288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
288 Meeting Street
288 Meeting Street
288 Meeting Street
Charleston, SC 29401-1570
Charleston, SC 29401-1570
Charleston, SC 29401-1570
GARDEN CITY
GARDEN CITY
GARDEN CITY
2636 S Hwy 17
2636 S Hwy 17
2636 S Hwy 17
Murrells Inlet, SC 29576-7617
Murrells Inlet, SC 29576-7617
Murrells Inlet, SC 29576-7617
WEST ASHLEY
WEST ASHLEY
WEST ASHLEY
884 Orleans Road
884 Orleans Road
884 Orleans Road
Charleston, SC 29407-4937
Charleston, SC 29407-4937
Charleston, SC 29407-4937
LITCHFIELD/PAWLEYS ISLAND
LITCHFIELD/PAWLEYS ISLAND
LITCHFIELD/PAWLEYS ISLAND
13021 Ocean Highway
13021 Ocean Highway
13021 Ocean Highway
Pawleys Island, SC 29585-7080
Pawleys Island, SC 29585-7080
Pawleys Island, SC 29585-7080
JAMES ISLAND
JAMES ISLAND
JAMES ISLAND
430 Folly Road
430 Folly Road
430 Folly Road
LITTLE RIVER
LITTLE RIVER
LITTLE RIVER
1180 Highway 17
1180 Highway 17
1180 Highway 17
Charleston, SC 29412-2641
Charleston, SC 29412-2641
Charleston, SC 29412-2641
Little River, SC 29566-9208
Little River, SC 29566-9208
Little River, SC 29566-9208
MOUNT PLEASANT
MOUNT PLEASANT
MOUNT PLEASANT
1492 Stuart Engals Blvd.
1492 Stuart Engals Blvd.
1492 Stuart Engals Blvd.
Mount Pleasant, SC 29464-3378
Mount Pleasant, SC 29464-3378
Mount Pleasant, SC 29464-3378
SUMMERVILLE
SUMMERVILLE
SUMMERVILLE
200 N Cedar Street
200 N Cedar Street
200 N Cedar Street
Summerville, SC 29483-6404
Summerville, SC 29483-6404
Summerville, SC 29483-6404
NORTH CHARLESTON
NORTH CHARLESTON
NORTH CHARLESTON
8485 Dorchester Road
8485 Dorchester Road
8485 Dorchester Road
GREENVILLE
GREENVILLE
GREENVILLE
3695 E. North Street
3695 E. North Street
3695 E. North Street
Greenville, SC 29615
Greenville, SC 29615
Greenville, SC 29615
HEATH SPRINGS
HEATH SPRINGS
HEATH SPRINGS
202 N Main Street
202 N Main Street
202 N Main Street
Heath Springs, SC 29058
Heath Springs, SC 29058
Heath Springs, SC 29058
SUNSET BEACH
SUNSET BEACH
SUNSET BEACH
7290 Beach Drive SW
7290 Beach Drive SW
7290 Beach Drive SW
North Charleston, SC 29420-7307
North Charleston, SC 29420-7307
North Charleston, SC 29420-7307
Ocean Isle Beach, NC 28469-5436
Ocean Isle Beach, NC 28469-5436
Ocean Isle Beach, NC 28469-5436
CANE BAY
CANE BAY
CANE BAY
1724 State Road
1724 State Road
1724 State Road
Summerville, SC 29483-2842
Summerville, SC 29483-2842
Summerville, SC 29483-2842
HOLDEN BEACH
HOLDEN BEACH
HOLDEN BEACH
3178 Holden Beach Road SW
3178 Holden Beach Road SW
3178 Holden Beach Road SW
Holden Beach, NC 28462
Holden Beach, NC 28462
Holden Beach, NC 28462
SAINT GEORGE
SAINT GEORGE
SAINT GEORGE
5561 Memorial Blvd.
5561 Memorial Blvd.
5561 Memorial Blvd.
SHALLOTTE
SHALLOTTE
SHALLOTTE
200 Smith Avenue
200 Smith Avenue
200 Smith Avenue
Saint George, SC 29477-2475
Saint George, SC 29477-2475
Saint George, SC 29477-2475
Shallotte, NC 28470-4458
Shallotte, NC 28470-4458
Shallotte, NC 28470-4458
MYRTLE BEACH
MYRTLE BEACH
MYRTLE BEACH
991 38th Avenue N
991 38th Avenue N
991 38th Avenue N
Myrtle Beach, SC 29577-2832
Myrtle Beach, SC 29577-2832
Myrtle Beach, SC 29577-2832
SOUTHPORT
SOUTHPORT
SOUTHPORT
4945 Southport Supply Road SE
4945 Southport Supply Road SE
4945 Southport Supply Road SE
Southport, NC 28461-8742
Southport, NC 28461-8742
Southport, NC 28461-8742
NORTH MYRTLE BEACH
NORTH MYRTLE BEACH
NORTH MYRTLE BEACH
700 Main Street
700 Main Street
700 Main Street
North Myrtle Beach, SC 29582-3030
North Myrtle Beach, SC 29582-3030
North Myrtle Beach, SC 29582-3030
SOCASTEE
SOCASTEE
SOCASTEE
4506 Highway 707
4506 Highway 707
4506 Highway 707
Myrtle Beach, SC 29588
Myrtle Beach, SC 29588
Myrtle Beach, SC 29588
CONWAY
CONWAY
CONWAY
2069 E Hwy 501
2069 E Hwy 501
2069 E Hwy 501
Conway, SC 29526-9504
Conway, SC 29526-9504
Conway, SC 29526-9504
CONWAY
CONWAY
CONWAY
1230 16th Avenue
1230 16th Avenue
1230 16th Avenue
WHITEVILLE
WHITEVILLE
WHITEVILLE
110 N J K Powell Blvd.
110 N J K Powell Blvd.
110 N J K Powell Blvd.
Whiteville, NC 28472-3124
Whiteville, NC 28472-3124
Whiteville, NC 28472-3124
CHADBOURN
CHADBOURN
CHADBOURN
111 Strawberry Blvd.
111 Strawberry Blvd.
111 Strawberry Blvd.
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
ELIZABETHTOWN
ELIZABETHTOWN
ELIZABETHTOWN
306 S Poplar Street
306 S Poplar Street
306 S Poplar Street
Elizabethtown, NC 28337
Elizabethtown, NC 28337
Elizabethtown, NC 28337
TABOR CITY
TABOR CITY
TABOR CITY
105 Hickman Road
105 Hickman Road
105 Hickman Road
Conway, SC 29526-3479
Conway, SC 29526-3479
Conway, SC 29526-3479
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
ALL LOCATIONS
ALL LOCATIONS
ALL LOCATIONS
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
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2015 Annual Report
2015 Annual Report
2016 Annual Report
2016 Proxy Statement
2017 Proxy Statement
2016 Proxy Statement
HOME OFFICE
HOME OFFICE
HOME OFFICE
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
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.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
CarolinaFC-AR-Wrap-2016-FINAL.indd Custom H
3/24/16 9:47 AM
CAROLINA FINANCIAL CORPORATION
288 Meeting Street
Charleston, SC 29401
(843) 723-7700
March 20, 2017
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 26, 2017 at the Marina Inn at Grande Dunes, 8121 Amalfi Place, Myrtle Beach,
South Carolina.
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 2016 financial and operating performance.
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An important aspect of the meeting process is the stockholder vote on corporate business 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 following proposals: (i) to elect three directors to serve
for a term of three years and (ii) to ratify the appointment of the Company’s independent registered
public accounting firm for the fiscal year ended December 31, 2017. The Board of Directors has carefully
considered these proposals and unanimously recommends that you vote for each of the nominees and in
favor of the proposal 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 vote your shares in advance of the Annual
Meeting either by internet, telephone or by mail. Instructions regarding internet and telephone voting are
included on the proxy card. If you choose to submit a proxy by mail, please mark, sign and date the proxy
card and promptly return it in the enclosed postage-paid envelope. This will save the Company additional
expense in soliciting proxies and will ensure that your shares are represented. If you need assistance in
completing your proxy, please call the Assistant Secretary of the Company at (843) 534-5142. If you are a
stockholder of record, attend the meeting, and desire to revoke your proxy and vote in person, you may
do so.
Thank you for your attention to this important matter.
Sincerely,
G. Manly Eubank
Chairman of the Board
(This page intentionally left blank)
CAROLINA FINANCIAL CORPORATION
288 Meeting Street
Charleston, South Carolina 29401
(843) 723-7700
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 26, 2017
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 26, 2017.
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 three directors to serve for a term of three years;
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2. The ratification of the appointment of Elliott Davis Decosimo, LLC as the independent
registered public accounting firm of the Company for the fiscal year ending December 31,
2017; and
3. 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. 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 3,
2017 are the stockholders entitled to vote at the Meeting and any adjournments thereof. A complete list
of these stockholders will be available at the Company’s offices prior to the Meeting.
Whether or not you plan to attend the Meeting in person, you are requested to promptly vote by
telephone, internet, or by mail on the proposals presented, following the instructions on the proxy card
for whichever voting method you prefer. If you vote by mail, please mark, sign and date the proxy card and
promptly return it in the enclosed postage-paid envelope. If you need assistance in completing your proxy
card, please call the Assistant Secretary of the Company at 843-534-5142. If you are a record shareholder,
attend the meeting, and desire to revoke your proxy and vote in person, you may do so. In any event, a
proxy may be revoked by a record shareholder at any time before it is executed.
BY ORDER OF THE BOARD OF DIRECTORS
Charleston, South Carolina
March 20, 2017
M. J. Huggins, III
Executive Vice President and Secretary
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 26, 2017
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 Mortgage”), and Carolina Services Corporation of
Charleston (“Carolina Services Corporation”), which are direct subsidiaries of the Bank, 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 26, 2017, 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 20, 2017.
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At the Meeting, stockholders of the Company are being asked to consider and vote upon the
election of three directors to serve for a term of three years and to ratify the appointment of Elliott Davis
Decosimo, LLC as the independent registered public accounting firm for the Company for the fiscal year
ended December 31, 2017.
Vote Required and Proxy Information
The Board of Directors set March 3, 2017, as the record date for the Meeting. Stockholders that
owned the Company’s common stock at the close of business on that date are entitled to vote and to attend
the Meeting. As of the record date, there were 14,438,595 shares of common stock outstanding, which
were held by 1,175 stockholders of record. Each share of the Company’s common stock is entitled to one
vote on all matters voted on at the Meeting. If you are a stockholder of record who wishes to vote, you may
do so by selecting one of the following options:
Voting by Proxy: You are requested to vote the enclosed form of proxy, which is solicited on behalf
of the Board of Directors, either by internet, telephone or by mail. Instructions regarding internet and
telephone voting are included on the proxy card. If you choose to submit a proxy by mail, please mark,
sign and date the proxy card and promptly return it in the enclosed postage-paid envelope. No postage is
required if mailed within the United States. If you receive more than one proxy card, it means that you
have multiple accounts at the transfer agent. Please vote all proxy cards to be certain that all your shares
are voted.
Voting in Person: Stockholders of record may vote in person at the Meeting.
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
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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 nominee 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 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 on certain matters, your bank or broker was
allowed to vote those shares on your behalf as they felt appropriate. Your brokerage firm may now vote
your shares only under certain circumstances. Brokerage firms have authority under stock exchange rules
to vote their customers’ shares on certain “routine” matters. We expect that brokers will be allowed to
exercise discretionary authority for beneficial owners who have not provided voting instructions ONLY
with respect to the ratification of the appointment of our independent registered public accounting firm,
but not with respect to the election of directors. If you hold your shares in street name, it is critical that you
cast your vote so your shares may be voted on all proposals.
When a brokerage firm votes its customers’ unvoted shares on routine matters, these shares are
counted for purposes of establishing a quorum to conduct business at the meeting. If a brokerage firm
indicates on a proxy that it does not have discretionary authority to vote certain shares on a particular
matter, then those shares will be treated as “broker non-votes.”
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. 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.
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 directors up to the maximum number of directors to
be elected at the Meeting. Abstentions, broker non-votes, and the failure to return a signed
proxy will have no effect on the outcome of the vote on this matter.
With respect to Proposal No. 2, 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 outcome 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.
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As of the record date, the Company’s directors and executive officers owned or were deemed to
control approximately 12.26% of the Company’s common stock, and they have indicated that they intend
to vote their shares for the election of the Company’s director nominees and for the ratification of Elliott
Davis Decosimo, LLC as our independent registered public accounting firm for the fiscal year ended
December 31, 2017.
When you sign the proxy card, you appoint W. Scott Brandon and Robert M. Moïse as your
representatives at the Meeting. Messrs. Brandon and Moïse 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.
Brandon and Moïse will vote your proxy for the election to the Board of Directors of all the nominees
listed below under “Election of Directors” 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, 2017. 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. Brandon and Moïse will vote
your proxy on such matters in 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.
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 20, 2017.
Important Notice of Internet Availability. The proxy statement and the Company’s 2016 Annual
Report on Form 10-K are available to the public for viewing under the Investor Relations section under
the SEC Filings tab of the Company’s website https://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 2016 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 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. Alternatively, any stockholders sharing an address
and currently receiving multiple copies of the proxy materials may request that a single copy of the proxy
materials be provided their shared address.
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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 11 members and divided into three
classes. Directors of the Company are generally elected to serve for a three-year term. The terms are
staggered in order 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
Robert M. Moïse, CPA
David L. Morrow
Jerold L. Rexroad
Claudius E. Watts IV
Class II
W. Scott Brandon
Jeffery L. Deal, M.D.
Michael P. Leddy
Thompson E. Penney
Class III
Robert G. Clawson, Jr
Gary M. Griffin
Daniel H. Isaac, Jr.
At the Meeting, stockholders will elect three nominees as Class III directors to serve a three-year
term, expiring at the 2020 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 three 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. Clawson, Griffin and Isaac as Class
III directors.
One of the Company’s current Class III directors – G. Manly Eubank – will not stand for re-
election. His term as a director will expire at the Meeting.
If you submit a proxy but do not specify how you would like it to be voted, Messrs. Brandon
and Moïse will vote your proxy to elect Messrs. Clawson, Griffin and Isaac. If any of these nominees are
unable or fails to accept nomination or election (which we do not anticipate), Messrs. Brandon and Moïse
will vote instead for a replacement 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 age, the period they
have served as a director or executive officer, their business experience for at least the past five years, the
names of other publicly-held companies where they currently serve as a director or served as a director
during the past five years, and additional information about the 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.
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Robert G. Clawson, Jr., 74, has served as a member of the Company’s Board of Directors 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 University 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 experience in founding a successful law practice and his extensive legal experience.
Gary M. Griffin, 62, a native of Greer, South Carolina, served as a director of Greer Bancshares
Incorporated and Greer State Bank (collectively, “Greer”) from 1992 until March 2017 when they were
acquired by the Company and the Bank. Under the definitive agreement governing the Company’s
acquisition of Greer, the Company agreed to appoint Mr. Griffin as a Class III director and nominate
him for re-election at the Meeting. During his tenure as a Greer director, Mr. Griffin served two terms
as Chairman of the Board of Directors. He is a graduate of Furman University and has served as
Vice-President and part owner of Mutual Home Stores, a group of retail home furnishings stores in the
upstate region of South Carolina, where he has over 40 years of work experience in all aspects of the
business. Mr. Griffin is a past president of the Greer Lions Club. He has served as a board member and
treasurer of Greer Community Ministries, which provides a Meals on Wheels program in the region. He
also served as a board member of The Greer Relief and Resources Agency. Mr. Griffin’s qualification to
serve on the Company’s Board of Directors is primarily attributed to his previous experience serving as
a director of Greer, as well as his successful business experience in the upstate region of South Carolina.
Daniel H. Isaac, Jr., 65, has served as a member of the Company’s Board of Directors since
2016 and has served as a member of the Board of Directors of the Company’s wholly-owned subsidiary,
CresCom Bank, since 2001. Mr. Isaac is founder and co-owner of A&I Fire and Water Restoration. He
holds a Bachelor of Science degree from The Citadel in Charleston, South Carolina. Mr. Isaac has been
involved in numerous local and state organizations. He previously served as Chairman of the Myrtle Beach
Chamber of Commerce and the South Carolina Department of Transportation. Mr. Isaac’s qualification
to serve on the Company’s Board of Directors is attributable primarily to his experience of founding a
successful business and his involvement in many leadership positions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR”
EACH OF THE NOMINEES LISTED IN THIS PROXY STATEMENT.
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 age, the period they have served as a director or executive officer, their business
experience for at least the past five years, the names of other publicly-held companies where they currently
serve as a director or served as a director during the past five years, and additional information about the
specific experience, qualifications, attributes, or skills that led to the board’s conclusion that such person
should serve as a director for the Company.
W. Scott Brandon, 53, 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
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advertising agency. He is also owner of Intellistrand, an internet 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 advertising agency. 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 Advertising 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 Charleston Metro Chamber of Commerce, the Myrtle Beach Area Recovery
Council and the Myrtle Beach Regional Economic Development Corporation and is a member of the
Board of Trustees for Brookgreen Gardens. 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 Administration
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. 62, has served as a member of the Company’s Board of Directors since
1996. Dr. Deal is an anthropologist and physician and served as Director of Health Studies for Water
Missions International, a non-profit non-governmental organization 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 Surgery, 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 relative to the challenges and opportunities facing small businesses and
healthcare professionals within the Company’s market areas.
Michael P. Leddy, 73, has served as a member of the Company’s Board of Directors since 2013
and as a Director of Crescent Mortgage Company since 2004. Prior to joining the Company’s 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. He holds a Bachelor 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.
Robert M. Moïse, 68, has served as a member of the Company’s Board of Directors since 1996.
Mr. Moïse is a partner with WebsterRogers LLP in Charleston, South Carolina. 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 President of the Coastal Council BSA and is a
member of the Coastal Boys Council Board. He is a member of the American Institute of Certified Public
Accountants, having served on their national Tax Practice Responsibilities Committee and is a member
of the South Carolina Association of Certified Public Accountants. Mr. Moïse served as Chairman of the
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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 his 40 years of financial
expertise and 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, 66, 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 a graduate of
Clemson University with a Bachelor of Science degree and has more than 42 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
Clemson University Board of Visitors, a member of the Board of Directors and 1st Vice Chairman for the
S.C. Bankers Association (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, a past member of the Board of Directors of Leadership
South Carolina and a past member of the Board of Directors for the South Carolina Museum Foundation.
His years of experience in financial institution 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.
Thompson E. “Thom” Penney, 66, 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 United States. With more than 300 personnel throughout eight Southeastern offices,
he is responsible for overall firm management, organizational vision, successful integration of professional
services, marketing, and operations of the firm. Mr. Penney has more than 42 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, he has
received the Joseph P. Riley Leadership Award from the Charleston Metro Chamber 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.
Jerold L. Rexroad, 56, has served as the Company’s President and Chief Executive Officer since
2012 and as a director since 2012. Mr. Rexroad also serves as Executive Chairman of the Board of the Bank
and Executive 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,
7
Mitchell and Co., a predecessor to the international accounting firm KPMG LLP, and is a Certified Public
Accountant. 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. 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, enhance
his ability to serve on the Company’s Board of Directors. These roles have required industry expertise
combined with operational and global management expertise.
Claudius E. “Bud” Watts IV, 55, 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 focused 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 investment in, and, currently serves on the Board of Directors of, CommScope
(NASDAQ: COMM), where he has served as Director since 2011. 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, Freescale Semiconductor, 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 Managing 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 operations 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. His qualifications as a member of
the Board of Directors is attributed to his business expertise with public companies.
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, 56, 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 Corporation. Mr. Gehman, a Certified Public
Accountant with over 14 years of experience 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, 54, 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 Company and assisting in the founding of
8
Crescent 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 an
executive board member of the Wall College Board of Visitors at Coastal Carolina University. He is a
graduate of Coastal Carolina University (Wall College Alumnus of the Year in 2003) and The Graduate
School of Banking at Louisiana State University.
Fowler Williams, 42, has served as President, as well as a Director of Crescent Mortgage Company
since 2011. In 2016, Mr. Williams was promoted to CEO and President of Crescent Mortgage Company. In
his 17 years at Crescent Mortgage Company, Mr. Williams has previously worked as National Sales Manager
and Executive Vice President over Sales and Operations. Mr. Williams holds the highest designation in
the mortgage industry as a Certified Mortgage Banker (CMB). Mr. Williams has served as Chairman
of the Mortgage Action Alliance (MAA), the grassroots policy, advocacy, and lobbying network for the
real estate finance industry. Mr. Williams also has been named 2015-2016 Chairman of the Community
Bank and Credit Union Network (CBCUN) for the Mortgage Bankers Association where he serves on
the Independent Mortgage Bankers Executive Counsel and the Regulatory Compliance Committee.
Mr. Williams also has been named to the Customer Advisory Board of Freddie Mac, both the QM and
TRID regulatory implementation committees for the MBA, and has twice been named to the forty most
influential mortgage professionals under 40 by National Mortgage Professional magazine.
Family and Business Relationships. No director has a family relationship with any other director or
executive officer of the Company.
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9
PROPOSAL II – 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, 2017, subject to the ratification
of the appointment by the Company’s stockholders. Representatives of Elliott Davis Decosimo, LLC are
expected to attend the Meeting to respond to appropriate questions and to make a statement if they so
desire. Although stockholder ratification 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, 2017.
Board Leadership Structure and Role in Risk Oversight
CORPORATE GOVERNANCE
The Board of Directors is focused on the Company’s corporate governance practices and values
independent board oversight as an essential component of strong corporate performance to enhance
stockholder value. The Board of Directors’ commitment to independent 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. G. Manly Eubank, a director of the Company since 1996 and a long-time
resident of the Company’s primary market area, has served as Chairman of the Board of Directors since
2015. Effective upon Mr. Eubank’s retirement from the Board of Directors at the Meeting, Claudius
E. “Bud” Watts IV will serve as Chairman of the Board of Directors. 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 independent 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 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 individually. 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 Directors believes that its role is one of oversight, recognizing that management is responsible
for executing the Company’s risk management policies.
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At each regular meeting, the Board of Directors’ standing agenda requires reports from the Chief
Financial Officer and other executive officers, who collectively are responsible 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 Directors’ 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 findings. 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 supports this approach.
The Company recognizes that different board leadership structures may be appropriate 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 Compensation 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
independence 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 meets the standards of NASDAQ
Rule 5605(a)(2). The Board of Directors has also concluded 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).
The Board of Directors has determined that Messrs. Brandon, Clawson, Deal, Eubank, Isaac,
Leddy, Moïse, Penney and Watts 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
During 2016, the Board of Directors held eight regular and special meetings. Each of the
current directors attended at least 75% of the aggregate of such board meetings and meetings of each
committee on which they served for the periods during which they served. 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. All of the Company’s directors attended the 2016 Annual Meeting
of Stockholders.
The Board of Directors has standing Audit, Compensation/Benefits and Corporate Governance/
Nominating committees, each of which is described in more detail below. The Board of Directors
previously also had an Executive and a Finance and Capital Allocation Committee; however, in May 2016,
the Executive and the Finance and Capital Allocation Committees were dissolved, but the Board may
reconstitute the Executive Committee should the need arise.
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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, Deal, Isaac, Leddy and Watts each of whom is a non-management director.
The Audit Committee met five times during the 2016 fiscal year.
The Audit Committee’s review includes a detailed discussion with the independent 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 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 issuing 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 registered 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 and revised December 16, 2015. A copy of the Audit Committee Charter may be found under
the Investor Relations section under the Governance Documents tab of the Company’s website,
https://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.
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The Audit Committee reviewed and discussed with management the audited financial statements.
The Audit Committee also discussed with its independent registered public accounting firm those matters
required to be discussed by the independent registered 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 recommended 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, 2016 for filing with the SEC.
The report of the Audit Committee is included herein at the direction of its members, Messrs.
Moïse, Deal, Isaac, Leddy and Watts.
Independent Certified Public Accountants
Elliott Davis Decosimo, LLC was the Company’s independent registered public accounting firm
during the fiscal years ended December 31, 2016 and 2015 and provided Audit and Audit-related services.
For the fiscal years ended December 31, 2016 and 2015, 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, 2016 and 2015:
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Audit Fees
Audit-Related Fees
Total
Year Ended
December 31, 2016
Year Ended
December 31, 2015
$
$
238,495
8,150
246,645
$
$
239,100
64,180
303,280
Audit Fees. This category includes the aggregate fees billed for professional services rendered by
the Company’s independent registered public accounting firm during the 2016 and 2015 fiscal years for the
audit of the Company’s annual financial statements, internal financial reporting controls under FDICIA,
HUD audits, annual reports on Form 10-K, and quarterly reports on Form 10-Q.
Audit-Related Fees. For 2016, audit-related fees consisted of services rendered in connection with
the filing of SEC Forms to the S-4 and the audit procedures performed in connection with the Company’s
acquisition of Congaree Bancshares, Inc. For 2015, audit-related fees consisted of services rendered in
connection with the filing of SEC Forms S-8, S-3, and S-4.
