm our business, results of operations, and financial condition.
The Dodd-Frank Act may have a material adverse effect on our operations.
The Dodd-Frank Act imposes significant regulatory and compliance changes on banks and bank
holding companies. The key effects of the Dodd-Frank Act on our business are:
•
•
•
•
•
•
•
•
changes to regulatory capital requirements;
exclusion of hybrid securities, including trust preferred securities, issued on or after May 19,
2010 from Tier 1 capital;
creation of new government regulatory agencies (such as the Financial Stability Oversight
Council, which oversees systemic risk, and the Consumer Financial Protection Bureau, which
develops and enforces rules for bank and non-bank providers of consumer financial products);
potential limitations on federal preemption;
changes to deposit insurance assessments;
regulation of debit interchange fees we earn;
changes in retail banking regulations, including potential limitations on certain fees we may
charge; and
changes in regulation of consumer mortgage loan origination and risk retention.
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary
trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains
provisions designed to limit the ability of insured depository institutions, their holding companies and
their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in
financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many
provisions, however, will require regulations to be promulgated by various federal agencies in order to be
implemented, some but not all of which have been proposed or finalized by the applicable federal agencies.
The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until after imple-
mentation. Certain changes resulting from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, impose upon us more stringent capital, liquid-
ity and leverage requirements or otherwise adversely affect our business. These changes may also require
38
us to invest significant management attention and resources to evaluate and make any changes necessary to
comply with new statutory and regulatory requirements. Failure to comply with the new requirements may
negatively impact our results of operations and financial condition. While we cannot predict what effect any
presently contemplated or future changes in the laws or regulations or their interpretations would have on
us, these changes could be materially adverse to investors in our common stock.
New capital rules that were recently issued generally require insured depository institutions and their holding companies
to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be
materially adverse.
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.” The requirements in the rule began to phase in on January 1, 2014 for advanced
approaches banking organizations, and on January 1, 2015 for other covered banking organizations,
including the Company and the Bank. The requirements in the rule will be fully phased in by January 1,
2019. These rules substantially amend the regulatory risk-based capital rules applicable to us.
The final rules increase capital requirements and generally include two new capital measurements
that will affect us, a risk-based common equity Tier 1 ratio and a capital conservation buffer. common equity
Tier 1 (CET1) capital is a subset of Tier 1 capital and is limited to common equity (plus related surplus),
retained earnings, accumulated other comprehensive income and certain other items. Other instruments
that have historically qualified for Tier 1 treatment, including non-cumulative perpetual preferred stock,
are consigned to a category known as additional Tier 1 capital and must be phased out over a period of
nine years beginning in 2014. The rules permit bank holding companies with less than $15 billion in assets
(such as us) to continue to include trust preferred securities and non-cumulative perpetual preferred stock
issued before May 19, 2010 in Tier 1 capital, but not CET1. Tier 2 capital consists of instruments that have
historically been placed in Tier 2, as well as cumulative perpetual preferred stock.
The final rules adjust all three categories of capital by requiring new deductions from and adjust-
ments to capital that will result in more stringent capital requirements and may require changes in the
ways we do business. Among other things, the current rule on the deduction of mortgage servicing assets
from Tier 1 capital has been revised in ways that are likely to require a greater deduction than we
currently make and that will require the deduction to be made from CET1. This deduction phases in over a
three-year period from 2015 through 2017. We closely monitor our mortgage servicing assets, and we expect
to maintain our mortgage servicing asset at levels close to the deduction thresholds by a combination of
sales of portions of these assets from time to time either on a flowing basis as we originate mortgages or
through bulk sale transactions. Additionally, any gains on sales from mortgage loans sold into securitiza-
tions must be deducted in full from CET1. This requirement phases in over three years from 2015 through
2017. Under the earlier rule and through 2014, no deduction was required.
Beginning in 2015, our minimum capital requirements will be (i) a CET1 ratio of 4.5%, (ii) a Tier
1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the
current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning
in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement
of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a require CET1 ratio of
7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital
requirements will result in limits on paying dividends, engaging in share repurchases and paying discre-
tionary bonuses. These limitations will establish a maximum percentage of eligible retained income that
could be utilized for such actions. While the final rules will result in higher regulatory capital standards, it
is difficult at this time to predict when or how any new standards will ultimately be applied to us.
39
2014 Form 10-K In addition to the higher required capital ratios and the new deductions and adjustments, the final
rules increase the risk weights for certain assets, meaning that we will have to hold more capital against
these assets. For example, commercial real estate loans that do not meet certain new underwriting require-
ments must be risk-weighted at 150%, rather than the current 100%. There are also new risk weights for
unsettled transactions and derivatives. We also will be required to hold capital against short-term commit-
ments that are not unconditionally cancelable; currently, there are no capital requirements currently for
these off-balance sheet assets. All changes to the risk weights take effect in full in 2015.
In addition, in the current economic and regulatory environment, bank regulators may impose
capital requirements that are more stringent than those required by applicable existing regulations. The
application of more stringent capital requirements for us could, among other things, result in lower returns
on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable
to comply with such requirements. Implementation of changes to asset risk weightings for risk-based
capital calculations, items included or deducted in calculating regulatory capital or additional capital
conservation buffers, could result in management modifying our business strategy and could limit our
ability to make distributions, including paying dividends or buying back our shares.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), and other
laws and regulations require financial institutions, among other duties, to institute and maintain effective
anti-money laundering programs and file suspicious activity and currency transaction reports as appro-
priate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer
the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those
requirements and has recently engaged in coordinated enforcement efforts with the individual federal
banking regulators, as well as the Department of Justice, Drug Enforcement Administration and Internal
Revenue Service. There is also increased scrutiny of compliance with the rules enforced by OFAC. Federal
and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money
laundering regulations. If our policies, procedures and systems are deemed deficient we would be subject
to liability, including fines and regulatory actions, such as restrictions on our ability to pay dividends, which
would negatively impact our business, financial condition and results of operations. Failure to maintain
and implement adequate programs to combat money laundering and terrorist financing could also have
serious reputational consequences for us.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase
our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending
practices considered “predatory.” These laws prohibit practices such as steering borrowers away from
more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and
making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespec-
tive of the value of the underlying property. Since 2013, the CFPB has issued several rules on mortgage
lending, notably a rule requiring all home mortgage lenders to determine a borrower’s ability to repay
the loan. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified
mortgage” may be protected from liability to a borrower for failing to make the necessary determinations.
In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response
40
to the CFPB rules, which may constrain our ability to make loans consistent with our business strategies.
It is our policy not to make predatory loans and to determine borrowers’ ability to repay, but the law and
related rules create the potential for increased liability with respect to our lending and loan investment
activities. They increase our cost of doing business and, ultimately, may prevent us from making certain
loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
The requirements of being a public company may strain our resources, divert management’s attention and affect our
ability to attract and retain executive management and qualified board members.
Our common stock was registered under the Exchange Act in 2014, thereby subjecting the
Company to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act,
and other applicable securities rules and regulations. Compliance with these rules and regulations have
and will continue to increase our legal and financial compliance costs, make some activities more difficult,
time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires,
among other things, that we file annual, quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. In order to maintain and,
if required, improve our disclosure controls and procedures and internal control over financial report-
ing to meet this standard, significant resources and management oversight may be required. As a result,
management’s attention may be diverted from other business concerns, which could adversely affect our
business and operating results. Although we have already hired additional employees to comply with these
requirements, we may need to hire more employees in the future or engage outside consultants, which will
increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public
disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs
and making some activities more time consuming. These laws, regulations and standards are subject to
varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could
result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws,
regulations and standards, and this investment may result in increased general and administrative expenses
and a diversion of management’s time and attention from revenue-generating activities to compliance
activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended
by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory
authorities may initiate legal proceedings against us and our business may be adversely affected.
We also expect that being a public reporting company and these new rules and regulations will
increase the costs of our director and officer liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to obtain coverage. These factors could also make it more
difficult for us to attract and retain qualified members of our board of directors, particularly to serve on
our audit committee and compensation committee, and qualified executive officers.
As a result of disclosure of information in this report and in filings required of a public company,
our business and financial condition will become more visible, which may result in threatened or actual
litigation, including by competitors and other third parties. If such claims are successful, our business
and operating results could be adversely affected, and even if the claims do not result in litigation or are
resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the
resources of our management and adversely affect our business and operating results.
41
2014 Form 10-K We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other
relationships. We have exposure to many different industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including commercial banks, brokers
and dealers, investment banks, and other institutional clients. Many of these transactions expose us to
credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacer-
bated when the collateral held by the bank cannot be realized upon or is liquidated at prices not sufficient
to recover the full amount of the credit or derivative exposure due to the bank. Any such losses could have
a material adverse affect on our financial condition and results of operations.
We may face risks if we seek to expand through acquisitions or mergers.
From time to time, we may seek to acquire other financial institutions or parts of those institu-
tions. We may also expand into new markets or lines of business or offer new products or services. These
activities would involve a number of risks, including:
•
•
•
the potential inaccuracy of the estimates and judgments used to evaluate credit, operations,
management, and market risks with respect to a target institution;
the time and costs of evaluating new markets, hiring or retaining experienced local manage-
ment, and opening new offices and the time lags between these activities and the generation
of sufficient assets and deposits to support the costs of the expansion;
the incurrence and possible impairment of goodwill associated with an acquisition and possi-
ble adverse effects on our results of operations; and
•
the risk of loss of key employees and customers.
We depend on the accuracy and completeness of information about clients and counterparties and our financial
condition could be adversely affected if we rely on misleading information.
In deciding whether to extend credit or to enter into other transactions with clients and counter-
parties, we may rely on information furnished to us by or on behalf of clients and counterparties, including
financial statements and other financial information, which we do not independently verify. We also may
rely on representations of clients and counterparties as to the accuracy and completeness of that information
and, with respect to financial statements, on reports of independent auditors. For example, in deciding
whether to extend credit to clients, we may assume that a customer’s audited financial statements conform
with GAAP and present fairly, in all material respects, the financial condition, results of operations and
cash flows of the customer. Our financial condition and results of operations could be negatively impacted
to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.
Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.
The Federal Reserve has issued a policy statement regarding the payment of dividends by bank
holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only
out of current earnings and only if the prospective rate of earnings retention by the bank holding company
appears consistent with the organization’s capital needs, asset quality and overall financial condition. The
Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength
42
to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to
those banks during periods of financial stress or adversity and by maintaining the financial flexibility and
capital raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.
In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay
dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could
affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
Our ability to pay cash dividends may be limited by regulatory restrictions, by our Bank’s ability
to pay cash dividends to the Company and by our need to maintain sufficient capital to support our oper-
ations. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends
that it is permitted to pay. Unless otherwise instructed by the SCBFI, 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 SCBFI. If our Bank is not permitted to pay cash
dividends to the Company, it is unlikely that we would be able to pay cash dividends on our common stock.
Moreover, holders of our common stock are entitled to receive dividends only when, and if declared by
our board of directors. Although we have historically paid cash dividends on our common stock, we are
not required to do so and our board of directors could reduce or eliminate our common stock dividend in
the future.
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and
other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result
in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and
cause losses.
We rely heavily on communications and information systems to conduct our business. Information
security risks for financial institutions such as ours have generally increased in recent years in part because
of the proliferation of new technologies, the use of the internet and telecommunications technologies to
conduct financial transactions, and the increased sophistication and activities of organized crime, hackers,
and terrorists, activists, and other external parties. As customer, public, and regulatory expectations
regarding operational and information security have increased, our operating systems and infrastructure
must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our
business, financial, accounting, and data processing systems, or other operating systems and facilities may
stop operating properly or become disabled or damaged as a result of a number of factors, including events
that are wholly or partially beyond our control. For example, there could be electrical or telecommunication
outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events
arising from local or larger scale political or social matters, including terrorist acts; and as described below,
cyber attacks.
As noted above, our business relies on our digital technologies, computer and email systems,
software and networks to conduct its operations. Although we have information security procedures and
controls in place, our technologies, systems, networks, and our customers’ devices may become the target
of cyber attacks or information security breaches that could result in the unauthorized release, gathering,
monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential
information. Third parties with whom we do business or that facilitate our business activities, including
financial intermediaries, or vendors that provide service or security solutions for our operations, and other
unaffiliated third parties, including the South Carolina Department of Revenue, which had customer
records exposed in a 2012 cyber attack, could also be sources of operational and information security risk
to us, including from breakdowns or failures of their own systems or capacity constraints.
43
2014 Form 10-K While we have disaster recovery and other policies and procedures designed to prevent or limit the
effect of the failure, interruption or security breach of our information systems, there can be no assurance
that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be
adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving
nature of these threats. As a result, cyber security and the continued development and enhancement of our
controls, processes, and practices designed to protect our systems, computers, software, data, and networks
from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may
be required to expend additional resources to continue to modify or enhance our protective measures or
to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical
infrastructure or operating systems that support our businesses and clients, or cyber attacks or security
breaches of the networks, systems or devices that our clients use to access our products and services could
result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or
other compensation costs, and/or additional compliance costs, any of which could have a material effect on
our results of operations or financial condition.
Negative public opinion surrounding our Company and the financial institutions industry generally could damage our
reputation and adversely impact our earnings and our ability to make loans or to acquire deposits.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion
surrounding our company and the financial institutions industry generally, is inherent in our business.
Negative public opinion can result from our actual or alleged conduct in any number of activities, including
lending practices, corporate governance and acquisitions, and from actions taken by government regulators
and community organizations in response to those activities. Negative public opinion can adversely affect
our ability to keep and attract clients and employees and can expose us to litigation and regulatory action.
Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk
will always be present given the nature of our business.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can take
advantage of certain exemptions from various reporting requirements that are applicable to other public
companies including, without limitation, reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding
advisory stockholder vote on executive compensation and any golden parachute payments not previously
approved, exemption from the requirement of auditor attestation in the assessment of our internal control
over financial reporting and exemption from any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about our audit and the financial statements (auditor discussion
and analysis). As a result of the foregoing, the information that we provide stockholders may be different
than what is available with respect to other public companies. We cannot predict if investors will find our
common stock less attractive because we will rely on these exemptions. If investors find our common stock
less attractive as a result of our status as an emerging growth company, there may be less liquidity for our
common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in
which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the
end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues
of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in
44
non-convertible debt in a three-year period or (iv) the end of the fiscal year following the fifth anniversary
of the date of the first sale of our common stock pursuant to an effective registration statement filed under
the Securities Act.
Risks Related to Our Common Stock
Our stock price may be volatile, which could result in losses to our investors and litigation against us.
Several factors could cause our stock price to fluctuate substantially in the future. These factors
include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recom-
mendations or projections, our announcement of developments related to our businesses, operations and
stock performance of other companies deemed to be peers, new technology used or services offered by
traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part
of investors, new federal banking regulations, and other issues related to the financial services industry.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our
performance. General market declines or market volatility in the future, especially in the financial insti-
tutions sector, could adversely affect the price of our common stock, and the current market price may
not be indicative of future market prices. Stock price volatility may make it more difficult for you to resell
your common stock when you want and at prices you find attractive. Moreover, in the past, securities class
action lawsuits have been instituted against some companies following periods of volatility in the market
price of its securities. We could in the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management’s attention and resources from our normal business.
Future sales of our stock by our stockholders or the perception that those sales could occur may cause our stock price
to decline.
Although our common stock is listed on the Nasdaq Global Market under the symbol “CARO,”
the trading volume in our common stock is lower than that of other larger financial services companies.
A public trading market having the desired characteristics of depth, liquidity and orderliness depends on
the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This
presence depends on the individual decisions of investors and general economic and market conditions
over which we have no control. Given the relatively low trading volume of our common stock, significant
sales of our common stock in the public market, or the perception that those sales may occur, could cause
the trading price of our common stock to decline or to be lower than it otherwise might be in the absence
of those sales or perceptions.
Economic and other circumstances may require us to raise capital at times or in amounts that are unfavorable to us.
If we have to issue shares of common stock, they will dilute the percentage ownership interest of existing stockholders
and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain
additional capital.
We may need to incur additional debt or equity financing in the future to make strategic acquisi-
tions or investments or to strengthen our capital position. Our ability to raise additional capital, if needed,
will depend on, among other things, conditions in the capital markets at that time, which are outside of our
control and our financial performance. We cannot provide assurance that such financing will be available
to us on acceptable terms or at all, or if we do raise additional capital that it will not be dilutive to existing
stockholders.
45
2014 Form 10-K If we determine, for any reason, that we need to raise capital, our board generally has the authority,
without action by or vote of the stockholders, to issue all or part of any authorized but unissued shares
of stock for any corporate purpose, including issuance of equity-based incentives under or outside of our
equity compensation plans. Additionally, we are not restricted from issuing additional common stock or
preferred stock, including any securities that are convertible into or exchangeable for, or that represent the
right to receive, common stock or preferred stock or any substantially similar securities. The market price
of our common stock could decline as a result of sales by us of a large number of shares of common stock
or preferred stock or similar securities in the market or from the perception that such sales could occur.
Any issuance of additional shares of stock will dilute the percentage ownership interest of our stockholders
and may dilute the book value per share of our common stock. Shares we issue in connection with any
such offering will increase the total number of shares and may dilute the economic and voting ownership
interest of our existing stockholders.
Our board of directors may issue shares of preferred stock that would adversely affect the rights of our common
stockholders.
Our authorized capital stock includes 200,000 shares of preferred stock of which no preferred
shares are issued and outstanding. Our board of directors, in its sole discretion, may designate and issue
one or more series of preferred stock from the authorized and unissued shares of preferred stock. Subject
to limitations imposed by law or our certificate of incorporation, our board of directors is empowered to
determine:
•
•
•
•
•
•
the designation of, and the number of, shares constituting each series of preferred stock;
the dividend rate for each series;
the terms and conditions of any voting, conversion and exchange rights for each series;
the amounts payable on each series on redemption or our liquidation, dissolution or
winding-up;
the provisions of any sinking fund for the redemption or purchase of shares of any series; and
the preferences and the relative rights among the series of preferred stock.
We could issue preferred stock with voting and conversion rights that could adversely affect the
voting power of the shares of our common stock and with preferences over the common stock with respect
to dividends and in liquidation.
Our securities are not FDIC insured.
Our securities, including our common stock, are not savings or deposit accounts or other obliga-
tions of the Bank, are not insured by the Deposit Insurance Fund, the FDIC or any other governmental
agency and are subject to investment risk, including the possible loss of principal.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
46
ITEM 2. PROPERTIES.
Our main office is located at 288 Meeting Street, Charleston, South Carolina 29401-1575. In
addition, the Bank operates 25 additional branches located along the coastal region of South Carolina. The
addresses of these offices are provided below. In addition to our main office and branches, we also operate
Crescent Mortgage Company, which is headquartered in Atlanta, Georgia, Carolina Services Corporation
of Charleston, with Carolina Services Corporation’s operations conducted from our West Ashley location,
and loan production offices in Greenville, South Carolina and Wilmington, North Carolina. We believe
these premises will be adequate for present and anticipated needs and that we have adequate insurance to
cover our owned and leased premises. For each property that we lease, we believe that upon expiration of
the lease we will be able to extend the lease on satisfactory terms or relocate to another acceptable location.
Office
Myrtle Beach
Office
North Myrtle
Beach Office
Conway Office
Address
City, State, Zip
991 38th Avenue N.
Myrtle Beach, South Carolina
Lease/Own
Own
29577
700 Main Street
North Myrtle Beach, South
Land Lease
Carolina 29582
2069 Highway 501 East
Conway, South Carolina
Land Lease
Garden City Office
Socastee Office
2636 South Highway 17
Business
4506 Highway 707
29526
Garden City, South Carolina
Own
29576
Myrtle Beach, South Carolina
Own
29588
Meeting Street
Office
West Ashley Office
288 Meeting Street
Charleston, South Carolina
Lease
29401-1575
884 Orleans Road
Charleston, South Carolina
Own
29407-4937
James Island Office
430 Folly Road
Charleston, South Carolina
Own
Summerville Office
200 North Cedar Street
29412-2641
Summerville, South Carolina
29483-6404
Own
1492 Stuart Engals Blvd
Mt. Pleasant, South Carolina
Own
29464
8485 Dorchester Road
N. Charleston, South Carolina
Own
29420-7307
13021 Ocean Highway
Pawleys Island, South Carolina
Own
5561 Memorial Boulevard
Cane Bay Office
1274 State Road, Suite 4C
5901 Peachtree Dunwoody
Road NE
1230 16th Avenue
29585
St. George, South Carolina
29477
Summerville, South Carolina
29483
Atlanta, GA 30328
Own
Lease
Lease
Conway, South Carolina
Lease
29526
Mount Pleasant
Office
North Charleston
Office
Litchfield/Pawleys
Island Office
St. George Office
Crescent Mortgage
Company
Conway 16th Ave
Office
Little River Office
Heath Springs
Office
1180 Highway 17
Little River, South Carolina
Own
29566
202 N Main Steet
Heath Springs, South Carolina
Own
29058
47
2014 Form 10-K
Whiteville Office
110 N J K Powell Blvd
Whiteville, North Carolina
Own
28472
Chadbourn Office
111 Strawberry Blvd
Chadbourn, North Carolina
Lease
28431
Tabor City Office
105 Hickman Rd
Tabor City, North Carolina
Lease
Elizabethtown
Office
Shallotte Office
Sunset Beach
Office
Holden Beach
Office
Southport Howe St
Office
Southport Supply
Rd Office
306 S Poplar Street
Elizabethtown, North Carolina
Land Lease
28463
200 Smith Avenue
28337
Shallotte, North Carolina
28459
Own
7290-17 Beach Drive SW Ocean Isle Beach, North
Lease
3178 Holden Beach Road
SW
115 North Howe Street
4945 Southport-Supply
Road
Carolina 28469
Supply, North Carolina 28462 Lease
Southport, North Carolina
48461
Southport, North Carolina
48461
Lease
Land Lease
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of operations, we may be a party to various legal proceedings from time
to time. We do not believe that there is any pending or threatened proceeding against us, which, if deter-
mined adversely, would have a material effect on our business, results of operations, or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
48
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
As of March 6, 2015, there were approximately 498 stockholders of record of our common stock.
Our common stock was listed on the NASDAQ Capital Market on July 1, 2014. From October 9, 2013 to
June 30, 2014, our common stock was quoted on the OTCQB marketplace (the “OTCQB”) and a spon-
soring broker-dealer matched buy and sell orders for our common stock. Although our common stock was
quoted on the OTCQB during this period, the trading markets on the OTCQB lack the depth, liquidity,
and orderliness necessary to maintain a liquid market. The OTCQB prices are quotations, which reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual
transactions. The following table sets forth the high and low sales price information as reported by
NASDAQ or OTCQB quotations, as applicable, for each quarter since October 9, 2013, and the dividends
per share declared on our common stock in each quarter of 2013 and 2014. All information has been
adjusted for any stock splits and stock dividends effected during the periods presented.
2014
Quarter Ended December 31, 2014
$ 20.970
$ 12.675
$ 0.03
High
Low
Dividends
Quarter Ended September 30, 2014
Quarter Ended June 30, 2014
Quarter Ended March 31, 2014
2013
Quarter Ended December 31, 2013
Quarter Ended September 30, 2013
Quarter Ended June 30, 2013
Quarter Ended March 31, 2013
14.495
10.750
11.750
9.925
9.700
7.688
10.000
7.250
N/A
N/A
N/A
N/A
N/A
N/A
0.03
0.03
0.03
0.02
N/A
N/A
N/A
We are authorized to pay dividends as declared by our board of directors, provided that no such
distribution results in our insolvency on a going concern or balance sheet basis. On July 26, 2013, our board
of directors approved the initiation of a quarterly cash dividend to our common shareholders. Future div-
idends will be subject to board approval. As we are a legal entity separate and distinct from the Bank, our
principal source of funds with which we can pay dividends to our shareholders is dividends we receive from
the Bank. For that reason, our ability to pay dividends is subject to the limitations that apply to the Bank.
For more information on restrictions on payments of dividends, see Note 20 “Capital Requirements and
Other Restrictions” included in Part II, Item 8 – Financial Statements and Supplementary Data.
49
2014 Form 10-K
Equity Compensation Plan Information
The following table provides information as of December 31, 2014, with respect to shares of our
common stock that may be issued under existing equity compensation plans.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities
to be issued upon ex-
ercise of outstanding
options, warrants
and rights
Weighted-average
exercise price
of outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity compen-
sation plans
123,268 $
—
123,268 $
5.43
—
5.43
500,924
—
500,924
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.
On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one
stock split to stockholders of record as of October 31, 2014, payable on November 14, 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.
50
ITEM 6. SELECTED FINANCIAL DATA
2014
For The Years Ended December 31,
2012
(In thousands)
2011
2013
Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income (loss) after provision for
loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
$
$
37,656
5,602
32,054
—
32,948
5,718
27,230
(860)
32,054
21,148
41,443
11,759
3,448
8,311
28,090
44,086
45,972
26,204
9,386
16,818
35,356
7,513
27,843
2,707
25,136
53,524
51,387
27,273
10,395
16,878
38,441
11,113
27,328
10,735
16,593
19,721
37,413
(1,099)
(128)
(971)
2010
46,842
17,077
29,765
30,755
(990)
21,600
39,070
(18,460)
(5,872)
(12,588)
Balance Sheet Data:
Total assets
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans held for sale
Loans receivable, net
Allowance for loan losses
Deposits
Short-term borrowed funds
Long-term debt
Stockholders’ equity
2014
2013
At December 31,
2012
(In thousands)
2011
2010
34,176
11,340
$ 1,199,017 881,584 888,724 826,218
10,694
16,679
251,717 167,535 148,407 136,944
25,544
9,166
24,554
9,401
5,405
7,185
4,103
6,413
40,912
80,007
36,897 144,849
768,122 535,221 501,691 513,335
12,039
964,190 697,581 653,247 621,803
57,800
63,484
61,740
80,390
93,700
45,655
82,482
64,840
67,514
10,300
74,540
82,227
9,035
9,520
8,091
930,749
21,415
151,574
9,848
11,129
82,615
583,995
14,263
689,814
57,759
123,339
46,494
51
2014 Form 10-K
2014
For The Years Ended December 31,
2011
2012
2013
2010
Selected Average Balances:
Total assets
Loans receivable
Deposits
Stockholders’ equity
Performance Ratios:
Return on average equity
Return on average assets
Average earning assets to average total
(Dollars in thousands)
$
990,773
613,144
777,622
88,474
889,851
509,455
696,784
76,322
837,066
495,889
641,085
54,002
858,432
545,556
649,002
47,003
1,018,130
640,646
742,409
50,065
9.39%
0.84%
22.04%
1.89%
31.25%
2.02%
(2.07)%
(0.11)%
(25.14)%
(1.24)%
assets
91.43%
91.38%
92.29%
92.24%
94.24%
Average loans receivable to average
deposits
Average equity to average assets
Net interest margin
Net interest margin - tax equivalent (1)
Net (recovery) charge-offs to average
loans receivable
Non-performing assets to period end
loans receivable
Non-performing assets to total assets
Non-performing loans to total loans
Allowance for loan losses as a percentage
of loans receivable (end of period) (2)
Allowance for loan losses as a percentage
78.85%
8.93%
3.54%
3.62%
73.12%
8.58%
3.35%
3.41%
77.35%
6.45%
3.60%
3.61%
84.06%
5.48%
3.45%
3.45%
86.29%
4.92%
3.10%
3.10%
(0.15)%
0.11%
1.05%
2.38%
4.61%
0.74%
0.47%
0.31%
3.24%
1.97%
2.04%
4.29%
2.42%
2.98%
7.84%
4.87%
6.50%
11.69%
7.33%
9.60%
1.16%
1.49%
1.86%
2.29%
2.38%
of nonperforming loans
371.20%
73.03%
62.43%
35.24%
24.84%
Per Share Data:
Book value (end of period)
Basic earnings (loss)
Diluted earnings (loss)
At or For The Years Ended December 31,
2014
2013
2012
2011
2010
$
12.02
1.07
1.05
10.69
2.19
2.13
8.80
2.20
2.20
5.95
(0.13)
(0.13)
6.06
(1.65)
(1.65)
Average common shares - basic
Average common shares - diluted
7,761,707
7,922,854
7,682,460
7,917,489
7,675,968
7,675,968
7,675,968
7,675,968
7,652,960
7,652,960
Note: Book value is calculated using common shares less unvested restricted shares.
(1)
(2)
The tax equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.
Included in loans receivable are approximately $80.3 million in acquired loans
52
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.
On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one
stock split to stockholders of record as of October 31, 2014, payable on November 14, 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.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of
operations should be read in conjunction with our consolidated financial statements and related notes
included elsewhere in this report. Historical results of operations and the percentage relationships among
any amounts included, and any trends that may appear, may not indicate trends in operations or results of
operations for any future periods.
We have made, and will continue to make, various forward-looking statements with respect to
financial and business matters. Comments regarding our business that are not historical facts are consid-
ered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ
materially from those contained in these forward-looking statements. For additional information regard-
ing our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” at the
beginning of this report.
Company Overview
The Company is a Delaware corporation and bank holding company that was incorporated in
1996 and began operations in 1997. It operates principally through CresCom Bank, a South Carolina
state-chartered bank. Crescent Mortgage Company operates as a wholly-owned subsidiary of CresCom
Bank. CresCom Bank provides a full range of commercial and retail banking financial services designed to
meet the financial needs of our customers through its branch network in South Carolina and North
Carolina. Crescent Mortgage Company, headquartered in Atlanta, Georgia, is a wholesale mortgage
company that provides mortgage banking services to over 45 states and has partnered with over 2,000
community banks, credit unions and mortgage brokers.
During 2014, we registered our common stock with the Securities and Exchange Commission (the
“SEC”) and became a public reporting company and listed our common stock on the NASDAQ Capital
Market under the ticker symbol “CARO”. We experienced strong organic loan and deposit growth and
completed two branch acquisitions in contiguous markets that have more than doubled our branch
network. In addition, the Company added a branch in the Charleston market and a branch in the Myrtle
Beach market along with two loan production offices, one each in Greenville, South Carolina and
Wilmington, North Carolina.
53
2014 Form 10-K Like most community banks, we derive a significant portion of our income from interest we re-
ceive on our loans and investments. Our primary source of funds for making these loans and investments is
our deposits, both interest-bearing and noninterest-bearing. Consequently, one of the key measures of our
success is our amount of net interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits
and borrowed funds. In order to maximize our net interest income, we must not only manage the volume
of these balance sheet items, but also the yields that we earn on our interest-earning assets and the rates
that we pay on interest-bearing liabilities.
There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb prob-
able losses on existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings.
In addition to earning interest on our loans and investments, we derive a portion of our income
from Crescent Mortgage Company through net gain on sale of loans held for sale as well as servicing
income. We also earn income through fees that we charge to our customers. Likewise, we incur other
operating expenses as well.
Economic conditions, competition, and the monetary and fiscal policies of the federal government
significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee
income generation are influenced by levels of business spending and investment, consumer income, con-
sumer spending and savings, capital market activities, and competition among financial institutions as well
as client preferences, interest rate conditions and prevailing market rates on competing products in our
market areas.
Executive Summary of Operating Results
At December 31, 2014, our total assets were $1.2 billion, an increase of $317.4 million, from
total assets of $881.6 million at December 31, 2013. The largest components of our total assets are loans
receivable and securities which were $768.1 million and $277.2 million, respectively at December 31, 2014.
Comparatively, our loans receivable and securities totaled $535.2 million and $192.1 million, respectively,
at December 31, 2013. At December 31, 2014 loans held for sale were $40.9 million compared to $36.9
million as of December 31, 2013. Our liabilities and stockholders’ equity at December 31, 2014 totaled $1.1
billion and $93.7 million, respectively, compared to liabilities of $799.4 million and stockholders’ equity of
$82.2 million at December 31, 2013. The principal components of our liabilities are deposits which were
$964.2 million and $697.6 million at December 31, 2014 and 2013, respectively. The increase in total assets
and deposits during 2014 primarily related to strong organic growth along with two branch acquisitions
completed during the current year.
The Company reported net income available to common stockholders of approximately $8.3 million,
or $1.05 per diluted share, for the year ended December 31, 2014, compared to $16.8 million, or $2.12 per
diluted share for the year ended December 31, 2013. Our 2014 results include pretax acquisition related
expenses associated with branch acquisitions of $1.4 million. The reduction in net income from period to period
primarily relates to the decrease in income derived from the wholesale mortgage subsidiary. Nationally, 2014
mortgage originations have decreased approximately 50% from 2013 levels resulting in a significant reduction
in origination revenues and operating margins. For the year ended December 31, 2014, mortgage originations
for the Company were approximately $982.7 million, a decrease of 39.2%, as compared to originations of $1.6
billion for the year ended December 31, 2013.
54
Asset quality continued to improve during 2014, with nonperforming assets to total loans decreas-
ing to 0.47% as of December 31, 2014 as compared to 1.97% as of December 31, 2013. Nonperforming
loans decreased $8.7 million to $2.4 million as of December 31, 2014 as compared to $11.1 million at
December 31, 2013. The decrease in nonperforming assets is a result of continued improvement in asset
quality as well as the resolution of a large nonperforming loan relationship that paid off during the fourth
quarter 2014.
The allowance for loan losses was $9.0 million, or 1.16% of total loans (1.28% of total non-
acquired loans), at December 31, 2014, compared to $8.1 million, or 1.49% of total loans, at December 31,
2013. The Company experienced net recoveries of $944,000 during 2014 compared to net charge-offs of
$569,000 during 2013. No provision expense was recorded during 2014 due to the continued improvement
in asset quality as well as the net recoveries experienced. Comparatively, the Company recorded a negative
provision of $860,000 during 2013, which was primarily related to the removal of a specific allocation on an
impaired loan relationship as well as the overall improvement in the credit quality of our loan portfolio.
At December 31, 2014, the Company’s capital ratios exceeded “well capitalized” levels under
applicable law. Stockholders’ equity totaled $93.7 million as of December 31, 2014, compared to $82.2
million at December 31, 2013. As planned, in 2014 due to strong loan growth and branch acquisitions, the
Company was better able to leverage its capital. At December 31, 2014, the Bank’s Tier 1 capital ratio was
9.40% compared to 11.01 % at December 31, 2013. At December 31, 2014, the Bank’s total risk-based
capital ratio was 13.02% compared to 16.66% at December 31, 2013.
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles
generally accepted in the United States and with general practices within the banking industry in the
preparation of our financial statements. Our significant accounting policies are described in the notes
to our consolidated financial statements within Item 8 “Financial Statements and Supplementary Data”
elsewhere in this report.
Certain accounting policies involve significant judgments and assumptions by us that have a mate-
rial impact on the carrying value of certain assets and liabilities. We consider these accounting policies to
be critical accounting policies. The judgment and assumptions we use are based on historical experience
and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the
judgment and assumptions we make, actual results could differ from these judgments and estimates that
could have a material impact on the carrying values of our assets and liabilities and our results of opera-
tions. Management has reviewed and approved these critical accounting policies and discussed them with
the audit committee of the Board of Directors.
Allowance for Loan Losses. The allowance for loan losses is the critical accounting policy that
requires the most significant judgment and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for loan losses
include judgments about the credit worthiness of borrowers, the estimated value of the underlying collat-
eral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact
of current events, and conditions, and other factors impacting the level of probable inherent losses. Under
different conditions or using different assumptions, the actual amount of credit losses incurred by us may
be different from management’s estimates provided in our consolidated financial statements. Refer to the
55
2014 Form 10-K portion of this discussion that addresses our allowance for loan losses for a more complete discussion of
our processes and methodology for determining our allowance for loan losses.
Other-Than Temporary Impairment. The evaluation and recognition of other-than-temporary
impairment, or OTTI, on certain investments including our private label mortgage-backed securities and
trust preferred securities requires significant judgment and estimates. Some of the more critical judgments
supporting the evaluation of OTTI include projected cash flows including prepayment assumptions,
default rates and severities of losses on the underlying collateral within the security. Under different con-
ditions or utilizing different assumptions, the actual OTTI realized by us may be different from the actual
amounts recognized in our consolidated financial statements. See Note 4 to the consolidated financial
statements to within Item 8 “Financial Statements and Supplementary Data” for the disclosure of certain
assumptions used in the financial statements during the years ended December 31, 2014 and 2013.
Derivatives. The determination of fair value related to derivatives of the Company requires sig-
nificant judgment and estimates. 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.
For additional discussion related to the determination of fair value related to derivative
instruments, see Note 5 to the consolidated financial statements within Item 8 “Financial Statements and
Supplementary Data.”
Mortgage Repurchase Reserve. The establishment of the mortgage repurchases reserves related to var-
ious representations and warranties related to mortgages sold in the secondary market. Management’s esti-
mate of losses require significant judgment and estimates. Some of the more critical factors are incorporated
into the estimation of the mortgage repurchase reserve include the defects on internal quality assurance,
default expectations, historical investor repurchase demand and appeals success rates, reimbursement by
correspondent and other third party originators, changes in regulatory repurchase framework, and projected
loss severity. The Company establishes a reserve at the time loans are sold and continually updates the re-
serve estimate during the estimated loan life. 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, caus-
ing future additions to the repurchase reserve. Refer to the “Mortgage Operations” below for additional
discussion.
56
Business Combinations. The Company accounts for its acquisitions under ASC Topic 805, Busi-
ness Combinations, which requires the use of the acquisition method of accounting. All identifiable
assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the
acquired loans is recorded on the acquisition date because the fair value of the loans acquired incor-
porates assumptions regarding credit risk. As provided for under GAAP, management has up to twelve
months following the date of the acquisition to finalize the fair values of acquired assets and assumed
liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities
within this twelve month period, management considers such values to be the day 1 fair values (“Day 1
Fair Values”).
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to the
audited consolidated financial statements within Item 8 “Financial Statements and Supplementary Data.”
Results of Operations
Summary
Our net income available to common stockholders was approximately $8.3 million, or $1.05 per
diluted share, for the year ended December 31, 2014, compared to net income of $16.8 million, or $2.12
per diluted share for the year ended December 31, 2013. The 2014 results include pretax acquisition
related expenses associated with branch acquisitions of $1.4 million.
During the third quarter of 2013, mortgage interest rates began to rise and the overall economy
remained sluggish. As a result, mortgage loan production began to slow down. As the overall mortgage
originations volumes declined, there was a corresponding reduction in margins earned due to competitive
pressures. Additionally, there has been a significant decline in mortgage applications, which reached
almost twenty year industry lows, a trend that has continued throughout 2014. For the year ended December
31, 2014, mortgage originations were approximately $982.7 million, a decrease of 39.2%, as compared to
originations of $1.6 billion for the year ended December 31, 2013.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income and Margin
Net interest income is a significant component of our net income. Net interest income is the
difference between income earned on interest-earning assets and interest paid on deposits and borrow-
ings. Net interest income is determined by the yields earned on interest-earning assets, rates paid on
interest-bearing liabilities, the relative balances of interest-earning assets and interest-bearing liabilities,
the degree of mismatch, and the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities.
For the years ended December 31, 2014 and 2013, our net interest income was $32.1 million and
$27.2 million, respectively. The $4.8 million, or 17.7%, increase in net interest income during 2014 was
related to several factors including an increase in average earnings assets balances and yields as well as
57
2014 Form 10-K a decrease in rates paid on interest-bearing liabilities and a shift to lower cost of funding. Included in
interest income for loans for the years ended December 31, 2014 was $793,000 of back interest recognized
related to the resolution of nonperforming loan that paid off during the fourth quarter.
The Company is focused on continuing to improve the utilization of its capital. To accomplish this,
the Bank has incorporated various strategies to increase the loan portfolio. Accordingly, the increase in
average earnings assets for the year ended December 31, 2014, is primarily the result of increased balances
of loans receivable and securities.
The growth in average loan balances was primarily the result of the following:
•
•
•
Residential mortgage – during the third quarter of 2013 and continuing into 2014, the
Company has hired several retail residential mortgage loan officers in its Charleston and
Myrtle Beach markets of South Carolina. In addition to selling a portion of its production,
the Company has retained a portion of the mortgage production. Due to the emphasis to
grow the residential mortgage portfolio, gross loans receivable within the one-to-four family
portfolio have increased $39.6 million since December 31, 2013. The growth in one-to-four
family excludes $9.2 million in loans acquired in the St. George branch acquisition in
February 2014 and $20.7 million in loans acquired in the First Community Branch acquisition
during the fourth quarter of 2014, described further below.
Commercial lending – during 2014, the Company expanded its commercial lending team by
hiring additional loan officers in its Charleston and Myrtle Beach markets of South Carolina.
The Company has also opened a loan production office in the upstate of South Carolina. As a
result, gross loans receivable within the commercial real estate and construction and develop-
ment portfolios have grown $56.5 million and $30.7 million, respectively, since December 31,
2013. The growth in commercial lending excludes $20.9 million of construction and develop-
ment loans and $18.2 of commercial real estate loans acquired as part of the First Community
Branch acquisition completed on December 12, 2014.
Syndicated loans – the Charleston and Myrtle Beach markets of South Carolina have provided
limited opportunities for the Bank to develop a commercial and industrial (“C&I”) loan
portfolio. The Company’s primary markets are generally concentrated in real estate lending.
However, in order to diversify our lending portfolio, the Company began a syndicated loan
program in 2014 to purchase C&I loans to retain in the loan portfolio. These loans typically
have terms of seven years and are tied to a floating rate index such as LIBOR or prime. To
effectively manage this new line of lending, the Company hired an experienced senior lend-
ing executive with relevant experience to lead and manage this area of the loan portfolio and
engaged a consulting firm that specializes in syndicated loans. The Company expects to con-
tinue to grow this portion of the loan portfolio throughout 2014. As of December 31, 2014,
the syndicated loan portfolio outstanding was $50.2 million and is grouped within commercial
business loans.
•
Acquisition of St. George branch – The Bank acquired $11.2 million in loans related to this
first quarter of 2014 branch acquisition. Approximately $ 9.2 million of these loans were
one-to-four family secured loans with the remaining loans consisting of consumer and com-
mercial real estate loans.
58
•
Acquisition of First Community Bank branches – On December 12, 2014, the Company
finalized the acquisition of 13 branches from First Community Bank. Loans acquired totaled
$70.0 million after fair value adjustments with approximately $20.7 million in one-to-family,
$18.2 million in commercial real estate and $20.9 million in construction and development
with the remaining loans consisting of consumer, home equity, and commercial business
loans.
For additional information regarding branches acquired, refer to Note 2 “Business Combina-
tions” within Item 8. “Financial Statements and Supplementary Data.”
In addition to improving the utilization of capital, the Company had also strategically increased its
securities portfolio in anticipation of the acquisition of the 13 branches from First Community Bank which
closed on December 12, 2014. To facilitate the growth in securities prior the completion of the acquisition,
the Company incurred approximately $90 million of short-term advances which would be repaid with a
portion of the proceeds of net cash to be received as part of the transaction.
Partially offsetting the increase in average earning assets is the decrease in average balance of
loans held for sale as the Company experienced a significant decrease in the level of wholesale mortgage
activity in its mortgage subsidiary during the latter half of 2013 continuing into 2014. For the year ended
December 31, 2014, mortgage originations were approximately $982.7 million, a decrease of 39.2%, as
compared to originations of $1.6 billion for the year ended December 31, 2013.
The decrease in rates paid on interest-bearing liabilities is based on the continued historically
low interest rates that have positively impacted our ability to reduce funding cost. We have also shifted
to lower cost funding sources through the Company’s sustained efforts to grow checking, savings, and
money market accounts. During 2014, the Company experienced significant growth in checking, savings,
and money market accounts which typically yield less than other forms of interest-bearing liabilities.