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, Leddy, Moise, Penney and
Watts. The Corporate Governance/ Nominating Committee met three times during the 2016 fiscal year.
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Potential director candidates may come to the attention of the Corporate Governance/
Nominating Committee through current members of the Board of Directors, stockholders, or other
persons. In evaluating such recommendations, the Corporate Governance/Nominating Committee uses
the qualifications and standards discussed below and seeks to achieve a balance of knowledge, experience,
and capability on the Board of Directors. The Company does not pay a third party to assist in identifying
and evaluating potential director candidates.
The Corporate Governance/Nominating Committee recommends to the Board of Directors
criteria for the selection of new directors, evaluates the qualifications and independence of potential
candidates for directors, including any nominees submitted by stockholders, in accordance with the
provisions of the Company’s certificate of incorporation and bylaws, and recommends to the Board of
Directors a slate of nominees for election by the stockholders at the annual meeting of stockholders.
The Corporate Governance/Nominating Committee is also responsible for recommending to the Board
of Directors any nominees to be considered to fill a vacancy or a newly created directorship resulting
from any increase in the authorized number of directors. When considering a person to be recommended
for nomination as a director, the Corporate Governance/Nominating Committee considers, among other
factors, 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. Each
director must represent the interests of our stockholders.
Any stockholder may nominate persons for election to the Board of Directors by complying
with the procedures set forth in our bylaws, which require that timely written notice be provided to
the Secretary of the Company in advance of the meeting of stockholders at which directors are to be
elected. To be timely, such notice must be delivered or received not less than 90 days prior to the date
of the meeting; provided, that if less than 100 days’ notice or prior disclosure of the date of the meeting
is given or made to stockholders, such notice must be received not later than the close of business on
the 10th day following the day on which such notice was given or made to stockholders. Each notice must
set forth: (i) all information relating to such person that is required to be disclosed in solicitations of
proxies for the election of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (including such person’s written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder
giving notice of (x) the name and address, as they appear on the Company’s books, of such stockholder
and (y) the class and number of shares of the Company’s capital stock that are beneficially owned by
such stockholder. The officer of the Company or other person presiding at the meeting may determine
that a nomination was not made in accordance with the foregoing procedure and disregard the defective
nomination.
The Corporate Governance/Nominating Committee annually reviews the adequacy of, and the
Company’s compliance with, the corporate governance principals of the Company and recommends
any proposed changes to the Board of Directors for approval. The Corporate Governance/Nominating
Committee also administers the annual self-evaluation process for the Board of Directors and each of its
committees.
The Corporate Governance/Nominating Committee functions are set forth in its charter, which was
adopted on April 24, 2013 and revised on June 18, 2014. A copy of the Corporate Governance/Nominating
Charter may be found under the Investor Relations section under the Governance Documents tab of the
Company’s website, https://www.haveanicebank.com.
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Compensation/Benefits Committee
The Compensation/Benefits Committee is responsible for evaluating the performance of the
Company’s principal officers and employees and determining the compensation and benefits to be paid
to such persons. The Compensation/Benefits Committee is composed of five members: Messrs. Penney,
Clawson, Deal, Isaac and Leddy. The Compensation/Benefits Committee met seven times during the 2016
fiscal year.
The Compensation/Benefits Committee is authorized to (i) review and approve annually
the corporate goals and objectives relevant to the compensation of the chief executive officers of the
Company and the Bank, (ii) conduct an annual evaluation of the performance of the Chief Executive
Officer of the Company, and (iii) annually review and establish the base salary and incentive bonus levels
and payments to the Chief Executive Officer and all other executive officers of the Company and the
Bank. The Compensation/Benefits Committee is also responsible for administering the Corporation’s
incentive plans, including equity-based incentive plans, and for reviewing and granting equity awards to
all eligible employees. The Compensation/Benefits Committee may delegate to one or more officers of
the Company who are also directors the authority to designate officers and employees of the Company
or its subsidiaries to receive equity awards and to determine the number of such awards to be granted
to them; provided, that such delegation shall include the total number of equity awards that may be
granted under such authority and that no officer may be delegated the power to designate himself or
herself the recipient of such awards. In addition, the Compensation/Benefits Committee may engage
compensation consultants or other advisors as it deems appropriate to assist it in performing its duties
and responsibilities.
In determining the compensation for executive officers, the Compensation/Benefits Committee’s
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/Benefits Committee believes that its executive officers’ level
of compensation is reasonable based upon the Company’s corporate goals and objectives, the business
plan of the Bank, normal and customary levels of compensation within the banking industry taking into
consideration geographic and competitive factors, the Bank’s asset quality, capital level, operations and
profitability and the duties performed and responsibilities held by the officer.
The Compensation/Benefits Committee functions are set forth in its charter, which was adopted
on April 24, 2013 and revised on February 17, 2016. A copy of the Compensation/Benefits Committee
Charter may be found under the Investor Relations section under the Governance Documents section of
the Corporate Information tab of the Company’s website, https://www.haveanicebank.com.
Finance and Capital Allocation Committee
The Board of Directors previously had a Finance and Capital Allocation Committee, which
was responsible for reviewing the Company’s financial results and accounting policies. The Finance and
Capital Allocation Committee was composed of seven members: Messrs. Brandon, Leddy, Moïse, Morrow,
Rexroad, Rosen and Watts. The Finance and Capital Allocation Committee met two times during the 2016
fiscal year.
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Stockholder Communications
The Board of Directors has 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.
16
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
During 2016, non-employee directors of the Company received a retainer fee of $8,000 paid in
cash and 618 shares of the Company’s common stock. Those directors not employed by a subsidiary of the
Company also received $500 for each committee meeting attended. The Chairman of the Company’s Board
of Directors received an annual fee of $51,500, paid monthly, and 618 shares of the Company’s common
stock. Additionally, the Chairmen of the Company’s Audit, Governance/Nominating and Compensation/
Benefits each received a fee of $5,000 per year while the Board Loan Committee Chairman received
$2,500 per year.
As directors of CresCom Bank, Messrs. Brandon, Clawson, Deal, Moïse, Penney and Watts
received $1,250 per meeting. As a director of Crescent Mortgage Company, Mr. Clawson received $1,250
per meeting, and Mr. Leddy, who serves as Vice Chairman of Crescent Mortgage Company, received
an annual retainer of $25,000 for his services on Crescent Mortgage Company’s Board of Directors. As
directors of Carolina Services Corporation, Mr. Edward L. Proctor, Mr. Donald B. Shackelford, and
Mrs. Mary E. Eaddy received $1,000 per meeting.
DIRECTOR COMPENSATION TABLE
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Director Name
Howell V. Bellamy, Jr.(2)
W. Scott Brandon
Robert G. Clawson, Jr.
Jeffery L. Deal, M.D.
G. Manly Eubank
Daniel H. Isaac, Jr
Michael P. Leddy
Robert M. Moïse, CPA
Thompson E. Penney
Benedict P. Rosen(2)
Claudius E. Watts IV
Bonum S. Wilson, Jr (2)
Fees Earned or
Paid in
Cash(1)
Stock
Awards
Total
$
$
$
$
$
$
$
$
$
$
$
$
3,000
35,250
53,250
35,250
51,500
38,950
56,500
43,250
42,900
21,000
$
$
$
$
$
$
$
$
—
11,989
11,989
11,989
11,989
11,989
11,989
11,989
11,989
—
38,250
$
11,989
11,000
—
$
$
$
$
$
$
$
$
$
$
$
$
3,000
47,239
65,239
47,239
63,489
50,939
68,489
55,239
54,889
21,000
50,239
11,000
(1) Includes fees, if any, for serving on boards of the Company’s subsidiaries.
(2) Retired from the Board of Directors with the 2015 annual meeting.
17
Security Ownership of Certain Beneficial Owners and Management
The following table shows how many shares of common stock are owned by the directors and
director nominees, 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 17, 2017. Unless otherwise indicated,
the mailing address for each beneficial owner is care of Carolina Financial Corporation, 288 Meeting
Street, Charleston, SC 29401.
Directors and Named Executive Officers
Age
Number of
Shares
Beneficially Owned(1)(2)(3)(4)
Percent of
Beneficial
Ownership(5)
W. Scott Brandon
Robert G. Clawson, Jr.
Jeffery L. Deal, M.D.
G. Manly Eubank
M.J. Huggins, III
Daniel H. Isaac, Jr.
Michael P. Leddy
David L. Morrow
Robert M. Moïse, CPA
Thompson E. Penney
Jerold L. Rexroad
Claudius E. Watts IV
All Directors and Executive Officers as a Group of
(14 persons)
53
74
62
80
54
65
73
66
68
66
56
55
169,067
150,725
59,945
234,382
83,598
49,733
92,607
198,597
138,158
30,235
411,880
69,181
1.17%
1.05%
0.42%
1.63%
0.58%
0.35%
0.64%
1.38%
0.96%
0.21%
2.84%
0.48%
1,688,108
12.23%
(1)
(2)
(3)
(4)
(5)
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.
Includes unvested shares of restricted stock, as to which the directors and executive officers have full voting privileges. The
shares are as follows: Mr. Huggins, 14,400 shares; Mr. Morrow, 14,400 shares; Mr. Rexroad, 36,585 shares.
Includes shares that may be acquired within 60 days of March 17, 2017 by exercising vested stock options or unvested stock
options that will vest within 60 days of March 17, 2017. The shares are as follows: Mr. Huggins, 18,094 shares; Mr. Morrow,
38,744 shares; Mr. Rexroad, 101,833 shares.
Excludes shares of common stock owned by or for the benefit of family members of the following director, who disclaims
beneficial ownership of such shares: Mr. Clawson, 13,272 shares
For each individual, this percentage is determined by assuming the named person exercises all options which he has the right
to acquire within 60 days, but that no other person exercise any options. For the directors and executive officers as a group,
this percentage is determined by assuming that each director and executive officer exercises all options which he has the right
to acquire within 60 days but that no other persons exercises any options. The calculations are based on 14,399,652 shares of
common stock outstanding at March 17, 2017.
18
Executive Compensation
Summary Compensation Table
The following table shows the compensation the Company paid for the years ended December 31,
2016 and 2015 to its named executive officers during such periods.
Name and Principal Position
Year
Salary
Bonus
Stock
Awards(1)
Option
Awards(2)
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
Jerold L. Rexroad(1)
Director, President and Chief Executive Officer;
Chairman of Crescent Mortgage Company;
Chairman of CresCom Bank
Director, President and Chief Executive Officer;
Chairman and CEO of Crescent Mortgage
Company; Chairman and Senior Executive
Vice President 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
2016 $463,500
—
$224,650
$111,870
$418,598
$52,487
$1,271,105
2015 $450,000
—
$160,046
$ 87,205
$371,250
$52,316
$1,120,817
2016 $386,250
—
$ 70,037
$ 51,036
$271,582
$48,057
$ 826,962
2015 $375,000
—
$ 68,786
$ 49, 833
$222,773
$59,402
$ 775,794
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2016 $262,250
—
$ 30,861
$ 19,820
$184,676
$87,382
$ 584,989
2015 $255,000
—
$ 27,763
$ 19,933
$139,915
$84,291
$ 526,902
(1)
(2)
All 2016 and 2015 stock awards were issued from the Company’s 2013 Equity Incentive Plan . In 2016, 9,598 shares of
restricted stock and 2,799 restricted stock units were awarded to Mr. Rexroad, 3,110 restricted stock units were awarded
to Mr. Morrow and 1,087 restricted stock units were awarded to Mr. Huggins. In addition, Mr. Rexroad, Mr. Morrow and
Mr. Huggins were awarded 750, 625, and 425 shares of common stock, respectively, for meeting certain performance
thresholds related to their 2016 incentive compensation plans, which are discussed below. In 2015, 7,554 shares of restricted
stock and 4,320 restricted stock units were awarded to Mr. Rexroad, 4,320 restricted stock units were awarded to Mr. Morrow
and 1,296 restricted stock units were awarded to Mr. Huggins. In addition, Mr. Rexroad, Mr. Morrow and Mr. Huggins
were awarded 1,359, 1,132, and 770 shares of common stock, respectively, for meeting certain performance thresholds
related to their 2015 incentive compensation plans 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 closing market price per share for the day prior to the
date such award was granted, computed in accordance with Financial Accounting Standards Board Accounting Standards
Codification Topic 718.
All 2016 and 2015 options awards were issued from the 2013 Equity Incentive Plan. In 2016, Mr. Rexroad was awarded
20,613 options, Mr. Morrow was awarded 9,229 options and Mr. Huggins was awarded 3,584 options. Options granted to
Mr. Rexroad, Mr. Morrow and Mr. Huggins in 2016 vest over three years ratably. In 2015, Mr. Rexroad was awarded
24,590 options, Mr. Morrow was awarded 14,052 options and Mr. Huggins was awarded 5,621 options. Options granted to
Mr. Rexroad, Mr. Morrow and Mr. Huggins in 2015 vest over three years ratably. 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 closing market price per share for the
day prior to the date such award was granted, computed in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718.
19
(3)
(4)
Amounts awarded for each year under one or more of the Company’s cash incentive plans and related bonuses were paid
in the subsequent fiscal year. Bonus compensation for Messrs. Rexroad, Morrow and Huggins was determined by the
Compensation/Benefits Committee of the Board for meeting certain performance thresholds related to their 2016 incentive
compensation plans.
All other compensation includes the Company’s contributions under the 401(k) Plan, dividends on unvested restricted
stock and car allowances paid by the Company to the named executives. In addition, life insurance premiums and other
payments received in connection with LifeComp life insurance arrangements were paid for Mr. Huggins in 2016 and 2015.
Under the agreements with Mr. Huggins, the Bank pays, among other things, the premiums on each policy and additional
amounts to the executive to cover federal income taxes owed with respect to his deemed bonuses under the LifeComp
Agreement. In 2016 and 2015, the Company allocated $24,000 in life insurance premiums to Mr. Huggins. In 2016 and 2015,
the Company also paid $16,000 in other compensation to Mr. Huggins to cover federal income taxes owed with respect to the
deemed bonuses. See “Benefit Plans – Elite LifeComp Program” below for additional information regarding the LifeComp
Agreements between the Bank and Mr. Huggins.
Outstanding Equity Awards at Fiscal Year-End
The following table summarized outstanding equity awards to our named executive officers at
December 31, 2016:
Stock Options
Stock Awards
Equity Incentive
Plan Awards:
Number of Shares
underlying
Unexercised
Options
Exercisable
Unexercisable
Option
Exercise
Price
Option
Expiration
Date
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares that
have not
Vested
Equity
Incentive
Plan Awards:
Market of
Payout Value
of Unearned
Shares
that have
not Vested
78,902
8,197
—
—
26,299
4,684
—
6,576
6,576
1,874
—
—
16,394
16,613
4,000
—
9,368
9,229
—
—
3,747
3,584
$
$
$
$
$
$
$
$
$
$
$
4.17
4/25/2023
33,834
$ 1,041,749
11.58
1/21/2025
16.56
16.83
1/20/2026
3/16/2026
4.17
4/25/2023
14,400
$
443,376
11.58
1/21/2025
16.56
4.17
4/25/2023
14,400
$
443,376
8.54
4/25/2023
11.58
1/21/2025
16.56
Name
Jerold L. Rexroad
David L. Morrow
M.J. Huggins, III
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 Mr. Huggins
20
also participates in the Elite LifeComp program. Under the employment agreements, Mr. Rexroad
currently receives a base salary of $463,500, Mr. Morrow currently receives a base salary of $386,250, and
Mr. Huggins currently receives a base salary of $262,650.
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, 2016, Carolina Financial Corporation and/or the Bank would be required
to pay, in the aggregate, (i) approximately $5.9 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 $6.1 million in the event the executive’s employment terminated without cause
upon an Event of Termination that does not include a Change in Control.
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Incentive Compensation Plan
For fiscal years 2016 and 2015, the Board of Directors implemented an incentive compensation plan
for Messrs. Rexroad, Morrow, and Huggins, which was tied to achieving certain earnings and operational
targets. Upon completion of the financial results for 2016 and 2015, the Compensation Committee reviewed
the attainment of the targets included in the incentive plan and approved the incentive compensation cash
bonuses paid to executives. For 2016, Mr. Rexroad earned of $418,598, Mr. Morrow earned $271,582, and
Mr. Huggins earned $184,676. For 2015, Mr. Rexroad earned $371,250, Mr. Morrow earned $222,773,
and Mr. Huggins earned $139,915. The level of compensation approved by the Compensation Committee
was based upon the level of the attainment of targeted objectives as well as the attainment of personal
objectives. The objectives included in the bonus plan included:
•
Operating earnings, as defined in the plan, at Carolina Financial Corporation and
CresCom Bank,
• Nonperforming assets to total assets ratios,
• Growth in checking balances and growth in the number of checking accounts,
• Loan growth metrics, excluding loans acquired in acquisitions, and
• Operating Bank ROAA goals.
21
Elite LifeComp Program
A life insurance policy has been purchased on the life of Mr. Huggins under split-dollar life
insurance arrangements between the executive and the Bank in order to provide the executive with target
retirement and death benefits following termination of employment. Under the arrangement, referred to
as the LifeComp Agreement, the executive is named as the policy owner, but the Bank pays the premiums
on his policy for a period of years and is entitled to recover a death benefit of $1.8 million under the policy
as key man insurance. Until the executive attains an age specified in such executive’s agreement, the Bank
annually pays the 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 additional 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 agreement with
Mr. Huggins, the termination date is February 27, 2022. Until such termination date, the addendum requires
the Company, or its successor, 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 the executive would owe with respect to the deemed bonuses and
interest owed (but not paid) on the loans. Beginning at retirement age, 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 Mr. Huggins is $75,000. In addition, the 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. Life insurance premium and other payments. Under the agreement
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 both 2016 and 2015, the Company allocated $24,000 in life insurance premium to Mr. Huggins and
$16,000 in other compensation to cover federal income taxes owed with respect to the deemed bonuses.
Certain Relationships and Related 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
22
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for similar transactions with non-affiliates, subject to limited exceptions. Loans to all directors, executive
officers, and their associates totaled $14.0 million at December 31, 2016, which was 8.6% of the Company’s
stockholders’ 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, 2016. All loans to directors and officers were performing in accordance with their
terms at December 31, 2016.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation/Benefits Committee during 2016 were Messrs. Penney,
Clawson, Deal, Isaac and Leddy. No member of the Compensation/Benefits Committee was at any time
during 2016 or at any other time an officer or employee of the Company or any of its subsidiaries, and
no member of the Compensation/Benefits Committee had any relationship with the Company requiring
disclosure under Item 404 of Regulation S-K. No executive officer of the Company has served on the board
of directors or compensation committee of any other entity that has or has had one or more executive
officers who served as a member of the Compensation/Benefits Committee during 2016.
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, amendments thereto, 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 following
exceptions:
• Mr. Morrow filed one late form 4 to update his indirect ownership based on shares and;
• Mr. Rexroad filed one late form 4 to update his indirect d ownership based on shares acquired.
Code of Ethics
The Company expects all of its employees to conduct themselves honestly and ethically. 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 employees 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 section of the Corporate Information tab of the
Company’s website, http://www.haveanicebank.com.
Stockholder Proposals for the 2018 Annual Meeting of Stockholders
Stockholders interested in submitting a proposal for inclusion in the proxy statement for the
Company’s 2018 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 20, 2017. 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 Company’s proxy materials.
23
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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, 2016
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 number 001-10897
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
57-1039637
(I.R.S. Employer Identification No.)
288 Meeting Street, Charleston,
South Carolina
(Address of principal executive offices)
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 ˛
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 ˛
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 ˛ 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). Yes ˛ No ®
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. ˛
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ® No ˛
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 $204,560,906 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 ®
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $.01 par value per share
Outstanding at March 10, 2017
14,399,652 shares
(Do not check if a smaller reporting company)
Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on April 26,
2017, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
DOCUMENTS INCORPORATED BY REFERENCE
2016 Form 10-K
TABLE OF CONTENTS
PART 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
4
29
48
48
49
49
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ITEM 6.
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 54
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . 93
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . 165
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
PART III
ITEM 10. DIRECTOR, EXECUTIVE OFFICER AND CORPORATE GOVERNANCE. . . . 167
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . 167
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 167
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 167
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . 167
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
operation, 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 anticipated 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, includ-
ing, 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;
changes in interest rates, or changes in regulatory environment 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;
1
2016 Form 10-K •
our ability to attract and retain key personnel;
•
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 initia-
tives affecting the banking, mortgage 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
(the “FASB”);
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;
•
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 growth rates of the markets in which we compete;
2
•
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 state-
ments and determining option exercise prices and stock-based compensation.
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 statements 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
2016 Form 10-K PART I
ITEM 1. BUSINESS
General Overview
Carolina Financial Corporation is a Delaware corporation and a bank holding company regis-
tered under the Bank Holding Company Act of 1956, as amended. Our primary business is to serve as the
holding company for CresCom Bank, a South Carolina state-chartered commercial bank with 30 branches
located throughout the Carolinas, in addition to a loan production office in Greenville, South Carolina.
CresCom Bank is primarily engaged in the business of accepting demand deposits and savings deposits
insured by the Federal Deposit Insurance Corporation (the “FDIC”), and providing commercial, con-
sumer and mortgage loans to the general public. CresCom Bank operates Crescent Mortgage Company,
a wholly-owned subsidiary of CresCom Bank based in Atlanta, Georgia, as a wholesale and correspondent
mortgage lender for community banks in the Southeastern United States. Crescent Mortgage Company
lends in 46 states and has partnered with community banks, credit unions, and mortgage brokers. CresCom
Bank is also the holding company for Carolina Services Corporation of Charleston, a Delaware financial
services company that provides financial processing services to, and otherwise supports the operations
of, CresCom Bank and Crescent Mortgage Company. Except where the context otherwise requires, the
“Company”, “we”, “us” and “our” refer to Carolina Financial Corporation and its consolidated subsidiar-
ies and the “Bank” refers to CresCom Bank.
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 June 11, 2016, we completed our acquisition of Congaree Bancshares, Inc. (“Congaree”), the
holding company for Congaree State Bank, pursuant to the Agreement and Plan of Merger, dated as of
January 5, 2016. Under the terms of the merger, the Company issued 508,910 shares of its common stock,
assumed and immediately redeemed $1.6 million in preferred stock and paid $5.7 million in cash to Con-
garee shareholders. In the transaction, the Company acquired two banking locations, $104.2 million in
total assets, and $89.3 million in deposits.
On November 8, 2016, we announced the signing of a definitive agreement pursuant to which
Carolina Financial Corporation will acquire Greer Bancshares Incorporated (“Greer”) in a cash and
stock transaction with a total value as of the date of announcement of approximately $45.1 million. Sub-
ject to the terms and conditions of the agreement, each share of Greer common stock will be converted
into the right to receive one of the following: (i) $18.00 in cash, (ii) 0.782 shares of Company common
stock, or (iii) a combination of cash and Company common stock, subject to the limitation that, excluding
any shares held by Greer shareholders who exercise their dissenters’ rights, the total merger consid-
eration shall be prorated to 10% cash consideration and 90% stock consideration. The transaction is
anticipated to close by the end of the first quarter of 2017, subject to customary closing conditions. As
of December 31, 2016, Greer had total loans of $208.7 million, total assets of $378.4 million and total
deposits of $295.1 million.
As of December 31, 2016, we had total assets of $1.7 billion, total deposits of $1.3 billion, and total
stockholders’ equity of $163.2 million.
Our main office is located at 288 Meeting Street, Charleston, South Carolina 29401.
4
Our Market Area
Our primary market areas are the Coastal, Midlands, and Upstate regions of South Carolina,
including the Charleston (Charleston, Dorchester and Berkeley Counties), Myrtle Beach (Horry and
Georgetown Counties), Columbia (Lexington and Richland Counties), and Greenville (Greenville County)
market areas, Wilmington (New Hanover) and the surrounding southeastern coastal region of North
Carolina (Bladen, Brunswick, and Columbus Counties). We currently operate 30 branches: eight in the
Charleston market, eight in the Myrtle Beach market, two in the Columbia market, one in the Greenville
market, one in another South Carolina market, two in the Wilmington market, and 8 in southeastern North
Carolina. We also operate a loan production office in Greenville, South Carolina. Greer has four banking
locations, all in the Greenville market area, and a loan production office in Clemson, South Carolina.
The following table presents, for each of our above-described primary market areas, the number
of branches of CresCom Bank in the market area, the approximate amount of deposits with CresCom
Bank in the market area as of June 30, 2016 and our approximate deposit market share in market area at
June 30, 2016 (the latest date for which such data is available). This table does not include deposits held in
our Heath Springs, South Carolina branch.
Market Name
Charleston, South Carolina
Myrtle Beach, South Carolina
Columbia, South Carolina
Greenville, South Carolina
Wilmington, North Carolina
Southeastern North Carolina
Number of
Branches
8
8
2
1
2
8
Deposits
(in millions)
Market
Share
$
$
$
$
$
$
567.0
342.3
87.5
49.0
4.0
212.4
4.6%
4.7%
0.5%
0.5%
0.1%
7.8%
Our markets in or near the Charleston, South Carolina 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 Corps, U.S. Air Force, U.S. Army and U.S. Coast Guard.