Specifically, checking, savings and money market balances increased $30.9 million since December 31,
2013, excluding the effect of deposits assumed in the two branch acquisitions completed in 2014. In
addition to the aforementioned growth, the Company established a deposit relationship with its mortgage
subservicing provider during the third quarter of 2013 whereby the sub-servicer deposited impound escrow
funds with the Company. The impound escrow funds had average balances of $44.3 million and $15.1 million
for the years ended December 31, 2014 and 2013, respectively, and are included in interest-bearing
demand accounts within the yield rate tables below.
The following table sets forth information related to our average balance sheet, average yields on
assets, and average costs of liabilities at December 31, 2014, 2013 and 2012. We derived these yields or
costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We
derived average balances from the daily balances throughout the periods indicated. During the same peri-
ods, we had no securities purchased with agreements to resell. All investments were owned at an original
maturity of over one year. Nonaccrual loans are included in earning assets in the following tables. Loan
yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The
net of capitalized loan costs and fees, which are considered immaterial, are amortized into interest income
on loans.
59
2014 Form 10-K For The Years Ended December 31,
2014
Interest
Paid/
Earned
Average
Yield/
Rate
Average
Balance
Average
Balance
2013
Interest
Paid/
Earned
Average
Yield/
Rate
Average
Balance
2012
Interest
Paid/
Earned
Average
Yield/
Rate
(Dollars in thousands)
$
31,563
613,144
22,988
206,977
24,314
4,939
1,938
905,863
84,910
$ 990,773
114,867
213,149
24,617
311,246
41,324
68,620
773,823
113,743
14,733
88,474
1,253
30,064
55
5,199
884
158
43
37,656
3.92%
2,696
72,975
4.90% 509,455 25,035
0.24%
107
43,151
2.51% 170,061
4,662
3.64%
11,428
292
3.20%
111
4,221
2.22%
45
1,872
4.16% 813,163
32,948
76,688
3.69% 106,626
4.91% 495,889
0.25%
16,765
2.74% 136,715
9,361
2.56%
5,508
2.63%
2.40%
1,706
4.05% 772,570
64,496
889,851
837,066
179
473
38
2,793
106
2,013
5,602
0.16%
56,405
0.22% 213,924
0.15%
14,387
0.90% 302,999
0.26%
22,335
2.93%
75,595
0.72% 685,645
109,069
18,815
76,322
115
857
46
2,321
239
2,140
5,718
0.20%
41,361
0.40% 199,062
0.32%
9,468
0.77% 306,691
42,367
1.07%
2.83%
80,272
0.83% 679,221
84,503
19,340
54,002
3,914
26,160
41
4,870
209
107
55
35,356
110
1,227
47
2,794
640
2,695
7,513
3.67%
5.28%
0.24%
3.56%
2.23%
1.94%
3.22%
4.58%
0.27%
0.62%
0.50%
0.91%
1.51%
3.36%
1.11%
Interest-earning assets:
Loans held for sale
Loans receivable (1)
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Other investments
Total interest-earning assets
Non-earning assets
Total assets
Interest-bearing liabilities:
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and Stockholders’ equity
$ 990,773
889,851
837,066
Net interest spread
Net interest margin
Net interest margin (tax equivalent) (2)
Net interest income
3.44%
3.22%
3.47%
3.54%
3.62%
3.35%
3.41%
3.60%
3.61%
32,054
27,230
27,843
(1)
(2)
Average balances of loans include nonaccrual loans.
The tax equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.
Our net interest margin was 3.54%, and 3.62% on a tax equivalent basis, for the twelve months
ended December 31, 2014 compared to 3.35%, and 3.41% on a tax equivalent basis, for 2013. The 19
basis point increase in net interest margin during 2014 as compared to the prior year was driven primarily
by the 11 basis point increase in the yield on interest-earning assets and 11 basis point decrease in the
contract rate paid on in interest bearing liabilities.
Our average interest-earning assets increased by $100.9 million during 2014 and our interest
income increased $4.7 million. As previously stated, the increase in interest income is primarly related
to the increase in loans receivable and securities during 2014 partially offset by a decline in loans held
for sale.
60
Our interest expense decreased $116,000 during 2014 as compared to the year ended 2013 while
our average interest-bearing liabilities increased $88.2 million. The decrease in interest expense was a
result of the 11 basis point decrease in rate paid on interest-bearing lialibity as the Company experienced
substantial growth in our demand deposit, savings, and money market accounts which typically provide
lower rates than other funding sources. Continued historically low interest rates have also positively im-
pacted our ability to reduce funding costs.
Our net interest spread was 3.44% for the year ended December 31, 2014 as compared to 3.22%
for the same period in 2013. The net interest spread is the difference between the yield we earn on our
interest-earning assets and the rate we pay on our interest-bearing liabilities. The 11 basis point increase in
yield on earnign assets and the 11 basis point reduction in rate on our interest-bearing liabilities, resulted
in a 22 basis point increase in our net interest spread for the 2014 period.
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing interest rates and chang-
ing volume. The following tables set forth the effect which the varying levels of interest-earning assets
and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the
periods presented.
2014 vs. 2013
Increase (decrease)
due to
Volume
Rate
Rate/
Volume
For The Years Ended December 31,
2013 vs. 2012
Increase (decrease)
due to
Net
Dollar
Change
Volume
(In thousands)
Loans held for sale
Loans receivable
Interest-bearing cash
Securities available for sale
Securities held to maturity
FHLB stock
Other investments
Interest income
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
Interest expense
Net interest income
Provision for Loan Loss
$ (1,644)
5,084
(48)
927
469
23
1
4,812
91
(2)
16
74
49
(205)
23
$
87
(66)
(2)
(475)
263
28
(4)
(169)
(55)
(381)
(41)
409
(336)
70
(334)
114
11
(2)
85
(139)
(4)
—
65
28
(1)
17
(11)
154
8
195
(1,443)
5,029
(52)
537
593
47
(3)
4,708
64
(384)
(8)
472
(133)
(127)
(116)
4,824
(1,235)
716
65
1,188
46
(25)
5
760
40
92
24
(34)
(303)
(125)
(306)
Rate
25
(1,792)
1
(1,122)
30
38
(14)
(2,834)
(26)
(430)
(17)
(445)
(187)
(451)
(1,556)
Rate/
Volume
Net
Dollar
Change
(8)
(49)
—
(274)
7
(9)
(1)
(334)
(9)
(32)
(8)
6
89
21
67
(1,218)
(1,125)
66
(208)
83
4
(10)
(2,408)
5
(370)
(1)
(473)
(401)
(555)
(1,795)
(613)
We have established an allowance for loan losses through a provision for loan losses charged as
an expense on our statements of operations. We review our loan portfolio periodically to evaluate our
61
2014 Form 10-K
outstanding loans and to measure both the performance of the portfolio and the adequacy of the allow-
ance for loan losses. Please see the discussion below under “Allowance for Loan Losses” for a description
of the factors we consider in determining the amount of the provision we expense each period to maintain
this allowance.
Following is a summary of the activity in the allowance for loan losses during the years ended
December 31, 2014 and 2013.
For the Years
Ended December 31,
2014
2013
(Dollars in thousands)
Balance, beginning of period
Provision for loan losses
Loan charge-offs
Loan recoveries
Balance, end of period
$
$
8,091
—
(363)
1,307
9,035
9,520
(860)
(1,675)
1,106
8,091
For the year ended December 31, 2014, there was no provision for loan loss recorded due to the
continued decrease in charge-offs and significant recoveries experienced. The overall allowance for loan
losses was $9.0 million or 1.16% of loans outstanding (1.28% of total non-acquired loans). In comparison,
for the year ended December 31, 2013, we incurred a negative provision for loan losses of $860,000, reduc-
ing the overall allowance for loan losses to $8.1 million, or 1.49% of gross loans, as of December 31, 2013.
The negative provision in 2013 was primarily related to the removal of a specific allocation on an impaired
loan relationship as well as the overall improvement in the credit quality of our loan portfolio and contin-
ued reduction in net charge offs during 2013.
During the twelve months ended December 31, 2014, the Company had net recoveries of $944,000,
consisting of $363,000 in loans charged-off and $1.3 million of recoveries on loans previously charged-off.
In addition, our loan balances increased by $164.2 million excluding loans acquired in branch acquisi-
tions during 2014. Nonperforming loans declined $8.7 million to $2.4 million at December 31, 2014 as
compared to $11.1 million amount at December 31, 2013. The decrease in nonperforming loans is a
result of continued improvement in our asset quality as well as the resolution of a large nonperforming
relationship that paid off during the fourth quarter 2014. Factors such as these are also considered in
determining the amount of loan loss provision necessary to maintain our allowance for loan losses at an
adequate level.
For further discussion regarding the provision for loan loss, see the “Allowance for Loan Losses”
below.
Noninterest Income and Expense
Noninterest income provides us with additional revenues that are significant sources of
income. In 2014 and 2013, noninterest income comprised of 35.9% and 57.2%, respectively, of total
62
interest and noninterest income. The major components of noninterest income for the Company are
listed below:
Noninterest income:
Net gain on sale of loans held for sale
Deposit service charges
Net loss on extinguishment of debt
Net gain (loss) on sale of securities
Net unrealized (loss) 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
For the Years
Ended December 31,
2014
2013
(In thousands)
$
$
11,908
2,065
(58)
1,084
(1,170)
775
731
5,077
736
21,148
29,914
1,558
(19)
(1,125)
428
5,489
374
6,583
884
44,086
Noninterest income decreased $22.9 million to $21.1 million for the year ended December 31,
2014 as compared to $44.1 million for the year ended December 31, 2013. The decrease in non-interest
income primarily relates to the decrease in the net gain on sale of loans sold from our mortgage banking
subsidiary. During the third quarter of 2013, mortgage interest rates began to rise and, as a result, mort-
gage loan production began to slow down. As the overall mortgage originations volumes declined, there
was a corresponding reduction in margins earned due to competitive pressures. Additionally, there has
been a significant decline in mortgage applications, which are at almost twenty year industry lows. Origi-
nations for the year ended December 31, 2014 were $982.7 million, a decrease of 39.2%, as compared to
$1.6 billion for the year ended December 31, 2013.
Net gain on sale of servicing asset decreased to $775,000 for the year ended December 31, 2014
as compared to $5.5 million for the year ended December 31, 2013. During the fourth quarter of 2013,
the Company sold $972.9 million of unpaid principal balance of mortgage servicing rights and in the first
quarter of 2014, the Company sold $147.7 million of unpaid principal balance of mortgage servicing rights.
As a result of these sales, there was a corresponding decrease in mortgage loan servicing income which
decreased $1.5 million to $5.1 million for the year ended December 31, 2014 as compared to $6.6 million
for the year ended December 31, 2013.
During the year ended December 31, 2014, the Company recognized net gains on sale of avail-
able-for-sale securities of $1.1 million compared to losses on sale of securities during year ended Decem-
ber 31, 2013 of $1.1 million.
The fair value adjustment on interest rate swaps reduced noninterest income by $1.2 million for
the year ended December 31, 2014 compared to an increase of noninterest income of $428,000 for the year
ended December 31, 2013. The change in fair value adjustment on interest rate swaps relates to the change
in interest rates from period to period.
Deposit service charges were $2.1 million and $1.6 million for the years ended December 31, 2014
and 2013, respectively, an increase of 32.6%. The increase in deposit service charges relates to the increase
in noninterest-bearing checking and interest-bearing checking accounts during 2014.
63
2014 Form 10-K
Net Increase in cash value of life insurance increased $357,000 to $731,000 as of the year ended
December 31, 2014 as compared to $374,000 as of the year ended December 31, 2013. The increase in cash
surrender value is a result of the Company purchasing $20.0 million in bank owned life insurance policies
on certain employees at the end of the first quarter in 2013. These insurance policies were outstanding for
all periods during 2014.
The following table sets forth for the periods indicated the primary components of noninterest
expense:
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
Ended December 31,
2014
2013
(In thousands)
$
$
23,308
4,858
1,251
581
(750)
438
638
1,392
1,795
—
7,932
41,443
23,590
3,450
1,088
588
2,438
926
622
1,862
2,444
2,639
6,325
45,972
Noninterest expense represents the largest expense category for the Company. Noninterest
expense decreased $4.5 million to $41.4 million for the year ended December 31, 2014 from $46.0 million
year ended December 31, 2013. The decrease in noninterest expense is primarily a result of the reduction
in mortgage subservicing and amortization expense, the reduction in settlement of employment agree-
ments, and the negative provision related to the reserve for mortgage repurchase losses.
Salaries and employee benefits have decreased $282,000 to $23.3 million from $23.6 million for
the comparable prior period as a result of the reduced mortgage loan originations as compared to the prior
periods, and the related compensation paid on those originations.
Mortgage subservicing expense and amortization of mortgage subservicing rights decreased
during the year ended 2014 compared to the year ended 2013 due to the sale of $147.7 million in unpaid
principal balance of mortgage servicing rights during the first quarter of 2014 and the sale of $972.9 million
in unpaid principal balance of mortgage servicing rights during the fourth quarter in 2013.
The decrease in expense in settlement of employment agreements related to the Company settling
employment agreements with two former retired executive officers during 2013. All amounts related to the
settlement of these agreements were expensed during 2013. As such, there were no additional expenses
related to these contracts during the year ended 2014.
64
Legal expense declined as a result of previously recognized expenses recovered by the Company
of $404,000 from the resolution of a nonperforming loan that paid off during the fourth quarter of 2014.
Provision for mortgage loan repurchase losses decreased $3.2 million to a negative $750,000 year
ended December 31, 2014 as compared to $2.4 million for the comparable prior period. The Company
evaluates its mortgage repurchase reserves quarterly and considers a combination of factors including
production volumes, estimated levels of defects on internal quality assurance, default exceptions, histor-
ical investor repurchase demand and appeals success rates, reimbursement by correspondent and other
third party originators and projected loss severity. In addition, during 2013 and 2014, there was a change
in the framework of certain regulatory agencies that, in management’s opinion, favorably impacted the
Company’s mortgage loan repurchase loss exposure. As a result of a significant reduction in production
volumes, favorable trends in the factors discussed above and the change in regulatory framework related
to mortgage loan repurchase loss exposure, management believed it was appropriate to reduce the reserve
for mortgage repurchase losses. Originations for the year ended December 31, 2014 were $982.7 million,
a decrease of 39.2%, as compared to $1.6 billion for the year ended December 31, 2013.
Offsetting the decrease in noninterest expense was an increase in occupancy and equipment as
well as an increase in other expense the year ended December 31, 2014 as compared to the comparable
prior period. The increase in occupancy and equipment is attributed to the addition of three branches
during 2014 and the related depreciation and operational expenses related to those branches. Other ex-
penses increased primarily due to the increased cost related to being a public company, the acquisition of
one branch during the first quarter of 2014, the opening of three branches and one loan production office,
and additional transaction expenses related to the 13 branches acquired from First Community Bank
which was completed on December 12, 2014.
Income Tax Expense
Our effective tax rate decreased to 29.3% for the year ended December 31, 2014, compared to
35.8% for the year ended December 31, 2013. The lower effective tax rate in 2014 is primarily attributable
to the increase in balances of tax-exempt municipal securities, an increase in average balances of bank-
owned life insurance, and certain tax credits recognized during the year ended 2014 compared to the year
ended 2013.
Balance Sheet Review
Investment Securities
Our primary objective in managing the investment portfolio is to maintain a portfolio of high
quality, highly liquid investments yielding competitive returns. We are required under federal regulations
to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances
based on a continuing assessment of cash flows, the level of current and expected loan production, cur-
rent interest rate risk strategies and the assessment of the potential future direction of market interest
rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of
return risk.
At December 31, 2014, the $277.3 million in our investment securities portfolio, excluding FHLB
stock and other investments, represented approximately 23.1% of our assets. Our available-for-sale
investment portfolio included US agency securities, municipal securities, mortgage-backed securities
65
2014 Form 10-K (agency and non-agency) and collateralized loan obligations with a fair value of $251.7 million and an
amortized cost of $246.4 million for an unrealized gain of $5.3 million. Our held-to-maturity portfolio in-
cluded municipal securities and asset backed securities, made up of pooled trust preferred securities, with
a fair value of $27.4 million and a cost of $25.5 million for an unrealized gain of $1.9 million.
For additional information regarding the asset-backed securities, see Note 4 “Securities” within
Item 8. “Financial Statements and Supplementary Data.”
As securities are purchased, they are designated as held-to-maturity or available-for-sale based
upon our intent, which incorporates liquidity needs, interest rate expectations, asset/liability management
strategies, and capital requirements. We do not currently hold, nor have we ever held, any securities that
are designated as trading securities.
The following table summarizes issuer concentrations of agency mortgage-backed securities for
which aggregate fair values exceed 10% of stockholders’ equity at December 31, 2014:
Issuer
GNMA
FNMA
FHLMC
Aggregate
Amortized
Cost
Aggregate
Fair
Value
(Dollars in thousands)
Fair Value
as a % of
Stockholders’ Equity
$
$
51,790
55,359
15,578
122,727
52,823
56,783
15,936
125,542
56.37%
60.60%
17.01%
133.98%
The amortized costs and the fair value of our investments are as follows:
Securities available-for-sale:
Municipal securities
US government agencies
Collateralized loan obligations
Mortgage-backed securities:
Agency
Non-agency
Total mortgage-backed securities
Total securities available-for-sale
Securities held-to-maturity:
Municipal securities
Asset-backed securities
Total securities held-to- maturity
2014
At December 31,
2013
2012
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
$
43,119
4,770
25,883
122,727
49,936
172,663
$ 246,435
44,717
4,748
25,872
125,542
50,838
176,380
251,717
39,790
5,199
—
68,813
53,195
122,008
166,997
$
$
16,787
8,757
25,544
17,652
9,733
27,385
15,488
9,066
24,554
38,499
5,175
—
69,929
53,932
123,861
167,535
15,177
8,370
23,547
17,630
—
—
76,775
50,106
126,881
144,511
—
9,166
9,166
17,769
—
—
79,209
51,429
130,638
148,407
—
5,549
5,549
The Company uses prices from third party pricing services and, to a lesser extent, indicative
(nonbinding) quotes from third party brokers, to estimate the fair value of our investment securities. While
we obtain fair value information from multiple sources, we generally obtain one price/quote for each
66
individual security. For securities priced by third party pricing services, we determine the most appropriate
and relevant pricing service for each security class and have that vendor provide the price for each security
in the class. We record the value provided by the third party pricing service/broker in our Consolidated
Financial Statements, subject to our internal price verification procedures, which include periodic compar-
isons to other brokers and Bloomberg pricing screens.
Contractual maturities and yields on our investments are shown in the following table. Municipal
yields were not tax effected in the table below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment penal-
ties. Securities available-for-sale are presented at fair value and held-to-maturity securities are presented
at amortized cost.
At December 31, 2014
Less than 12 Months One to Five Years
Five to Ten Years Over Ten Years
Total
Amount
Yield
Amount Yield
Amount Yield
Amount Yield
Amount Yield
(Dollars in thousands)
Securities available-for-sale:
Municipal securities
US government agencies
Collateralized loan
obligations
Mortgage-backed securities:
Agency
Non-agency
Total mortgage-
backed securities
Total securities
available-for-sale
Securities held-to-maturity:
Municipal securities
Asset-backed securities
Total securities
held-to- maturity
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
962
962
—
—
—
—
—
—
—
7,147
4,748
2.01 % 37,570
2.47 %
2.94 % 44,717 2.80 %
4,748 2.47 %
— —
4,698
2.10 % 21,174
1.95 % 25,872 1.97 %
—
598
— 125,542
5.04 % 50,240
3.71 % 125,542 3.71 %
3.44 % 50,838 3.46 %
598
4.59 % 175,782
3.74 % 176,380 3.77 %
17,191
2.27 % 234,526
3.37 % 251,717 3.29 %
—
2.49 %
4,429
—
1.76 % 12,358
7,795
—
3.74 % 16,787 3.21 %
8,757 1.09 %
0.91 %
2.49 %
4,429
1.76 % 20,153
2.64 % 25,544 2.48 %
For disclosures related to the Company’s evaluation of securities for OTTI, see Note 4 “Securities”
within Item 8. “Financial Statements and Supplementary Data.”
Non-marketable investments are comprised of the following and are recorded at cost which
approximates fair value since no readily available market exists for these securities.
Community Reinvestment Act fund
SBIC Investments
Investment in Statutory Business Trusts
Total other investments
Federal Home Loan Bank stock
Non-marketable investments
At December 31,
2014
2013
(In thousands)
$
$
1,277
567
465
2,309
5,405
7,714
1,218
175
465
1,858
4,103
5,961
67
2014 Form 10-K
Loans by Type
Since loans typically provide higher interest yields than other types of interest-earning assets,
a substantial percentage of our earning assets are invested in our loan portfolio. Before allowance for
loan losses, loans outstanding at December 31, 2014 and 2013 were $777.2 million and $543.3 million,
respectively.
Our loan portfolio consists primarily of loans secured by real estate mortgages. As of Decem-
ber 31, 2014, our loan portfolio included $690.3 million, or 88.7%, of loans secured by real estate. As of
December 31, 2013, our loan portfolio included $515.1 million, or 94.8%, of loans secured by real estate.
Most of our real estate loans are secured by residential or commercial property. We obtain a security
interest in real estate, in addition to any other available collateral. This collateral is taken to increase the
likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to
coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan
portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types.
The Bank’s primary markets are generally concentrated in real estate lending. In order to diversify our
lending portfolio, the Bank began a syndicated loan program during 2014 with balances of $50.2 million as
of December 31, 2014 and are grouped within commercial business loans in the table below
As shown in the table below, loans excluding the allowance for loan losses, increased $233.8 mil-
lion to $777.2 million at December 31, 2014 from $543.3 million at December 31, 2013. The increase
in loans receivable primarily relates to the Bank’s focus on growing residential mortgage, commercial
lending, and syndicated loans, as well as $80.2 million of loans acquired through branch acquisitions. See
additional discussion regarding the increase in loans during 2014 in “Results of Operations – Net Interest
Income and Margin”.
The following table summarizes loans by type and percent of total at the end of the periods
indicated:
2014
% of Total
At December 31,
2013
% of Total
2012
% of Total
Amount Loans
Amount Loans
Amount Loans
(Dollars in thousands)
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 commitments
Allowance for loan losses
Deferred fees, net
Total loans receivable, net
$ 253,658
28,032
327,728
118,638
7,065
90,527
825,648
47,382
9,035
1,109
$ 768,122
30.72% 184,210
3.40%
23,661
39.69% 253,035
14.37%
67,056
0.86%
3,060
10.96%
33,938
100.00% 564,960
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
27.66%
5.91%
45.52%
12.88%
0.71%
7.32%
100.00%
21,550
8,091
98
535,221
17,690
9,520
63
501,691
68
At December 31,
2011
% of Total
Amount
Loans
(Dollars in thousands)
Amount
2010
% 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 commitments
Allowance for loan losses
Deferred fees, net
Total loans receivable, net
$
$
124,604
35,173
250,560
75,985
5,085
47,933
539,340
13,898
12,039
68
513,335
22.39%
6.28%
44.67%
16.53%
1.01%
9.12%
100.00%
23.10%
6.52%
46.46%
14.09%
0.94%
8.89%
100.00%
138,482
38,798
276,199
102,195
6,225
56,362
618,261
19,708
14,263
295
583,995
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following table is based on the contractual maturities of individual loans,
including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments
of loans may differ from the maturities reflected below because borrowers have the right to prepay obliga-
tions with or without prepayment penalties.
The following table summarizes the loan maturity distribution by type and related interest rate
characteristics.
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 loan commitments
Deferred fees, net
Total loans receivable
Loans maturing - after one year
Variable rate loans
Fixed rate loans
At December 31, 2014
After one
but within
five years
After five
years
(In thousands)
51,382
11,898
240,710
51,270
3,589
24,026
382,875
196,113
11,011
57,101
31,941
2,119
47,198
345,483
9,874
941
372,060
16,558
36
328,889
One Year
or Less
$
$
6,163
5,123
29,917
35,427
1,357
19,303
97,290
20,950
132
76,208
Total
253,658
28,032
327,728
118,638
7,065
90,527
825,648
47,382
1,109
777,157
$
$
294,506
406,443
700,949
69
2014 Form 10-K
Nonperforming and Problem 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. Generally, a loan is placed on nonaccrual
status when it becomes 90 days past due as to principal or interest, or when we believe, after considering
economic and business conditions and collection efforts, that the borrower’s financial condition is such
that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is
recognized as a reduction of principal when received. In general, a nonaccrual loan may be placed back
onto accruing status once the borrower has made a minimum of six consecutive payments in accordance
with the loan terms. Further, the borrower must show capacity to continue performing into the future prior
to restoration of accrual status. As of December 31, 2014 and 2013, we had no loans 90 days past due and
still accruing.
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 other-
wise 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 demon-
strated repayment performance in accordance with the modified terms for a reasonable period of time,
generally a minimum of six months.
The following table summarizes nonperforming and problem assets at the end of the periods
indicated.
Loans receivable:
At December 31,
2014 2013 2012 2011 2010
(In thousands)
Nonaccrual loans-renegotiated loans
Nonaccrual loans-other
Accruing loans 90 days or more delinquent
Real estate acquired through foreclosure,net
58
2,376
—
3,239
Total Non-Performing Assets $ 5,673
$
7,641
3,438
—
6,273
17,352
10,733 18,704 34,829
4,515 11,227 22,552
48
— 4,231
6,284 6,097 10,816
21,532 40,259 68,245
Problem Assets not included in Non-Performing
Assets-Accruing renegotiated loans outstanding $ 10,798
16,367
17,195 23,421 16,344
At December 31, 2014, nonperforming assets were $5.7 million, or 0.47% of total assets, and
nonperforming loans were $2.4 million, or 0.31 % of gross loans. Comparatively, at December 31, 2013,
nonperforming assets were $17.4 million, or 2.0% of total assets and nonperforming loans were $11.1 million,
70
or 2.04 % of gross loans. Nonaccrual loans decreased $8.7 million to $2.4 million at December 31, 2014
from $11.1 million at December 31, 2013. The decrease in nonperforming loans is a result of continued
improvement in our asset quality as well as the resolution of a large nonperforming relationship that paid
off during the fourth quarter 2014.
Potential problem loans, which are not included in nonperforming loans, amounted to approxi-
mately $10.8 million, or 1.38% of total gross loans at December 31, 2014, compared to $16.4 million, or
3.01% of gross loans at December 31, 2013. Potential problem loans represent those loans with a well-
defined weakness and where information about possible credit problems of borrowers has caused manage-
ment to have serious doubts about the borrower’s ability to comply with present repayment terms.
Substantially all of the nonaccrual loans, accruing loans 90 days or more delinquent and accru-
ing renegotiated loans for fiscal 2014 and 2013 are collateralized by real estate. The Bank utilizes third
party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal
policies require the Bank to obtain updated appraisals on an annual basis, either through a new external
appraisal or an internal appraisal evaluation. Impaired loans are individually reviewed on a quarterly basis
to determine the level of impairment. We typically charge-off a portion or create a specific reserve for
impaired loans when we do not expect repayment to occur as agreed upon under the original terms of the
loan agreement. Management believes based on information known and available currently, the probable
losses related to problem assets are adequately reserved in the allowance for loan losses.
Credit quality indicators generally showed improvement during 2014 as the Company experienced
reduced loan migrations to nonaccrual status, lower loss severity on individual problem assets and a signif-
icant reduction in nonperforming assets through December 31, 2014. The Company believes this general
trend in reduced loans migrating into nonaccrual status is an indication of improving credit quality in the
Company’s overall loan portfolio and a leading indicator of reduced credit losses going forward. Neverthe-
less, the Company can make no assurances that nonperforming assets will continue to improve in future
periods. The Company continues to monitor the loan portfolio and foreclosed assets very carefully and is
continually working to reduce its problem assets.
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of probable credit losses inherent in the
loan portfolio at the balance sheet date. Management determines the allowance based on an ongoing eval-
uation. Estimating the amount of the allowance for loan losses requires significant judgment and the use
of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated
losses on non-impaired loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change. The allowance consists of
specific and general components.
The general component covers non-impaired loans and is based on historical loss experience ad-
justed for current factors. The historical loss experience is determined by major loan category and is based
on the actual loss history trends for the previous sixteen quarters. The actual loss experience is supple-
mented with internal and external qualitative factors as considered necessary at each period and given the
facts at the time. These qualitative factors adjust the historical loss rate to recognize the most recent loss
results and changes in the economic conditions to ensure the estimated losses in the portfolio are recog-
nized in the period incurred and that the allowance at each balance sheet date is adequate and appropriate
in accordance with generally accepted accounting principles. Qualitative factors include consideration of
the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs
71
2014 Form 10-K and recoveries for the most recent sixteen 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.
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. 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.
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. To the extent actual outcomes differ from management’s estimates, additional
provisions for loan losses could be required that could adversely affect the Bank’s earnings or financial
position in future periods.
At December 31, 2014 and 2013, the allowance for loan losses was $9.0 million and $8.1 million,
respectively, or 1.16% and 1.49% of outstanding loans, respectively. Acquired loans of approximately
$80.7 million at December 31, 2014 were included in outstanding loans. The allowance for loan losses to
gross loans, excluding acquired loans was 1.28% as of December 31, 2014. For a discussion of the account-
ing for acquired loans, see Note 1 to the consolidated financial statements.
The allowance for loan losses as a percentage of our outstanding loan portfolio decreased pri-
marily as a result of the overall improvement in the credit quality of our loan portfolio during 2014 as well
as the increase in loans receivable. During 2014, the Company experienced net recoveries of $944,000
as compared to net charge-offs of $569,000 during 2013. In conjunction with the reduced net charge offs
experienced during the current year, our total nonaccrual loans decreased $8.7 million to $2.4 million at
December 31, 2014 from $11.1 million at December 31, 2013. The decrease in nonperforming loans is a
result of continued improvement in our asset quality as well as the resolution of a large nonperforming
relationship that paid off during the fourth quarter 2014. See Note 6 to the Consolidated Financial State-
ments for more information on our allowance for loan losses.
72
The following table summarizes the activity related to our allowance for loan losses for the five
years ended December 31, 2014.
Balance, beginning of period
Provision for loan losses
Loan charge-offs:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total loan charge-offs
Loan recoveries:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total loan recoveries
Net loan recoveries
(charge-offs)
Balance, end of period
Allowance for loan losses as a
percentage of loans receivable (end
of period)
Net (recoveries) charge-offs to average
loans receivable
2014
$
8,091
—
For the Years Ended December 31,
2012
2013
(Dollars in thousands)
12,039
2,707
14,263
10,735
9,520
(860)
2011
2010
13,032
30,755
(80)
—
(28)
(172)
(24)
(59)
(363)
158
—
100
457
71
521
1,307
(168)
(28)
(269)
(765)
(35)
(410)
(1,675)
(3,837)
(8,602)
(2,680)
(211)
(873)
(319)
(3,614)
(3,548)
(1,432)
(6,043) (15,267)
(1,506)
(338)
(84)
(1,169)
(1,092)
(7,190) (14,789) (29,786)
(221)
(929)
438
1
126
110
53
378
1,106
375
—
231
740
172
446
1,964
764
—
182
203
41
640
1,830
72
—
8
64
50
68
262
944
9,035
$
(569)
8,091
(5,226) (12,959) (29,524)
14,263
9,520
12,039
1.16%
1.49%
1.86%
2.29%
2.38%
(0.15)%
0.11%
1.05%
2.38%
4.61%
The following table summarizes an allocation of the allowance for loan losses and the related
percentage of loans outstanding in each category for the five years ended December 31, 2014.
2014
Amount %
2013
Amount %
At December 31,
2012
Amount %
(Dollars in thousands)
2011
Amount %
2010
Amount %
Loans receivable:
$ 2,888 30.72%
3.40%
3,283 39.69%
221
2,472 32.60%
4.19%
2,855 44.79%
231
3,193 27.66%
5.91%
3,315 45.52%
276
3,978 23.10%
6.52%
3,283 46.46%
550
3,193 22.39%
6.28%
6,371 44.67%
896
1,069 14.37%
0.86%
1,430 10.96%
30
1,418 11.87%
0.54%
6.01%
42
339
1,792 12.88%
0.71%
7.32%
82
862
2,695 14.09%
0.94%
8.89%
210
1,323
2,358 16.53%
1.01%
9.12%
144
1,301
Unallocated
Total
114 —
$ 9,035 100.00%
734 —
8,091 100.00%
73
—
— —
9,520 100.00% 12,039 100.00% 14,263 100.00%
— —
—
One-to-four family
Home equity
Commercial real estate
Construction and
development
Consumer loans
Commercial business loans
2014 Form 10-K
Mortgage Operations
Mortgage Activities and Servicing
Our mortgage banking operations are conducted through our mortgage origination subsidiary,
Crescent Mortgage Company. Mortgage activities involve the purchase of mortgage loans and table funded
originations for the purpose of generating gains on sales of loans and fee income on the origination of
loans. While the Company originates residential one-to-four family loans that are held in its loan portfolio,
the majority of new loans are generally sold pursuant to secondary market guidelines through our whole-
sale mortgage origination subsidiary, Crescent Mortgage Company. Generally, residential mortgage loans
are sold and, depending on the pricing in the marketplace, servicing rights are either sold or retained. The
level of loan sale activity and its contribution to the Company’s profitability depends on maintaining a suf-
ficient volume of loan originations. Changes in the level of interest rates and the local economy affect the
volume of loans originated by the Company and the amount of loan sales and loan fees earned. Discussion
related to the impact and changes within the mortgage operations are provided in “Results of Operations”
above. Additional segment information is provided in Note 21 “Supplemental Segment Information” to
the consolidated financial statements included under Item 8.
Loan Servicing
We retain the rights to service loans we sell on the secondary market, as part of our mortgage
banking activities, for which we receive service fee income. These rights are known as mortgage servicing
rights, or MSRs, where the owner of the MSR acts on behalf of the mortgage loan owner and has the
contractual right to receive a stream of cash flows in exchange for performing specified mortgage ser-
vicing functions. These duties typically include, but are not limited, to performing loan administration,
collection, and default activities, including the collection and remittance of loan payments, responding to
customer inquiries, accounting for principal and interest, holding custodial (impound) funds for the pay-
ment of property taxes and insurance premiums, counseling delinquent mortgagors, modifying loans and
supervising foreclosures and property dispositions. We subservice the duties and responsibilities obligated
to the owner of the MSR to a third party provider for which we pay a fee.
At December 31, 2014, the Company was servicing $1.9 billion of loans for others, a decrease
from $2.0 billion at December 31, 2013. The decrease in loans serviced in the current year relates to a loan
servicing sale where the Company sold $147.7 million in unpaid loan principal serviced for a net gain of
$775,000.
We recognize the rights to service mortgage loans for others as an asset. We initially record the
MSR at fair value and subsequently account for the asset at lower of cost or market using the amortization
method. Servicing assets are amortized in proportion to, and over the period of, the estimated net ser-
vicing income and are carried at amortized cost. A valuation is performed by an independent third party
on a quarterly basis to assess the servicing assets for impairment based on the fair value at each reporting
date. The fair value of servicing assets is determined by calculating the present value of the estimated net
future cash flows consistent with contractually specified servicing fees. This valuation is performed on a
disaggregated basis, based on loan type and year of production. Generally, loan servicing becomes more
valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates
decline (as prepayments typically increase). As discussed in detail in notes to the consolidated financial
statements, we use an appropriate weighted average constant prepayment rate, discount rate, and other
defined assumptions to model the respective cash flows and determine the fair value of the servicing asset
74
at each reporting date. See Note 7 to the consolidated financial statements for further detail regarding
the assumptions used in determining the economic estimated fair value of the mortgage servicing rights
retained.
In aggregate, the net servicing asset had a balance of $10.2 million and $10.9 million at December
31, 2014 and 2013, respectively. The economic estimated fair value of the mortgage servicing rights was
$15.2 and $17.7 million at December 31, 2014 and 2013, respectively.
Below is a roll-forward of activity in the balance of the servicing assets for the years ended Decem-
ber 31, 2014 and 2013 respectively:
MSR beginning balance
Amount capitalized
Amount sold
Amount amortized
MSR ending balance
Losses on Mortgage Loans Previously Sold
December 31,
2014
2013
(In thousands)
10,908
1,868
(800)
(1,795)
10,181
12,039
6,860
(5,547)
(2,444)
10,908
$
$
Loans held for sale have primarily been fixed-rate single-family residential mortgage loans under
contracts to be sold in the secondary market. In most cases, loans in this category are sold within thirty
days of closing. Buyers generally have recourse to return a purchased loan to the Company under limited
circumstances. Repurchases and losses on mortgage loans previously sold are recorded when the Company
indemnifies or repurchases mortgage loans previously sold. The representations and warranties in our
loan sale agreements provide that we repurchase or indemnify the investors for losses or costs on loans we
sell under certain limited conditions. Some of these conditions include underwriting errors or omissions,
fraud or material misstatements by the borrower in the loan application or invalid market value on the col-
lateral property due to deficiencies in the appraisal. In addition to these representations and warranties,
our loan sale contracts define a condition in which the borrower defaults during a short period of time,
typically 120 days to one year, as an early payment default, or EPD. In the event of an EPD, we are re-
quired to return the premium paid by the investor for the loan as well as certain administrative fees, and in
some cases repurchase the loan or indemnify the investor. Because the level of mortgage loan repurchase
losses depends upon economic factors, investor demand strategies and other external conditions that may
change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses
is difficult to estimate and requires considerable management judgment.
The Company had losses paid of $389,000 and $1.2 million for indemnification and repurchase for
the years ended December 31, 2014 and 2013, respectively.
75
2014 Form 10-K
The following table demonstrates the activity for the mortgage repurchase reserve for the years
ended December 31, 2014 and 2013:
Beginning Balance
Losses paid
Recoveries
Provision for mortgage repurchase losses
Ending balance
$
$
December 31,
2014
2013
(In thousands)
6,109
(389)
29
(750)
4,999
4,882
(1,237)
26
2,438
6,109
For the years ended December 31, 2014, the Company recorded a negative provision for mortgage
repurchase losses of $750,000 compared to a provision for mortgage repurchase losses of $2.4 million for
the year ended December 31, 2013. The decline in the provision for mortgage loan repurchase losses is
related to several factors. The Company sells mortgage loans to various third parties, including
government-sponsored entities (“GSEs”), under contractual provisions that include various representations
and warranties as previously stated. The Company establishes the reserve for mortgage loan repurchase
losses based on a combination of factors, including 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. Prior to 2012, there was
no expiration date related to representations and warranties as long as the loan sold to the investor was
outstanding. As a result, the Company received loan repurchase requests years after the loan was orig-
inated and sold to various third parties. In the latter part of 2012, the regulatory framework for certain
GSEs changed where, under certain circumstances, the loan repurchase risk was limited for production
beginning in January 2013. In addition, in May 2014, additional regulatory changes further limited loan
repurchase risk. Also adding to the decrease in the level of provision was the decline in originations of
loans held for sale which decreased 39.2% during 2014 as compared to 2013.
As a result of these factors, the Company performed an analysis of its reserve for mortgage loan
repurchase losses and, based on management’s judgment and interpretation of such regulatory changes,
reduced the reserve accordingly. Management will continue to monitor how the GSEs implement the
regulatory changes and trends. If such trends continue to be favorable, there is a possibility that additional
reductions in this reserve could occur in future periods.
Deposits and Other Interest-Bearing Liabilities
We provide a range of deposit services, including noninterest-bearing demand accounts, interest-
bearing demand and savings accounts, money market accounts and time deposits. These accounts generally
pay interest at rates established by management based on competitive market factors and management’s
desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary
funding source. At December 31, 2014 deposits totaled $964.2 million, an increase of $266.6 million from
December 31, 2013. The increase in deposits is a result of the two branch acquisitions during 2014 where
the company assumed approximately $239.6 million in deposits as of the acquisition dates. In addition
to the deposits assumed in branch acquisitions, the Company has experienced continued growth in our
checking, savings and money market deposits. For additional disclosures of deposits assumed from branch
acquisitions during 2014, See Note 2 “Business Combinations” within Item 8. “Financial Statement and
Supplementary Data.”
76
In addition to the aforementioned growth, the Company established a deposit relationship with
its mortgage subservicing provider during the third quarter of 2013 whereby the subservicer deposited im-
pound funds totaling $49.0 million and $31.9 million at December 31, 2014 and 2013, respectively. These
funds are included in interest-bearing deposits.
Our retail deposits represented $842.1 million, or 87.3% of total deposits at December 31, 2014,
while our out-of-market, or brokered deposits and institutional certificate of deposits, represented $122.1
million, or 12.7% of our total deposits. At December 31, 2013, retail deposits represented $595.7 million,
or 85.4% of our total deposits, while our out-of-market, or brokered deposits and institutional certificate
of deposits, were $101.9 million, representing 14.6% of our total deposits.
The following table shows the average balance amounts and the average rates paid on deposits
held by us.
For the Years Ended December 31,
2014
2013
2012
Average
Balance
Average
Yield/
Rate
Average
Average
Average Yield/
Balance Rate
(Dollars in thousands)
Average Yield/
Balance Rate
Interest-bearing demand accounts
Money market accounts
Savings accounts
Certificates of deposit less than $100,000
Certificates of deposit of $100,000 or
$
114,867
213,149
24,617
211,128
0.16%
0.22%
0.15%
0.91%
56,405
213,924
14,387
210,029
0.20%
0.40%
0.32%
0.79%
41,361
199,062
9,468
249,413
0.27%
0.62%
0.50%
0.94%
more
100,118
0.87%
92,970
0.71%
57,278
0.81%
Total interest-bearing average
deposits
663,879
0.52%
587,715
0.57%
556,582
0.75%
Noninterest-bearing deposits
Total average deposits
113,743
777,622
$
109,069
696,784
84,503
641,085
The maturity distribution of our time deposits of $100,000 or more is as follows:
At December 31,
2014
2013
(In thousands)
Three months or less
$
Over three through six months
Over six through twelve months
Over twelve months
24,245
17,032
18,655
72,367
Total certificates of deposits
$
132,299
24,476
5,422
14,066
44,080
88,044
77
2014 Form 10-K
Borrowings and Other Interest-Bearing Liabilities
The following table outlines our various sources of borrowed funds during the years ended
December 31, 2014, 2013, and 2012, and the amounts outstanding at the end of each period, the maximum
amount for each component during the periods, the average amounts for each period, and the average
interest rate that we paid for each borrowing source. The maximum month-end balance represents the
high indebtedness for each component of borrowed funds at any time during each of the periods shown.