Data obtained through SNL Financial LC projects population growth in the Charleston-North Charles-
ton MSA of 8.7% from 2017 to 2022 as compared to a projection for national population growth of 3.8%
during the same time period.
The Myrtle Beach area, also known as the Grand Strand, is a 60-mile stretch of beaches extend-
ing south from the South Carolina/North Carolina state line to Pawley’s Island and is consistently ranked
as one of the top vacation destinations in the country. According to data published by the Myrtle Beach
Area Chamber of Commerce, Myrtle Beach hosted an estimated 16.1 million visitors in 2013, the most
recent year for which such data is available, representing 5.9% growth from 2012. Accordingly, the econ-
omy of the region is dominated by the tourism and retail industries. The Myrtle Beach-Conway-North
Myrtle Beach MSA is also home to Coastal Carolina University in Conway and Webster University in
Myrtle Beach. Data obtained through SNL Financial LC projects population growth in the Myrtle Beach-
Conway-North Myrtle Beach MSA of 9.8% from 2017 to 2022.
5
2016 Form 10-K
Our Wilmington and other markets in southeastern North Carolina are contiguous to South
Carolina and the Grand Strand. Wilmington has a diversified economy and is a major resort area and a
center for light manufacturing. The city also serves as the retail and medical center for the region. Com-
panies in the Wilmington area produce fiber optic cables for the communications industry, aircraft engine
parts, pharmaceuticals, nuclear fuel components and various textile products. According to data published
by the Wilmington Chamber of Commerce, major employers in the area include General Electric, PPD,
Inc., and Corning, Inc. The area also benefits from the presence of the University of North Carolina-
Wilmington, which also a major employer for the market. Data obtained through SNL Financial LC proj-
ects population growth in the Wilmington MSA of 7.1% from 2017 to 2022.
In August 2015, we established a branch in the Greenville, South Carolina market. In addition, we
operate in Greenville through a loan production office. Greer also has four banking locations in the Green-
ville market area. Greenville is located in the “Upstate” of South Carolina, which we believe represents a
growing, business-friendly environment. Major industries in the Upstate include the automobile industry,
which is concentrated primarily along the corridor between Greenville and Spartanburg around the BMW
manufacturing facility in Greer, South Carolina. The Greenville Health System and Bon Secours St. Francis
Health System represent the healthcare and pharmaceuticals industry in the area. The Upstate is also home
to a large amount of private sector and university-based research including research and development facil-
ities for Michelin, Fuji and General Electric and research centers to support the automotive, life sciences,
plastics and photonics industries. The Upstate also benefits from being an academic center and is home to
collegiate and university education facilities such as Clemson University, Furman University, Presbyterian
College, University of South Carolina-Upstate, Anderson University, Lander University, Bob Jones Uni-
versity, Wofford College and Converse College, among others. Data obtained through SNL Financial LC
projects population growth in the Greenville-Andersen-Mauldin MSA of 6.1% from 2017 to 2022.
Through our acquisition of Congaree in June 2016, we acquired two branches in the Colum-
bia, South Carolina market. Columbia, the state capital and largest city in South Carolina, is located
within Richland County in the center of the state between the Upstate region and the coastal cities of
Charleston and Myrtle Beach. Columbia’s central location has contributed greatly to its commercial ap-
peal and growth, and the city benefits from a diverse economy composed of advanced manufacturing,
healthcare, technology, shared services, logistics, and energy. The largest employers in the Columbia mar-
ket area include the U.S. Army’s Fort Jackson, the University of South Carolina, Palmetto Health Alli-
ance, Blue Cross Blue Shield, and Lexington Medical Center. Data obtained through SNL Financial LC
projects population growth in the Columbia MSA of 5.7% from 2017 to 2022.
Our markets have experienced steady economic and population growth over the past 10 years, and
we expect that the areas, 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, cred-
it unions, savings institutions, mortgage banking firms, consumer finance companies, securities broker-
age 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.
6
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 indus-
try 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 processes for larger loans, documentation examination, and fol-
low-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 $1.5 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 un-
impaired 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, 2016, the maximum amount we
could lend to one borrower is $27.0 million. However, our internal lending limit without board approval at
December 31, 2016 is $20.2 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.
7
2016 Form 10-K 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 80%.
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, generally 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 personal 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 gen-
erally 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.
8
We attempt to reduce risk associated with construction and development loans by obtaining per-
sonal guarantees and by keeping the maximum loan-to-value ratio at or below 65%-80% of the lesser 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, includ-
ing 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 ex-
ceeding 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 primary markets have provided limited opportunities for us 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 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 effec-
tively manage this line of lending business, 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. The Company’s policy currently limits the syndicated loan portfolio
not to exceed 75% of the Bank’s Tier 1 regulatory capital.
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 under-
written 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 typ-
ically 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 associated with Crescent Mortgage Com-
pany 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
9
2016 Form 10-K as well as the sale and servicing of a variety of residential mortgage loan products. Crescent Mortgage Com-
pany lends in 46 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
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 Com-
pany 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 originations
combined with maintaining a profitable margin upon ultimate sale. 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 on a portion of loans we sell, 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 pay-
ments, 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, mod-
ifying 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 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, busi-
nesses, associations, organizations and governmental authorities. We believe that our branch infrastruc-
ture will assist us in obtaining deposits from local customers in the future. Our retail deposits represented
$1.1 billion, or 88.7% of total deposits at December 31, 2016.
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
10
of the reduced disclosure and other requirements that are otherwise applicable generally to public com-
panies. These provisions include:
•
•
•
•
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 advantage
of the extended transition period provided in the Securities Act for complying with new or revised account-
ing standards. 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 account-
ing 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, which would be December 2019. At this time,
we expect to remain an “emerging growth company” for the foreseeable future.
Employees
As of March 10, 2017, we had 441 total employees, including 418 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 legisla-
tion may have on our business and earnings in the future.
11
2016 Form 10-K 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 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 equals our average total con-
solidated 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 governmen-
tal authorities such as the Financial Stability Oversight Council and the Consumer Financial Protection
Bureau, (the “CFPB”), an independent regulatory authority housed within the Board of Governors of the
Federal Reserve System (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) trans-
ferred from the Federal Reserve and other federal regulators to the CFPB on that date. The Dodd-Frank
12
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 depos-
itory institutions with $10 billion or less in assets for compliance 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 regulations 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.
13
2016 Form 10-K 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 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. 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 applies to all national and state banks and savings associations regardless of size and bank holding
companies and savings and loan holding companies with more than $1 billion in total consolidated assets.
We collectively refer to these organizations herein as “covered” banking organizations. 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 new and higher risk-based capital and leverage requirements than those previ-
ously in place. Specifically, the following minimum capital requirements apply to us:
•
•
•
•
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 former 4% requirement);
a total risk-based capital ratio of 8% (unchanged from the former requirements); and
a leverage ratio of 4%; and
Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 cap-
ital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, con-
sists 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 con-
solidated 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. Cumulative perpetual preferred stock, former-
ly includable in Tier 1 capital is now included only in Tier 2 capital. 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 rules provided for a one-time opportunity at the end of the first quarter
14
of 2015 for covered banking organization to opt-out of much of this treatment of AOCI. We made this
opt-out election and, as a result, will retain the pre-existing treatment for AOCI.
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 cap-
ital 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-based assets.
In general, the rule has had the effect of increasing capital requirements by increasing the risk
weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or
more or in nonaccrual status, 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.
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 hold-
ing 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.” Proprietary trading includes the purchase or sale of 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. In December 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.
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 compen-
sation 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.
15
2016 Form 10-K The covered funds that a banking entity may not sponsor or hold an 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 acquisi-
tion 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.
As issued on December 10, 2013, the regulation 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
total consolidated assets of less than $15 billion or by a mutual holding company, and that the bank hold-
ing 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 required
to be and is registered as 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 report-
ing requirements of 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;
16
•
•
•
•
•
•
•
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;
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 ter-
minate any of these activities or to terminate its ownership or control of any subsidiary when it has reason-
able 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 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 de-
pository 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. Un-
der the Federal Deposit Insurance Corporate Improvement Act of 1991, or FDICIA, to avoid receivership
17
2016 Form 10-K of its insured depository institution subsidiary, a bank holding company is required to guarantee the com-
pliance 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 be-
came undercapitalized, 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
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 in-
stitution 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 hold-
ing 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 “qualify-
ing” 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
18
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 div-
idends 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.
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
per depositor, per ownership category, 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;
19
2016 Form 10-K •
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.
These agencies, and the federal and state laws applicable to the Bank’s operations, extensively
regulate various aspects of our banking business, including among other things, permissible types and
amounts of loans, investments, and other activities capital adequacy, branching, interest rates on loans and
deposits, maintenance of reserves and the safety and soundness of our banking practices. 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 ap-
propriate. 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.
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:
20
•
•
•
•
•
Well Capitalized — The institution exceeds the required minimum level for each relevant
capital measure. A well capitalized institution (i) has a total risk-based capital ratio of 10% or
greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a Common Equity
Tier 1 risk-based capital ratio of 6.5% or greater, (iv) has a leverage capital ratio of 5% or
greater, and (v) 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 (i) has a total risk-based cap-
ital ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater, (iii) has
a Common Equity Tier 1 risk-based capital ratio of 4.5% or greater, and (iv) has a leverage
capital ratio of 4% or greater.
Undercapitalized — The institution fails to meet the required minimum level for any relevant
capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less
than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a Common Equity
Tier 1 risk-based capital ratio of less than 4.5%, or (iv) has a leverage capital ratio of less
than 4%.
Significantly Undercapitalized — The institution is significantly below the required minimum
level for any relevant capital measure. A significantly undercapitalized institution (i) has a
total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less
than 4%, (iii) has a Common Equity Tier 1 risk-based capital ratio of less than 3%, or (iv) has
a leverage capital ratio of less than 3%.
Critically Undercapitalized — The institution fails to meet a critical capital level set by the
appropriate federal banking agency. A critically undercapitalized institution has a ratio of
tangible equity to total assets that is equal to or less than 2%.
If the applicable federal regulator determines, after notice and an opportunity for hearing, that
the institution is in an unsafe or unsound condition, the regulator is authorized to reclassify the institution
to the next lower capital
If the FDIC determines, after notice and an opportunity for hearing, that a 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 compa-
rable 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 lim-
itations (an undercapitalized institution may not acquire another institution, establish additional branch
21
2016 Form 10-K offices or engage in any new line of business unless determined by the appropriate federal banking agency
to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the pro-
posed 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, 2016, the Bank was deemed to be “well capitalized.”
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 au-
dit 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
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.
22
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 ap-
propriate. 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, 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.
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
by a bank to any affiliate, including its holding company, and on a bank’s investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties collateralized by the securities
or obligations of any affiliates of the bank. Section 23A also applies to derivative transactions, repurchase
agreements and securities lending and borrowing transactions that cause a bank to have credit exposure to
an affiliate. 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.
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 subsidiar-
ies as affiliates.
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
23
2016 Form 10-K made on substantially the same terms, including interest rates and collateral requirements, as those pre-
vailing 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 SCB-
FI, 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
constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend
under certain circumstances.
Branching. Federal legislation permits out-of-state acquisitions by bank holding companies, inter-
state branching by banks, and interstate merging by banks. The Dodd-Frank Act removed previous state
law restrictions on de novo interstate branching in states such as South Carolina. This change effectively
permits out-of-state banks to open de novo branches in states where the laws of such state where 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
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 mod-
erate 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 May 15, 2015, the as of date of the most recent examination, the Bank received a “satisfactory”
CRA rating.
24
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 ade-
quacy. 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.
Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and reg-
ulations 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 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;
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 collected
by collection agencies; and
the rules and regulations of the various federal agencies charged with the responsibility of
implementing 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, 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.
the Truth in Savings Act and Regulation DD, which requires depositary institutions
to provide certain consumer disclosures.
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
25
2016 Form 10-K 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 reason-
able 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 sub-
stantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank reg-
ulators 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 that have not
complied with these requirements.
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 func-
tion. 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
businesses filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network for transac-
tions 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 institu-
tions 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 Unit-
ed 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.
Privacy, Data Security and Credit Reporting. Financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may prevent financial
26
institutions from sharing nonpublic personal financial information with nonaffiliated third parties except
under narrow circumstances, such as the processing of transactions requested by the consumer. Addition-
ally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s
policy not to disclose any personal information unless required by law.
Recent cyber attacks against banks and other institutions that resulted in unauthorized access to
confidential customer information have prompted the Federal banking agencies to issue several warnings
and extensive guidance on cyber security. The agencies are likely to devote more resources to this part of
their safety and soundness examination than they have in the past.
In addition, pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)
and the implementing regulations of the federal banking agencies and Federal Trade Commission, the Bank
is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity
theft. The Bank has implemented an identity theft red flags program designed to meet the requirements
of the FACT Act and the joint final rules. Additionally, the FACT Act amends the Fair Credit Reporting
Act to generally prohibit a person from using information received from an affiliate to make a solicitation
for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity
and a reasonable and simple method to opt out of the making of such solicitations.
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. In December 2016, the Federal
Open Market Committee raised the target range for the federal funds rate by 25 basis points and indicated
the potential for further gradual increases in the federal funds rate depending on the economic outlook.
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 opportu-
nity 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.
As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based
on its average total assets minus its average tangible equity. The Bank’s assessment rates are currently
based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). Insti-
tutions classified as higher risk pay assessments at higher rates than institutions that pose a lower risk. In
addition, following the fourth consecutive quarter (and any applicable phase-in period) where an institu-
tion’s total consolidated assets equal or exceed $10 billion, the FDIC will use a performance score and
a loss-severity score to calculate an initial assessment rate. In calculating these scores, the FDIC uses an
27
2016 Form 10-K institution’s capital level and regulatory supervisory ratings and certain financial measures to assess an
institution’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the
ability to make discretionary adjustments to the total score based upon significant risk factors that are not
adequately captured in the calculations. In addition to ordinary assessments described above, the FDIC
has the ability to impose special assessments in certain instances.
The FDIC’s deposit insurance fund is currently underfunded, and the FDIC has raised assessment
rates and imposed special assessments on certain institutions during recent years to raise funds. Under the
Dodd-Frank Act, the minimum designated reserve ratio for the deposit insurance fund is 1.35% of the esti-
mated total amount of insured deposits. In October 2010, the FDIC adopted a restoration plan to ensure that
the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least
semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase
or decrease assessment rates, following notice-and-comment rulemaking if required.
In addition, 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 quar-
terly assessment for the fourth quarter of 2013 equaled 1.085 basis points for each $100 of average con-
solidated 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. The amount
assessed on individual institutions is in addition to the amount, if any, paid for deposit insurance accord-
ing to the FDIC’s risk-related assessment rate schedules. Assessment rates may be adjusted quarterly to
reflect changes in the assessment base.
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. The Dodd-Frank Act requires the federal bank regulators and the SEC
to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified
regulated entities having at least $1 billion in total assets that encourage inappropriate risks by providing
an executive officer, employee, director or principal stockholder with excessive compensation, fees, or
benefits that could lead to a material financial loss to the entity. In addition, these regulators must estab-
lish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation
arrangements. The agencies proposed such regulations in April 2011, which reflected the guidance pre-
viously issued in June 2010 by the bank regulators. However, the 2011 proposal was replaced with a new
proposal in May 2016, which makes explicit that the involvement of risk management and control person-
nel includes not only compliance, risk management and internal audit, but also legal, human resources,
accounting, financial reporting and finance roles responsible for identifying, measuring, monitoring or
controlling risk-taking. A final rule has not yet been adopted.
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
28
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 corpo-
rate governance, including active and effective oversight by the organization’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the
incentive compensation arrangements of banking organizations, such as the Company, that are not “large,
complex banking organizations.” These reviews will be tailored to each organization based on the scope
and complexity of the organization’s activities and the prevalence of incentive compensation arrange-
ments. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies
will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability
to make acquisitions and take other actions. Enforcement actions may be taken against a banking orga-
nization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt
and effective measures to correct the deficiencies.
ITEM 1A. RISK FACTORS
Our business is subject to certain risks, including those described below. If any of the events de-
scribed 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 con-
tained 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
Our business may be adversely affected by economic conditions.
Our financial performance generally, and in particular the ability of borrowers to pay interest on
and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand
for loans and other products and services we offer, is highly dependent upon the business environment in
the primary markets where we operate and in the U.S. as a whole. Unfavorable or uncertain economic and
market conditions can be caused by declines in economic growth, business activity or investor or business
confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation
or interest rates; high unemployment, natural disasters; or a combination of these or other factors. While
economic conditions in our local markets in South Carolina and North Carolina have improved since the
end of the economic recession, economic growth has been slow and uneven, unemployment remains rel-
atively high, and concerns still exist over the federal deficit, government spending, and economic risks. A
return of recessionary conditions or negative developments in the domestic and international credit mar-
kets may significantly affect the markets in which we do business, the value of our loans and investments,
and our ongoing operations, costs and profitability. Declines in real estate value and sales volumes and
high unemployment levels may result in higher than expected loan delinquencies and a decline in demand
for our products and services. These negative events may cause us to incur losses and may adversely affect
our capital, liquidity, and financial condition.
29
2016 Form 10-K Furthermore, the Federal Reserve, in an attempt to help the overall economy, has among other
things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury
and mortgage-backed securities. The Federal Reserve increased the target range for the federal funds rate
by 25 basis points in December 2016 and indicated the potential for further gradual increases in the target
rate depending on the economic outlook. As the federal funds rate increases, market interest rates will
likely rise, which may negatively impact the housing markets and the U.S. economic recovery.
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 2009-2016, there was a period of historically low interest rates; however, the low
interest rate environment likely will not continue indefinitely. 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 continu-
ation of programs currently offered by the government sponsored entities, or GSEs, and other institutional
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 signifi-
cantly 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 others have provided
options to reform the GSEs, but the results of any such reform, and their impact on us, are difficult to pre-
dict. 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 institu-
tional and non-institutional investors. Our ability to remain eligible to originate and securitize government
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.
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
30
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 eco-
nomic 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, 2016, the Company had 81 individual securities available-for-sale in an un-
realized loss position. 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
trust preferred securities classified as available-for-sale securities that had OTTI expense recorded in
prior years, but did not incur OTTI expense during fiscal 2016 2015, or 2014. Management believes that
there are no other securities other-than-temporarily impaired at December 31, 2016. 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.
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 ad-
ditional 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 in-
crease 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 the FASB Accounting Standards Codification
(“ASC”) Topic 740, Income Taxes, which requires the use of the asset and liability method. In accordance
31
2016 Form 10-K 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 strategies and future taxable
income. At December 31, 2016, our net deferred tax asset was $8.3 million. We recognized the deferred tax
asset because management 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, 2016, we had $8.3 million of allowable net deferred tax assets for regulatory cap-
ital 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 $2.2 billion of mortgage loans owned by third parties as of
December 31, 2016. 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
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 liabil-
ity 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.
32
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, in-
cluding 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 chan-
nels, 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 per-
form 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.
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.
33
2016 Form 10-K 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 differ-
ent 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 de-
teriorate in value during the time the credit is extended. A weakening of the real estate market in our pri-
mary 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 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, 2016, we had approximately $445.4 million in loans outstanding to borrowers
whereby the collateral securing the loan was commercial real estate, representing approximately 37.1%
of our total loans outstanding as of that date. Approximately 33.4%, or $148.9 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
34
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, 2016, commercial business loans comprised 13.9% 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 se-
curing 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 uncol-
lectible 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
have experienced a significant decline in these markets in recent years and, if these economic drivers ex-
perience 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 gen-
eral economic conditions in the markets in which we operate negatively impact this important customer
35
2016 Form 10-K sector, our results of operations and financial condition and the value of our common stock may be ad-
versely affected. Moreover, a portion of these loans have been made by us in recent years and the borrow-
ers 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 con-
trol 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 opportunities 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
36
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 finan-
cial 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 depos-
its 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 collateral 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 accept-
able interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to
support future operations, our revenues may not increase proportionally to cover these costs. In addition,
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 may fluctuate based 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 mort-
gage banking aggregators, aggressive competition, the housing market recovery, the status and financial
condition of the FNMA and FHLMC, potential changes in FNMA and FHLMC lending guidelines and
programs, proposed changes in the FHA lending requirements, extensive regulatory changes and liquidity.
Should these factors significantly impact production of mortgages, it is likely that the Company’s earnings
would be adversely affected.
Our mortgage subsidiary’s operations are 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
37
2016 Form 10-K 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, 2016, Crescent Mortgage Company serviced approximately $2.2 billion of
loans. At that date, our mortgage loan servicing rights were recorded as an asset with a carrying value
of approximately $15.0 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 fac-
tors 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.
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.
38
Fowler C. Williams, Crescent Mortgage Company’s President and Chief Executive Officer,
has extensive knowledge and long-standing ties with the mortgage industry. If we lose the services of
Mr. Williams, he would be difficult to replace and our wholesale mortgage company results 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 CFPB, 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 agen-
cies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until after
implementation. 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
39
2016 Form 10-K capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may
also require us to invest significant management attention and resources to evaluate and make any chang-
es 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 inter-
pretations would have on us, these changes could be materially adverse to investors in our common stock.
The final Basel III capital rules generally require insured depository institutions and their holding companies to
hold more capital, which could adversely affect our financial condition and operations.
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 ap-
proaches banking organizations, and on January 1, 2015 for other covered banking organizations, includ-
ing 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 2015. 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 per-
petual 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
adjustments 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 ex-
pect 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 were increased to (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 re-
quired. 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 discretionary bonuses. These limitations will establish a maximum percentage of eligible retained
40
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.
In addition to the higher required capital ratios and the new deductions and adjustments, the final
rules increased 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 previous requirement of 100%. There are also new
risk weights for unsettled transactions and derivatives. We also are required to hold capital against short-
term commitments that are not unconditionally cancelable; currently, there are no capital requirements
currently for these off-balance sheet assets.
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 cap-
ital calculations, items included or deducted in calculating regulatory capital or additional capital conser-
vation 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
41
2016 Form 10-K 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
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 Compa-
ny 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 re-
sults. 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 reporting 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 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 ex-
penses and a diversion of management’s time and attention from revenue-generating activities to compli-
ance 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, our higher market capitalization, 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
42
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.
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
exacerbated 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 effect 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
possible 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 informa-
tion 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 generally accepted accounting principles (“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.
43
2016 Form 10-K 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
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 ven-
dors and other service providers or other third parties, including as a result of cyberattacks, 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, hack-
ers, 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 telecommunica-
tion 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,
cyberattacks.
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 cyberattacks or information security breaches that could result in the unauthorized release, gather-
ing, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential
44
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 could also be sources of operational and information security risk to us, including
from breakdowns or failures of their own systems or capacity constraints.
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 assur-
ance 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 enhance-
ment 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 protec-
tive 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 cyberattacks
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, includ-
ing lending practices, corporate governance and acquisitions, and from actions taken by government regu-
lators 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.
45
2016 Form 10-K 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 reve-
nues of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in
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, which will be in December of 2019.
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 stock-
holders 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
46
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.
If we determine, for any reason, that we need to raise capital, our board generally has the author-
ity, 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 stockhold-
ers 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 1,000,000 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.
47
2016 Form 10-K ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our main office is located at 288 Meeting Street, Charleston, South Carolina 29401-1575. In
addition, the Bank operates 29 additional branches located in South Carolina and southeastern coastal
region of North 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,
and Carolina Services Corporation of Charleston, with Carolina Services Corporation’s operations
conducted from our West Ashley location. 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
Address
991 38th Avenue N.