At or for the year ended December 31, 2014
Short-term borrowed funds
Unsecured line of credit
Short-term FHLB advances
Mortgage loan warehouse line of credit
Subordinated debenture, due 2020
Other short-term borrowings
Long-term borrowed funds
Period
Ending
End
Balance Rate
Maximum
Month Average for the
End
Period
Balance Balance Rate
(Dollars in thousands)
—
$
57,500 0.19-0.56% 110,500 40,886 0.24%
— —
—
—
—
300
—
—
2.68%
—
—
300
10,000
— —
300 2.02%
137 0.75%
Long-term FHLB advances, due 2014 through 2021
Subordinated debentures, due 2016 through 2020
Subordinated debentures issued to Carolina Financial Capital
45,000 1.20-4.00%
2.68%
1,275
57,500 50,507 2.83%
1,461 2.87%
1,575
Trust I, due 2032
5,155
3.75%
5,155
5,155 3.75%
Subordinated debentures issued to Carolina Financial Capital
Trust II, due 2034
10,310
3.28%
10,310 10,310 3.33%
At or for the year ended December 31, 2013
Short-term borrowed funds
Unsecured line of credit
Short-term FHLB advances
Mortgage loan warehouse line of credit
Subordinated debenture, due 2020
Ending
Balance
Period
End
Rate
Maximum
Month Average for the
End
Period
Balance Balance Rate
(Dollars in thousands)
$
—
10,000
—
300
—
0.36%
—
2.70%
2,700
1,987
73,000 17,513
1,620
3,748
300
300
5.00%
0.27%
5.20%
2.73%
Long-term borrowed funds
Long-term FHLB advances, due 2014 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
57,500 0.42% - 4.00%
2.70%
1,575
57,500 51,692
9,404
11,875
2.67%
1.99%
5,155
3.75%
5,155
5,155
3.75%
10,310
3.29%
10,310 10,310
3.57%
78
Ending
Balance
Period
End
Rate
Maximum
Month Average for the
End
Period
Balance Balance Rate
(Dollars in thousands)
$
2,750
77,500
1,932
—
300
4.75%
0.16% - .82%
2.5% - 4.5%
—
2.81%
2,900
70,000
23,612
20,400
300
2,825
29,754
10,442
2,508
300
5.00%
0.33%
4.43%
3.08%
2.18%
At or for the year ended December 31, 2012
Short-term borrowed funds
Unsecured line of credit
Short-term FHLB advances
Mortgage loan warehouse line of credit
Temporary Liquidity Guarantee Program
Subordinated debenture, due 2020
Long-term borrowed funds
Long-term FHLB advances, due 2013
through 2021
37,500
0.52% - 4.00%
55,000
50,765
3.46%
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
11,875
1.84% - 2.81%
12,475
12,060
2.23%
5,155
10,310
3.75%
5,155
5,155
4.05%
3.39%
10,310
10,310
3.76%
Liquidity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents with-
out significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management
involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements
while maximizing profits. Liquidity management is made more complicated because different balance
sheet components are subject to varying degrees of management control. For example, the timing of ma-
turities of our investment portfolio is fairly predictable and subject to a high degree of control at the time
investment decisions are made. However, net deposit inflows and outflows are far less predictable and are
not subject to the same degree of control.
The Company utilizes borrowing facilities in order to maintain adequate liquidity including: the
FHLB advance window, the Federal Reserve, and federal funds purchased. The Company also uses whole-
sale deposit products, including brokered deposits as well as national certificate of deposit services. Addi-
tionally, the Company has certain investment securities classified as available-for-sale that are carried at
market value with changes in market value, net of tax, recorded through stockholders’ equity.
Lines of credit with the FHLB 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 totaling $202.9 million at December
31, 2014. At December 31, 2014, the Company had FHLB advances of $102.5 million outstanding with
excess collateral pledged to the FHLB during those periods that would support additional borrowings of
approximately $65.3 million.
Lines of credit with the Federal Reserve 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 $125.2 million of collateral to the Federal Reserve for
79
2014 Form 10-K
these advances at December 31, 2014. At December 31, 2014, the Company had lines available with the
Federal Reserve for $78.4 million. At December 31, 2014, the Company had no Federal Reserve advances
outstanding.
Capital Resources
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 spe-
cific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabili-
ties, 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, 2014, the most recent notification from
federal banking agencies categorized the Company and the Bank as “well capitalized” under the current
regulatory framework. Since December 31, 2014, there have been no events or conditions that manage-
ment 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, 2014 and 2013 are as follows:
Actual
Amount Ratio
Required to be
Categorized
Adequately
Capitalized
Amount Ratio
(Dollars in thousands)
Required to be
Categorized
Well Capitalized
Amount
Ratio
$ 104,613 12.03%
34,787
4.00%
N/A
N/A
December 31, 2014
Carolina Financial
Corporation
Tier 1 capital (to risk
weighted assets)
Total risk based capital
(to risk weighted assets)
114,323 13.15%
69,574
8.00%
N/A
N/A
Tier 1 capital (to total
average assets)
CresCom Bank
Tier 1 capital (to risk
weighted assets)
Total risk based capital
104,613 9.49%
44,079
4.00%
N/A
N/A
103,319 11.90%
34,716
4.00%
52,074
6.00%
(to risk weighted assets)
113,029 13.02%
69,433
8.00%
86,791
10.00%
Tier 1 capital (to total
average assets)
103,319 9.40%
43,985
4.00%
54,981
5.00%
80
Actual
Amount Ratio
Required to be
Categorized
Adequately
Capitalized
Amount Ratio
(Dollars in thousands)
Required to be
Categorized
Well Capitalized
Amount
Ratio
$ 99,602 15.42%
25,834
4.00%
N/A
N/A
December 31, 2013
Carolina Financial
Corporation
Tier 1 capital (to risk
weighted assets)
Total risk based capital
(to risk weighted assets)
108,650 16.82%
51,668
8.00%
N/A
N/A
Tier 1 capital (to total
average assets)
CresCom Bank
Tier 1 capital (to risk
weighted assets)
Total risk based capital
99,602 11.15%
35,732
4.00%
N/A
N/A
98,301 15.26%
25,763
4.00%
38,645
6.00%
(to risk weighted assets)
107,327 16.66%
51,526
8.00%
64,408
10.00%
Tier 1 capital (to total
average assets)
98,301 11.01%
35,706
4.00%
44,632
5.00%
On July 2, 2014, the Federal Reserve adopted a final rule for the Basel III capital framework and,
on July 9, 2014, 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 began to phase on January 1, 2014, for advanced ap-
proaches banking organizations, and on January 1, 2015, for other covered banking organizations, including
the Company and the Bank. 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. Based on the Com-
pany’s capital levels and balance sheet composition at December 31, 2014, the Company believes imple-
mentation of the new rule will have no material impact on its capital needs.
The following table shows the return on average assets (net income divided by average total as-
sets), return on average equity (net income divided by average equity), and equity to assets ratio (average
equity divided by average total assets) for the three years ended December 31, 2014.
For the Years Ended December 31,
2014
2012
2013
Return on average assets
Return on average equity
Average equity to average assets ratio
0.84%
9.39%
8.93%
1.89%
22.04%
8.58%
2.02%
31.25%
6.45%
81
2014 Form 10-K
The following table provides the amount of dividends and payout ratios (dividends declared
divided by net income) for the year ended December 31, 2014. The Company had not paid a dividend to
stockholders prior to 2013.
For the Years Ended December 31,
2014
2013
Shareholder dividend payments
Dividend payout ratios
$
606,000
$
401,000
7.29%
2.38%
We retain earnings to have capital sufficient to grow our loan and investment portfolios and to
support certain acquisitions or other business expansion opportunities as they arise. The dividend payout
ratio is calculated by dividing dividends paid during the year by net income for the year.
Market Risk Management and Interest Rate Risk
The effective management of market risk is essential to achieving the Company’s objectives. As a
financial institution, the Company’s most significant market risk exposure is interest rate risk. The primary
objective of managing interest rate risk is to minimize the effect that changes in interest rates have on net
income. This is accomplished through active asset and liability management, which requires the strategic
pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabili-
ties. The expected result of these strategies is the development of appropriate maturity and re-pricing op-
portunities in those accounts to produce consistent net income during periods of changing interest rates.
The Bank’s asset/liability management committee, or ALCO, monitors loan, investment and liability port-
folios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for proper
fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management
process is designed to achieve relatively stable net interest margins and assure liquidity by coordinating the
volumes, maturities or re-pricing opportunities of interest-earning assets, deposits and borrowed funds.
It is the responsibility of the ALCO to determine and achieve the most appropriate volume and mix of
interest-earning assets and interest-bearing liabilities, as well as ensure an adequate level of liquidity and
capital, within the context of corporate performance goals. The ALCO meets regularly to review the Com-
pany’s interest rate risk and liquidity positions in relation to present and prospective market and business
conditions, and adopts funding and balance sheet management strategies that are intended to ensure that
the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within accept-
able standards. The Board of Directors also sets policy guidelines and establishes long-term strategies with
respect to interest rate risk exposure and liquidity.
The Company uses interest rate sensitivity analysis to measure the sensitivity of projected net
interest income to changes in interest rates. Management monitors the Company’s interest sensitivi-
ty by means of a computer model that incorporates current volumes, average rates earned and paid,
and scheduled maturities, payments of asset and liability portfolios, together with multiple scenarios of
prepayments, repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis
shows the effect that the indicated changes in interest rates would have on net interest income as pro-
jected for the next twelve months under the current interest rate environment. The resulting change in
net interest income reflects the level of sensitivity that net interest income has in relation to changing
interest rates.
82
As of December 31, 2014, the following table summarizes the forecasted impact on net interest
income using a base case scenario given upward movements in interest rates of 100, 200, and 300 basis
points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and
deposit repricing rates. Downward movements do not appear to be applicable due to the low interest rate
environment experienced during 2013 and 2014. Estimates are based on current economic conditions,
historical interest rate cycles and other factors deemed to be relevant. However, underlying assumptions
may be impacted in future periods which were not known to management at the time of the issuance of the
Consolidated Financial Statements. Therefore, management’s assumptions may or may not prove valid.
No assurance can be given that changing economic conditions and other relevant factors impacting our net
interest income will not cause actual occurrences to differ from underlying assumptions. In addition, this
analysis does not consider any strategic changes to our balance sheet which management may consider as
a result of changes in market conditions.
Annualized Hypothetical
Interest Rate Scenario
Change
0.00%
1.00%
2.00%
3.00%
Prime Rate
3.25%
4.25%
5.25%
6.25%
Percentage Change in
Net Interest Income
0.00%
0.80%
2.10%
2.40%
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 agree-
ments related to expected funding of fixed-rate mortgage loans to customers (interest rate lock commit-
ments) 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 liabil-
ity 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.
Derivative instruments not related to mortgage banking activities, including financial futures com-
mitments 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 trans-
action. 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.
83
2014 Form 10-K
The derivative positions of the Company at December 31, 2014 and 2013 are as follows:
At December 31,
2014
2013
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
$
$
Derivative liabilities:
Mortgage-backed securities forward sales commitments $
Mortgage loan interest rate lock commitments
Interest rate swaps
$
1,122
567
—
—
1,689
506
—
530
1,036
Contractual Obligations
106,440
27,292
—
—
133,732
93,000
—
20,000
113,000
—
106
878
428
1,412
—
55
—
55
—
20,516
88,000
20,000
128,516
—
103,614
—
103,614
The following table presents payment schedules for certain of our contractual obligations as of
December 31, 2014. Operating lease obligations of $5.6 million pertain to banking facilities and equip-
ment. Certain lease agreements include payment of property taxes and insurance and contain various
renewal options. Additional information regarding leases is contained in Note 16 of the audited consoli-
dated financial statements.
Total
Less than 1 to 3 3 to 5 More than
Years 5 Years
1 Year
Years
(Dollars in thousands)
Advances from FHLB
Subordinated debentures
Subordinated debentures issued to Carolina Financial Capital
$ 102,500
1,575
57,500
300
15,000 —
600
600
30,000
75
Trust I, due 2032
5,155
—
— —
5,155
Subordinated debentures issued to Carolina Financial Capital
Trust II, due 2034
Operating lease obligations
Total
10,310
5,557
$ 125,097
—
782
58,582
— —
931 2,825
16,531 3,425
10,310
1,019
46,559
Accounting, Reporting, and Regulatory Matters
Information regarding recent authoritative pronouncements that could impact the accounting,
reporting, and/or disclosure of the financial information by the Company are included in Note 1 of the
audited consolidated financial statements.
84
Effect of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has not been taken into account
in our consolidated financial statements. Rather, our financial statements have been prepared on an his-
torical cost basis in accordance with generally accepted accounting principles.
Unlike most industrial companies, our assets and liabilities are primarily monetary in nature.
Therefore, the effect of changes in interest rates will have a more significant impact on our performance
than will the effect of changing prices and inflation in general. In addition, interest rates may generally
increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed
previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those resulting from inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Opera-
tions – Market Risk and Interest Rate Sensitivity and – Liquidity and Capital Resources.
85
2014 Form 10-K ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2014 and 2013, and the related consolidated statements of operations and
comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of 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, 2014 and 2013,
and the results of their operations and their cash flows for the years then ended, in conformity with U.S. gener-
ally accepted accounting principles.
/s/ Elliott Davis Decosimo, LLC
Charleston, South Carolina
March 20, 2015
Elliott Davis LLC | elliottdavis.com
86
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Interest-bearing cash
Cash and cash equivalents
Securities available-for-sale (cost of $246,435 at December 31, 2014
and $166,997 at December 31, 2013)
Securities held-to-maturity (fair value of $27,385 at December 31, 2014
and $23,547 at December 31, 2013)
Federal Home Loan Bank stock, at cost
Other investments
Derivative assets
Loans held for sale
Loans receivable, net of allowance for loan losses of $9,035 at December 31,
2014 and $8,091 at December 31, 2013
Premises and equipment, net
Accrued interest receivable
Real estate acquired through foreclosure, net
Deferred tax assets, net
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
Reserve for mortgage repurchase losses
Dividends payable to stockholders
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 and 200,000 shares authorized at December 31,
2014 and December 31, 2013, respectively; no shares issued or outstanding
Common stock, par value $.01; 10,000,000 and 6,800,000 shares authorized
at December 31, 2014 and December 31, 2013, respectively; 8,097,536 and 8,030,408
issued and outstanding at December 31, 2014 and December 31, 2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
87
At December 31,
2014
2013
(In thousands)
$
10,453
10,694
21,147
4,489
34,176
38,665
251,717 167,535
25,544
5,405
2,309
1,689
40,912
24,554
4,103
1,858
1,412
36,897
768,122 535,221
31,075
17,585
3,628
2,802
3,239
6,273
4,715
7,419
10,181
10,908
21,532
20,910
7,802
5,442
$ 1,199,017 881,584
$
142,900
83,500
821,290 614,081
964,190 697,581
57,800
10,300
61,740
74,540
1,036
55
3,320
2,703
613
284
312
311
4,999
6,109
243
—
11,064
7,474
1,105,317 799,357
—
—
81
23,210
69,625
784
93,700
80
22,353
62,169
(2,375)
82,227
$ 1,199,017 881,584
2014 Form 10-K
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended December 31,
2014
2013
(In thousands, except share data)
Interest income
Loans
Debt securities
Dividends from FHLB
Other interest income
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 gain (loss) on sale of securities
Fair value adjustments on interest rate swaps
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
Earnings per common share:
Basic
Diluted
Average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
88
$
$
$
$
31,317
6,083
158
98
37,656
3,483
106
2,013
5,602
32,054
—
32,054
11,908
2,065
(58)
1,084
(1,170)
775
731
5,077
736
21,148
23,308
4,858
1,251
581
(750)
438
638
1,392
1,795
—
7,932
41,443
11,759
3,448
8,311
1.07
1.05
7,761,707
7,922,854
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
2.19
2.12
7,682,460
7,917,489
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years
Ended December 31,
2014
2013
(In thousands)
Net income
$
8,311
16,818
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities
Tax effect
Reclassification adjustment for (gains) losses included in earnings
Tax effect
Accretion of unrealized losses on held-to-maturity securities previously
recognized in other comprehensive income
Tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying notes to consolidated financial statements.
5,828
(2,101)
(1,084)
390
(4,526)
1,629
1,125
(404)
198
(72)
198
(72)
3,159
(2,050)
$
11,470
14,768
89
2014 Form 10-K
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock
Shares
Amount Capital
Additional
Paid-in Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss) Total
Balance, December 31, 2012
Stock awards, net
Stock options exercised
Stock-based compensation
expense, net
Net income
Dividends declared to
stockholders
7,675,968 $
345,800
8,640
—
—
—
Other comprehensive income,
net of tax
Balance, December 31, 2013
Stock awards, net
Stock options exercised
Excess tax benefit in connection
with equity awards
Stock-based compensation
expense, net
Net income
Dividends declared to stockholders
Other comprehensive loss,
net of tax
Balance, December 31, 2014
—
8,030,408
57,688
9,440
—
—
—
—
—
8,097,536 $
(In thousands, except share data)
78
2
—
—
—
—
—
80
1
—
—
—
—
—
—
81
22,009
(2)
43
45,752
—
—
303
—
—
16,818
(325) 67,514
—
43
—
—
303
—
— 16,818
—
(401)
—
(401)
—
22,353
201
50
—
62,169
—
—
(2,050) (2,050)
(2,375) 82,227
202
50
—
—
126
—
—
126
480
—
—
—
8,311
(855)
—
—
—
480
8,311
(855)
—
23,210
—
69,625
3,159
3,159
784 93,700
See accompanying notes to consolidated financial statements.
90
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
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
(Gain) 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
Fair value adjustments on interest rate swaps
Stock-based compensation
Decrease (increase) in cash surrender value of bank owned life insurance
Depreciation
Loss (gain) on disposals of premises and equipment
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
Increase (decrease) in:
Accrued interest receivable
Prepaid FDIC insurance
Other assets
Increase (decrease) in:
Accrued interest payable
Dividends payable to stockholders
Accrued expenses and other liabilities
Cash flows provided by operating activities
For the Years
Ended December 31,
2013
2014
(In thousands)
$
8,311
16,818
—
888
2,802
(2,819)
1,795
(1,084)
(11,908)
(982,670)
990,097
58
(750)
(360)
1,170
480
108
1,229
8
(91)
526
(775)
1,575
(1,868)
(668)
—
868
1
243
3,614
10,780
(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)
—
(3,391)
129,238
Continued
91
2014 Form 10-K
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years
Ended December 31,
2014
2013
(In thousands)
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases
Maturities, payments and calls
Proceeds from sales
Activity in held-to-maturity securities:
Purchases
Maturities, payments and calls
Increase in other investments
(Increase) decrease in Federal Home Loan Bank stock
Increase in loans receivable, net
Purchase of premises and equipment
Proceeds from disposals of premises and equipment
Proceeds from sale of real estate acquired through foreclosure
Purchase of bank owned life insurance
Distribution of bank owned life insurance
Net cash received for acquisitions
Cash flows used in investing activities
Cash flows from financing activities:
Net increase in deposit accounts
Net increase (decrease) in Federal Home Loan Bank advances
Net decrease in other short-term borrowed funds
Principal repayment of subordinated debt
Net increase (decrease) in drafts outstanding
Net increase (decrease) in advances from borrowers for insurance and taxes
Cash dividends paid on common stock
Net increase in excess tax benefit in connection with equity awards
Proceeds from exercise of stock options
Cash flows provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure
Cash paid for:
Interest on deposits and borrowed funds
Income taxes paid, net of refunds
Noncash investing and financing activities:
Transfer of loans receivable to real estate acquired through foreclosure
Transfer of available-for-sale securities to held-to-maturity securities
Change in unrealized gain (loss) on AFS Securities
See accompanying notes to consolidated financial statements.
$
$
$
(193,577)
37,782
74,901
(1,487)
536
(419)
(1,302)
(161,577)
(4,017)
—
4,060
(730)
—
131,135
(114,695)
51,488
34,942
—
(300)
617
329
(855)
126
50
86,397
(17,518)
38,665
21,147
5,601
3,553
1,461
—
4,744
(177,284)
51,180
91,653
(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
7,006
11,556
4,140
8,649
3,401
92
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”). Crescent Mortgage Company
operates as a wholly-owned subsidiary of CresCom Bank. The consolidated financial statements include the ac-
counts of the Company and its wholly-owned subsidiaries, the Bank and Carolina Services. In consolidation, all
material intercompany accounts and transactions have been eliminated. The results of operations of the busi-
nesses 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, 2014 and 2013, 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 in-
cluded 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 determi-
nation of the allowance for loan losses, including valuation for impaired loans, business combination account-
ing, 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 determina-
tion 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, fu-
ture 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.
93
2014 Form 10-K Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial state-
ments 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 and
warrant disclosure. Management has reviewed events occurring through the date the financial statements were
issued and no subsequent events occurred requiring accrual or disclosure.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash and due from banks and interest-bearing cash with banks. Sub-
stantially all of the interest-bearing cash at December 31, 2014 and 2013 consists of Federal Reserve Bank of
Richmond (“FRB”) and Federal Home Loan Bank of Atlanta (“FHLB”) 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 FRB. At December 31, 2014 and 2013 these reserve balances amounted to $12.1 million and $8.3
million, respectively.
Securities
Investment securities are classified into three categories: (a) Held-to-Maturity – debt securities that the Com-
pany 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 ac-
cepting residential mortgage loan applications, qualifying borrowers to standards established by investors, fund-
ing residential mortgage loans and selling mortgage loans to investors under pre-existing commitments. Loans
held for sale are recorded at fair value. 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 cur-
rent market prices, when available, and includes loan servicing value. When observable market prices are not
94
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, net gain on sale of loans held for sale
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.
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 expo-
sure, 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 reclas-
sified 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 instru-
ment 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 commit-
ments 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 in 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
95
2014 Form 10-K 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.
Troubled Debt Restructurings (“TDRs”)
The Company designates loan modifications as TDRs when, for economic or legal reasons related to the bor-
rower’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).
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
96
on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest pay-
ments 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 per-
formed 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 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 manage-
ment’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 Com-
pany 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 de-
termines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consid-
eration 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. 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.
97
2014 Form 10-K The general component covers non-impaired loans and is based on historical loss experience adjusted for cur-
rent factors. The Company considers the actual loss history experience over the trailing sixteen quarters to
determine the historical loss experience used in the general component. This actual loss experience is supple-
mented 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 sixteen quarters; trends in volume and terms of
loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, pro-
cedures, 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 adjust-
ments 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.
Business Combinations and Method of Accounting for Loans Acquired
The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition
method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance
for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the
loans acquired incorporates assumptions regarding credit risk. As provided for under GAAP, management
has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and
assumed liabilities. Once management has finalized the fair values of acquired assets and assumed liabilities
within this twelve month period, management considers such values to be the day 1 fair values (“Day 1 Fair
Values”).