City, State, Zip
Myrtle Beach, South Carolina
Lease/Own
Own
29577
North Myrtle Beach
700 Main Street
North Myrtle Beach, South
Land Lease
Office
Conway Office
2069 Highway 501 East
Carolina 29582
Conway, South Carolina
29526
Land Lease
Garden City Office
2636 South Highway 17
Garden City, South Carolina
Own
Socastee Office
Business
4506 Highway 707
29576
Myrtle Beach, South Carolina
Own
29588
Meeting Street Office 288 Meeting Street
Charleston, South Carolina
Lease
29401-1575
West Ashley Office
884 Orleans Road
Charleston, South Carolina
Own
29407-4937
James Island Office
430 Folly Road
Charleston, South Carolina
Own
29412-2641
Summerville Office
200 North Cedar Street
Summerville, South Carolina
Own
29483-6404
Mount Pleasant Office 1492 Stuart Engals Blvd
Mt. Pleasant, South Carolina
Own
29464
North Charleston
8485 Dorchester Road
N. Charleston, South
Own
Office
Litchfield/Pawleys
Island Office
St. George Office
13021 Ocean Highway
Carolina 29420-7307
Pawleys Island, South
Carolina 29585
Own
5561 Memorial Boulevard
St. George, South Carolina
Own
29477
Cane Bay Office
1274 State Road, Suite 4C
Summerville, South Carolina
Lease
29483
Conway 16th Ave
1230 16th Avenue
Conway, South Carolina
Lease
Office
29526
48
Little River Office
1180 Highway 17
Little River, South Carolina
Own
Heath Springs Office 202 N. Main Steet
29566
Heath Springs, South
Carolina 29058
Own
Greenville Office
3695 E. North Street
Greenville, South Carolina
Own
West Columbia Office 2023 Sunset Boulevard
29615
West Columbia, South
Carolina 29169
Lease
Cayce Office
Whiteville Office
1219 Knox Abbot Drive
110 N J K Powell Blvd
Cayce, South Carolina 29033 Own
Own
Whiteville, North Carolina
28472
Chadbourn Office
111 Strawberry Blvd
Chadbourn, North Carolina
Own
28431
Tabor City Office
105 Hickman Rd
Tabor City, North Carolina
Lease
Elizabethtown Office 306 S. Poplar Street
28463
Elizabethtown, North
Carolina 28337
Own
Shallotte Office
200 Smith Avenue
Shallotte, North Carolina
Own
Sunset Beach Office
7290-17 Beach Drive SW
28459
Ocean Isle Beach, North
Carolina 28469
Lease
Holden Beach Office 3178 Holden Beach Road SW Supply, North Carolina 28462 Lease
Southport Supply Rd
4945 Southport-Supply Road Southport, North Carolina
Land Lease
Office
Wilmington
Downtown Office
Wilmington Oleander
Office
48461
115 N. 3rd Street
Wilmington, North Carolina
Lease
28401
4710 Oleander Drive
Wilmington, North Carolina
Own
28401
Crescent Mortgage
5901 Peachtree Dunwoody
Atlanta, Georgia 30328
Lease
Company
Road NE
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.
49
2016 Form 10-K
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
As of March 10, 2017, there were approximately 1,175 stockholders of record of our common
stock. Our common stock was listed on the NASDAQ Capital Market on July 1, 2014. The following table
sets forth the high and low sales price information as reported by NASDAQ for each quarter of 2015 and
2016, and the dividends per share declared on our common stock in each quarter of 2015 and 2016. All in-
formation has been adjusted for any stock splits and stock dividends effected during the periods presented.
2016
Quarter Ended December 31, 2016
Quarter Ended September 30, 2016
Quarter Ended June 30, 2016
Quarter Ended March 31, 2016
2015
Quarter Ended December 31, 2015
Quarter Ended September 30, 2015
Quarter Ended June 30, 2015
Quarter Ended March 31, 2015
High
Low
Dividends
$
$
$
$
31.30
22.59
19.55
18.85
18.96
17.44
15.33
12.08
$
$
21.82
18.17
16.01
15.26
14.49
12.57
10.79
10.83
0.04
0.03
0.03
0.03
0.03
0.03
0.03
0.03
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. Future dividends 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.
Total Return Performance
Carolina Financial Corp.
Nasdaq Composite Index
SNL Southeast Bank Index
400
350
300
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
07/01/14
12/31/14
08/30/15
12/31/15
06/30/16
12/31/16
Prepared by Global Market Intelligence, a division of S&P Global Inc.
50
Index
Carolina Financial Corp.
Nasdaq Composite Index
SNL Southeast Bank Index
Period Ending
07/01/14 12/31/14 06/30/15 12/31/15 06/30/16 12/31/16
374.16
124.41
142.20
217.37
114.28
107.12
139.71
106.84
108.82
100.00
100.00
100.00
166.22
113.14
109.91
226.40
111.24
92.61
The performance graph above compares the Company’s cumulative total return from July 1, 2014
through December 31, 2016 with the NASDAQ Composite and the SNL Southeast Bank Index, a banking
industry performance index for the Southeastern United States. The Company was listed on the NASDAQ
exchange on July 1, 2014. Returns are shown on a total return basis, assuming the reinvestment of divi-
dends and a beginning stock index value of $100 per share. The value of the Company’s common stock as
shown in the graph is based on published prices for the transactions in the Company’s stock.
Equity Compensation Plan Information
The following table provides information as of December 31, 2016, with respect to shares of our
common stock that may be issued under existing equity compensation plans.
Number of securities
to be issued upon
exercise 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
compensation
plans
238,180 $
—
238,180 $
8.69
—
8.69
371,345
—
371.345
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
ITEM 6. SELECTED FINANCIAL DATA
Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
For The Years Ended December 31,
2016
2015
2014
2013
2012
(In thousands)
37,656
5,602
32,054
—
49,604
6,604
43,000
—
43,000
27,679
49,199
21,480
7,060
14,420
32,054
21,148
41,443
11,759
3,448
8,311
32,948
5,718
27,230
(860)
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
$
$
60,914
8,753
52,161
—
52,161
29,297
56,040
25,418
7,848
17,570
51
2016 Form 10-K
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
$1,683,736
14,591
335,352
—
11,072
31,569
1,167,578
10,688
1,258,260
203,000
38,465
163,190
2016
2015
At December 31,
2014
(In thousands)
1,199,017
10,694
251,717
25,544
5,405
40,912
768,122
9,035
964,190
57,800
61,740
93,700
1,409,669
16,421
306,474
17,053
9,919
41,774
912,582
10,141
1,031,528
120,000
103,465
139,859
2013
2012
881,584
34,176
167,535
24,554
4,103
36,897
535,221
8,091
697,581
10,300
74,540
82,227
888,724
11,340
148,407
9,166
6,413
144,849
501,691
9,520
653,247
82,482
64,840
67,514
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 assets
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 total 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 of
nonperforming loans
For The Years Ended December 31,
2016
2015
2014
2013
2012
(Dollars in thousands)
$1,537,654
1,035,115
1,197,688
151,285
1,303,402
827,787
1,012,659
101,896
990,773
613,144
777,622
88,474
889,851
509,455
696,784
76,322
837,066
495,889
641,085
54,002
11.61%
1.14%
93.56%
86.43%
9.84%
3.63%
3.71%
(0.05)%
0.58%
0.40%
0.48%
14.15%
1.11%
91.92%
81.74%
7.82%
3.59%
3.68%
(0.13)%
0.72%
0.47%
0.47%
9.39%
0.84%
91.43%
78.85%
8.93%
3.54%
3.62%
(0.15)%
0.73%
0.47%
0.31%
22.04%
1.89%
91.38%
73.12%
8.58%
3.35%
3.41%
0.11%
3.24%
1.97%
2.04%
31.25%
2.02%
92.29%
77.35%
6.45%
3.60%
3.61%
1.05%
4.29%
2.42%
2.98%
0.91%
1.10%
1.16%
1.49%
1.86%
190.01%
235.73%
371.20%
73.03%
62.43%
52
Per Share Data:
Book value (end of period)
Basic earnings (loss)
Diluted earnings (loss)
At or For The Years Ended December 31,
2016
2015
2014
2013
2012
$
13.23
1.45
1.42
11.92
1.51
1.48
10.02
0.89
0.87
8.91
1.83
1.77
7.33
1.83
1.83
Average common shares - basic
Average common shares - diluted
12,080,128
12,352,246
9,537,358
9,718,356
9,314,048
9,507,425
9,218,952
9,500,987
9,211,162
9,211,162
Note: Book value is calculated using outstanding 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 $119.4 million and $64.1 million in acquired loans at December
31, 2016 and 2015, respectively.
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.
On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split repre-
senting a 20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.
All share, earnings per share, and per share data have been retroactively adjusted to reflect these
stock splits for all periods presented in accordance with generally accepted accounting principles.
53
2016 Form 10-K
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
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 and Carolina Service Corpo-
ration of Charleston as wholly-owned subsidiaries of CresCom Bank. Except where the context otherwise
requires, the “Company”, “we”, “us” and “our” refer to Carolina Financial Corporation and its consoli-
dated subsidiaries and the “Bank” refers to 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 Car-
olina. Crescent Mortgage Company, headquartered in Atlanta, Georgia, is a wholesale mortgage company
that provides mortgage banking services in 46 states and partners with community banks, credit unions and
mortgage brokers.
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 mortgage banking income 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.
54
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
The Company reported net income available to common stockholders of approximately $17.6
million, or $1.42 per diluted share, for the year ended December 31, 2016, compared to $14.4 million, or
$1.48 per diluted share for the year ended December 31, 2015. Our 2016 results include pretax merger
related expenses of $3.2 million. Return on average assets and return on average equity were 1.14% and
11.61%, respectively. The decrease in earnings per share year over year was primarily a result of the
following:
•
•
•
Public offering completed in December 2015 where the Company issued 2,262,296 shares of
its common stock for net proceeds of approximately $32.1 million;
Issuance of 508,910 shares of common stock in connection with the acquisition of Congaree
Bancshares, Inc. (“Congaree”) during the second quarter of 2016; and
Merger related expenses of $3.2 million incurred for the year ended December 31, 2016 pri-
marily as a result of the acquisition of Congaree
Operating earnings, which exclude certain non-operating income and expenses, for the year end-
ed December 31, 2016 increased 34.7% to $20.2 million, or $1.64 per diluted share, from $15.0 million, or
$1.54 per diluted share, for the year ended December 31, 2015. Operating return on average assets and
return on average equity were 1.31% and 13.35%, respectively.
Total assets increased $274.1 million to $1.7 billion at December 31, 2016 compared to $1.4 billion
at December 31, 2015. The largest components of our total assets are loans receivable, net and securities
which were $1.2 billion and $335.4 million, respectively at December 31, 2016. Comparatively, our loans
receivable and securities totaled $912.6 million and $323.5 million, respectively, at December 31, 2015.
At December 31, 2016 loans held for sale were $31.6 million compared to $41.8 million as of December
31, 2015. The increase in assets from period to period is primarily attributable to the organic loan growth
experienced as well as loans acquired in the acquisition of Congaree.
Asset quality remained steady, with nonperforming assets to total assets of 0.40% as of December
31, 2016 compared to 0.47% as of December 31, 2015. Nonperforming loans were $5.6 million as of
December 31, 2016 as compared to $4.3 million at December 31, 2015.
The allowance for loan losses was $10.7 million, or 0.91% of total loans (1.05% of total non-
acquired loans), at December 31, 2016, compared to $10.1 million, or 1.10% of total loans (1.18% of total
non-acquired loans) at December 31, 2015. The Company experienced net recoveries of $547,000 during
2016 compared to net recoveries of $1.1 million during 2015. No provision expense was recorded during
2016 or 2015 due to the sustained low level of nonperforming assets (“NPAs”) as well as the net recoveries
experienced.
55
2016 Form 10-K Total deposits increased $226.7 million, or 22.0%, from December 31, 2015, to $1.3 billion at
December 31, 2016 due primarily to organic growth in core deposits as well as deposits acquired in the
Congaree acquisition. Core deposits increased $178.4 million during 2016 and comprised 60.6% of total
deposits at December 31, 2016.
At December 31, 2016, the Bank’s capital ratios exceeded “well capitalized” levels under applica-
ble law. Stockholders’ equity totaled $163.2 million as of December 31, 2016, compared to $139.9 million
at December 31, 2015. The Company reported book value per common share of $13.23 and $11.92 as of
December 31, 2016 and December 31, 2015, respectively. Tangible book value per common share was
$12.59 and $11.66 as of December 31, 2016 and December 31, 2015, respectively.
Operating earnings and related per share measures, as well as core deposits, tangible common
equity and tangible book value per common share are non-GAAP financial measures. For reconciliations
to the most comparable GAAP measures, see “Non-GAAP Financial Measures” below.
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
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 im-
pairment, (“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 conditions or
56
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, 2016 and 2015.
Derivatives. The determination of fair value related to derivatives of the Company requires
significant 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 mortgage banking within noninterest income section
of the consolidated statements of operations. Derivative instruments not related to mortgage banking
activities primarily relate to interest rate swap agreements.
For additional discussion related to the determination of fair value related to derivative instru-
ments, see Note 5 to the consolidated financial statements within Item 8 “Financial Statements and Sup-
plementary Data.”
Mortgage Repurchase Reserve. The establishment of the mortgage repurchases reserves related
to various representations and warranties related to mortgages sold in the secondary market. Manage-
ment’s estimate 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 reserve estimate during the estimated loan life. To the extent that economic con-
ditions and the housing market do not recover or future investor repurchase demand and appeals success
rates differ from past experience, the Company could continue to have increased demands and increased
loss severities on repurchases, causing future additions to the repurchase reserve. Refer to the “Mortgage
Operations” below for additional discussion.
Income Taxes. Income taxes are provided for the tax effects of the transactions reported in our con-
solidated financial statements and consist of taxes currently due plus deferred taxes related to differences
between the tax basis and accounting basis of certain assets and liabilities, including available for sale secu-
rities, allowance for credit losses, write-downs of real estate acquired in settlement of loans, accumulated
depreciation, net operating loss carry forwards, mortgage servicing rights and other intangible assets. The
deferred tax assets and liabilities represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax
assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. A valuation allowance is recorded in situations
where it is “more likely than not” that a deferred tax asset is not realizable. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file
a consolidated federal income tax return for the Company and the Bank. In addition, we evaluate the need
57
2016 Form 10-K for income tax reserves related to uncertain income tax positions but had no such reserves at December
31, 2016 or 2015.
Business Combinations. The Company accounts for its acquisitions under ASC Topic 805, Business
Combinations, which requires the use of the acquisition method of accounting. All identifiable assets ac-
quired, 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 assump-
tions 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 man-
agement 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”).
Non-GAAP Financial Measures
Statements included in this management’s discussion and analysis include non-GAAP financial
measures and should be read along with the accompanying tables which provide a reconciliation of
non-GAAP financial measures to GAAP financial measures. The Company’s management uses these
non-GAAP financial measures, including: (i) operating earnings; (ii) operating earnings per common
share (iii) operating return on average assets, (iv) operating return on average equity, (v) core deposits,
and (vi) tangible book value to evaluate the Company’s financial performance and financial condition.
Management believes that non-GAAP financial measures provide additional useful information
that allows readers to evaluate the ongoing performance of the Company without regard to transactional
activities. Non-GAAP financial measures should not be considered as an alternative to any measure of
performance or financial condition as promulgated under GAAP, and investors should consider the Com-
pany’s performance and financial condition as reported under GAAP and all other relevant information
when assessing the performance or financial condition of the Company. Non-GAAP financial measures
have limitations as analytical tools, and investors should not consider them in isolation or as a substitute
for analysis of the Company’s results or financial condition as reported under GAAP.
58
The following table presents a reconciliation of Non-GAAP performance measures for operating
earnings and corresponding ratios:
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
(In thousands, except share data)
Operating Earnings:
Income before income taxes
Gain on sale of securities
Net loss on extinguishment of debt
Fair value adjustments on interest rate swaps
Merger related costs
Operating earnings before income taxes
Tax expense (1)
Operating earnings (Non-GAAP)
Average equity
Average assets
Operating return on average assets (Non-GAAP)
Operating return on average equity (Non-GAAP)
Weighted average common shares outstanding:
Basic
Diluted
Operating earnings per common share:
Basic (Non-GAAP)
Diluted (Non-GAAP)
As Reported:
Income before income taxes
Tax expense
Net Income
Average equity
Average assets
Return on average assets
Return on average equity
Weighted average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
For the Twelve Months Ended
December 31,
2015
2014
2016
$
25,418
(706)
1,868
(590)
3,245
29,235
9,027
20,208
$
$
151,346
$ 1,537,654
21,480
(1,493)
1,251
1,111
—
22,349
7,346
15,003
101,896
1,303,402
11,759
(1,084)
58
1,170
—
11,903
3,490
8,413
88,474
990,773
1.31%
13.35%
1.15%
14.72%
0.85%
9.51%
12,080,128
12,352,246
9,537,358
9,718,356
9,314,048
9,507,425
$
$
1.67
1.64
$
25,418
7,848
$
17,570
151,346
$
$ 1,537,654
1.14%
11.61%
1.57
1.54
0.90
0.88
21,480
7,060
14,420
101,896
1,303,402
1.11%
14.15%
11,759
3,448
8,311
88,474
990,773
0.84%
9.39%
12,080,128
12,352,246
9,537,358
9,718,356
9,314,048
9,507,425
$
$
1.45
1.42
1.51
1.48
0.89
0.87
(1)
Tax expense is determined using the effective tax rate reflected in the accompanying income
statement for the applicable reporting period.
59
2016 Form 10-K
The following table presents a reconciliation of Non-GAAP performance measures of core depos-
its and tangible book value per share.
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
(In thousands, except share data)
Core deposits:
Noninterest-bearing demand accounts
Interest-bearing demand accounts
Savings accounts
Money market accounts
Total core deposits (Non-GAAP)
Certificates of deposit:
Less than $250,000
$250,000 or more
Total certificates of deposit
Total deposits
Tangible book value per share:
Total stockholders’ equity
Less intangible assets
Tangible common equity (Non-GAAP)
Issued and outstanding shares
Less nonvested restricted stock awards
Period end dilutive shares
Total stockholders equity
Divided by period end dilutive shares
Common book value per share
Tangible common equity (Non-GAAP)
Divided by period end dilutive shares
Tangible common book value per share
(Non-GAAP)
At December 31,
2016
2015
$
229,905
191,851
48,648
292,639
763,043
467,937
27,280
495,217
$ 1,258,260
163,054
158,581
39,147
223,906
584,688
428,067
18,773
446,840
1,031,528
At December 31,
2016
2015
$
$
$
$
$
$
163,190
(7,924 )
155,266
12,548,328
(211,908 )
12,336,420
163,190
12,336,420
13.23
155,266
12,336,420
139,859
(2,961)
136,898
12,023,557
(285,805)
11,737,752
139,859
11,737,752
11.92
136,898
11,737,752
12.59
11.66
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.”
60
Results of Operations
Summary
2016 compared to 2015
The Company reported net income available to common stockholders of approximately $17.6 mil-
lion, or $1.42 per diluted share, for the year ended December 31, 2016, compared to $14.4 million, or $1.48
per diluted share for the year ended December 31, 2015. Our 2016 results include pretax merger related
expenses of $3.2 million. Operating earnings, which exclude certain non-operating income and expenses,
for the year ended December 31, 2016 increased 34.7% to $20.2 million, or $1.64 per diluted share, from
$15.0 million, or $1.54 per diluted share, for the year ended December 31, 2015. Operating earnings and
related per share measures are non-GAAP financial measures. For a reconciliation to the most compared
GAAP measure, see “Non-GAAP Financial Measures”.
2015 compared to 2014
The Company reported net income available to common stockholders of approximately $14.4
million, or $1.48 per diluted share, for the year ended December 31, 2015, compared to $8.3 million, or
$0.87 per diluted share for the year ended December 31, 2014. Our 2014 results include pretax acquisition
related expenses associated with branch acquisitions of $1.4 million.
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.
2016 compared to 2015
For the years ended December 31, 2016 and 2015, our net interest income was $52.2 million
and $43.0 million, respectively. The increase in net interest income is a result of the increase in average
interest-earning assets balances. The increase in average earnings assets for the year ended December
31, 2016 is primarily the result of increased balances of loans receivable. Average loan balances increased
$207.3 million, or 25.0%, from 2015 to 2016.
The growth in average loan balances was primarily the result of the following:
•
Congaree Acquisition – On June 11, 2016, the Company acquired approximately $74.6 million
of loans, net of purchase accounting adjustments, as part of the acquisition of Congaree.
As of December 31, 2016, loans acquired from Congaree totaled $70.1 million.
61
2016 Form 10-K •
•
•
Residential mortgage – 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 in-
creased $66.5 million since December 31, 2015. This growth includes $12.6 million in loans
acquired in the acquisition of Congaree.
Commercial lending – The Company continues to expand its commercial lending team by
hiring additional loan officers in its Charleston and Myrtle Beach markets of South Carolina.
The Company also has opened a branch in the upstate of South Carolina, and two branches in
Wilmington, North Carolina. As a result, gross loans receivable within commercial real estate
increased $103.7 million since December 31, 2015. This growth includes $31.4 million in loans
acquired in the acquisition of Congaree.
Syndicated loans – The Company’s primary markets are generally concentrated in real estate
lending and have provided limited opportunities to develop a Commercial and Industrial
(“C&I”) loan portfolio. However, in order to diversify our lending portfolio, the Company
began a syndicated loan program in 2014 to purchase C&I loans originated in other markets
to retain in the loan portfolio. These loans typically have terms of seven years and generally
are tied to a floating rate index such as LIBOR or prime. To effectively manage this line of
lending business, the Company hired an experienced senior lending executive in 2014 with
relevant experience to lead and manage this area of the loan portfolio and retained a consult-
ing firm that specializes in syndicated loans. Syndicated loans have grown $7.9 million since
December 31, 2015. As of December 31, 2016, the syndicated loan portfolio outstanding was
$91.5 million and is grouped within commercial business loans. The Company’s policy cur-
rently limits the syndicated loan portfolio not to exceed 75% of the Bank’s Tier 1 regulatory
capital. As of December 31, 2016, the Moody’s weighted average credit facility rating of the
syndicated loan portfolio was Ba2, with no credit rated less than B2.
2015 compared to 2014
For the years ended December 31, 2015 and 2014, our net interest income was $43.0 million and
$32.1 million, respectively. The $10.9 million, or 34.1%, increase in net interest income during 2015 was
related to several factors including an increase in average earnings assets balances as well as 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 nonaccrual 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 and securities portfolio. Accordingly,
the increase in average earnings assets for the year ended December 31, 2015, 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 – 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 residen-
tial mortgage portfolio, gross loans receivable within the one-to-four family portfolio have
increased $90.9 million since December 31, 2014. This growth includes the purchase of a
62
•
•
non-conforming residential loan pool during the fourth quarter of 2015 with a balance of
$36.6 million as of December 31, 2015.
Commercial lending – during 2014 and 2015, the Company expanded its commercial lending
team by hiring additional loan officers in its Charleston and Myrtle Beach markets of South
Carolina. The Company also has opened its first branch in the upstate of South Carolina, and
a loan production office in Wilmington, North Carolina. As a result, gross loans receivable
within commercial real estate increased $24.5 million since December 31, 2014.
Syndicated loans – The Charleston and Myrtle Beach markets of South Carolina have pro-
vided 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 syndicat-
ed 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 lending executive in 2014 with relevant experience to lead and manage this area of the
loan portfolio and retained a consulting firm that specializes in syndicated loans. Syndicat-
ed loans have grown $32.9 million since December 31, 2014. As of December 31, 2015, the
syndicated loan portfolio outstanding was $83.1 million and is grouped within commercial
business loans. The Company’s policy currently limits the syndicated loan portfolio not to
exceed 75% of the Bank’s Tier 1 regulatory capital. As of December 31, 2015, the Moody’s
weighted average credit facility rating of the syndicated loan portfolio was Ba2, with no credit
rated less than B2.
The growth in securities is a result of the Company’s continued effort to deploy capital into earn-
ing assets as we grow the balance sheet.
The decrease in rates paid on interest-bearing liabilities is based on the continued historical-
ly low interest rates that have positively impacted our ability to reduce funding cost and an increase in
average balances of checking, savings and money markets, which typically yield less than other forms of
interest-bearing accounts. The increase in the average balance of deposits is primarily due to the deposits
acquired in a branch acquisition completed in December of 2014 where the Company assumed approxi-
mately $152.8 million of checking, savings, and money markets.
Short term borrowings increased period over period as a result of the rise in mortgage produc-
tion as well as the growth in loans and securities during 2015. Syndicated loans as well as collateralized
loan obligations securities, which are typically tied to floating rate indexes, have grown $32.9 million
and $12.9 million, respectively, since December 31, 2014.
The following table sets forth information related to our average balance sheet, average yields on
assets, and average costs of liabilities for the years ended December 31, 2016, 2015 and 2014. 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 periods, 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 capitalized loan costs and fees amortized into interest income on loans.
63
2016 Form 10-K For The Years Ended December 31,
2016
2015
Average
Balance
Interest
Paid/
Earned
Average
Yield/
Rate
Average
Balance
Interest
Paid/
Earned
Average
Yield/
Rate
Average
Balance
(Dollars in thousands)
2014
Interest
Paid/
Earned
Average
Yield/
Rate
Interest-earning assets:
Loans held for sale
$
28,779
1,000
3.47%
38,536
1,472
3.82% 31,563
1,253
Loans receivable (1)
1,035,115
50,137
4.84%
827,787
39,548
4.78% 613,144
30,064
Interest-bearing cash
29,644
75
0.25%
14,362
36
0.25% 22,988
55
Securities available for sale
327,516
9,057
2.73%
286,812
7,621
2.62% 206,977
5,199
Securities held to maturity
Federal Home Loan Bank stock
Other investments
7,089
7,884
2,657
217
374
54
3.06%
4.74%
2.03%
19,513
7,684
3,448
555
328
44
2.84% 24,314
4.27%
1.28%
4,939
1,938
884
158
43
Total interest-earning assets
1,438,684
60,914
4.23% 1,198,142
49,604
4.14% 905,863
37,656
Non-earning assets
98,970
Total assets
$1,537,654
Interest-bearing liabilities:
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
151,704
274,774
44,646
485,942
92,332
77,210
Total interest-bearing liabilities 1,126,608
Noninterest-bearing deposits
240,622
Other liabilities
Stockholders’ equity
19,139
151,285
Total liabilities and
105,260
1,303,402
0.15%
163,982
0.29%
235,283
0.13%
38,303
1.00%
395,131
0.55%
113,968
2.94%
57,380
0.78% 1,004,047
179,960
17,499
101,896
235
808
59
4,870
509
2,272
8,753
84,910
990,773
0.12% 114,867
0.19% 213,149
0.13% 24,617
0.93% 311,246
0.29% 41,324
3.32% 68,620
0.66% 773,823
113,743
14,733
88,474
199
457
50
3,661
331
1,906
6,604
179
473
38
2,793
106
2,013
5,602
3.92%
4.90%
0.24%
2.51%
3.64%
3.20%
2.22%
4.16%
0.16%
0.22%
0.15%
0.90%
0.26%
2.93%
0.72%
Stockholders’ equity
$1,537,654
1,303,402
990,773
Net interest spread
Net interest margin
Net interest margin (tax
equivalent) (2)
Net interest income
3.45%
3.48%
3.44%
3.63%
3.71%
3.59%
3.68%
3.54%
3.62%
52,161
43,000
32,054
(1)
(2)
Average balances of loans include nonaccrual loans.
The tax equivalent net interest margin reflects tax-exempt income on a tax-equivalent basis.
64
2016 compared to 2015
Our net interest margin was 3.63%, and 3.71% on a tax equivalent basis, for the twelve months
ended December 31, 2016 compared to 3.59%, and 3.68% on a tax equivalent basis, for 2015. The increase
in net interest margin during 2016 as compared to the prior year was driven primarily by an increase in
yield on interest-earning assets due to a higher percentage of assets comprised of loans receivable as com-
pared to the prior period. Average loans receivable comprised 71.9% of earnings assets for the year ended
December 31, 2016 compared to 69.1% for the year ended December 31, 2015. Our average interest-
earning assets increased by $240.5 million during 2016 and our interest income increased $11.3 million. As
previously stated, the increase in interest income is primarily related to the increase in loans receivable.
Our interest expense increased $2.1 million during 2016 as compared to the year ended 2015
while our average interest-bearing liabilities increased $122.6 million. The increase in interest expense is
primarily related to the organic growth in average balances of deposits as well as deposits acquired with
the acquisition of Congaree. In addition, the Federal Reserve increased interest rates in December of 2015
which increased the rate paid on our short term borrowings for 2016.
Our net interest spread was 3.45% for the year ended December 31, 2016 as compared to 3.48%
for the same period in 2015. 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 12 basis point increase in
rate on our interest-bearing liabilities offset by the 9 basis point increase on yield of interest-earning assets,
resulted in a 3 basis point decrease in our net interest spread for the 2016 period.
2015 compared to 2014
Our net interest margin was 3.59%, and 3.68% on a tax equivalent basis, for the twelve months
ended December 31, 2015 compared to 3.54%, and 3.62% on a tax equivalent basis, for 2014. The 5 basis
point increase in net interest margin during 2014 as compared to the prior year was driven primarily by the
6 basis point decrease in the contract rate paid on in interest bearing liabilities.
Our average interest-earning assets increased by $292.3 million during 2015 and our interest
income increased $11.9 million. As previously stated, the increase in interest income is primarily related to
the increase in loans receivable and securities during 2015.
Our interest expense increased $1.0 million during 2015 as compared to the year ended 2014
while our average interest-bearing liabilities increased $230.2 million. The increase in interest expense is
primarily related to the growth in average balance of deposits from the branch acquisition completed in
the fourth quarter of 2014 and being outstanding for all of 2015.
Our net interest spread was 3.48% for the year ended December 31, 2015 as compared to 3.44%
for the same period in 2014. 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 6 basis point reduction in
rate on our interest-bearing liabilities offset by the 2 basis point decline on yield of interest-earning assets,
resulted in a 4 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
65
2016 Form 10-K and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the
periods presented.
For The Years Ended December 31,
2016 vs. 2015
2015 vs. 2014
Increase (decrease)
due to
Rate/
Net
Dollar
Increase (decrease)
due to
Volume
Rate Volume Change Volume
Net
Dollar
Rate Volume Change
Rate/
Loans held for sale
Loans receivable, net
Interest-bearing cash
Securities available for sale
Securities held to maturity
FHLB stock
Other investments
Interest income
Demand accounts
Money market accounts
Savings accounts
Certificates of deposit
Short-term borrowed funds
Long-term debt
Interest expense
Net interest income
$
(339)
10,042
39
1,126
(380)
9
(16)
10,481
$
(19)
116
8
910
(119)
584
1,480
Provision for Loan Loss
(99)
684
1
354
15
37
20
1,012
51
274
1
368
241
(293)
642
(34)
(137)
—
(44)
27
(1)
6
(183)
4
(39)
—
(69)
56
75
27
(In thousands)
(472) $
266
10,255
(22)
2,121
(137)
117
19
12,619
10,589
40
1,436
(338)
45
10
11,310
36 $
351
9
1,209
178
366
2,149
9,161
60
43
18
777
211
(373)
736
(58)
(1,040)
2
417
(154)
82
(33)
(784)
(57)
(65)
(9)
115
39
223
246
11
269
1
(116)
(38)
(29)
15
113
17
6
3
(24)
(25)
43
20
219
9,484
(19)
2,422
(329)
170
1
11,948
20
(16)
12
868
225
(107)
1,002
10,946
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 out-
standing loans and to measure both the performance of the portfolio and the adequacy of the allowance
for loan losses.
Following is a summary of the activity in the allowance for loan losses during the years ended
December 31, 2016, 2015 and 2014.
Balance, beginning of period
Provision for loan losses
Loan charge-offs
Loan recoveries
Balance, end of period
2016 compared to 2015
For the Years
Ended December 31,
2015
(Dollars in thousands)
2016
$
$
10,141
—
(264)
811
10,688
9,035
—
(1,230)
2,336
10,141
2014
8,091
—
(363)
1,307
9,035
The allowance for loan losses was $10.7 million, or 0.91% of total loans (1.05% of total non-
acquired loans), at December 31, 2016, compared to $10.1 million, or 1.10% of total loans (1.18% of
total non-acquired loans) at December 31, 2015. The Company experienced net recoveries of $547,000
during 2016 compared to net recoveries of $1.1 million during 2015. Asset quality remained steady, with
66
nonperforming assets to total assets of 0.40% as of December 31, 2016 compared to 0.47% as of Decem-
ber 31, 2015. No provision expense was recorded during 2016 or 2015 due to the sustained low level of
NPAs as well as the net recoveries experienced.
2015 compared to 2014
For the year ended December 31, 2015 and 2014, there was no provision for loan loss recorded
primarily due to the net recoveries experienced. The Company experienced net recoveries of $1.1 million
during 2015 compared to net recoveries of $944,000 during 2014. The allowance for loan losses was $10.1
million, or 1.10% of total loans (1.18% of total non-acquired loans), at December 31, 2015, compared to
$9.0 million, or 1.16% of total loans (1.28% of total non-acquired loans) at December 31, 2014.
Provision expense is recorded based on our assessment of general loan loss risk as well as asset
quality. 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. For further discussion regard-
ing the calculation of the allowance, see the “Allowance for Loan Losses”.
Noninterest Income and Expense
Noninterest income provides us with additional revenues that are significant sources of income.
In 2016, 2015, and 2014, noninterest income comprised 32.4%, 35.8% and 36.0%, respectively, of total
interest and noninterest income. The major components of noninterest income for the Company are listed
below:
2016
For the Years
Ended December 31,
2015
(In thousands)
2014
Noninterest income:
Mortgage banking income
Deposit service charges
Net loss on extinguishment of debt
Net gain 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
$
$
17,226
3,688
(1,868)
706
590
—
902
5,748
2,305
29,297
2016 compared to 2015
17,417
3,496
(1,251)
1,493
(1,111)
—
726
5,313
1,596
27,679
11,908
2,065
(58)
1,084
(1,170)
775
731
5,077
736
21,148
Noninterest income increased $1.6 million to $29.3 million for the year ended December 31, 2016
compared to $27.7 million for the year ended December 31, 2015.
67
2016 Form 10-K
The following table provides a break out of mortgage banking income from our retail mortgage
team “Community banking” and Crescent Mortgage Company “Wholesale mortgage banking”. Mortgage
banking income consists primarily of gain on sale of loans and related fees as well as fair value changes in
derivatives related to the mortgage company.
For the Year Ended December 31,
Loan Originations
Mortgage Banking
Income
Margin
2016
2015
2016
2015
2016
2015
Additional segment information:
Community banking
Wholesale mortgage banking
Total mortgage banking income
$ 97,062
875,360
$ 972,422
73,591
986,650
1,060,241
2,063
15,163
17,226
1,656
15,761
17,417
2.13% 2.25%
1.73% 1.60%
1.77% 1.64%
Originations for 2016 were comprised of approximately 67% in purchase transactions and 33%
in refinance transactions. This compares to 65% originations from purchase transactions and 35% from
refinance transactions for 2015.
Deposit service charge income increased $192,000 to $3.7 million for the year ended December
31, 2016 from $3.5 million for the year ended December 31, 2015. The slight increase in deposit service
charge income is a result of the increase in deposits acquired with the acquisition of Congaree as well as
the Company’s sustained efforts to grow checking accounts.
For the year ended December 31, 2016, the Company incurred a $1.9 million loss on extinguish-
ment of debt primarily as a result of the prepayment of a FHLB borrowing. During the fourth quarter of
2016, the Company repaid a $20.0 million advance with a 4% fixed interest rate and a remaining term of
approximately 4.1 years. The Company also incurred a loss on extinguishment of debt of $1.3 million for
the year ended December 31, 2015.
During the year ended December 31, 2016, the Company recognized net gains on sale of
available-for-sale securities of $706,000 compared to gains on sale of securities during year ended
December 31, 2015 of $1.5 million.
The fair value adjustment on interest rate swaps increased noninterest income by $590,000 for the
year ended December 31, 2016 compared to a reduction of noninterest income of $1.1 million for the year
ended December 31, 2015. The change in fair value adjustment on interest rate swaps relates to the change
in interest rates from period to period. The Company uses standalone interest rate swaps to more closely
match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from timing
mismatches between assets and liabilities including duration mismatches.
Other noninterest income increased $708,000 to $2.3 million for the year ended December 31,
2016 compared to $1.6 million for the year ended December 31, 2015. The increase in other non-interest
income is primarily related to in an increase in debit card and ATM surcharge income resulting from the
increase in checking accounts from organic growth and acquisitions.
2015 compared to 2014
Noninterest income increased $6.5 million to $ 27.7 million for the year ended December 31, 2015
compared to $21.1 million for the year ended December 31, 2014. The increase in noninterest income
primarily relates to the increase in mortgage banking income from our retail mortgage team as well as
our wholesale mortgage banking subsidiary and an increase in deposit service charges during the period.
68
The increase in mortgage banking income is attributable to an increase in originations as well as
overall margin expansion experienced during 2015. The following table provides a break out of mortgage
banking income from our retail mortgage team “Community banking” and Crescent Mortgage Company
“Wholesale mortgage banking”. Mortgage banking income consists primarily of gain on sale of loans and
related fees as well as fair value changes in derivatives related to the mortgage company.
For the Twelve Months Ended December 31,
Loan Originations
2014
2015
Mortgage Banking
Income
Margin
2015
2014
2015
2014
Additional segment information:
Community banking
Wholesale mortgage banking
Total mortgage banking income
$
73,591
986,650
$1,060,241
33,654
948,550
982,204
1,656
15,761
17,417
761
11,147
11,908
2.25% 2.26%
1.60% 1.18%
1.64% 1.21%
Originations for 2015 were comprised of approximately 65% in purchase transactions and 35%
in refinance transactions. This compares to 70% originations from purchase transactions and 30% from
refinance transactions for 2014.
Deposit service charge income increased $1.4 million to $3.5 million for the year ended December
31, 2015 from $2.1 million for the year ended December 31, 2014. The increase in deposit service charge
income is a result of the increase in deposits assumed as part of the two branch acquisitions completed
during 2014 as well as the Company’s sustained efforts to grow checking accounts. The number of check-
ing accounts, excluding acquired accounts, have grown 11.1% since December 31, 2014.
For the year ended December 31, 2015, the Company incurred a $1.3 million loss on extinguish-
ment of debt as a result of the prepayment of a Federal Home Loan Bank borrowing. This compares to a
loss on extinguishment of debt of $58,000 for the year ended December 31, 2014.
Partially offsetting the overall increase in noninterest income for the year ended December 31,
2015 was a decrease in the net gain on sale of servicing assets. During the first quarter of 2014, the Compa-
ny sold $147.7 million in unpaid principal balance of mortgage servicing rights for a net gain of $775,000.
There were no servicing rights sold during 2015.
During the year ended December 31, 2015, the Company recognized net gains on sale of
available-for-sale securities of $1.5 million compared to gains on sale of securities during year ended
December 31, 2014 of $1.1 million.
The fair value adjustment on interest rate swaps reduced noninterest income by $1.1 million for
the year ended December 31, 2015 compared to a reduction of non-interest income of $1.2 million for the
year ended December 31, 2014. The change in fair value adjustment on interest rate swaps relates to the
change in interest rates from period to period. The Company uses standalone interest rate swaps to more
closely match the interest rate characteristics of assets and liabilities and to mitigate the risks arising from
timing mismatches between assets and liabilities including duration mismatches.
Other noninterest income increased $860,000 to $1.6 million for the year ended December 31,
2015 compared to $736,000 for the year ended December 31, 2014. The increase in other non-interest
income is primarily related to in an increase in debit card and ATM surcharge income.
69
2016 Form 10-K
The following table sets forth for the periods indicated the primary components of noninterest
expense:
For the Years
Ended December 31,
2016
2015
2014
(In thousands)
$
$
31,475
7,942
1,428
702
(1,000)
306
(20)
1,857
2,312
3,245
7,793
56,040
28,629
7,228
1,434
698
(1,000)
407
138
1,634
1,986
—
8,045
49,199
23,308
4,858
1,251
581
(750)
438
638
1,392
1,795
—
7,932
41,443
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment
Marketing and public relations
FDIC insurance
Recovery of mortgage loan repurchase losses
Legal expense
Other real estate (income) expense, net
Mortgage subservicing expense
Amortization of mortgage servicing rights
Merger related expenses
Other
Total noninterest expense
2016 compared to 2015
Noninterest expense represents the largest expense category for the Company. Noninterest ex-
pense increased $6.8 million to $56.0 million for the year ended December 31, 2016 compared to $49.2
million for the year ended December 31, 2015. The increase in noninterest expense for 2016 compared
to the prior periods is primarily a result of the increase in salaries and employee benefits paid as well as
merger related expenses incurred as a result of the acquisition of Congaree.
Salaries and employee benefits increased $2.8 million to $31.5 million for the year ended Decem-
ber 31, 2016 compared to $28.6 million for the year ended December 31, 2015. Occupancy and equipment
increased $714,000 to $7.9 million for the year ended December 31, 2016 compared to $7.2 million for the
year ended December 31, 2015.
The increase in salaries and employee benefits as well as occupancy and equipment from year to
year are primarily a result of the personnel and occupancy costs associated with the acquisition of Conga-
ree. In addition, the Company opened two branches in the Wilmington market during 2016.
Merger related expenses totaled $3.2 million for the year ended December 31, 2016 and were pri-
marily related with the acquisition of Congaree during the second quarter of 2016. There were no merger
related expenses recorded during 2015.
Offsetting the increase in noninterest expense was a decline in expenses associated with other
real estate as well as a negative provision for mortgage loan repurchase losses. Other real estate expenses,
net declined as a result of the reduction in other real estate balances and write-downs in 2016 compared
to 2015. The negative provision for mortgage loan repurchase losses is the result of continued low repur-
chase request as well as a change a change in the regulatory framework concerning repurchase requests.
For further discussion regarding the provision for mortgage loan repurchase losses, see the “Reserve For
Mortgage Repurchase Losses”.
70
2015 compared to 2014
Noninterest expense represents the largest expense category for the Company. Noninterest ex-
pense increased $7.8 million to $49.2 million for the year ended December 31, 2015 compared to $41.4
million for the year ended December 31, 2014. The increase in noninterest expense for 2015 compared to
the prior periods is primarily a result of the increase in salaries and employee benefits paid as well as the
increase in expenses related to occupancy and equipment.
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.
Salaries and employee benefits increased $5.3 million to $28.6 million for the year ended Decem-
ber 31, 2015 compared to $23.3 million for the year ended December 31, 2014. Occupancy and equipment
increased $2.4 million to $7.2 million for the year ended December 31, 2015 compared to $4.9 million for
the year ended December 31, 2014.
The increase in salaries and employee benefits as well as occupancy and equipment from year to
year are primarily a result of the personnel and occupancy costs associated with the acquisition of branch-
es completed during the fourth quarter of 2014. The company added approximately 72 employees and
13 branches during 2014 as a result of this acquisition. The expense associated with the acquisition of
branches were reflective all of 2015. In addition, the Company opened three branches and two loan pro-
duction offices during 2014 and a full service branch in the upstate of South Carolina during 2015.
Offsetting the increase in noninterest expense was a decline in expenses associated with other
real estate as well as a negative provision for mortgage loan repurchase losses. Other real estate expenses,
net declined as a result of the reduction in other real estate balances and write-downs in 2015 compared
to 2014. Other real estate balances were $2.4 million and $3.2 million as of December 31, 2015 and 2014,
respectively. The Company was not required to write down other real estate owned during 2015 compared
to write downs of $526,000 during 2014. The negative provision for mortgage loan repurchase losses is the
result of continued low repurchase request as well as a change a change in the regulatory framework con-
cerning repurchase requests. For further discussion regarding the provision for mortgage loan repurchase
losses, see the “Reserve For Mortgage Repurchase Losses”.
The increase in other noninterest expense primarily relates to general costs associated with the
branches acquired during 2014 as well as the amortization of the core deposit intangible which was reflec-
tive for all of 2015.
Income Tax Expense
2016 compared to 2015
Our effective tax rate decreased to 30.9% for the year ended December 31, 2016 compared to
32.9% for the year ended December 31, 2015. In March 2016, the FASB issued guidance to simplify sev-
eral aspects of the accounting for share-based payment award transactions, including income tax conse-
quences. In addition to other changes, the guidance changes the accounting for excess tax benefits and
tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax
71
2016 Form 10-K expense or benefit in the period they occur. The Company early adopted the new guidance in the second
quarter of 2016. As a result, the Company’s income tax expense was reduced by $454,000 for the year
ended December 31, 2016.
2015 compared to 2014
Our effective tax rate increased to 32.9% for the year ended December 31, 2015 compared to
29.3% for the year ended December 31, 2014. The lower effective tax rate in 2014 is primarily attributable
to higher proportion of tax-exempt municipal securities, bank-owned life insurance, and certain tax credits
recognized during the year ended 2014 compared to the year ended 2015.
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, current
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, 2016, the $335.4 million in our investment securities portfolio, excluding FHLB
stock and other investments, represented approximately 19.9% of our assets. Our available-for-sale invest-
ment portfolio primarily included US agency securities, municipal securities, mortgage-backed securities
(agency and non-agency), collateralized loan obligations and trust preferred securities with a fair value of
$335.4 million and an amortized cost of $338.2 million for an unrealized loss of $2.9 million.
For additional information regarding the trust preferred 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.
During the second quarter of 2016, the Company tainted its securities held-to-maturity portfolio
as a result of a change in the intent to hold the securities until maturity to provide opportunities to max-
imize its asset utilization. As a result, approximately $17.0 million in securities were moved to available-
for-sale and resulted in an increase to accumulated other comprehensive income of $655,000.
72
The amortized costs and the fair value of our investments are as follows:
2016
Amortized
Cost
At December 31,
2015
2014
Fair
Value
Amortized
Cost
(In thousands)
Fair
Value
Amortized
Cost
Fair
Value
Securities available-for-
sale:
Municipal securities
US government agencies
Collateralized loan
obligations
$
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
Total mortgage-backed
securities
Trust preferred securities
Total securities available-
92,792
3,438
76,202
474
90,477
63,628
93,212
3,386
76,249
491
90,986
63,864
60,603
7,015
38,957
—
62,475
7,096
38,758
—
43,119
4,770
44,717
4,748
25,883
—
25,872
—
112,608
75,415
113,855
75,536
122,727
49,936
125,542
50,838
154,105
11,203
154,850
7,164
188,023
11,374
189,391
8,754
172,663
—
176,380
—
for-sale
$ 338,214
335,352
305,972
306,474
246,435
251,717
Securities held-to-maturity:
Municipal securities
Trust preferred securities
Total securities held-to-
$
maturity
$
—
—
—
—
—
—
17,053
—
17,965
—
16,787
8,757
17,652
9,733
17,053
17,965
25,544
27,385
The Company uses prices from third party pricing services and, to a lesser extent, indicative (non-
binding) 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 in-
dividual 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.
73
2016 Form 10-K
Less than 12 Months One to Five Years
Amount Yield Amount Yield
At December 31, 2016
Five to Ten Years
Amount Yield
(Dollars in thousands)
Over Ten Years
Amount Yield
Total
Amount Yield
$
Securities available-for-sale:
Municipal securities
US government agencies
Collateralized loan
obligations
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
Total mortgage-
backed securities
Trust preferred securities
Total securities
available-for-sale
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
428
—
—
—
—
178
178
—
2.14% 13,256
3,386
—
2.30% 79,528
—
1.19%
3.19% 93,212
3,386
—
3.06%
2.74%
—
—
21,931
491
2.79% 54,318
—
2.80%
2.99% 76,249
491
—
2.94%
2.80%
—
3.02%
10,852
—
2.70% 80,134
63,686
—
2.27% 90,986
3.50% 63,864
2.30%
3.50%
3.76% 10,852
—
—
3.08% 143,820
7,164
—
2.90% 154,850
7,164
2.95%
2.81%
2.95%
606
2.40% 49,916
2.54% 284,830
2.95% 335,352
2.89%
For disclosures related to the Company’s evaluation of securities for OTTI, see Note 4 “Securi-
ties” within Item 8. “Financial Statements and Supplementary Data.”
Non-marketable investments are comprised of the following and are recorded at cost which ap-
proximates fair value since no readily available market exists for these securities.
Community Reinvestment Act fund
Investment in Statutory Business Trusts
$
Total other investments
At December 31,
2016
2015
(In thousands)
1,303
465
1,768
1,295
465
1,760
Federal Home Loan Bank stock
Non-marketable investments
11,072
12,840
$
9,919
11,679
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, 2016 and 2015 were $1.2 billion and $922.7 million, respectively.
Our loan portfolio consists primarily of loans secured by real estate mortgages. As of December
31, 2016, our loan portfolio included $1.0 billion, or 85.6%, of total loans secured by real estate. As of
December 31, 2015, our loan portfolio included $801.2 million, or 86.8%, of total loans secured by real
estate. Most of our real estate loans are secured by residential or commercial property. We obtain a secu-
rity 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. Syndicated loan balances were
74
$91.5 and $83.1 million as of December 31, 2016 and 2015, respectively, and are grouped within commer-
cial business loans in the table below.
As shown in the table below, loans excluding the allowance for loan losses, increased $255.5
million to $1.2 billion at December 31, 2016 from $922.7 million at December 31, 2015. The increase
in loans receivable primarily relates to the Bank’s focus on growing residential mortgage, commercial
lending, and syndicated loans as well as the loans acquired in the acquisition of Congaree. See addi-
tional discussion regarding the increase in loans during 2016 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:
2016
% of Total
Amount Loans
At December 31,
2015
% of Total
Amount Loans
(Dollars in thousands)
2014
% of Total
Amount Loans
$ 411,399
36,026
445,344
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and
115,682
development
5,714
Consumer loans
164,101
Commercial business loans
Total gross loans receivable 1,178,266
Less:
Allowance for loan losses
Total loans receivable, net
10,688
$1,167,578
34.91% 344,928
3.06% 23,256
37.80% 341,658
37.38% 253,364
2.52% 27,399
37.03% 317,162
9.82% 91,362
0.48%
5,179
13.93% 116,340
100.00% 922,723
9.90% 91,531
0.56%
5,650
12.61% 82,051
100.00% 777,157
32.59%
3.53%
40.81%
11.78%
0.73%
10.56%
100.00%
10,141
912,582
9,035
768,122
At December 31,
2013
2012
Amount
% of Total
Loans
(Dollars in thousands)
Amount
% 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:
$
183,638
23,342
247,867
60,104
2,815
25,546
543,312
33.80%
4.30%
45.62%
11.06%
0.52%
4.70%
100.00%
Allowance for loan losses
Total loans receivable, net
8,091
535,221
$
28.61%
6.01%
46.21%
12.42%
0.68%
6.07%
100.00%
146,266
30,710
236,230
63,475
3,501
31,029
511,211
9,520
501,691
75
2016 Form 10-K
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.