There are two methods to account for acquired loans as part of a business combination. Acquired loans that
contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected
future proceeds in accordance with ASC 310-30. All other acquired loans are recorded at their initial fair value,
adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on pur-
chase, charge-offs and any other adjustment to carrying value in accordance with ASC 310-20.
In determining the Day 1 Fair Values of acquired loans without evidence of credit deterioration at the date of
acquisition, management includes (i) no carry over of any previously recorded allowance for loan losses and
(ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk
profile and grade assigned to each loan. This adjustment will be accreted into earnings as a yield adjustment,
using the effective yield method, over the remaining life of each loan.
To the extent that current information indicates it is probable that the Company will collect all amounts ac-
cording to the contractual terms thereof, such loan is not considered impaired and is not considered in the
determination of the required allowance for loan losses. To the extent that current information indicates it is
probable that the Company will not be able to collect all amounts according to the contractual terms thereon,
such loan is considered impaired and is considered in the determination of the required level of allowance for
loan and lease losses.
98
Core Deposit Intangible
In connection with business combinations, the Company records core deposit intangibles, representing the
value of the acquired core deposit base. Core deposit intangibles are amortized over their estimated useful lives
ranging up to 10 years.
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 using the amortiza-
tion method.
Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing in-
come. 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 Com-
pany 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 esti-
mated 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 record-
ed as income when received in noninterest income. Amortization of mortgage servicing rights and mortgage
servicing costs are charged to expense when incurred.
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 gener-
ally not collateralized. Commitments under standby letters of credit are usually one year or less. At December
31, 2014 and 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, 2014 was $2.0 million.
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.
99
2014 Form 10-K 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 attrib-
utable 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 exam-
ination. 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 $340 of penalties and $750 of interest during fiscal 2014. The Company paid
$2,700 of penalties and $2,700 interest during fiscal 2013.
It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not.
Accordingly, no additional reserve was considered necessary. See Note 13 for additional information.
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, out-
standing 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
100
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 mort-
gage loans to meet investor and secondary market standards.
The Company establishes mortgage repurchase reserves related to various representations and warranties that
reflect management’s estimate of losses based on a combination of factors. Such factors incorporate estimated
levels of defects on internal quality assurance, default expectations, historical investor repurchase demand and
appeals success rates, reimbursement by correspondent and other third party originators, changes in the regu-
latory repurchase framework 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 following table presents activity in the reserve for mortgage loan repurchase losses
Beginning Balance
Losses paid
Recoveries
Provision for mortgage repurchase losses
Ending balance
Transfers of Financial Assets
December 31,
2014
2013
(In thousands)
$
$
6,109
(389)
29
(750)
4,999
4,882
(1,237)
26
2,438
6,109
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.
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 can issue stock options, restricted stock, and restricted stock units under various plans to direc-
tors, 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 usu-
ally 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.
101
2014 Form 10-K
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 ad-
ditional 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 trea-
sury 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 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.
On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one stock split to
stockholders of record as of October 31, 2014, payable on November 14, 2014.
As such, all share, earnings per share, and per share data have been retroactively adjusted to reflect the stock
splits for all periods presented in accordance with GAAP. Authorized shares, which have not been adjusted
for the stock split, were approved by shareholders to increase to 10,000,000 shares during the second quarter
of 2014.
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
In January 2014, the FASB amended Receivables topic of the Accounting Standards Codification. The amend-
ments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collat-
eralized consumer mortgage loan to other real estate owned (OREO). In addition, the amendments require
a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real
estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to
satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments are effective
for the Company for annual periods, and interim periods within those annual periods beginning after
December 15, 2014 with early implementation of the guidance permitted. In implementing this guidance, assets
that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of
adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan
receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply
the amendments prospectively. The Company does not expect these amendments to have a material effect on
its financial statements.
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers.
The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods
and services to customers in an amount equal to the consideration the entity receives or expects to receive.
102
The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The
Company will apply the guidance using a modified retrospective approach. The Company does not expect these
amendments to have a material effect on its financial statements.
In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for
certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity
transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates
accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements
related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically,
repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured bor-
rowings. The amendments will be effective for the Company for annual period beginning after December 15,
2014. The Company will apply the guidance by a cumulative-effect adjustment to retained earnings as of the
beginning of the period of adoption. The Company does not expect these amendments to have a material effect
on its financial statements.
In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate
whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide
related footnote disclosures. In connection with preparing financial statements, management will need to eval-
uate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the
organization’s ability to continue as a going concern within one year after the date that the financial statements
are issued. The amendments will be effective for the Company for annual period ending after December 15,
2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments
to have a material effect on its financial statements.
In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP.
Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and
transactions. The amendments will eliminate the requirements for reporting entities to consider whether an
underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items
that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are
both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either
prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is per-
mitted provided that the guidance is applied from the beginning of the fiscal year of adoption. 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 contrac-
tually 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
103
2014 Form 10-K 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 – BUSINESS COMBINATION
On December 12, 2014, CresCom Bank purchased 13 branches from First Community Bank. In accordance
with the Purchase and Assumption Agreement, dated as of August 6, 2014, by and between First Community
Bank and CresCom Bank (the “P&A Agreement”), CresCom Bank acquired approximately $215.2 million of
deposits, approximately $70.9 million of performing loans and the bank facilities and certain other assets of
the acquired branches. In consideration of the purchased assets and transferred liabilities, CresCom Bank paid
(a) the recorded investment of the loans acquired, (b) the net book value, or approximately $6.6 million, for the
bank facilities and certain assets located at the acquired branches, (c) a deposit premium of 3.25% on substan-
tially all of the deposits assumed, which equated to approximately $6.5 million. The acquisition settled by First
Community Bank paying cash of $131.1 million to CresCom Bank for the difference between these amounts
and the total deposits assumed.
The purchase was accounted for under the acquisition method in accordance with ASC 805, “Business Combi-
nations,” and accordingly the assets and liabilities were recorded at their fair values on the date of acquisition.
Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process in-
volving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair
values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as
information relative to closing date fair values become available. The following table summarizes the estimated
fair values of assets acquired and liabilities assumed at the date of acquisition.
December 12, 2014
Assets
Cash and cash
equivalents
Loans receivable
Premises and equipment
Accrued interest
receivable
Core deposit intangible
Other assets
Total assets acquired
Liabilities
Deposits
Accrued interest payable
Other liabilities
Total liabilities assumed
Acquired Book Value
(In thousands)
Fair Value Adjustments
(In thousands)
Amount Recorded
(In thousands)
— $
(940)(1)
4,102(2)
—
3,175(3)
—
6,337
$
— $
—
—
— $
131,135
69,966
10,710
158
3,175
53
215,197
215,121
42
34
215,197
$
$
$
$
131,135 $
70,906
6,608
158
—
53
208,860 $
215,121 $
42
34
215,197 $
104
Explanation of Fair Value Adjustments
1.
2.
3.
The fair value adjustment on loans relates to the interest rate and credit adjustments
applied to the loan portfolio. The interest rate adjustment is calculated by analyzing the gain
or loss based on movements in interest rates since origination of loans within the portfolio.
The credit adjustment utilizes assumption regarding the underlying probability of default
and loss given default of the loan portfolio by risk characteristics such as risk grade and
segment type. The combination of these adjustments will be accreted into earnings as a
yield adjustment, using the effective yield method, over the remaining life of each loan.
The Company hired an independent consulting firm to assist in the determination of the
fair value of the loan portfolio.
The fair value adjustment represents the difference between the fair value of the acquired
branches and the book value of the assets acquired. The Company utilized third party
appraisals to assist in the determination of the fair value.
The fair value adjustment represents the value of the core deposit base assumed in the
acquisition based on a study performed by an independent consulting firm. This amount
was recorded by the Company as an identifiable intangible asset and will be amortized as
an expense on a straight-line basis over the average life of the core deposit base, which is
estimated to be 10 years.
The following table presents loans acquired at the acquisition date summarized by category:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total loans receivable, at fair value
At December 12, 2014
% of Total
Loans
Amount
(Dollars in thousands)
$
$
20,675
3,833
18,179
20,926
3,220
3,133
69,966
29.55%
5.48%
25.98%
29.91%
4.60%
4.48%
100.00%
As stated in Note 1 under “Business Combination and Method of Accounting for Loans Acquired”, all iden-
tifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the
acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates
assumptions regarding credit risk.
105
2014 Form 10-K
The following table presents deposits acquired at the acquisition date by type of account:
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 12, 2014
(In thousands)
$
$
43,910
43,743
13,715
51,415
33,394
28,944
62,338
215,121
Included in non-interest expense for the period ended December 31, 2014 was approximately $1.4 million in
acquisition related expenses of which $880,000 was included in Other, $90,000 was included Marketing and
Public Relations, $242,000 was included in Occupancy and Equipment and $149,000 was included in Salaries
and Employee Benefits.
As the transaction occurred on December 12, 2014, the amount of revenue and earnings included in the consol-
idated income statement was deemed immaterial. Furthermore, it was concluded that it would be impracticable
to provide revenue and earnings of the combined entity as if the acquisition date for the business combination
had been as of the beginning of the annual reporting period for several reasons. The branches acquired were
only a portion of the seller’s branch network; therefore, historical and pro forma statements of revenue and
earnings for the branches acquired would not accurately reflect all of the overhead and other administrative
expenses associated with operating them as a stand-alone branch network. Also, the loans acquired only rep-
resent a sub-set of the loans as the remaining loans not purchased were still subject to loss-share protection
(cannot be sold). Finally, the seller would not be able to provide accurate, historical information regarding the
revenue and earnings of the acquired branches to facilitate appropriate presentation. As such, no historical or
pro forma financial statements are provided.
On February 21, 2014, the Bank completed the acquisition of one branch in St. George from 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. Business
combination accounting resulted in an immaterial effect on the balance sheet and income statement of the
Company.
There are two methods to account for acquired loans as part of a business combination. Acquired loans
that contain evidence of credit deterioration on the date of purchase are carried at the net present value
of expected future proceeds in accordance with Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) 310-30. All other acquired loans are recorded at their initial fair value,
adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on
purchase, charge-offs and any other adjustment to carrying value in accordance with ASC 310-20. All loans
acquired as part of the branch acquisitions were accounted for under ASC 310-20, as the loans acquired
did not have signs of deteriorated credit and the Company expects to receive all of the contractually specified
principal and interest payments.
106
NOTE 3 - CORE DEPOSIT INTANGIBLES
In connection with business combinations, the Company records core deposit intangibles, representing the
value of the acquired core deposit base. As of December 31, 2014, core deposit intangible was $3.3 million.
There was no core deposit intangible recorded as of December 31, 2013. Core deposit intangibles are amortized
straight line ranging up to ten years.
Amortization expense (in thousands) for core deposit intangible is expected to be as follows.
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total
$
343
343
343
343
343
1,588
$
3,303
Amortization expense of $47,345 related to the core deposit intangible was recognized in 2014. No amortization
expense was recognized in 2013.
NOTE 4 - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities avail-
able-for-sale and held-to-maturity at December 31, 2014 and 2013 follows:
At December 31,
2014
2013
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
(In thousands)
Fair
Value
$
43,119
1,621
(23)
44,717
39,790
Securities available-
for-sale:
Municipal securities
US government
agencies
Collateralized loan
obligations
Mortgage-backed
securities:
Agency
Non-agency
Total mortgage-
backed securities
Total
4,770
25,883
122,727
49,936
172,663
$ 246,435
Securities held-to-
maturity:
Municipal securities
Asset-backed securities
Total
$
$
16,787
8,757
25,544
99
—
—
1,433
826
2,259
2,358
30
2,107
2,137
(1,390)
38,499
(24)
5,175
—
—
(317)
(89)
69,929
53,932
(406)
(1,820)
123,861
167,535
(341)
(2,803)
(3,144)
15,177
8,370
23,547
—
11
2,856
1,065
3,921
5,553
882
3,125
4,007
(22)
4,748
5,199
(22)
25,872
—
(41)
(163)
125,542
50,838
68,813
53,195
(204)
(271)
176,380
251,717
122,008
166,997
(17)
(2,149)
(2,166)
17,652
9,733
27,385
15,488
9,066
24,554
107
2014 Form 10-K
The asset-backed securities portfolio is collateralized with trust preferred securities issued by other financial
institutions in pooled issuances.
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, 2014 and 2013.
At December 31, 2014
Recognized in
OCI
Gross Unrealized
Not Recognized
in OCI
Gross Unrealized
Purchased
Face Value
Cumula-
tive
OTTI
Carrying
Value
Gains Losses
Amortized
Cost
Gains
Losses
(In thousands)
Estimated
Fair
Value
Collateral-
ization
Percentage
$
$
2,381
11,718
2,727
16,826
—
(2,635)
(1,340)
(3,975)
2,381
9,083
1,387
12,851
—
(558)
— (2,458)
— (1,078)
— (4,094)
1,823
6,625
309
8,757
336
1,788
1,001
3,125
(75)
(2,074)
—
(2,149)
175% - 378%
96% - 111%
92% - 92%
2,084
6,339
1,310
9,733
Purchased
Face Value
Cumula-
tive
OTTI
Carrying
Value
At December 31, 2013
Recognized in
OCI
Gross Unrealized
Not Recognized
in OCI
Gross Unrealized
Gains Losses
Amortized
Cost
Gains
Losses
(In thousands)
Estimated
Fair
Value
Collateral-
ization
Percentage
$
$
2,841
11,804
2,688
17,333
—
(2,635)
(1,340)
(3,975)
2,841
9,169
1,348
13,358
—
(586)
— (2,569)
— (1,137)
— (4,292)
2,255
6,600
211
9,066
354
1,190
563
2,107
(99)
(2,704)
—
(2,803)
2,510 164% - 164%
94% - 98%
5,086
774
83% - 83%
8,370
Held-to-Maturity:
Trust Preferred
Securities
Total A-Class
Total B-Class
Total C-Class
Held-to-Maturity:
Trust Preferred
Securities
Total A-Class
Total B-Class
Total C-Class
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-collateraliza-
tion 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 mezza-
nine 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.
108
As of December 31, 2014, $0.9 million of the pooled trust preferred securities were investment grade,
$1.0 million were split-rated, and $6.9 million were below investment grade. As of December 31, 2013,
$1.3 million of the pooled trust preferred securities were investment grade, $1.0 million were split-rated, and
the remaining $6.8 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, 2014, senior tranches represent $1.8 million of the Company’s pooled securities, while
mezzanine tranches represented $7.0 million. All of the $7.0 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, 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.
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2014 follows:
Securities available-for-sale:
Three to five years
Six to ten years
After ten years
Total
Securities held-to-maturity:
Three to five years
Six to ten years
After ten years
Total
2014
Amortized
Cost
(In thousands)
Fair
Value
$
—
—
17,119
17,191
229,316 234,526
$ 246,435 251,717
$
$
962
4,429
20,153
25,544
886
4,446
22,053
27,385
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.
Sales of investment securities available-for-sale for the years ended December 31, 2014 and 2013 are as follows.
Proceeds
Realized gains
Realized losses
Total investment securities gains (losses), net
For the Years
Ended December 31,
2014
2013
(In thousands)
74,901
91,653
1,251
(167)
1,084
473
(1,598)
(1,125)
$
$
At December 31, 2014, the Company has pledged $52.6 million of securities for FHLB advances. See
Note 11 – Short-Term Borrowed Funds for further discussion.
109
2014 Form 10-K
At December 31, 2014, the Company has pledged $16.5 million of securities to secure public agency funds.
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, 2014 are as
follows:
Less than 12 Months
Fair
Value
Amortized
Cost
Unrealized
Losses
At December 31, 2014
12 Months or Greater
Fair
Value
Amortized
Cost
Unrealized
Losses
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
$
2,479
2,475
(4)
1,504
1,485
(19)
3,983
3,960
(In thousands)
Available-for-sale:
Municipal securities
US government
agencies
Collateralized loan
obligations
Mortgage-backed
securities:
Agency
Non-agency
Total mortgage-
backed securities
Total
Held-to-maturity:
Municipal securities
Asset-backed
securities
Total
—
—
—
—
—
3,114
—
3,097
3,114
4,618
3,097
4,582
—
—
—
(17)
(17)
(36)
4,770
4,748
14,708
14,686
17,541
17,398
17,500
17,235
34,939
58,400
34,735
58,129
(23)
(22)
(22)
(41)
(163)
(204)
(271)
2,363
2,346
(17)
2,363
2,346
(17)
7,326
9,689
5,177
7,523
(2,149)
(2,166)
7,326
9,689
5,177
7,523
(2,149)
(2,166)
4,770
4,748
14,708
14,686
17,541
14,284
17,500
14,138
31,825
53,782
31,638
53,547
—
—
—
—
—
—
$
$
$
(22)
(22)
(41)
(146)
(187)
(235)
—
—
—
110
The gross unrealized losses and fair value of the Company’s investments available-for-sale with unrealized loss-
es 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
Amortized
Cost
Unrealized
Losses
At December 31, 2013
12 Months or Greater
Fair
Value
Amortized
Cost
Unrealized
Losses
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
Available-for-sale:
Municipal securities
US government
agencies
Mortgage-backed
securities:
Agency
Non-agency
Total mortgage-
backed securities
Total
Held-to-maturity -
Municipal securities
Asset-backed
securities
Total
(In thousands)
$
27,108
25,917
(1,191)
3,157
2,958
(199)
30,265
28,875
(1,390)
5,199
5,175
(24)
—
—
—
5,199
5,175
(24)
27,140
15,006
26,823
14,951
42,146
74,453
41,774
72,866
(317)
(55)
(372)
(1,587)
—
3,660
—
3,626
3,660
6,817
3,626
6,584
—
(34)
(34)
(233)
27,140
18,666
26,823
18,577
45,806
81,270
45,400
79,450
(317)
(89)
(406)
(1,820)
11,945
11,734
(211)
2,177
2,047
(130)
14,122
13,781
(341)
—
11,945
—
11,734
—
(211)
7,398
9,575
4,595
6,642
(2,803)
(2,933)
7,398
21,520
4,595
18,376
(2,803)
(3,144)
$
$
$
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 invest-
ment’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, 2014 and 2013, the Company had 26 and 58, 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 2014.
At December 31, 2014, 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 pre-
ferred 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 securi-
ty. The major assumptions used during the impairment test are described in the subsequent paragraph.
111
2014 Form 10-K
In 2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2014) 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. 2014 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.
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, 2014 and 2013 for the trust preferred securities.
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
At December 31,
2014
2013
(In thousands)
$
3,975
3,975
—
—
—
3,975
—
3,975
$
Management believes that there are no additional securities other-than-temporarily impaired at December 31,
2014. 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 following table presents detail of non-marketable investments at December 31, 2014 and 2013.
Community Reinvestment Act fund
SBIC Investments
Investment in Statutory Business Trusts
Total other investments
Federal Home Loan Bank stock
Non-marketable investments
At December 31,
2014
2013
(In thousands)
$
$
1,277
567
465
2,309
5,405
7,714
1,218
175
465
1,858
4,103
5,961
The Company, as a member of the FHLB, is required to own capital stock in the FHLB 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.
For additional information regarding the investments in statutory business trust, see Note 12 (Long Term Debt).
112
NOTE 5 - DERIVATIVES
The derivative positions of the Company at December 31, 2014 and 2013 are as follows:
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Interest rate swaps
Derivative liabilities:
Mortgage-backed securities forward sales commitments
Mortgage loan interest rate lock commitments
Interest rate swaps
At December 31,
2014
2013
Fair
Value
Notional
Value
(In thousands)
Fair
Value
Notional
Value
$
$
$
$
1,122
567
—
—
1,689
506
—
530
1,036
106,440
27,292
—
—
133,732
93,000
—
20,000
113,000
—
106
878
428
1,412
—
55
—
55
—
20,516
88,000
20,000
128,516
—
103,614
—
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 ob-
taining the forward commitments is to mitigate the interest rate risk associated with the interest rate lock com-
mitments 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
in the consolidated statements of operations.
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.
113
2014 Form 10-K NOTE 6 - LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2014 and 2013 are summarized by category as follows:
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 commitments
Allowance for loan losses
Deferred fees, net
Total loans receivable, net
At December 31,
2014
2013
Amount
% of Total
Loans
Amount
% of Total
Loans
(Dollars in thousands)
$ 253,658
28,032
327,728
118,638
7,065
90,527
825,648
47,382
9,035
1,109
$ 768,122
30.72% 184,210
3.40%
23,661
39.69% 253,035
14.37%
67,056
0.86%
3,060
10.96%
33,938
100.00% 564,960
32.60%
4.19%
44.79%
11.87%
0.54%
6.01%
100.00%
21,550
8,091
98
535,221
Included in the loan totals at December 31, 2014 were $80.2 million in loans acquired through branch acquisi-
tions during 2014. No allowance for loan losses related to the acquired loans is recorded on the acquisition date
because the fair value of the loans acquired incorporates assumptions regarding credit risk.
See Note 2 “Business Combinations” for additional information regarding acquired loans.
The composition of gross loans outstanding, net of undisbursed amounts, by rate type is as follows:
Variable rate loans
Fixed rate loans
Total loans outstanding
At December 31,
2014
2013
(Dollars in thousands)
$ 337,802
440,464
$ 778,266
43.40% 219,589
56.60% 323,821
100.00% 543,410
40.41%
59.59%
100.00%
114
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, 2014
Loans Secured by Real Estate
One-to-
Commercial Construction
four Home
family equity
real
estate
and
Commercial
Development Consumer
business Unallocated Total
Balance at January 1, 2014
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2014
231
$ 2,472
338
(10)
(80) —
158 —
221
$ 2,888
2,855
356
(28)
100
3,283
(In thousands)
1,418
(634)
(172)
457
1,069
42
(59)
(24)
71
30
339
629
(59)
521
1,430
734 8,091
(620) —
—
(363)
— 1,307
114 9,035
Loans Secured by Real Estate
At December 31, 2013
One-to-
four
Home
family equity
real
estate
Commercial Construction
and
Development Consumer
Unallocated Total
Commercial
business
(In thousands)
1,792
281
(765)
110
1,418
82
(58)
(35)
53
42
862
(491)
(410)
378
339
— 9,520
734
(860)
— (1,675)
— 1,106
734 8,091
Balance at January 1, 2013
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2013
$ 3,193
(991)
(168)
438
$ 2,472
276
(18)
(28)
1
231
3,315
(317)
(269)
126
2,855
115
2014 Form 10-K
The following table disaggregates our allowance for loan losses and recorded investment in loans by impair-
ment methodology.