At December 31, 2016
After one
One Year but within After five
or Less five years
years
Total
(In thousands)
$
17,827
7,096
47,854
26,484
1,246
12,870
$ 113,377
56,110
3,623
307,728
74,170
3,674
92,068
537,373
337,462
25,307
89,762
15,028
794
59,163
527,516
411,399
36,026
445,344
115,682
5,714
164,101
1,178,266
$ 398,560
666,329
$ 1,064,889
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
Loans maturing - after one year:
Variable rate loans
Fixed rate loans
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, 2016 and 2015, 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 otherwise
76
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,
2016
2015
2014
2013
2012
(In thousands)
Nonaccrual loans-renegotiated loans
Nonaccrual loans-other
Accruing loans 90 days or more delinquent
Real estate acquired through foreclosure, net
Total Non-Performing Assets
$ 1,227
4,398
—
1,179
$ 6,804
1,136
3,166
—
2,374
6,676
58
2,376
—
3,239
5,673
7,641
3,438
—
6,273
17,352
10,733
4,515
—
6,284
21,532
Problem Assets not included in Non-Performing
Assets- Accruing renegotiated loans outstanding $ 5,216
13,212
14,251
16,367
17,195
At December 31, 2016, nonperforming assets were $6.8 million, or 0.40% of total assets, and non-
performing loans were $5.6 million, or 0.48% of gross loans. Comparatively, at December 31, 2015, non-
performing assets were $6.7 million, or 0.47% of total assets, and nonperforming loans were $4.3 million,
or 0.47% of gross loans. Nonaccrual loans increased slightly to $5.6 million at December 31, 2016 from
$4.3 million at December 31, 2015.
Potential problem loans, which are not included in nonperforming loans, amounted to
approximately $5.2 million, or 0.44% of total gross loans at December 31, 2016, compared to $13.2 million,
or 1.43% of gross loans at December 31, 2015. Potential problem loans represent those loans with a
well-defined weakness and where information about possible credit problems of borrowers has caused
management 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 2016 and 2015 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.
77
2016 Form 10-K
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of probable credit losses inherent in the loan
portfolio at the balance sheet date. Management determines the allowance based on an ongoing evaluation.
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-im-
paired 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 nonimpaired loans and is based on historical loss experience
adjusted 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 20 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 20 quarter 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 recognized in the period incurred and that the allowance at each balance sheet date is adequate and
appropriate in accordance with GAAP. Qualitative factors include consideration of the following: levels
of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries for
the most recent twelve quarters; trends in volume and terms of loans; effects of any changes in risk selec-
tion 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. See
additional discussion in section “Nonperforming and Problem Assets” above.
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.
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 premi-
um or discount on purchase, charge-offs and any other adjustment to carrying value in accordance with ASC
310-20. To date, all loans acquired in business combinations have been accounted for under ASC 310-20.
To the extent that current information indicates it is probable that the Company will collect all
amounts according to the contractual terms thereof, such loan is not considered impaired and is not
78
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.
The allowance for loan losses was $10.7 million, or 0.91% of total loans (1.05% of total non-
acquired loans), at December 31, 2016, compared to $10.1 million, or 1.10% of total loans (1.18% of total
non-acquired loans) at December 31, 2015. The Company experienced net recoveries of $547,000 during
2016 compared to net recoveries of $1.1 million during 2015. Asset quality remained steady, with nonper-
forming assets to total assets of 0.40% as of December 31, 2016 compared to 0.47% at December 31, 2015.
No provision expense was recorded during 2016 or 2015 due to the sustained low level of NPAs as well as
the net recoveries experienced.
Loans acquired in business combinations totaled $119.4 million and $64.1 million at December
31, 2016 and 2015, respectively. 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 discussed above.
The following table summarizes the activity related to our allowance for loan losses for the five
years ended December 31, 2016.
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
2016
$
10,141
—
(84)
—
—
—
(53)
(127)
(264)
464
—
—
76
24
247
811
547
10,688
2015
For the Years Ended December 31,
2014
(Dollars in thousands)
2013
9,035
—
(1,050)
—
—
(90)
(20)
(70)
(1,230)
576
150
350
479
38
743
2,336
1,106
10,141
8,091
—
(80)
—
(28)
(172)
(24)
(59)
(363)
158
—
100
457
71
521
1,307
944
9,035
9,520
(860)
(168)
(28)
(269)
(765)
(35)
(410)
(1,675)
438
1
126
110
53
378
1,106
(569)
8,091
2012
12,039
2,707
(2,680)
(319)
(1,432)
(1,506)
(84)
(1,169)
(7,190)
375
—
231
740
172
446
1,964
(5,226)
9,520
0.91%
1.10%
1.16%
(0.05)%
(0.13)%
(0.15)%
1.49%
0.11%
1.86%
1.05%
79
2016 Form 10-K
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, 2016.
At December 31,
2016
2015
2014
2013
2012
Amount % Amount %
Amount %
Amount %
Amount %
(Dollars in thousands)
Loans receivable:
One-to-four family
$ 2,636
34.91%
2,903
37.23% 2,888
32.48% 2,472
33.81%
3,193
28.62%
Home equity
197
3.06%
151
2.52%
221
3.54%
231
4.30%
276
6.01%
Commercial real estate
3,344
37.80%
3,402
37.10% 3,283
40.85% 2,855
45.61%
3,315
46.20%
Construction and
development
Consumer loans
1,132
80
9.82%
0.48%
Commercial business loans
2,805
13.93%
2,100
12.65% 1,430
10.58%
1,138
9.94% 1,069
11.82% 1,418
11.06%
1,792
12.42%
27
0.56%
30
0.73%
42
339
0.52%
4.70%
82
862
0.68%
6.07%
Unallocated
Total
494
—
420
—
114
—
734
—
—
—
$ 10,688
100.00% 10,141
100.00% 9,035
100.00% 8,091
100.00%
9,520
100.00%
Mortgage Operations
Mortgage Activities and Servicing
Our mortgage banking operations are conducted through our wholesale mortgage subsidiary,
Crescent Mortgage Company. Mortgage activities involve the purchase of mortgage loans and table fund-
ed 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 (“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
80
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, 2016, the Company was servicing $2.2 billion of loans for others, a slight increase
from $2.0 billion at December 31, 2015.
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 servicing
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 disaggre-
gated 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 as-
sumptions to model the respective cash flows and determine the fair value of the servicing asset at each
reporting date. See Note 9 to the consolidated financial statements for further detail regarding the assump-
tions used in determining the economic estimated fair value of the mortgage servicing rights retained.
In aggregate, the net servicing asset had a balance of $15.0 million and $11.4 million at December
31, 2016 and 2015, respectively. The economic estimated fair value of the mortgage servicing rights was
$21.0 million and $17.6 million at December 31, 2016 and 2015, respectively.
Below is a roll-forward of activity in the balance of the servicing assets for the years ended
December 31, 2016 and 2015 respectively:
MSR beginning balance
Amount capitalized
Amount sold
Amount amortized
MSR ending balance
Losses on Mortgage Loans Previously Sold
December 31,
2016
2015
(In thousands)
$
$
11,433
5,911
—
(2,312)
15,032
10,181
3,238
—
(1,986)
11,433
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
30 days of closing. Buyers generally have recourse to return a purchased loan to the Company under
limited circumstances. An estimation of mortgage repurchase losses is reviewed on a quarterly basis. 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 condi-
tions include underwriting errors or omissions, fraud or material misstatements by the borrower in the
loan application or invalid market value on the collateral property due to deficiencies in the appraisal.
In addition to these representations and warranties, our loan sale contracts define a condition in which
81
2016 Form 10-K
the borrower defaults during a short period of time, typically 120 days to one year, as an early payment
default (“EPD”). In the event of an EPD, we are required 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 consid-
erable management judgment.
The following table demonstrates the activity for the mortgage repurchase reserve for the years
ended December 31, 2016, 2015, and 2014:
Beginning Balance
Losses paid
Recoveries
Recovery of mortgage repurchase losses
Ending balance
2016
$
$
3,876
(21 )
25
(1,000)
2,880
December 31,
2015
(In thousands)
4,999
(165)
42
(1,000)
3,876
2014
6,109
(389)
29
(750)
4,999
The Company recorded a negative provision for mortgage repurchases losses of $1.0 million for
the years ended December 31, 2016 and 2015. For the years ended December 31, 2014, the Company
recorded a negative provision for mortgage repurchase losses of $750,000.
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 represen-
tations 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 originated and sold to various third parties. In
the latter part of 2012, the regulatory framework for certain GSEs changed where, under certain circum-
stances, 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.
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 man-
agement’s desire to increase or decrease certain types or maturities of deposits. Deposits continue to be
82
our primary funding source. At December 31, 2016, deposits totaled $1.3 billion, an increase of $226.7
million from deposits of $1.0 billion at December 31, 2015. The increase in deposits is a result of the Com-
pany’s continued efforts to organically grow our retail branches as well as the acquired deposits associated
with the acquisition with Congaree. As of December 31, 2016, the deposits associated with the Congaree
acquisition totaled $83.2 million.
The Company established a deposit relationship with its mortgage subservicing provider whereby
the subservicer deposited impound funds. As of December 31, 2016 and 2015, impound funds were $21.8
million and $22.8 million, respectively. These funds are included in interest-bearing demand accounts
within deposits.
Our retail deposits represented $1.1 billion, or 88.7% of total deposits at December 31, 2016,
while our out-of-market, or brokered deposits and institutional certificate of deposits, represented $142.6
million, or 11.3% of our total deposits. At December 31, 2015, retail deposits represented $882.9 million,
or 85.6% of total deposits at December 31, 2015, while our out-of-market, or brokered deposits and insti-
tutional certificate of deposits, represented $148.6 million, or 14.4% 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,
2015
2016
2014
Average
Average Yield/
Balance Rate
Average
Average Yield/
Balance Rate
(Dollars in thousands)
Average
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 more
Total interest-bearing average deposits
$
151,704
274,774
44,646
266,808
219,134
957,066
0.15%
0.29%
0.13%
0.92%
1.10%
0.62%
163,982
235,283
38,303
236,461
158,670
832,699
0.12% 114,867
0.19% 213,149
0.13% 24,617
0.89% 211,128
0.98% 100,118
0.52% 663,879
0.16%
0.22%
0.15%
0.91%
0.87%
0.52%
Noninterest-bearing deposits
Total average deposits
240,622
$ 1,197,688
179,960
1,012,659
113,743
777,622
The maturity distribution of our time deposits of $100,000 or more is as follows:
At December 31,
2016
2015
(In thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total certificates of deposits
$
$
29,031
15,523
57,539
124,327
226,420
33,787
31,895
37,609
88,028
191,319
83
2016 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, 2016, 2015, and 2014, 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, 2016
Short-term borrowed funds
Short-term FHLB advances
Long-term borrowed funds
Long-term FHLB advances, due 2018 through
Ending
Balance
Period
End
Rate
Maximum
Month Average for the
End
Period
Balance Balance Rate
(Dollars in thousands)
$ 203,000
0.49%-1.20%
203,000
92,332
0.55%
2019
23,000
1.11%-1.32%
88,000
61,745
2.70%
Subordinated debentures issued to Carolina
Financial Capital Trust I, due 2032
Subordinated debentures issued to Carolina
Financial Capital Trust II, due 2034
5,155
10,310
4.00%
5,155
5,155
4.00%
3.93%
10,310
10,310
3.81%
At or for the year ended December 31, 2015
Short-term borrowed funds
Short-term FHLB advances
Subordinated debenture, due 2016
Other short-term borrowings
Long-term borrowed funds
Long-term FHLB advances, due 2017 through
2021
Subordinated debentures, due 2017 through 2020
Subordinated debentures issued to Carolina
Ending
Balance
Period
End
Rate
Maximum
Month
End
Average for the
Period
Balance Balance Rate
(Dollars in thousands)
$ 120,000
—
—
0.28%-0.64%
—
—
147,500
300
—
113,840
125
3
0.29%
2.71%
0.73%
88,000
—
0.35%-4.00%
0.00%
88,000
1,275
41,276
639
3.26%
2.54%
Financial Capital 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
3.38%
10,310
10,310
3.38%
84
Ending
Balance
Period
End
Rate
Maximum
Month Average for the
End
Period
Balance Balance Rate
(Dollars in thousands)
$ 57,500 0.19%-0.56% 110,500 40,887
300
2.68%
137
0.00%
300
10,000
300
—
0.24%
2.02%
0.75%
At or for the year ended December 31, 2014
Short-term borrowed funds
Short-term FHLB advances
Subordinated debenture, due 2015
Other short-term borrowings
Long-term borrowed funds
Long-term FHLB advances, due 2015
through 2021
45,000 1.20%-4.00%
57,500 51,694
2.83%
Subordinated debentures, due 2016
through 2020
1,275
2.68%
1,575 1,461
2.87%
Subordinated debentures issued to
Carolina Financial Capital 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%
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 require-
ments while maximizing profits. Liquidity management is made more complicated because different bal-
ance sheet components are subject to varying degrees of management control. For example, the timing of
maturities 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. At December 31, 2016 the Company
had FHLB advances of $226.0 million outstanding with excess collateral pledged to the FHLB during those
periods that would support additional borrowings of approximately $119.0 million. In addition, at Decem-
ber 31, 2016, the Company has pledged securities with a fair value of $10.7 million for these advances.
85
2016 Form 10-K
Lines of credit with the Federal Reserve Bank of Richmond (“FRB”) are based on collateral
pledged. The Company has pledged approximately $269.5 million of certain non-mortgage commer-
cial, acquisition and development, and lot loan portfolios under blanket lien agreements to the FRB. At
December 31, 2016, the Company had lines available with the FRB for $159.0 million. At December 31,
2016 and 2015, the Company had no FRB 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 cer-
tain mandatory and possible additional discretionary actions that if undertaken could have a direct mate-
rial effect on the Company’s and the Bank’s financial statements.
Effective January 2, 2015, the Company and Bank became subject to the regulatory risk-based
capital rules adopted by the federal banking agencies implementing Basel III. Under the new capital
guidelines, applicable regulatory capital components consist of (1) common equity Tier 1 capital (com-
mon stock, including related surplus, and retained earnings, plus limited amounts of minority interest in
the form of common stock, net of goodwill and other intangibles (other than mortgage servicing assets),
deferred tax assets arising from net operating loss and tax credit carry forwards above certain levels, mort-
gage servicing rights above certain levels, gain on sale of securitization exposures and certain investments
in the capital of unconsolidated financial institutions, and adjusted by unrealized gains or losses on cash
flow hedges and accumulated other comprehensive income items (subject to the ability of a non-advanced
approaches institution to make a one-time irrevocable election to exclude from regulatory capital most
components of AOCI), (2) additional Tier 1 capital (qualifying non-cumulative perpetual preferred stock,
including related surplus, plus qualifying Tier 1 minority interest and, in the case of holding companies
with less than $15 billion in consolidated assets at December 31, 2009, certain grandfathered trust pre-
ferred securities and cumulative perpetual preferred stock in limited amounts, net of mortgage servicing
rights, deferred tax assets related to temporary timing differences, and certain investments in financial
institutions) and (3) Tier 2 capital (the allowance for loan and lease losses in an amount not exceeding
1.25% of standardized risk-weighted assets, plus qualifying preferred stock, qualifying subordinated debt
and qualifying total capital minority interest, net of Tier 2 investments in financial institutions). Total Tier
1 capital, plus Tier 2 capital, constitutes total risk-based capital.
The required minimum ratios are as follows:
•
Common equity Tier 1 capital ratio (common equity Tier 1 capital to total risk-weighted
assets) of 4.5%
• Tier 1 Capital Ratio (Tier 1 capital to total risk-weighted assets) of 6%
• Total capital ratio (total capital to total risk-weighted assets) of 8%; and
• Leverage ratio (Tier 1 capital to average total consolidated assets) of 4%
The new capital guidelines also provide that all covered banking organizations must maintain a
new capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total
risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus
86
payments to executive officers. The phase-in of the capital conservation buffer requirement began on
January 1, 2016.
The final regulatory capital rules also incorporate these changes in regulatory capital into the
prompt corrective action framework, under which the thresholds for “adequately capitalized” banking
organizations are equal to the new minimum capital requirements. Under this framework, in order to be
considered “well capitalized”, insured depository institutions are required to maintain a Tier 1 leverage
ratio of 5%, a common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based capital ratio
of 8% and a total risk-based capital ratio of 10%.
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, 2016 and 2015 are as follows:
Actual
Amount Ratio
Minimum Capital
Required - Basel III
Phase-In Schedule
Amount Ratio
Minimum Capital
Required - Basel III
Fully Phased-In
Amount Ratio
(Dollars in thousands)
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations
Amount Ratio
December 31, 2016
Carolina Financial
Corporation
CET1 capital (to risk
weighted assets)
Tier 1 capital (to risk
weighted assets)
Total capital (to risk
weighted assets)
Tier 1 capital (to
$ 157,876
12.87%
62,859
5.125%
85,857
7.000%
N/A
N/A
172,876
14.09%
81,257
6.625%
104,254
8.500%
N/A
N/A
183,564
14.97%
105,788
8.625%
128,785
10.500%
N/A
N/A
total average assets) 172,876
10.49%
65,911
4.000%
65,911
4.000%
N/A
N/A
CresCom Bank
CET1 capital (to risk
weighted assets)
Tier 1 capital (to risk
weighted assets)
Total capital (to risk
weighted assets)
Tier 1 capital (to
169,222
13.81%
62,811
5.125%
85,791
7.000%
79,663
6.50%
169,222
13.81%
81,195
6.625%
104,174
8.500%
98,046
8.00%
179,910
14.68%
105,706
8.625%
128,686
10.500%
122,558
10.00%
total average assets) 169,222
10.30%
65,701
4.000%
65,701
4.000%
82,126
5.00%
87
2016 Form 10-K
Minimum
Required
For Capital
Adequacy
Purposes
Amount Ratio
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations
Amount Ratio
Actual
Amount Ratio
(Dollars in thousands)
December 31, 2015
Carolina Financial Corporation
CET1 capital (to risk weighted assets) $ 138,213
Tier 1 capital (to risk weighted assets) 153,213
Total capital (to risk weighted assets)
163,353
Tier 1 capital (to total average assets) 153,213
13.97% 44,527 4.50% N/A N/A
15.48% 59,370 6.00% N/A N/A
16.51% 79,160 8.00% N/A N/A
11.23% 54,557 4.00% N/A N/A
CresCom Bank
CET1 capital (to risk weighted assets) 139,025
Tier 1 capital (to risk weighted assets) 139,025
149,165
Total capital (to risk weighted assets)
Tier 1 capital (to total average assets) 139,025
14.08% 44,442 4.50% 64,194 6.50%
14.08% 59,256 6.00% 79,008 8.00%
15.10% 79,008 8.00% 98,760 10.00%
10.21% 54,466 4.00% 68,082 5.00%
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, 2016, 2015, and 2014.
Return on average assets
Return on average equity
Average equity to average assets ratio
For the Years Ended December 31,
2016
2014
2015
1.14%
11.61%
9.84%
1.11%
14.15%
7.82%
0.84%
9.39%
8.93%
The following table provides the amount of dividends and payout ratios (dividends declared divid-
ed by net income) for the years ended December 31, 2016, 2015, and 2014.
Shareholder dividends declared
Dividend payout ratios
For the Years Ended December 31,
2015
$ 1,142,000
2016
$ 1,616,000
$
2014
855,000
9.20%
7.92%
10.29%
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.
Off Balance Sheet Arrangements
Through the operations of our Bank, we have made contractual commitments to extend credit in
the ordinary course of our business activities. These commitments are legally binding agreements to lend
88
money to our customers at predetermined interest rates for a specified period of time. We evaluate each
customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed neces-
sary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but
may include accounts receivable, inventory, property, plant and equipment, commercial and residential
real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting
and risk management processes.
At December 31, 2016, we had issued commitments to extend credit of approximately $111.4 mil-
lion through various types of lending arrangements. There were 33 standby letters of credit included in the
commitments for $2.2 million. Fixed rate commitments were $19.5 million and variable rate commitments
were $94.2 million.
Commitments generally have fixed expiration dates or other termination clauses and may require
the payment of a fee. A significant portion of the unfunded commitments relate to consumer equity lines
of credit and commercial lines of credit. Based on historical experience, we anticipate that a portion of
these lines of credit will not be funded.
Except as disclosed in this report, we are not involved in off-balance sheet contractual relation-
ships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could
result in liquidity needs or other commitments that significantly impact earnings.
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 lia-
bilities. The expected result of these strategies is the development of appropriate maturity and re-pricing
opportunities in those accounts to produce consistent net income during periods of changing interest
rates. The Bank’s asset/liability management committee (“ALCO”) monitors loan, investment and liability
portfolios to ensure comprehensive management of interest rate risk. These portfolios are analyzed for
proper fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability manage-
ment process is designed to achieve relatively stable net interest margins and assure liquidity by coordinat-
ing 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
Company’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 acceptable 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 sensitivity by
means of a computer model that incorporates current volumes, average rates earned and paid, and sched-
uled maturities, payments of asset and liability portfolios, together with multiple scenarios of prepayments,
89
2016 Form 10-K repricing opportunities and anticipated volume growth. Interest rate sensitivity analysis shows the effect
that the indicated changes in interest rates would have on net interest income as projected for the next
twelve months under the current interest rate environment. The resulting change in net interest income
reflects the level of sensitivity that net interest income has in relation to changing interest rates.
As of December 31, 2016, 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 de-
posit repricing rates. Downward movements do not appear to be applicable due to the low interest rate
environment experienced during 2015 and 2016. 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.
Interest Rate Scenario Annualized Hypothetical Percentage
Change Prime Rate
3.50%
0.00%
4.50%
1.00%
5.50%
2.00%
6.50%
3.00%
7.50%
4.00%
Change in Net Interest Income
0.00%
-0.30%
-0.70%
-1.60%
-3.00%
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 re-
lated to expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and
forward commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The
Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated
with the interest rate lock commitments and the mortgage loans that are held for sale. Derivatives related
to these commitments are recorded as either a derivative asset or a derivative liability in the balance sheet
and are measured at fair value. Both the interest rate lock commitments and the forward commitments are
reported at fair value, with adjustments recorded in current period earnings in mortgage banking income
within the noninterest income of the consolidated statements of operations. Derivative instruments not
related to mortgage banking activities primarily relate to interest rate swap agreements.
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.
90
The derivative positions of the Company at December 31, 2016 and 2015 are as follows:
At December 31,
2016
Fair Notional
Value
Value
Fair
Value
2015
Notional
Value
(In thousands)
$
421
30,000
180
30,000
Derivative assets:
Cash flow hedges:
Interest rate swaps
Non-hedging derivatives:
Interest rate swaps
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales
commitments
Total derivative assets
532
1,113
153
—
$ 2,219
20,000
117,439
94,001
—
261,440
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps
Mortgage-backed securities forward sales
commitments
Total derivative liabilities
$
195
10,000
147
342
$
22,784
32,784
—
1,246
340
179
1,945
306
—
306
—
143,318
31,513
105,014
309,845
10,000
—
10,000
The Company has entered into interest rate swaps to reduce the exposure to variability in inter-
est-related cash outflows attributable to changes in forecasted LIBOR based FHLB borrowings. These
derivative instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the
series of future adjustable rate borrowings over the term of the interest rate swap. Accordingly, changes
to the amount of interest payment cash flows for the hedged transactions attributable to a change in cred-
it risk are excluded from our assessment of hedge effectiveness. The effective portion of changes in the
fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other
comprehensive income and is subsequently reclassified into earnings in the period that the hedged fore-
casted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is
recognized directly in earnings. The Company has not recorded any hedge ineffectiveness since inception.
As of December 31, 2016, the Company had two outstanding interest rate derivatives with a no-
tional value of $30.0 million that were designated as cash flow hedges of interest rate risk with a weighted
average remaining term of 8.84 years.
In the event that the forecasted transaction was no longer be probable, the Company would recog-
nize a gain of $421,000 directly into earnings, the current fair value, as of December 31, 2016.
Contractual Obligations
The following table presents payment schedules for certain of our contractual obligations
as of December 31, 2016. Operating lease obligations of $6.6 million pertain to banking facilities and
equipment. Certain lease agreements include payment of property taxes and insurance and contain
91
2016 Form 10-K
various renewal options. Additional information regarding leases is contained in Note 14 of the audited
consolidated financial statements.
More
Less than 1 to 3 3 to 5
than
1 Year Years Years 5 Years
Total
(Dollars in thousands)
$ 226,000
30,000
30,000
203,000
—
—
—
23,000
—
—
— 25,000
—
30,000
5,000
5,155
—
—
—
5,155
10,310
6,589
$ 308,054
—
1,207
204,207
—
2,164
25,164
—
1,418
26,418
10,310
1,800
52,265
Advances from FHLB
Interest rate swap - cash flow hedge derivative
Interest rate swap - non-hedging derivative
Subordinated debentures issued to
Carolina Financial Capital Trust I, due 2032
Subordinated debentures issued to
Carolina Financial Capital Trust II, due 2034
Operating lease obligations
Total
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.
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
Operations – Market Risk and Interest Rate Sensitivity and – Liquidity and Capital Resources.
92
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 Corpo-
ration and subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated
statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2016. These consolidated financial statements are the re-
sponsibility of the Company’s management. Our responsibility is to express an opinion on these consoli-
dated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB). 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 under PCAOB standards. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstanc-
es, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting under PCAOB standards. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state-
ments, 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 mate-
rial respects, the financial position of Carolina Financial Corporation and subsidiary as of December 31,
2016 and 2015, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Elliott Davis Decosimo, LLC
Greenville, South Carolina
March 10, 2017
93
2016 Form 10-K 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 $338,214 at December 31, 2016 and
$305,972 at December 31, 2015)
Securities held-to-maturity (fair value of $0 at December 31, 2016
and $17,965 at December 31, 2015)
Federal Home Loan Bank stock, at cost
Other investments
Derivative assets
Loans held for sale
Loans receivable, net of allowance for loan losses of $10,688 at December 31,
2016 and $10,141 at December 31, 2015
Premises and equipment, net
Accrued interest receivable
Real estate acquired through foreclosure, net
Deferred tax assets, net
Mortgage servicing rights
Cash value life insurance
Core deposit intangible
Goodwill
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 authorized at December 31,
2016 and December 31, 2015; no shares issued or outstanding
Common stock, par value $.01; 25,000,000 and 15,000,000 shares authorized
at December 31, 2016 and December 31, 2015, respectively; 12,548,328 and 12,023,557
issued and outstanding at December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
94
At December 31,
2016
2015
(In thousands)
9,761
14,591
24,352
10,206
16,421
26,627
335,352
306,474
—
11,072
1,768
2,219
31,569
1,167,578
37,054
5,373
1,179
8,341
15,032
28,984
3,658
4,266
5,939
1,683,736
229,905
1,028,355
1,258,260
203,000
38,465
342
6,223
1,058
327
2,880
502
9,489
1,520,546
17,053
9,919
1,760
1,945
41,774
912,582
32,562
4,333
2,374
5,273
11,433
28,082
2,961
—
4,517
1,409,669
163,054
868,474
1,031,528
120,000
103,465
306
2,154
641
333
3,876
361
7,146
1,269,810
—
—
125
66,156
98,451
(1,542)
163,190
1,683,736
120
56,418
82,859
462
139,859
1,409,669
$
$
$
$
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended December 31,
2015
(In thousands, except share data)
2016
2014
Interest income
Loans
Investment securities
Dividends from Federal Home Loan Bank stock
Federal Funds sold
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
Mortgage banking income
Deposit service charges
Net loss on extinguishment of debt
Net gain 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
Recovery of mortgage loan repurchase losses
Legal expense
Other real estate (income) expense, net
Mortgage subservicing expense
Amortization of mortgage servicing rights
Merger related expenses
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.
95
51,137
9,274
374
5
124
60,914
5,972
509
2,272
8,753
52,161
—
52,161
17,226
3,688
(1,868)
706
590
—
902
5,748
2,305
29,297
31,475
7,942
1,428
702
(1,000)
306
(20)
1,857
2,312
3,245
7,793
56,040
25,418
7,848
17,570
1.45
1.42
41,020
8,176
328
—
80
49,604
4,367
331
1,906
6,604
43,000
—
43,000
17,417
3,496
(1,251)
1,493
(1,111)
—
726
5,313
1,596
27,679
28,629
7,228
1,434
698
(1,000)
407
138
1,634
1,986
—
8,045
49,199
21,480
7,060
14,420
1.51
1.48
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
0.89
0.87
12,080,128
12,352,246
9,537,358
9,718,356
9,314,048
9,507,425
2016 Form 10-K
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on securities
Tax effect
Reclassification adjustment for gains included in
earnings
Tax effect
Unrealized gains on interest rate swaps designated as
cash flow hedges
Tax effect
Transfer from held-to-maturity to available
for sale securities
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.
For the Years
Ended December 31,
2015
(In thousands)
2014
2016
$
17,570
14,420
8,311
(3,681)
1,322
(706)
252
241
(87)
1,023
(368)
—
—
(2,004)
15,566
$
(939)
338
(1,493)
537
180
(65)
1,604
(580)
151
(55)
(322)
14,098
5,828
(2,101)
(1,084)
390
—
—
—
—
198
(72)
3,159
11,470
96
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock
Additional
Paid-in Retained Comprehensive
Accumulated
Other
Shares
Amount Capital
Earnings Income (Loss) Total
9,636,490 $
69,225
11,328
(In thousands, except share data)
96
1
—
22,337
64
50
62,169
—
—
Balance, December 31, 2013
Stock awards
Stock options exercised
Excess tax benefit in connection with
equity awards
Stock-based compensation expense, net
Net income
Dividends declared to stockholders
Other comprehensive income, net of tax
Balance, December 31, 2014
Issuance of common stock, net of
offering expenses
Stock awards
Vested stock awards surrendered in
cashless exercise
Stock options exercised
Excess tax benefit in connection with
equity awards
Stock-based compensation expense, net
Net income
Dividends declared to stockholders
Other comprehensive income, net of tax
Balance, December 31, 2015
Stock awards
Vested stock awards surrendered in
cashless exercise
Stock options exercised
Stock issued - Congaree Bancshares,
Inc. merger
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, 2016
—
—
—
—
—
9,717,043 $
2,262,296
37,491
(7,289)
14,016
—
—
—
—
—
12,023,557
39,056
(26,555)
3,360
508,910
—
—
—
—
—
12,548,328 $
—
—
—
—
—
97
23
—
—
—
—
—
—
—
—
120
—
—
—
5
—
—
—
—
—
125
126
617
—
—
—
23,194
32,133
—
(42)
70
189
874
—
—
—
56,418
—
—
—
8,311
(855)
—
69,625
—
—
(44)
—
—
—
14,420
(1,142)
—
82,859
—
(120)
27
(362)
—
8,545
—
15
1,271
—
—
—
66,156
—
—
17,570
(1,616)
—
98,451
(2,375)
—
—
—
—
—
—
3,159
784
—
—
—
—
—
—
—
—
(322)
462
—
—
—
—
82,227
65
50
126
617
8,311
(855)
3,159
93,700
32,156
—
(86)
70
189
874
14,420
(1,142)
(322)
139,859
—
(482)
27
8,550
15
—
1,271
—
17,570
—
(1,616)
—
(2,004)
(2,004)
(1,542) 163,190
See accompanying notes to consolidated financial statements.
97
2016 Form 10-K
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
operating activities:
Amortization of unearned discount/premiums on investments, net
Accretion of deferred loan fees
Accretion of acquired loans
Amortization of core deposit intangibles
Gain on sale of available-for-sale securities, net
Mortgage banking income
Originations of loans held for sale
Proceeds from sale of loans held for sale
Loss on extinquishment of debt
Recovery of mortgage loan repurchase losses
Mortgage loan losses paid, net of recoveries
Fair value adjustments on interest rate swaps
Stock-based compensation
Increase in cash surrender value of bank owned life insurance
Depreciation
(Gain) loss 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
Originations of mortgage servicing assets
Amortization of mortgage servicing assets
(Increase) decrease in:
Accrued interest receivable
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,
2015
(In thousands)
2016
2014
$
17,570
14,420
8,311
3,039
(674)
(814)
407
(706)
(17,226)
(972,422)
999,853
1,868
(1,000)
4
(590)
1,271
(902)
1,972
(1)
(88)
15
—
(5,911)
2,312
(754)
(937)
(28)
141
2,365
28,764
3,416
(955)
—
343
(1,493)
(17,417)
(1,060,241)
1,076,796
1,251
(1,000)
(123)
1,111
874
(726)
1,778
11
(10)
—
—
(3,238)
1,986
(705)
109
21
118
(5,224)
11,102
2,802
(550)
—
47
(1,084)
(11,908)
(982,204)
990,097
58
(750)
(360)
1,170
617
(731)
1,229
8
(91)
526
(775)
(1,868)
1,795
(668)
464
1
243
4,116
10,495
Continued
98
CAROLINA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years
Ended December 31,
2016
2015
2014
(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 in Federal Home Loan Bank stock
Increase in loans receivable, net
Proceeds from the sale of servicing assets
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 in Federal Home Loan Bank advances
Principal repayment of subordinated debt
Net increase (decrease) in drafts outstanding
Net increase in advances from borrowers for insurance and taxes
Cash dividends paid on common stock
Proceeds from issuance of common stock
Net increase in excess tax benefit in connection with equity awards
Proceeds from exercise of stock options
Cash flows provided by 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
Transfer of loans receivable to real estate acquired
through foreclosure
Transfer of held-to-maturity securities to available-for-sale
securities
Acquisitions:
Assets acquired
Liabilities assumed
Net assets
Goodwill and fair value acquisition adjustments
See accompanying notes to consolidated financial statements.
99
$
$
$
$
(165,510)
57,909
99,113
—
—
(29)
(804)
(180,077)
—
(3,714)
1
3,898
(25)
—
3,668
(185,570)
137,407
13,632
—
4,069
417
(1,475)
—
454
27
154,531
(2,275)
26,627
24,352
8,759
7,101
2,630
16,955
104,221
92,203
12,018
4,266
(207,316)
52,906
105,840
(497)
199
(973)
(4,514)
(144,812)
—
(3,329)
34
2,182
(6,025)
175
—
(206,130)
67,338
104,249
(1,575)
(1,166)
28
(781)
32,156
189
70
200,508
5,480
21,147
26,627
6,583
7,160
1,307
12,652
—
—
—
—
(193,577)
37,782
74,901
(1,487)
536
(419)
(1,302)
(163,846)
1,575
(4,017)
—
4,060
—
—
131,135
(114,659)
51,488
34,942
(300)
617
329
(606)
—
126
50
86,646
(17,518)
38,665
21,147
5,601
3,553
1,461
—
—
—
—
—
2016 Form 10-K
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 one wholly-owned subsidiary, CresCom Bank
(the “Bank”). CresCom Bank operates two wholly-owned subsidiaries, Crescent Mortgage Company and
Carolina Services Corporation of Charleston (“Carolina Services”). The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, the Bank. In consolidation, all
material intercompany accounts and transactions have been eliminated. The results of operations of the
businesses acquired in transactions accounted for as purchases are included only from the dates of acqui-
sition. All majority-owned subsidiaries are consolidated unless control is temporary or does not rest with
the Company.
At December 31, 2016 and 2015, statutory business trusts (“Trusts”) created by the Company had out-
standing trust preferred securities with an aggregate par value of $15,000,000. The principal assets of
the Trusts are $15,465,000 of the Company’s subordinated debentures with identical rates of interest and
maturities as the trust preferred securities. The Trusts have issued $465,000 of common securities to the
Company and are included in other investments in the accompanying consolidated balance sheets. The
Trusts are not consolidated subsidiaries of the Company.
Management’s Estimates
The financial statements are prepared in accordance with generally accepted accounting principles in the
United States of America which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the de-
termination of the allowance for loan losses, including valuation for impaired loans, business combination
accounting, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans,
the valuation of securities, the valuation of derivative instruments, the valuation of mortgage servicing
rights, the determination of the reserve for mortgage loan repurchase losses, asserted and unasserted legal
claims and deferred tax assets or liabilities. In connection with the determination of the allowance for loan
losses and foreclosed real estate, management obtains independent appraisals for significant properties.
Management must also make estimates in determining the estimated useful lives and methods for depre-
ciating premises and equipment.
Management uses available information to recognize losses on loans and foreclosed real estate. However,
future additions to the allowance may be necessary based on changes in local economic conditions. In ad-
dition, 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.
100
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions that provide additional
evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in
the process of preparing financial statements. Non-recognized subsequent events are events that provide
evidence about conditions that did not exist at the date of the statement of financial condition but arose
after that date 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 except
as noted below:
On January 18, 2017, the Company declared a quarterly cash dividend of $0.04 per share payable on its
common stock. The cash dividend will be payable on April 7, 2017 to stockholders of record as of March
17, 2017.
On January 25, 2017, Carolina Financial Corporation closed a public offering of 1,807,143 shares of its
common stock with net proceeds of approximately $47.7 million after deducting underwriting discounts,
commissions and estimated offering expenses incurred by the Company.
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, 2016 and 2015 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 instru-
ments is considered a reasonable estimate of fair value. The Bank is required to maintain average balances
on hand or with the FRB. There were no reserve requirements at December 31, 2016 or December 31,
2015.
Securities
Investment securities are classified into three categories: (a) Held-to-Maturity – debt securities that the
Company has positive intent and ability to hold to maturity, which are reported at amortized cost; (b)
Trading – debt and equity securities that are bought and held principally for the purpose of selling them in
the near term, which are reported at fair value, with unrealized gains and losses included in earnings; and
(c) Available-for-Sale – debt and equity securities that may be sold under certain conditions, which are re-
ported 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-ma-
turity 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.
101
2016 Form 10-K The cost basis of securities sold is determined by specific identification. Purchases and sales of securities
are recorded on a trade date basis.
Loans Held for Sale
The Company’s residential mortgage lending activities for sale in the secondary market are comprised
of accepting residential mortgage loan applications, qualifying borrowers to standards established by in-
vestors, funding 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 current market prices, when available, and includes loan servicing value. When
observable market prices are not available, the Company uses judgment and estimates fair value using
internal models, in which the Company uses its best estimates of assumptions it believes would be used by
market participants in estimating fair value. Adjustments to reflect unrealized gains and losses resulting
from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as
noninterest income, mortgage banking income in the Consolidated Statements of Operations.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors.
Derivatives related to these commitments are recorded as either assets or liabilities in the balance sheet
and are measured at fair value. Changes in the fair value of the derivatives are reported in current earnings
or other comprehensive income depending on the purpose for which the derivative is held and whether the
derivative qualifies for hedge accounting.
Derivative Financial Instruments
Derivatives are recognized as either assets or liabilities and are recorded at fair value on the Company’s
Consolidated Balance Sheet. The accounting for changes in the fair value of derivatives depends on the
intended use of the derivative and resulting designation. The Company’s hedging policies permit the use
of various derivative financial instruments to manage interest rate risk or to hedge specified assets and
liabilities.
To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with
the exposure being hedged and must be designated as a hedge at the inception of the derivative contract.
If derivative instruments are designated as fair value hedges, and such hedges are highly effective, both the
change in the fair value of the hedge and the hedged item are included in current earnings. If derivative
instruments are designated as cash flow hedges, fair value adjustments related to the effective portion are
recorded in other comprehensive income and are reclassified to earnings when the hedged transaction
is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur.
Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded
as adjustments to the interest income or interest expense associated with the hedged item. During the
life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments
continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is
determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting
prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed
into current earnings and the derivative instrument is reclassified to a trading position recorded at fair
value. For derivatives not designated as hedges, changes in fair value are recognized in earnings, in non-
interest income.
102
For additional discussion related to the determination of fair value related to derivative instruments, see
Note 5.
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 origi-
nated loans and unamortized premiums or discounts on purchased loans. The net amount of nonrefund-
able 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 pur-
chased loans are amortized to interest income over the estimated life of the loans using methods that ap-
proximate 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 ef-
fective 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
borrower’s financial difficulties, it grants a concession to the borrower that it would not otherwise con-
sider. 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).
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 oth-
er 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 prin-
cipal 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
103
2016 Form 10-K and interest is not significant. When loans are placed on nonaccrual status, interest receivable is re-
versed against interest income in the current period. Interest payments received thereafter are applied
as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection
of the principal. Loans are removed from nonaccrual status when they become current as to both
principal and interest and when concern no longer exists as to the collectability of principal or interest.
Assets acquired as a result of foreclosure are initially recorded at fair value less estimated selling costs at
the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodi-
cally performed by management and the assets are carried at the lower of carrying amount or fair value
less cost to sell. Gains and losses on the sale of assets acquired through foreclosure and related revenue
and expenses of these assets are included in noninterest expense in other real estate expenses, net.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is con-
firmed. 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 management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that
are individually classified as impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the contractual terms of the loan
agreement. Loans for which the terms have been modified resulting in a concession, and for which the
borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified
as impaired. These analyses involve a high degree of judgment in estimating the amount of loss associated
with specific loans, including estimating the amount and timing of future cash flows and collateral values.
Impaired loans are evaluated for impairment using the discounted cash flow methodology or based on the
net realizable value of the underlying collateral. Impaired loans are individually reviewed on a quarterly
basis to determine the level of impairment.
Factors considered by management in determining impaired loans include payment status, collateral val-
ue, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed.
If a loan has impairment, a portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan’s existing rate or at the fair value of collater-
al 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.
104
When appropriate, the fair value was based on the probable sales price of the collateral when sale of the
collateral was imminent or contracted sales price if the collateral is subject to a binding sales contract as
of the end of the quarter.
The general component covers non-impaired loans and is based on historical loss experience adjusted for
current factors. The Company considers the actual loss history experience over the trailing twenty quarters
to determine the historical loss experience used in the general component. This actual loss experience is
supplemented with other economic factors based on the risks present for each portfolio segment. These
economic factors include consideration of the following: levels of and trends in delinquencies and im-
paired 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, procedures, and practices; experience, ability, and depth of lending manage-
ment and other relevant staff; national and local economic trends and conditions; industry conditions; and
effects of changes in credit concentrations.
While management uses the best information available to establish the allowance for loan losses, future
adjustments to the allowance may be necessary if economic conditions differ substantially from the as-
sumptions 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”) Ac-
counting 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 val-
ue. 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 val-
ues 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 purchase, 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.
105
2016 Form 10-K 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.
Goodwill and Core Deposit Intangible
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets
acquired in a business combination. Goodwill is not amortized but instead is subject to review for impair-
ment annually, or more frequently if deemed necessary. Also 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 amortization method.
Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing
income. The amortization of the mortgage servicing rights is analyzed periodically and is adjusted to re-
flect changes in prepayment rates and other estimates.
The Company evaluates potential impairment of mortgage servicing rights based on the difference be-
tween the carrying amount and current estimated fair value of the servicing rights. In determining impair-
ment, the Company aggregates all servicing rights and stratifies them into tranches based on predominant
risk characteristics. If impairment exists, a valuation allowance is established for any excess of amortized
cost over the current estimated fair value by a charge to income. If the Company later determines that all
or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may
be recorded as an increase to income.
Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements
with the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corpora-
tion (“FHLMC”), Government National Mortgage Association (“GNMA”) and certain private investors.
The fees are based on a contractual percentage of the outstanding principal balance of the loans serviced
and are recorded as income when received in noninterest income. Amortization of mortgage servicing
rights and mortgage servicing costs are charged to expense when incurred.
Guarantees
Standby letters of credit obligate the Company to meet certain financial obligations of its customers, under
the contractual terms of the agreement, if the customers are unable to do so. Payment is only guaranteed
under these letters of credit upon the borrower’s failure to perform its obligations to the beneficiary. The
Company can seek recovery of the amounts paid from the borrower; however, these standby letters of
credit are generally not collateralized. Commitments under standby letters of credit are usually one year
106
or less. At December 31, 2016 and 2015, 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.
Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using
the straight-line method over the asset’s estimated useful life. Estimated lives range up to forty years for
buildings and improvements and up to ten years for furniture, fixtures and equipment. Maintenance and
repairs are charged to expense as incurred. Improvements that extend the lives of the respective assets are
capitalized. When property or equipment is sold or otherwise disposed of, the cost and related accumu-
lated 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 pub-
lic relations in the accompanying consolidated statements of operations.
Income Taxes
The provision for income taxes is based upon income or loss before taxes for financial statement purposes,
adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided
when different accounting methods have been used in determining income for income tax purposes and
for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax
consequences attributable to differences arising from the financial statement carrying values of assets
and liabilities and their tax bases. In the event of changes in the tax laws, deferred tax assets and liabilities
are adjusted in the period of the enactment of those changes, with the cumulative effects included in the
current year’s income tax provision.
Positions taken by the Company’s tax returns may be subject to challenge by the taxing authorities upon
examination. The benefits of uncertain tax positions are initially recognized in the financial statements
only when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that
is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowl-
edge 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 state-
ment of operations. There were no significant interest and penalties paid on income tax uncertainties
during 2016 or 2015.
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.
107
2016 Form 10-K Drafts Outstanding
The Company invests excess funds on deposit at other banks (including amounts on deposit for payment of
outstanding disbursement checks) on a daily basis in an overnight interest-bearing account. Accordingly,
outstanding checks are reported as a liability.
Reserve for Mortgage Loan Repurchase Losses
The Company sells mortgage loans to various third parties, including government-sponsored entities, under
contractual provisions that include various representations and warranties that typically cover ownership of
the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the
loan, absence of delinquent taxes or liens against the property securing the loan, and similar matters. The
Company may be required to repurchase the mortgage loans with identified defects, indemnify the investor
or insurer, or reimburse the investor for credit loss incurred on the loan (collectively “repurchase”) in the
event of a material breach of such contractual representations or warranties. Risk associated with potential
repurchases or other forms of settlement is managed through underwriting and quality assurance practices
and by servicing mortgage loans to meet investor and secondary market standards.
The Company establishes mortgage repurchase reserves related to various representations and warranties
that reflect management’s estimate of losses based on a combination of factors. Such factors incorporate
estimated levels of defects on internal quality assurance, default expectations, historical investor
repurchase demand and appeals success rates, reimbursement by correspondent and other third party
originators, changes in the regulatory repurchase framework and projected loss severity. The Company
establishes a reserve at the time loans are sold and quarterly 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
Recovery of mortgage repurchase losses
Ending balance
Transfers of Financial Assets
December 31,
2016
2015
2014
(In thousands)
4,999
(165)
42
(1,000)
3,876
3,876
(21)
25
(1,000)
2,880
$
$
6,109
(389)
29
(750)
4,999
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
108
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
directors, officers and other key employees. The Company accounts for its stock compensation plans in
accordance with ASC Topics 718 and 505. Under those provisions, the Company has adopted a fair value
based method of accounting for employee stock compensation plans, whereby compensation cost is mea-
sured at the grant date based on the value of the award and is recognized on a straight-line basis over the
service period, which is usually the vesting period, taking into account retirement eligibility. As a result,
compensation expense relating to stock options and restricted stock is reflected in net income as part of
“salaries and employee benefits” on the consolidated statements of operations.
Earnings Per Common Share
Basic earnings per common share (“EPS”) represents income available to common stockholders’ divided
by the weighted-average number of common shares outstanding during the year. Diluted earnings per
common share reflects additional shares that would have been outstanding if dilutive potential shares
had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock
options, restricted stock (non-vested shares), and warrants, and are determined using the treasury stock
method. Under the treasury stock method, the number of incremental shares is determined by assuming
the issuance of stock for the outstanding stock options and warrants, reduced by the number of shares
assumed to be repurchased from the issuance 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 stock-
holders 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.
On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a
20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.
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.
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 pre-
viously reported.
Recently Issued Accounting Pronouncements
In May 2014 and August 2015, the Financial Accounting Standards Board (“FASB”) issued guidance to
change the recognition of revenue from contracts with customers. The core principle of the new guidance
109
2016 Form 10-K 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. The guidance will be effective
for the Company for reporting periods beginning after December 15, 2017. 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 clarifies that performance targets associated with stock
compensation should be treated as a performance condition and should not be reflected in the grant date
fair value of the stock award. The amendments are effective for the Company for fiscal years that begin
after December 15, 2015. The Company applied the guidance to stock awards with performance targets
that are outstanding at the start of the first fiscal year in the financial statements and to all stock awards
that are granted or modified after the effective date. These amendments did not have a material effect on
the financial statements.
In February 2015, the FASB issued guidance which amends the consolidation requirements and signifi-
cantly changes the consolidation analysis required under GAAP. Although the amendments are expected
to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous
consolidation conclusions. The amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015 with early adoption permitted (including during an inter-
im period), provided that the guidance is applied as of the beginning of the annual period containing the
adoption date. These amendments did not have a material effect on the financial statements.
In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codifica-
tion to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connec-
tion with line-of-credit arrangements. The amendments were effective upon issuance. The amendments
did not have a material effect on the financial statements
In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards
Codification to simplify the accounting for adjustments made to provisional amounts recognized in a busi-
ness combination by eliminating the requirement to retrospectively account for those adjustments. The
amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015 with early adoption permitted for financial statements that have not been issued. All
entities are required to apply the amendments prospectively to adjustments to provisional amounts that
occur after the effective date. The Company does not expect these amendments to have a material effect
on its financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Cod-
ification to address certain aspects of recognition, measurement, presentation, and disclosure of finan-
cial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company will apply the guidance by means of a
cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The
amendments related to equity securities without readily determinable fair values will be applied prospec-
tively to equity investments that exist as of the date of adoption of the amendments. The Company does
not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise
certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The
amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods
110
within those fiscal years. The Company is currently evaluating the effect that implementation of the new
standard will have on its financial position, results of operations, and cash flows.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to
clarify the implementation guidance on principal versus agent considerations and address how an entity
should assess whether it is the principal or the agent in contracts that include three or more parties.