Loans Secured by Real Estate
One-to-
four
Home
family equity
Commercial Construction
real
estate
and
Commercial
Development Consumer
business Unallocated Total
(In thousands)
At December 31, 2014:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment
$
364
—
30
90
1
—
—
485
Collectively evaluated for
impairment
Loans receivable ending
balances:
Individually evaluated for
2,524
2,888
221
221
$
3,253
3,283
979
1,069
29
30
1,430
1,430
114
114
8,550
9,035
impairment
$
3249
63
8,153
267
30
1,730
— 13,492
Collectively evaluated for
impairment
249,570
27,485
Total loans receivable
$ 252,819
27,548
309,759
317,912
91,741
92,008
5,644
5,674
80,575
82,305
— 764,774
— 778,266
At December 31, 2013:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment
$
103
—
55
165
20
6
—
349
2,369
2,472
231
231
$
2,800
2,855
1,253
1,418
22
42
333
339
734
734
7,742
8,091
Collectively evaluated for
impairment
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
116
The following table presents impaired loans individually evaluated for impairment in the segmented portfolio
categories as of December 31, 2014 and 2013. 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, 2014
Unpaid
Average
Recorded Principal Related Recorded
Investment Balance Allowance Investment Recognized
Interest
Income
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
$
2,008
63
7,893
—
29
1,730
11,723
3,731
410
8,439
1,733
506
2,927
17,746
1,241
—
260
267
1
—
1,769
1,241
—
260
267
1
—
1,769
3,249
63
8,153
267
30
1,730
$ 13,492
4,972
410
8,699
2,000
507
2,927
19,515
(In thousands)
—
—
—
—
—
—
—
364
—
30
90
1
—
485
364
—
30
90
1
—
485
5,144
4
13,372
348
23
2,405
21,296
673
—
265
184
4
—
1,126
5,817
4
13,637
532
27
2,405
22,422
128
1
1,067
(26)
11
275
1,456
29
—
19
1
1
—
50
157
1
1,086
(25)
12
275
1,506
117
2014 Form 10-K
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
At and for the Year Ended December 31, 2013
Unpaid
Interest
Average
Recorded Principal Related Recorded
Income
Investment Balance Allowance Investment Recognized
(In thousands)
$
5,713
125
16,695
1,227
20
2,554
26,334
7,682
472
17,240
3,887
404
3,599
33,284
507
—
313
266
20
6
1,112
607
—
313
266
20
6
1,212
6,220
125
17,008
1,493
40
2,560
27,446
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
The Company was not committed to advance additional funds in connection with impaired loans as of
December 31, 2014. The Company was committed to advance up to $230,000 of additional funds in connection
with impaired loans as of December 31, 2013.
118
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, 2014 and 2013.
At December 31, 2014
Real estate loans
Commercial Construction
One-to-
four
family
Home
equity
real
estate
and
Development Consumer
Commercial
business
Total
30-59 days past due $
60-89 days past due
90 days or more past
due
Total past due
Current
Total loans
receivable
336
188
18
—
(In thousands)
60
—
260
—
1,589
2,113
—
18
250,706 27,530
333
593
317,319
267
327
91,681
21
6
6
33
5,641
27
—
722
194
—
27
82,278
2,195
3,111
775,155
$ 252,819 27,548
317,912
92,008
5,674
82,305
778,266
At December 31, 2013
Real estate loans
Commercial Construction
One-to-
four
family
Home
equity
real
estate
and
Development Consumer
Commercial
business
Total
231
1,034
—
—
(In thousands)
53
—
273
—
3,440
4,705
125
125
179,031 23,217
5,074
5,347
242,520
1,477
1,530
58,574
—
—
7
7
2,808
—
—
557
1,034
431
431
25,115
10,554
12,145
531,265
$ 183,736 23,342
247,867
60,104
2,815
25,546
543,410
30-59 days past due $
60-89 days past due
90 days or more past
due
Total past due
Current
Total loans
receivable
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 in-
terest accrual is discontinued, all unpaid accrued interest is reversed. Interest payments received while
the loan is 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.
119
2014 Form 10-K
The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at December 31, 2014
and 2013.
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,
2014
2013
(In thousands)
$
$
1,720
63
333
267
12
39
2,434
3,902
125
5,114
1,481
20
437
11,079
There were no loans past due 90 days or more and still accruing at December 31, 2014 or 2013.
The Company uses several metrics as credit quality indicators of current or potential risks as part of the ongo-
ing 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.
Pass: These loans range from minimal credit risk to average, however, still acceptable credit risk.
Special mention: A special mention loan has potential weaknesses that deserve management’s close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the
loan or the institution’s credit position at some future date.
Substandard: A substandard loan is inadequately protected by the current sound worth and paying capacity
of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or
weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful: A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing
facts, conditions and values, highly questionable and improbable.
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.
120
The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of December 31,
2014 and 2013.
At December 31, 2014
Real estate loans
Commercial Construction
One-to-
four
family
Home
equity
real
estate
and
Development Consumer
Commercial
business
Total
Internal Risk Rating
Grades:
Pass
Special Mention
Substandard
Total loans
receivable
Performing
Nonperforming:
90 days or more
and still
accruing
Nonaccrual
Total
(In thousands)
$ 249,781
1,318
1,720
27,485
—
63
307,283
10,037
592
91,441
300
267
5,661
1
12
81,499 763,150
11,873
3,243
217
589
$ 252,819
27,548
317,912
92,008
5,674
82,305 778,266
$ 251,099
27,485
317,579
91,741
5,662
82,266 775,832
—
1,720
—
63
—
333
—
267
—
12
—
39
—
2,434
nonperforming
1,720
$ 252,819
63
27,548
333
317,912
267
92,008
12
5,674
39
2,434
82,305 778,266
At December 31, 2013
Real estate loans
Commercial Construction
One-to-
four
family
Home
equity
real
estate
and
Development Consumer
Commercial
business
Total
(In thousands)
$ 177,878
1,679
4,179
23,217
—
125
231,269
10,633
5,965
58,563
295
1,246
2,795
—
20
24,823 518,545
12,893
11,972
286
437
$ 183,736
23,342
247,867
60,104
2,815
25,546 543,410
$ 179,834
23,217
242,753
58,623
2,795
25,109 532,331
Total loans receivable
Internal Risk Rating
Grades:
Pass
Special Mention
Substandard
Total loans
receivable
Performing
Nonperforming:
90 days or more
and still
accruing
Nonaccrual
Total
—
3,902
—
125
—
5,114
—
1,481
1,481
60,104
—
20
20
2,815
—
437
—
11,079
437
11,079
25,546 543,410
nonperforming
Total loans receivable
3,902
$ 183,736
125
23,342
5,114
247,867
121
2014 Form 10-K
Activity in loans to officers, directors and other related parties for the years ended December 31, 2014 and 2013
is summarized as follows:
Balance at beginning of year
New loans
Repayments
Balance at end of year
At December 31,
2014
2013
(In thousands)
12,932
3,735
(4,434)
12,233
12,965
3,470
(3,503)
12,932
$
$
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 gener-
ally do not involve more than the normal risk of collectability.
Loans serviced for the benefit of others under loan participation arrangements amounted to $1.7 million and
$2.3 million at December 31, 2014 and 2013, respectively.
Troubled Debt Restructurings
During the year ended December 31, 2014, one commercial business loan was designated as a troubled debt
restructuring due to a modification to extend terms on the note. The pre-modification and post-modification
balance was $589,000.
During the year ended December 31, 2013, the Bank modified one commercial business loan that was consid-
ered a trouble debt restructuring with a pre-modification and post- modification balance of $6,000. The Bank
extended terms for this loan at a market rate.
No loans restructured in the twelve months prior to December 31, 2014 or 2013 went into default during the
period ended December 31, 2014 or 2013.
At December 31, 2014, there were $10.8 million in loans designated as troubled debt restructurings of which
$ 10.7 million were accruing. At December 31, 2013, there were $24.1 million in loans designated as troubled
debt restructurings of which $16.3 million were accruing.
NOTE 7 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 2014 and 2013 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,
2014
2013
(In thousands)
7,859
19,311
12,437
678
40,285
(9,210)
31,075
5,304
11,658
8,023
599
25,584
(7,999)
17,585
$
$
122
Depreciation expense included in operating expenses for the years ended December 31, 2014 and 2013 amounted
to $1.2 million and $918,000, respectively. The construction in process relates to property (building and land)
purchased for future expansion. Remaining estimated costs for completion of the construction in process are
expected to be approximately $200,000. There was no interest capitalized during fiscal 2014 and 2013.
NOTE 8 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Transactions in other real estate owned for the years ended December 31, 2014 and 2013 are summarized
below:
Balance at beginning of year
Additions
Sales
Write downs
Balance at end of year
At December 31,
2014
2013
(In thousands)
$
$
6,273
1,461
(3,969)
(526)
3,239
6,284
4,140
(3,302)
(849)
6,273
A summary of the composition of real estate acquired through foreclosure follows:
Real estate loans:
One-to-four family
Commercial real estate
Construction and development
NOTE 9 - MORTGAGE SERVICING RIGHTS
At December 31,
2014
2013
(In thousands)
$
$
2,040
245
954
3,239
959
1,781
3,533
6,273
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 $1.9 billion and $2.0 billion, respectively, at December 31,
2014 and 2013.
The economic estimated fair values of mortgage servicing rights were $15.2 million and $17.7 million, respec-
tively, at December 31, 2014 and 2013. The estimated fair value of servicing rights at December 31, 2014 were
determined using discount rates ranging from 11.73% to 12.73%, prepayment speed assumptions (“PSA”)
ranging from 151.6 to 169.2, depending upon the stratification of the specific servicing right, and a weighted
average delinquency rate of 1.35% as determined by a third party. 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.
123
2014 Form 10-K
During 2014, servicing rights related to approximately $147.7 million of unpaid loan principal serviced for
others were sold resulting in a net gain on sale of $775,000.
During 2013, servicing rights related to approximately $972.9 million of unpaid loan principal serviced for
others were sold resulting in a net gain on sale of $5.5 million.
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, 2014 and 2013:
MSR beginning balance
Amount capitalized
Amount sold
Amount amortized
MSR ending balance
$
At December 31,
2014
2013
(In thousands)
10,908
1,868
(800)
12,039
6,860
(5,547)
(2,444)
10,908
(1,795)
10,181
$
There was no allowance for loss in fair value in mortgage servicing rights for the years ended December 31,
2014 and 2013.
Estimated amortization expense is presented below for the following subsequent years ended (in thousands):
Year 1
Year 2
Year 3
Year 4
Year 5
After Year 5
Total
$
$
1,805
1,805
1,805
1,509
1,280
1,977
10,181
The estimated amortization expense is based on current information regarding future loan payments and pre-
payments. Amortization expense could change in future periods based on changes in the volume of prepay-
ments and economic factors.
At December 31, 2014 and 2013, servicing related trust funds of approximately $26.1 million, and $19.9 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, 2014 and 2013, the Company had blanket bond and errors and omissions coverages of $5.0
million each.
124
NOTE 10 - DEPOSITS
Deposits outstanding by type of account at December 31, 2014 and 2013 are summarized as follows:
Noninterest-bearing demand accounts
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit:
Less than $250,000
$250,000 or more
Total certificates of deposit
Total deposits
At December 31,
2014
2013
(In thousands)
$ 142,900
83,500
183,550
92,067
36,630
17,816
246,116 220,915
335,740 275,724
19,254
7,559
354,994
283,283
$ 964,190 697,581
The aggregate amount of brokered certificates of deposit was $77.3 million and $61.8 million at December 31,
2014 and 2013, respectively. Brokered certificates of deposit are included in the table above under certificates
of deposit less than $250,000. The aggregate amount of institutional certificates of deposit was $44.8 and $40.0
million at December 31, 2014 and 2013, respectively.
The amounts and scheduled maturities of certificates of deposit at December 31, 2014 and 2013 are as follows:
Maturing within one year
Maturing one through three years
Maturing after three years
At December 31,
2014
2013
(In thousands)
$ 157,849 144,119
53,231
85,933
283,283
101,116
$ 354,994
96,029
Included in the schedules above were deposits assumed as part of branch acquisitions during 2014. See Note 2
“Business Combinations” for further details regarding the types and balances of deposits assumed.
The Company has pledged $16.5 million of securities as of December 31, 2014 to secure public agency funds.
NOTE 11 – SHORT-TERM BORROWED FUNDS
Short-term borrowed funds at December 31, 2014 and 2013 are summarized as follows:
Short-term FHLB advances
Subordinated debenture, due 2020
Total short-term borrowed funds
At December 31,
2014
2013
Balance
$
$
57,500
300
57,800
Interest
Rate
Balance
(Dollars in thousands)
0.19%-0.56%
10,000
2.68%
300
10,300
Interest
Rate
0.36%
2.70%
125
2014 Form 10-K
Lines of credit with the FHLB are based upon FHLB-approved percentages of Bank assets, but must be sup-
ported 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 $202.9 million of collateral for
these advances. In addition, at December 31, 2014, the Company has pledged $52.6 million of securities for
these advances. At December 31, 2014 the Company had FHLB advances of $102.5 million outstanding with
excess collateral pledged to the FHLB during those periods that would support additional borrowings of ap-
proximately $65.3 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 $125.2 million of collateral to the FRB for these advances. At De-
cember 31, 2014 the Company had lines available with the FRB for $78.4 million. At December 31, 2014 the
Company had no FRB advances outstanding.
NOTE 12 - LONG-TERM DEBT
Long-term debt at December 31, 2014 and 2013 are summarized as follows:
December 31, 2014
Interest
Rate
Balance
(Dollars in thousands)
Long-term FHLB advances, due 2016 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
$
$
45,000
1,275
5,155
10,310
61,740
1.20%-4.00%
2.68 %
3.75 %
3.28 %
December 31, 2013
Interest
Rate
Balance
(Dollars in thousands)
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
$
$
57,500
1,575
5,155
10,310
74,540
0.42%-4.00%
2.70%
3.75%
3.29%
The following table presents the scheduled repayments of long-term debt as of December 31, 2014.
2015
2016
2017
2018
2019
Thereafter
Total
$
$
—
10,300
5,300
300
300
45,540
61,740
126
As of December 31, 2014, there were no principal amounts callable by the FHLB on advances.
At December 31, 2014 and 2013, 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 float-
ing interest rates ranging from 3.28% to 3.75% at December 31, 2014 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 re-
deemable 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 lim-
itations, 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 through December 31, 2012, the Company
deferred payment of interest for nine quarters and had eleven quarters of deferral available. These as well as
any future deferred distributions continued to accrue interest and 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. During 2013, the Company cured all deferred payments and inter-
est 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 cap-
ital at December 31, 2014 and 2013. The Company had $675,000 and $975,000 of long-term debt that qualified
as Tier 2 capital at December 31, 2014 and 2013, respectively.
NOTE 13 - INCOME TAXES
Income tax expense for the years ended December 31, 2014 and 2013 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,
2014
2013
(In thousands)
$
$
2,331
229
2,560
752
136
888
3,448
7,673
1,171
8,844
754
(212)
542
9,386
127
2014 Form 10-K
A reconciliation from expected Federal tax expense to actual income tax expense for the years ended
December 31, 2014 and 2013 using the base federal tax rates of 35% follows:
Computed federal income taxes
State income tax, net of federal benefit
Tax exempt interest
Change in valuation allowance
Cash surrender value of life
Other, net
Total income tax expense
For the Years
Ended December 31,
2014
2013
(In thousands)
$
$
4,116
190
(497)
73
(256)
(178)
3,448
9,171
623
(305)
—
(131)
28
9,386
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, 2014 and 2013:
At December 31,
2014
2013
(In thousands)
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
Loan fees
Reserve for miscellaneous losses
Other
Valuation allowance
Total gross deferred tax assets
Deferred tax liabilities:
Depreciation
Loan fees
Unrealized gain on securities available for sale
Total gross deferred tax liabilities
Deferred tax assets, net
$
$
3,204
—
46
86
246
1,827
368
144
171
223
392
6,707
(245)
6,462
(1,296)
—
(451)
(1,747)
4,715
2,810
1,365
—
95
220
2,291
466
121
—
375
716
8,459
(172)
8,287
(633)
(235)
—
(868)
7,419
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.
128
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 $1.8 million and $(1.2 million), for the years ended December 31, 2014
and 2013, 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 $888,000 of deferred tax
and $542,000 of deferred tax for the years ended December 31, 2014 and 2013, 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 re-
maining net deferred tax assets is more likely than not. The Company’s federal income tax returns were ex-
amined for the years 2008 through 2010. No changes were proposed. Tax returns for 2011 and subsequent
years are subject to examination by taxing authorities. The Company has analyzed the tax positions taken
or expected to be taken on its tax returns and concluded it has no liability related to uncertain tax positions
in accordance with ASC Topic 740.
NOTE 14 - 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, 2014, and 2013 totaled $729,000, and $653,000,
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
$
$
782
931
941
946
938
1,019
5,557
In the course of ordinary business, the Bank is, from time to time, named a party to legal actions and pro-
ceedings, 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 contingen-
cies 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 $0
and $2.6 million for the periods ended December 31, 2014 and 2013, respectively. All amounts related to
the settlement of these agreements were expensed as of December 31, 2013.
NOTE 15 - STOCK-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
129
2014 Form 10-K
common stock at the date of grant is used as the fair value of restricted stock awards. Compensa-
tion 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.
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.
On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one stock
split to stockholders of record as of October 31, 2014, payable on November 14, 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. In addition, all stock
options and restricted stock awards have been retroactively adjusted for the stock splits.
The Company has adopted the 2002 Stock Option Plan under which an aggregate of 555,000 shares
have been reserved for issuance by the Company upon the grant of stock options or limited rights, of
which 13,680 are outstanding. The plan provided for the grant of options to key employees and Direc-
tors 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 240,000
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 2013 and 2014 from this plan. As of December 31, 2014, a total of 226,000 shares have been
awarded under the plan, of which all have vested.
The Company has adopted a 2013 Equity Incentive Plan under which an aggregate of 1,000,000 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 con-
sultants. 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,
2014 a total of 404,862 shares, net of forfeitures, were issued as restricted stock and 109,588 as stock
options.
The expense recognition of employee stock option and restricted stock awards resulted in net expense
of approximately $480,000, and $303,000 during the twelve months ended December 31, 2014, and 2013,
respectively.
Information regarding the 2014 grants as well as other relevant disclosure related to the share-based compen-
sation plans of the Company is presented below.
130
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,
2014
Weighted
Average
Exercise
Price
Shares
2013
Weighted
Average
Exercise
Price
Shares
127,228 $
5,480
(9,440)
—
123,268 $
5.20
10.25
5.66
—
5.43
33,760
104,108
(8,640)
(2,000)
127,228
5.83
5.00
5.08
(6.00)
5.20
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at end of year
66,534 $
5.37
23,120
6.10
The aggregate intrinsic value of 123,268 and 127,288 stock options outstanding at December 31, 2014 and 2013
was $1.1 million and $346,000, respectively. The aggregate intrinsic value of 66,534 and 23,120 stock options
exercisable at December 31, 2014 and 2013 was $574,000 and $41,038, respectively.
Information pertaining to options outstanding at December 31, 2014 and 2013, is as follows:
At December 31, 2014
Options Outstanding
Weighted Avg.
Remaining Years
Weighted
Average
Options Exercisable
Number
Weighted
Average
Number
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
5.00
8.3 $
$5.00
6.00
0.4
$6.00
9.63
1.8
$9.63
10.25
9.3
$10.25
5.37
7.5 $
104,108
10,880
2,800
5,480
123,268
52,054 $
10,880
2,800
—
66,534 $
5.00
6.00
9.63
10.25
5.43
At December 31, 2013
Options Outstanding
Weighted Avg.
Remaining
Years
Number
Options Exercisable
Weighted
Average
Number
Weighted
Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
5.00
8.7 $
$5.00
6.00
1.5
$6.00
9.63
2.8
$9.63
6.10
7.9 $
112,108
12,320
2,800
127,228
8,000 $
12,320
2,800
23,120 $
5.00
6.00
9.63
5.20
131
2014 Form 10-K
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 2014 and 2013:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
2014
2013
1.0%
0%
8 years
6.5 years
32%
2.42%
35%
1.04%
As of December 31, 2014, there was $45,000 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 .63 years as of December 31, 2014.
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 stock-
holders 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.
132
Nonvested restricted stock for the year ended December 31, 2014 and 2013 is summarized in the following
table. All information has been retroactively adjusted for stock splits.
At and For the Years Ended December 31,
2014
2013
Restricted stock
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
Shares
348,400
61,062
(108,362)
(2,000)
299,100
$
$
Weighted
Average
Grant- Date
Fair Value
Weighted
Average
Grant- Date
Fair Value
Shares
5.29
10.34
6.99
5.00
5.83
23,200 $
357,800
(20,600)
(12,000)
348,400 $
2.03
5.30
3.16
5.00
5.29
The vesting schedule of these shares as of December 31, 2014 is as follows:
2015
2016
2017
2018
2019
Thereafter
Shares
66,675
62,475
61,475
61,475
47,000
—
299,100
As of December 31, 2014, there was $1.1 million 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 2.56 years as of December 31, 2014.
NOTE 16 - 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 substan-
tiated 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 var-
ious financial instruments, and other factors.
133
2014 Form 10-K
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 settle-
ment 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 estab-
lished 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
Level 2
Level 3
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.
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.
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 pric-
ing 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 liabil-
ity. 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.
134
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 cer-
tain 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, 2014 and 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.
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 subse-
quent 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.
Bank-owned life insurance - The cash surrender value of bank owned life insurance policies held by the Bank
approximates fair values of the policies.
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.
135
2014 Form 10-K 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 chang-
es, 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.
136
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.
The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2014
and 2013 are as follows:
Financial assets:
Cash and due from banks
Interest-bearing cash
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Other investments
Derivative assets
Loans held for sale
Loans receivable, net
Cash value life insurance
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities
Accrued interest payable
At December 31, 2014
Carrying
Amount
Fair Value
Level 1 Level 2
Total
Level 3
(In thousands)
$
10,453
10,694
251,717
25,544
5,405
2,309
1,689
40,912
768,122
21,532
3,628
10,181
10,453
10,694
251,717
27,385
5,405
2,309
1,689
39,729
785,109
21,532
3,628
15,147
10,453
10,694
—
—
— 251,717
17,652
—
—
—
—
—
1,689
—
39,729
—
—
—
21,532
—
3,628
—
15,147
—
—
—
—
9,733
5,405
2,309
—
—
785,109
—
—
—
964,190
57,800
61,740
1,036
312
962,763
57,745
65,516
1,036
312
— 962,763
57,745
—
65,516
—
506
530
312
—
—
—
—
—
—
137
2014 Form 10-K
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
Cash value life insurance
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowed funds
Long-term debt
Derivative liabilities
Accrued interest payable
Carrying
Amount
At December 31, 2013
Fair Value
Total
Level 1
Level 2
Level 3
(In thousands)
$
4,489
34,176
167,535
24,554
4,103
1,858
1,412
36,897
535,221
20,910
2,802
10,908
4,489
34,176
167,535
23,547
4,103
1,858
1,412
37,041
524,142
20,910
2,802
17,718
4,489
34,176
—
—
—
—
428
—
—
—
—
—
—
—
167,535
15,177
—
—
984
37,041
—
20,910
2,802
17,718
697,581
10,300
74,540
55
311
696,674
10,300
71,462
55
311
—
—
—
—
—
696,674
10,300
71,462
55
311
—
—
—
8,370
4,103
1,858
—
—
524,142
—
—
—
—
—
—
—
—
At December 31,
2014
2013
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
(In thousands)
Off-Balance Sheet Financial Instruments:
Commitments to extend credit
Standby letters of credit
$
68,181
1,982
—
—
38,595
526
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Interest rate swaps
Derivative liabilities -
Mortgage-backed securities forward sales commitments
Mortgage loan interest rate lock commitments
Interest rate swaps
106,440
27,292
—
—
93,000
—
20,000
1,122
567
—
—
—
20,516
88,000
20,000
506
—
— 103,614
530
—
—
—
—
106
878
428
—
55
—
138
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 tech-
niques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit
losses, and liquidity. At December 31, 2014 and 2013, 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 esti-
mates 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. As of December 31, 2014, there were no brokered deposits
accounted for under fair value.
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 December 31, 2014, 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.
139
2014 Form 10-K 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 mort-
gage 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 de-
rived 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 commit-
ment 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 assump-
tions are based on the mortgage subsidiary’s historical experience, conversion ratios for similar loan commit-
ments, 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 ap-
plied 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 con-
solidated 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.
140
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.
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2014
and 2013:
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable inputs
(Level 3)
December 31, 2014
Available-for-sale investment securities:
Municipal securities
US government agencies
Collateralized loan obligations
Mortgage-backed securities:
Agency
Non-agency
Loans held for sale
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Derivative liabilities:
Mortgage-backed securities forward sales
commitments
Interest rate swaps
Total
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 forward sales commitments
Mortgage-backed securities forward sales
commitments
Interest rate swaps
Brokered deposits
Derivative liabilities:
Mortgage loan interest rate lock commitments
Total
$
$
$
$
44,717
4,748
25,872
125,542
50,838
39,729
1,122
567
506
—
293,641
38,499
5,175
69,929
53,932
37,041
106
878
—
4,948
—
55
210,563
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
530
530
—
—
—
—
—
—
—
428
—
—
—
428
141
2014 Form 10-K
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2014 and 2013:
Quoted market price Significant other
Significant other
observable inputs unobservable inputs
in active markets
(Level 1)
December 31, 2014
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, 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
$
(Level 2)
(In thousands)
(Level 3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,885
63
8,123
177
29
1,730
2,040
245
954
16,246
6,117
125
16,953
1,328
20
2,554
959
1,781
3,533
33,370
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.
142
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December
31, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were
as follows:
Valuation Technique
Impaired Loans
Appraisal Value
Real estate owned
Appraisal Value/
Comparison Sales/
Other estimates
December 31, 2014 and 2013
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
Appraisals and or sales of
comparable properties
Appraisals discounted 10% to 20% for
sales commissions and other holding costs
NOTE 17 - 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, 2014 and 2013, the Company had commitments to extend credit in the amount of $68.2 million
and $48.6 million, respectively. At December 31, 2014 and 2013, the Company had standby letters of credit in
the amount of $2.0 million and $526,000, 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 collater-
alized. Commitments under standby letters of credit are usually one year or less. At December 31, 2014, 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, 2014 was approximately $2.0 million.
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 Com-
pany 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.
143
2014 Form 10-K 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,
2014 and 2013, the Company’s outstanding mortgage interest rate lock commitments totaled $106.4 and $103.6
million, respectively. The Company uses mortgage loan forward sales commitments and mortgage-backed se-
curities 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, 2014 and 2013, the Company’s outstanding mortgage loan forward
sales commitments totaled $27.3 million and $20.5 million, respectively. At December 31, 2014 and 2013, the
Company’s outstanding mortgage-backed securities forward sales commitments totaled $93.0 million and $88.0
million, respectively. The Company’s derivative positions are marked to market as shown in Note 5 - 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, 2014 and 2013, the Company’s outstanding interest rate swap
totaled $20.0 million and $20.0 million, respectively. The Company’s derivative positions are marked to market
as shown in Note 5 - 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
$
$
NOTE 18 - EMPLOYEE BENEFIT PLANS
At December 31,
2014
2013
(In thousands)
270,141
134,953
36,427
441,521
190,934
115,413
12,120
318,467
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 2014 and 2013, 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, 2014, and 2013, the Company made matching contributions of
$415,000 and $500,000, 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 surren-
der value of the payment to the insurance company is included in other assets in the accompanying consoli-
dated statements of financial condition. The cash surrender value of the advance at December 31, 2014 and
2013 is $427,000 and $535,000, 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
144
the loan balance and the increase in the cash value is recorded as compensation to the executives. The insur-
ance 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 premi-
ums, the insurance proceeds would be taxable to the Company. One of the executives ended their participation
in the plan and received their portion of the cash value in January 2015.
The Company incurred an aggregate payment of $180,000 and $108,000 paid on behalf of the executives for the
period ended December 31, 2014 and 2013, respectively.
NOTE 19 - 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. Basic earnings per share exclude the effect of nonvested restricted stock.
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 out-
standing 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.
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.
On October 15, 2014, the Board of Directors of the Company declared an additional two-for-one stock split to
stockholders of record as of October 31, 2014, payable on November 14, 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,
2014 and 2013:
December 31,
2014
2013
Basic
Diluted
Basic
Diluted
Weighted average shares outstanding
Effect of dilutive securities
Average shares outstanding
7,761,707
—
7,761,707
7,761,707
161,147
7,922,854
7,682,460
—
7,682,460
7,682,460
235,029
7,917,489
The average market price used in calculating the dilutive securities under the treasury stock method for the
years ended December 31, 2014 and 2013 was $11.39 and $6.58, respectively.
For the years ended December 31, 2014 and 2013, 5,480 and 700 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.
145
2014 Form 10-K
NOTE 20 - CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
The Company and the Bank are subject to various federal and state regulatory requirements, including regu-
latory 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 Com-
pany’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, 2014, the most recent notification from federal banking agencies categorized the Company
and the Bank as “well capitalized” under the current regulatory framework. Since December 31, 2014, 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, 2014 and 2013 are as follows:
Required to be
Categorized Required to be
Adequately
Capitalized Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Categorized
Actual
December 31, 2014
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted
$ 104,613 12.03% 34,787 4.00% N/A N/A
assets)
Tier 1 capital (to total average assets)
114,323 13.15% 69,574 8.00% N/A N/A
104,613 9.49% 44,079 4.00% N/A N/A
CresCom Bank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted
assets)
Tier 1 capital (to total average assets)
December 31, 2013
Carolina Financial Corporation
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted
103,319 11.90% 34,716 4.00% 52,074
6.00%
113,029 13.02% 69,433 8.00% 86,791 10.00%
5.00%
103,319 9.40% 43,985 4.00% 54,981
$ 99,602 15.42% 25,834 4.00% N/A N/A
assets)
Tier 1 capital (to total average assets)
108,650 16.82% 51,668 8.00% N/A N/A
99,602 11.15% 35,732 4.00% N/A N/A
CresCom Bank
Tier 1 capital (to risk weighted assets)
Total risk based capital (to risk weighted
98,301 15.26% 25,763 4.00% 38,645
6.00%
assets)
Tier 1 capital (to total average assets)
107,327 16.66% 51,526 8.00% 64,408 10.00%
5.00%
98,301 11.01% 35,706 4.00% 44,632
146
On July 2, 2014, the Federal Reserve adopted a final rule for the Basel III capital framework and, on July 9,
2014, 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 ap-
proaches” 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 require-
ments in the rule began 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. Based on the Company’s capital
levels and balance sheet composition at December 31, 2014, the Company believes implementation of the new
rule will have no material impact on its capital needs.
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.
During the year ended December 31, 2014 and 2013, the Company paid dividend payments of $606,000 and
$401,000 to stockholders.
NOTE 21 - 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 account-
ing 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.
147
2014 Form 10-K The following tables present selected financial information for the Company’s reportable business segments for
the years ended December 31, 2014 and 2013:
For the Year Ended December 31, 2014
Banking Banking Other Eliminations
Total
Community Mortgage
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)
$
$
36,075
5,061
31,014
(61)
4,084
—
19,548
5,186
10,425
3,157
7,268
(In thousands)
16
541
(525)
—
1,455
28
1,427
61
17,017
136
14,946
960
2,613
762
1,851
47
6,146
6,949
—
(1,281)
(472)
(809)
110
(28)
138
—
—
(6,282)
—
(6,146)
2
1
1
37,656
5,602
32,054
—
21,148
—
41,443
—
11,759
3,448
8,311
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$ 1,192,419
764,881
1,547
966,309
104,076
67,952 111,096
—
10,808
—
39,365
—
—
6,800 15,465
(172,450) 1,199,017
768,122
40,912
964,190
119,540
(7,567)
—
(2,119)
(6,801)
For the Year Ended December 31,
2013
Community
Banking
Mortgage
Banking Other Eliminations
Total
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)
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$
$
$
31,200
4,965
26,235
(900)
2,678
—
17,724
4,853
7,236
2,273
4,963
(In thousands)
17
675
(658)
—
1,637
84
1,553
40
41,332
488
22,452
1,037
19,844
7,441
12,403
76
5,812
5,796
—
(566)
(219)
(347)
94
(6)
100
—
—
(6,300)
—
(5,890)
(310)
(109)
(201)
32,948
5,718
27,230
(860)
44,086
—
45,972
—
26,204
9,386
16,818
873,104
532,616
753
701,110
69,376
61,846 101,497
—
3,374
—
36,144
—
—
— 15,465
(154,863)
(769)
—
(3,529)
(1)
881,584
535,221
36,897
697,581
84,840
148
NOTE 22 - 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
Long-term debt
Stockholders’ equity
Total liabilities and stockholders’ equity
Carolina Financial Corporation
Condensed Statements of Operations
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 before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of CresCom Bank
Equity in undistributed earnings (losses) of Carolina Services
Total equity in undistributed earnings of subsidiaries
Net income
149
At December 31,
2014
2013
(In thousands)
$
519
107,407
850
465
1
295
$ 109,537
372
15,465
93,700
$ 109,537
334
95,928
971
465
1
165
97,864
172
15,465
82,227
97,864
For the Years
Ended December 31,
2014
2013
(In thousands)
$
$
800
16
816
541
578
1,119
(303)
(415)
112
8,320
(121)
8,199
8,311
4,400
17
4,417
670
435
1,105
3,312
(414)
3,726
12,764
328
13,092
16,818
2014 Form 10-K
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
Stock awards
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Excess tax benefit in connection with equity awards
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,
2014
2013
(In thousands)
$
8,311
16,818
(8,199)
480
202
(130)
200
126
990
(13,092)
303
—
171
(1,197)
—
3,003
—
50
(855)
(805)
185
334
519
(2,750)
43
(401)
(3,108)
(105)
439
334
$
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on our management’s evaluation (with the participation of our principal executive officer and principal
financial officer), as of the end of the period covered by this report, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act ) are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
150
Management’s Annual Report on Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Under the supervision and with the participation of management, including the principal executive officer and
the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control
over financial reporting as of December 31, 2014 based on criteria established in Internal Control-Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, the Company’s management has evaluated and concluded that the Company’s internal con-
trol over financial reporting was effective as of December 31, 2014.
Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2014 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
151
2014 Form 10-K PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
In response to this Item, this information is contained in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2015 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
In response to this Item, this information is contained in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2015 and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS.
In response to this Item, the information required by Item 201(d) is contained in Item 5 of this report. The
other information required by this item is contained in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2015 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information is contained in our Proxy Statement for the Annual Meeting of Shareholders to be held on
April 29, 2015 is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
In response to this Item, this information is contained in our Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2015 and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
(1)
(2)
Financial Statements
The following consolidated financial statements are located in Item 8 of this report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014
and 2013
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to the Consolidated Financial Statements
Financial Statement Schedules
These schedules have been omitted because they are not required, are not applicable or have been
included in our consolidated financial statements.
(3) Exhibits
See the “Exhibit Index” immediately following the signature page of this report.
152
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CAROLINA FINANCIAL CORPORATION
Date: March 20, 2015
By:
/s/ Jerold L. Rexroad
Jerold L. Rexroad
Chief Executive Officer
153
2014 Form 10-K
Exhibit No.
3.1
3.2
3.3
4.1
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation filed on April 2, 1997 (1)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed
on June 11, 2010 (1)
Amended and Restated Bylaws [need to file]
See Exhibits 3.1 through 3.3 for provisions in Carolina Financial Corporation’s Certificate of
Incorporation and Bylaws defining the rights of holders of common stock (1)
4.2
Form of certificate of common stock (1)
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Employment Agreement by and between Crescent Bank and
M.J. Huggins, III dated as of December 24, 2008 (1)(2)
First Amendment to the Amended and Restated Employment Agreement between CresCom
Bank and M.J. Huggins, III dated September 21, 2012 (1)(2)
Amended and Restated Supplemental Executive Agreement by and between Carolina
Financial Corporation and M.J. Huggins, III dated as of December 24, 2008 (1)(2)
Amended and Restated Employment Agreement by and between Crescent Bank and David
Morrow dated as of December 24, 2008 (1)(2)
First Amendment to the Amended and Restated Employment Agreement between CresCom
Bank and David Morrow dated as of September 19, 2012 (1)
Amended and Restated Supplemental Executive Agreement by and between Carolina
Financial Corporation and David Morrow dated as of December 24, 2008 (1)(2)
Employment Agreement by and between Carolina Financial Corporation and Jerold L. Rexroad
dated as of May 1, 2008 (1)(2)
First Amendment to the Employment Agreement between Carolina Financial Corporation
and Jerold L. Rexroad dated as of September 19, 2012 (1)(2)
10.9
Carolina Financial Corporation 2002 Stock Option Plan (1)
10.10 Carolina Financial Corporation 2006 Recognition and Retention Plan (1)(2)
10.11 Carolina Financial Corporation 2013 Equity Incentive Plan (1)(2)
10.12
Form of Carolina Financial Corporation Elite LifeComp Agreement (1)(2)
154
10.13
Subservicing Agreement by and between Cenlar FSB and Crescent Mortgage Company
dated January 1, 2004 (1)
10.14
First Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of February 19, 2004 (1)
10.15
Second Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of February 1, 2006 (1)
10.16
Third Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of January 1, 2011 (1)
21.1
Subsidiaries of Carolina Financial Corporation (1)
23
Consent of Independent Registered Public Accounting Firm—Elliott Davis Decosimo, LLC
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer
32
Section 1350 Certifications
101
The following materials from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheets as December 31, 2014 and December 31, 2013; (ii) Consolidated
Statements of Operations for the years ended December 31, 2014 and 2013; (iii) Consoli-
dated Statements of Comprehensive Income for the years ended December 31, 2014 and
2013 ; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the years ended
December 31, 2014 and 2013; and (vi) Notes to the Consolidated Financial Statements.
(1)
(2)
Incorporated by reference from the Company’s Registration Statement on Form 10 filed on February 26, 2014.
Indicates management contracts or compensatory plans or arrangements.
155
2014 Form 10-K
Exhibit 31.1
Rule 13a-14(a) Certification of the Chief Executive Officer
I, Jerold L. Rexroad, President and Chief Executive Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Carolina Financial Corporation;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal con-
trol over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and pro-
cedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over fi-
nancial reporting to be designed under our supervision, to provide reasonable assurance regard-
ing the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of this annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
156
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the reg-
istrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 20, 2015
/s/ Jerold l. rexroad
Jerold L. Rexroad,
Chief Executive Officer
(Principal Executive Officer)
157
2014 Form 10-K
Exhibit 31.2
Rule 13a-14(a) Certification of the Chief Financial Officer
I, William A. Gehman III, Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Carolina Financial Corporation;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal con-
trol over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and pro-
cedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over fi-
nancial reporting to be designed under our supervision, to provide reasonable assurance regard-
ing the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of this annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
158
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 20, 2015
/s/ William a. Gehman iii
William A. Gehman III
Chief Financial Officer
(Principal Financial and Accounting Officer)
159
2014 Form 10-K
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
The undersigned, the Chief Executive Officer and the Chief Financial Officer of Carolina Financial
Corporation (the “Company”), each certify that, to his knowledge on the date of this certification:
1.
2.
The annual report of the Company for the period ended December 31, 2014 as filed with
the Securities and Exchange Commission on this date (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Jerold l. rexroad
Jerold L. Rexroad
Chief Executive Officer
March 20, 2015
/s/ William a. Gehman iii
William A. Gehman III
Chief Financial Officer
March 20, 2015
160
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SHAREHOLDER INFORMATION
OFFICERS
Jerold L. Rexroad
President and Chief Executive Officer
William A. Gehman, III
Executive Vice President and Chief Financial Officer
David L. Morrow
Executive Vice President
President and Chief Executive Officer of CresCom Bank
M. J. Huggins, III
Executive Vice President
CORPORATE HEADQUARTERS
Carolina Financial Corporation
288 Meeting Street • Charleston, SC 29401
1 (855) 273 -7266
TRANSFER AGENT
Shareholder correspondence
Computershare
P.O. BOX 30170
College Station, TX 77842-3170
Overnight correspondence
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Telephone: Direct Dial 1 (781) 575 - 4223
Toll Free: (800) 368 - 5948
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Wednesday, April 29, 2015 at 5:00 PM at:
Marina Inn at Grande Dunes
8121 Amalfi Place
Myrtle Beach, South Carolina 29572
288 Meeting Street, Charleston, SC 29401
DOWNTOWN CHARLESTON
288 Meeting Street
Charleston, SC 29401-1570
GARDEN CITY
2636 S Hwy 17
Murrells Inlet, SC 29576-7617
WEST ASHLEY
884 Orleans Road
Charleston, SC 29407-4937
LITCHFIELD/PAWLEYS ISLAND
13021 Ocean Highway
Pawleys Island, SC 29585-7080
JAMES ISLAND
430 Folly Road
Charleston, SC 29412-2641
MOUNT PLEASANT
1492 Stuart Engals Blvd.
Mount Pleasant, SC 29464-3378
LITTLE RIVER
1180 Highway 17
Little River, SC 29566-9208
HEATH SPRINGS
202 N Main Street
Heath Springs, SC 29058
SUMMERVILLE
200 N Cedar Street
Summerville, SC 29483-6404
OCEAN ISLE BEACH
7290 Beach Drive SW
Ocean Isle Beach, NC 28469-5436
NORTH CHARLESTON
8485 Dorchester Road
North Charleston, SC 29420-7307
HOLDEN BEACH
3178 Holden Beach Road SW
Holden Beach, NC 28462
CANE BAY
1724 State Road
Summerville, SC 29483-2842
SAINT GEORGE
5561 Memorial Blvd.
Saint George, SC 29477-2475
MYRTLE BEACH
991 38th Avenue N
Myrtle Beach, SC 29577-2832
NORTH MYRTLE BEACH
700 Main Street
North Myrtle Beach, SC 29582-3030
SOCASTEE
4506 Highway 707
Myrtle Beach, SC 29588
CONWAY
2069 E Hwy 501
Conway, SC 29526-9504
CONWAY
1230 16th Avenue
Conway, SC 29526-3479
SHALLOTTE
200 Smith Avenue
Shallotte, NC 28470-4458
SOUTHPORT
115 N Howe Street
Southport, NC 28461-3813
SOUTHPORT
4945 Southport Supply Road SE
Southport, NC 28461-8742
WHITEVILLE
110 N J K Powell Blvd.
Whiteville, NC 28472-3124
CHADBOURN
111 Strawberry Blvd.
Chadbourn, NC 28431-1415
ELIZABETHTOWN
306 S Poplar Street
Elizabethtown, NC 28337
TABOR CITY
105 Hickman Road
Tabor City, NC 28463-1927
ALL LOCATIONS
1 (855) 273-7266 • www.haveanicebank.com
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HOME OFFICE
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.