The amendments will be effective for the Company for reporting periods beginning after December
15, 2017. The Company does not expect these amendments to have a material effect on its financial
statements.
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based
payment award transactions including the income tax consequences, the classification of awards as either
equity or liabilities, and the classification on the statement of cash flows. In addition to other changes, the
guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recog-
nized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur.
For public business entities, the amendments are effective for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any
interim or annual period. The Company adopted the new guidance in the second quarter of 2016. These
amendments did not a material impact to the Company’s financial position and cash flows.
In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify
guidance related to identifying performance obligations and accounting for licenses of intellectual prop-
erty. The amendments will be effective for the Company for reporting periods beginning after December
15, 2017. The Company does not expect these amendments to have a material effect on its financial state-
ments.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clari-
fy guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The
amendments will be effective for the Company for reporting periods beginning after December 15, 2017.
The Company does not expect these amendments to have a material effect on its financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impair-
ment model for certain debt securities. The amendments will be effective for the Company for reporting
periods beginning after December 15, 2019. The Company is evaluating the effect that implementation of
the new standard will have on its financial position, results of operation and cash flows.
In August 2016, the FASB amended the Statement of Cash Flows topic of the ASC to clarify how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The amend-
ments will be effective for the Company for fiscal years beginning after December 15, 2017 including inter-
im periods within those fiscal years. The Company does not expect these amendments to have a material
effect on its financial statements.
In October 2016, the FASB amended the Income Taxes topic of the ASC to modify the accounting for in-
tra-entity transfers of assets other than inventory. The amendments will be effective for the Company for
fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early
adoption is permitted. The Company does not expect these amendments to have a material effect on its
financial statements.
111
2016 Form 10-K In October 2016, the FASB amended the Consolidation topic of the ASC to revise the consolidation guid-
ance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should
treat indirect interests in the entity held through related parties that are under common control with the
reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments will
be effective for the Company for fiscal years beginning after December 15, 2016 including interim periods
within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to
have a material effect on its financial statements.
In November 2016, the FASB amended the Statement of Cash Flows topic of the ASC to clarify how re-
stricted cash is presented and classified in the statement of cash flows. The amendments will be effective
for the Company for fiscal years beginning after December 15, 2017 including interim periods within those
fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a ma-
terial effect on its financial statements.
In December 2016, the FASB issued amendments to clarify the ASC, correct unintended application of
guidance, and make minor improvements to the ASC that are not expected to have a significant effect on
current accounting practice or create a significant administrative cost to most entities. The amendments
were effective upon issuance (December 14, 2016) for amendments that do not have transition guidance.
Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
In December 2016, the FASB issued technical corrections and improvements to the Revenue from Con-
tracts with Customers Topic. These corrections make a limited number of revisions to several pieces of
the revenue recognition standard issued in 2014. The effective date and transition requirements for the
technical corrections will be effective for the Company for reporting periods beginning after December 15,
2017. 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.
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 opera-
tions or cash flows.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant types of risks: economic
and regulatory. There are three main components of economic risk: interest rate risk, credit risk, and
market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities
mature or re-price at different speeds, or on a different basis, than its interest-earning assets. Credit
risk is the risk of default on the loan portfolio or certain securities that results from borrowers’ inability
or unwillingness to make contractually required payments. Market risk reflects changes in the value of
collateral underlying loans receivable and the valuation of real estate held by the Company. The Compa-
ny is subject to the regulations of various governmental agencies. These regulations can and do change
significantly from period to period. Periodic examinations by the regulatory agencies may subject the
Company to further changes with respect to asset valuations, amounts of required loss allowances and
operating restrictions from the regulators’ judgments based on information available to them at the time
of their examination.
112
NOTE 2 – BUSINESS COMBINATION
Acquisition of Congaree Bancshares, Inc.
On June 11, 2016, the Company completed its acquisition of Congaree Bancshares, Inc. (“Congaree”),
the holding company for Congaree State Bank, pursuant to the Agreement and Plan of Merger, dated as
of January 5, 2016. Under the terms of the merger agreement, each share of Congaree common stock was
converted into the right to receive $8.10 in cash or 0.4806 shares of the Company’s common stock, or a
combination thereof, subject to certain limitations.
The following table presents a summary of total consideration paid by the Company at the acquisition date
(dollars in thousands).
Common stock issued (508,910 shares)
Cash payments to common stockholders
Preferred shares assumed and redeemed at par
Fair value of Congaree stock options assumed - paid out in cash
Total consideration paid
$
$
8,557
5,724
1,564
439
16,284
The following table presents the Congaree assets acquired and liabilities assumed as of June 11, 2016 as
well as the related fair value adjustments and determination of goodwill.
As Reported
by Congaree
Fair Value
Adjustments
(In thousands)
As Recorded by
the Company
Assets
Cash and cash equivalents
Securities
Loans
Allowance for loan losses
Premises and equipment
Foreclosed assets
Core deposit intangible
Deferred tax asset
Other assets
Total assets acquired
Liabilities
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
Total consideration paid
Goodwill
—
(59)(a)
(4,111)(b)
1,112(c)
38(d)
(250)(e)
1,104(f)
915(g)
(152)(h)
(1,403)
98(i)
—
—
98
11,394
9,394
74,601
—
2,750
1,460
1,104
2,728
790
104,221
89,325
2,500
378
92,203
12,018
16,284
4,266
$
$
$
$
11,394
9,453
78,712
(1,112)
2,712
1,710
—
1,813
942
105,624
89,227
2,500
378
92,105
113
2016 Form 10-K
Explanation of fair value adjustments:
(a)
Adjustment reflects opening fair value of securities portfolio, which was established as the new book
basis of the portfolio.
Adjustment reflects the fair value adjustment based on the Company’s third party valuation report.
(b)
(c) Adjustment reflects the elimination of Congaree’s historical allowance for loan losses.
(d) Adjustment reflects fair value adjustments on acquired branch and administrative offices.
(e)
Adjustment reflects the fair value adjustment based on the Company’s evaluation of the foreclosed
assets.
Adjustment reflects the fair value adjustment to record the estimated core deposit intangible based
on the Company’s third party valuation report.
(f)
(g) Adjustment reflects the tax impact of acquisition accounting fair value adjustments.
(h)
Adjustment reflects the fair value adjustment based on the Company’s evaluation of acquired other
assets.
Adjustment reflects the fair value adjustment based on the Company’s third party evaluation report
on deposits assumed.
(i)
The Congaree acquisition was accounted for under the acquisition method of accounting. The assets and
liabilities of Congaree have been recorded at their estimated fair values and added to those of the Com-
pany for periods following the merger date. The Company may refine its valuations of acquired Congaree
assets and liabilities for up to one year following the merger date. As of December 31, 2016, there have
been no measurement period adjustments recognized during the reporting period.
The Company acquired $104.2 million in assets at fair value, including $74.6 million in loans, $9.4 million
in investment securities, and $1.5 million in real estate acquired through foreclosure. The Company also
assumed $92.2 million of liabilities at fair value, including $89.3 million of total deposits with a core depos-
it intangible asset recorded of $1.1 million.
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 FASB 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 transaction were accounted for under ASC 310-20, as
a practical expedient, due to the immaterial balances of accruing substandard and nonaccrual loans as of
the acquisition date. Nonaccrual and accruing substandard loans acquired totaled $204,000 and $423,000,
respectively, as of June 11, 2016.
Supplemental Pro Forma Information
The table below presents supplemental pro forma information as if the Congaree acquisition had occurred
at the beginning of the earliest period presented, which was January 1, 2014. Pro forma results include
adjustments for amortization and accretion of fair value adjustments and do not include any projected
cost savings or other anticipated benefits of the merger. Therefore, the pro forma financial information
is not indicative of the results of operations that would have occurred had the transactions been effected
on the assumed date. Pre-tax merger-related costs of $3.0 million for year ended December 31, 2016, are
included in the Company’s Consolidated Statements of Operations and are not included in the pro forma
statements below. Net interest income and net income recorded from the merger date to December 31,
2016 was $2.7 million and $1.4 million, respectively.
114
For the Year Ended December 31,
2015
2014
2016
Net interest income
Net income (a)
Weighted average shares outstanding (b):
Basic
Diluted
Earnings per common share:
Basic
Diluted
$
$
54,679
20,185
12,844,191
13,116,309
$
$
1.57
1.54
$
$
$
$
48,092
15,554
$
$
37,100
10,412
10,046,733
10,227,731
$ 9,823,423
$ 10,016,800
1.55
1.52
$
$
1.06
1.04
(a)
(b)
Supplemental pro forma net income includes the impact of certain fair value adjustments. In ad-
dition, preferred shares were assumed to have been repaid; therefore no preferred dividends were
assumed to have been paid. Supplemental pro forma net income does not include assumptions on
cost saves or impact of merger related expenses.
Weighted average shares outstanding include the full effect of the common stock issued in connec-
tion with the Congaree acquisition as of the earliest reporting date.
On November 8, 2016, we announced the signing of a definitive agreement pursuant to which Carolina
Financial Corporation will acquire Greer Bancshares Incorporated (“Greer”) in a cash and stock transac-
tion with a total value as of the date of announcement of approximately $45.1 million. Subject to the terms
and conditions of the agreement, each share of Greer common stock will be converted into the right to
receive one of the following: (i) $18.00 in cash, (ii) 0.782 shares of Company common stock, or (iii) a com-
bination of cash and Company common stock, subject to the limitation that, excluding any shares held by
Greer shareholders who exercise their dissenters’ rights, the total merger consideration shall be prorated
to 10% cash consideration and 90% stock consideration. The transaction is anticipated to close by the end
of the first quarter of 2017, subject to customary closing conditions. As of December 31, 2016, Greer had
total assets of $378.4 million, total loans held for investment of $208.7 million and total deposits of $295.1
million.
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, 2016 and 2015, core deposit intangible was
$3.7 million and $3.0 million, respectively. 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
453
453
453
453
432
1,414
3,658
115
2016 Form 10-K
Amortization expense of $407,000, $343,000, and $47,000 related to the core deposit intangible was
recognized in 2016, 2015, and 2014, respectively.
NOTE 4 - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investments securities
available-for-sale and held-to-maturity at December 31, 2016 and 2015 follows:
2016
Gross
Gross
2015
Gross
Gross
At December 31,
Amortized Unrealized Unrealized Fair
Amortized Unrealized Unrealized Fair
Cost
Gains
Losses
Value
Cost
Gains
Losses
Value
(In thousands)
Securities available-for-
sale:
Municipal securities
US government agencies
Collateralized loan
$
obligations
Corporate securities
Mortgage-backed
securities:
Agency
Non-agency
Total mortgage-
92,792
3,438
76,202
474
90,477
63,628
backed securities
154,105
Trust preferred
securities
Total
Securities held-to-
maturity:
11,203
338,214
$
138
17
995
424
1,419
545
3,594
1,475
—
(1,055)
(52)
93,212
3,386
(91)
—
76,249
491
60,603
7,015
38,957
—
(486)
(188)
90,986
63,864
112,608
75,415
(674) 154,850
188,023
(4,584)
7,164
(6,456) 335,352
11,374
305,972
1,885
81
8
—
1,370
580
1,950
1,145
5,069
(13)
—
62,475
7,096
(207)
—
38,758
—
(123)
(459)
113,855
75,536
(582)
189,391
(3,765)
(4,567)
8,754
306,474
Municipal securities
$
—
—
—
—
17,053
912
—
17,965
During the second quarter of 2016, the Company tainted its securities held-to-maturity portfolio as a
result of a change in the intent to hold these securities until maturity to provide opportunities to maximize
its asset utilization. As a result, the securities were moved to available-for-sale resulting in an increase to
accumulated other comprehensive income of $655,000.
116
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2016 follows:
Securities available-for-sale:
One to five years
Six to ten years
After ten years
Total
2016
Amortized
Cost
Fair
Value
(In thousands)
$
$
597
50,355
287,262
338,214
606
49,916
284,830
335,352
The contractual maturity dates of the securities were used for this table. No estimates were made to antic-
ipate principal repayments.
Sales of investment securities available-for-sale for the years ended December 31, 2016 and 2015 are as
follows.
Proceeds
Realized gains
Realized losses
Total investment securities gains, net
For the Years
Ended December 31,
2016
2015
(In thousands)
99,113
1,003
(297)
706
105,840
1,639
(146)
1,493
$
$
At December 31, 2016, the Company has pledged $10.7 million of securities for FHLB advances.
At December 31, 2016, the Company has pledged $19.1 million of securities to secure public agency funds.
117
2016 Form 10-K
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, 2016 are as follows:
Less than 12 Months
Total
Unrealized Amortized Fair Unrealized Amortized Fair
Unrealized
At December 31, 2016
12 Months or Greater
Amortized Fair
Cost
Value Losses
Cost
Value Losses
Cost
Value Losses
(In thousands)
Available-for-sale:
Municipal securities
US government agencies
Collateralized loan
obligations
Mortgage-backed
securities:
Agency
Non-agency
Total mortgage-backed
securities
Trust preferred securities
Total
$
$
40,479
3,438
39,424
3,386
(1,055)
(52)
—
—
—
—
—
—
40,479
3,438
39,424
3,386
(1,055)
(52)
16,792
16,748
(44)
8,500
8,453
(47)
25,292
25,201
(91)
33,323
9,357
32,960
9,240
(363)
(117)
10,125
8,801
10,002
8,730
(123)
(71)
43,448
18,158
42,962
17,970
42,680
1,362
$ 104,751
42,200
1,112
102,870
(480)
(250)
(1,881)
18,926
8,667
36,093
18,732
4,333
31,518
(194)
(4,334)
(4,575)
61,606
10,029
140,844
60,932
5,445
134,388
(486)
(188)
(674)
(4,584)
(6,456)
The gross unrealized losses and fair value of the Company’s investments available-for-sale and held-to-ma-
turity 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, 2015 are as follows:
Less than 12 Months
Total
Amortized Fair Unrealized Amortized Fair Unrealized Amortized Fair
At December 31, 2015
12 Months or Greater
Unrealized
Cost
Value Losses
Cost
Value Losses
(In thousands)
Cost
Value Losses
$
2,579
2,566
(13)
—
—
—
2,579
2,566
(13)
24,289
24,130
(159)
9,706
9,658
(48)
33,995
33,788
(207)
22,528
27,724
22,416
27,432
Total mortgage-backed
securities
Trust preferred securities
Total
$
50,252
—
77,120
49,848
—
76,544
(112)
(292)
(404)
—
(576)
804
12,242
793
12,075
(11)
(167)
23,332
39,966
23,209
39,507
13,046
8,803
31,555
12,868
5,038
27,564
(178)
(3,765)
(3,991)
63,298
8,803
108,675
62,716
5,038
104,108
(123)
(459)
(582)
(3,765)
(4,567)
The Company reviews its investment securities portfolio at least quarterly and more frequently when eco-
nomic 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
118
Available-for-sale:
Municipal securities
Collateralized loan
obligations
Mortgage-backed
securities:
Agency
Non-agency
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.
As of December 31, 2016, trust preferred securities had an amortized cost of $11.2 million and a fair value
of $7.2 million. For each trust preferred security, impairment testing is performed on a quarterly basis
using a detailed cash flow analysis.
The major assumptions used during the quarterly impairment testing are described in the subsequent
paragraph.
In 2009, the Company adopted a four year “burst” scenario for its modeled default rates (2010 - 2015)
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. The last year of the elevated default rate was 2014. The
constant default rate used by the Company is now 0.25% annually. All issuers that were currently in de-
ferral 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 underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance
companies and real estate investment trusts. The Company owns both senior and mezzanine tranches
in pooled trust preferred securities; however, the Company does not own any income notes. The senior
and mezzanine tranches of trust preferred collateralized debt obligations generally have some protection
from defaults in the form of over-collateralization and excess spread revenues, along with waterfall struc-
tures that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior
tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and
income notes subordinated to the mezzanine tranches.
As of December 31, 2016, $0.8 million of the pooled trust preferred securities were investment grade
and $6.4 million were below investment grade. As of December 31, 2015, $0.8 million of the pooled trust
preferred securities were investment grade and $8.0 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.
At December 31, 2016 and 2015, the Company had 81 and 45, respectively, individual investments avail-
able-for-sale that were in an unrealized loss position. The unrealized losses on the Company’s invest-
ments in US government-sponsored agencies, municipal securities, mortgage-backed securities (agency
and non-agency), and trust preferred securities summarized above were attributable primarily to changes
in interest rates. Management has performed various analyses, including cash flows as needed, and deter-
mined that no OTTI expense was necessary during 2016, 2015, or 2014.
Management believes that there are no additional securities other-than-temporarily impaired at Decem-
ber 31, 2016. 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
119
2016 Form 10-K 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 earn-
ings in such periods.
The following table presents detail of non-marketable investments at December 31, 2016 and 2015.
Community Reinvestment Act fund
Investment in Statutory Business Trusts
Total other investments
Federal Home Loan Bank stock
Non-marketable investments
At December 31,
2016
2015
(In thousands)
1,303
465
1,768
11,072
12,840
1,295
465
1,760
9,919
11,679
$
$
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.
NOTE 5 – DERIVATIVES
In the ordinary course of business, the Company enters into various types of derivative transactions. The
Company’s primary uses of derivative instruments are related to the mortgage banking activities. As such,
the Company holds derivative instruments, which consist of rate lock agreements related to expected fund-
ing of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments
to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s objective in
obtaining the forward commitments is to mitigate the interest rate risk associated with the interest rate
lock commitments and the mortgage loans that are held for sale. Derivative instruments not related to
mortgage banking activities primarily relate to interest rate swap agreements.
120
The derivative positions of the Company at December 31, 2016 and December 31, 2015 are as follows:
At December 31,
2016
2015
Fair
Value
Notional
Value
Fair
Value
Notional
Value
(In thousands)
Derivative assets:
Cash flow hedges:
Interest rate swaps
Non-hedging derivatives:
Interest rate swaps
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales
commitments
Total derivative assets
$ 421
30,000
180
30,000
532
1,113
153
20,000
117,439
94,001
—
$ 2,219
—
261,440
—
1,246
340
179
1,945
—
143,318
31,513
105,014
309,845
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps
Mortgage-backed securities forward sales
commitments
Total derivative liabilities
Non-Designated Hedges
$ 195
10,000
147
$ 342
22,784
32,784
306
—
306
10,000
—
10,000
Derivative Loan Commitments and Forward Sales Commitments
The Company enters into mortgage loan commitments that are also referred to as derivative loan commit-
ments, if the loan that will result from exercise of the commitment will be held for sale upon funding. The
Company enters into commitments to fund residential mortgage loans at specified rates and times in the
future, with the intention that these loans will subsequently be sold in the secondary market.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans
arising from exercise of the loan commitment might decline from inception of the rate lock to funding of
the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan com-
mitments typically decreases. Conversely, if interest rates decrease, the value of these loan commitments
typically increases.
To protect against the price risk inherent in derivative loan commitments, the Company utilizes both
“mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential
decreases in the values of loans that would result from the exercise of the derivative loan commitments.
121
2016 Form 10-K
With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of
mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to
deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated
to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor
for the shortfall.
With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified
principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the
price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g.,
on the same day the lender commits to lend funds to a potential borrower). The Company expects that
these forward loan sale commitments will experience changes in fair value opposite to the change in fair
value of derivative loan commitments.
Derivatives related to these commitments are recorded as either a derivative asset or a derivative liability
on 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 mortgage banking income within the noninterest income in the consolidated statements of operations.
Interest Rate Swaps
The Company enters into interest rate swaps that do not meet the hedge accounting requirements and
are recorded at fair value as a derivative asset or liability. Interest rate swaps that are not designated as
hedges are primarily used to more closely match the interest rate characteristics of assets and liabilities
and to mitigate the risks arising from timing mismatches between assets and liabilities including duration
mismatches. Fair value changes are recognized in noninterest income as “fair value adjustment on interest
rate swaps”. As of December 31, 2016, the Company had four outstanding stand-alone interest rate deriv-
atives with a notional value of $30.0 million and a weighted average remaining term of 4.68 years.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using certain interest rate derivatives are to add stability to interest expense
and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses
interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as
cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company
making fixed-rate payments over the life of the agreements without exchange of the underlying notional
amount.
The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related
cash outflows attributable to changes in forecasted LIBOR based FHLB borrowings. These derivative
instruments are designated as cash flow hedges. The hedged item is the LIBOR portion of the series of
future adjustable rate borrowings over the term of the interest rate swap. Accordingly, changes to the
amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk
are excluded from our assessment of hedge effectiveness. The Company tests for hedging effectiveness on
a quarterly basis. The effective portion of changes in the fair value of derivatives designated and that qual-
ify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclas-
sified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective
portion of the change in fair value of the derivatives is recognized directly in earnings. The Company has
not recorded any hedge ineffectiveness since inception.
122
As of December 31, 2016, the Company had two outstanding interest rate derivatives with a notional val-
ue of $30.0 million that were designated as cash flow hedges of interest rate risk with a weighted average
remaining term of 8.84 years.
Risk Management Objective of Using Derivatives
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 percent-
age 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 de-
termined, the Company would adjust the fair value of the derivative recorded asset balance to consider
such risk.
NOTE 6 - LOANS RECEIVABLE, NET
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 ac-
tivities 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 con-
ditions, 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 cus-
tomer lending limits, with approval processes 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 $1.5 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.
The following is a description of the risk characteristics of the material loan portfolio segments:
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 80%. We offer fixed and adjustable rate residen-
tial 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
123
2016 Form 10-K 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 exten-
sion 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 profile. 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, generally does not exceed 80%. We
also generally require that a borrower’s cash flow exceed 120% of monthly debt service obligations. In or-
der to ensure secondary sources of payment and liquidity to support a loan request, we typically review all
of the personal 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 com-
mercial 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. 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%-80% of the lesser 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 gener-
ally 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. Gen-
erally, 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 guar-
antees 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 primary markets have provided limited opportunities for us to develop a commercial and industrial
loan portfolio. The Company’s primary markets are generally concentrated in real estate lending. How-
ever, in order to diverse our lending portfolio, the Company began a syndicated loan program in 2014 to
purchase nationally syndicated commercial and industrial loans. These loans typically have terms of seven
years and are generally tied to a floating rate index such as LIBOR or prime. To effectively manage this
line of business, The Company hired an experienced senior lending executive with relevant experience to
lead and manage this are of the loan portfolio. In addition, the Company engaged a consulting firm that
specializes in syndicated loans to assist in monitoring an performance analytics. As of December 31, 2016,
124
there were approximately $91.5 million in syndicated loans outstanding. Syndicated loans are grouped
within commercial business loans below.
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 typi-
cally 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.
Loans receivable, net at December 31, 2016 and 2015 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:
Allowance for loan losses
Total loans receivable, net
At December 31,
2016
% of Total
2015
% of Total
Amount
Loans
(Dollars in thousands)
Amount
Loans
$ 411,399
36,026
445,344
115,682
5,714
164,101
1,178,266
10,688
$ 1,167,578
34.91%
3.06%
37.80%
9.82%
0.48%
13.93%
100.00%
344,928
23,256
341,658
91,362
5,179
116,340
922,723
10,141
912,582
37.38%
2.52%
37.03%
9.90%
0.56%
12.61%
100.00%
Included in the loan totals at December 31, 2016 and 2015 were $119.4 million and $64.1 million, respec-
tively, in acquired loans. No allowance for loan losses related to the acquired loans is recorded on the ac-
quisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
Subsequent to the purchase date and after any credit discounts have been fully used, the methods utilized
to estimate the required allowance for loan losses are the same as originated loans.
See Note 2 “Business Combinations” for additional information regarding acquired loans.
The composition of gross loans outstanding by rate type is as follows:
Variable rate loans
Fixed rate loans
Total loans outstanding
At December 31,
2016
2015
$ 455,589
722,677
$ 1,178,266
(Dollars in thousands)
38.67%
61.33%
100.00%
397,873
524,850
922,723
43.12%
56.88%
100.00%
125
2016 Form 10-K
The following table presents activity in the allowance for loan losses. Allocation of a portion of the allow-
ance to one category of loans does not preclude its availability to absorb losses in other categories.
Allowance for loan losses:
At December 31, 2016
Loans Secured by Real Estate
Commercial Construction
One-to-
four
Home
family equity
real
estate
and
Commercial
Development Consumer
business Unallocated Total
Balance at January 1, 2016
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2016
151
$ 2,903
(647)
46
(84) —
464 —
197
$ 2,636
3,402
(58)
—
—
3,344
(In thousands)
1,138
(82)
—
76
1,132
27
82
(53)
24
80
2,100
585
(127)
247
2,805
420 10,141
74 —
(264)
—
—
811
494 10,688
Loans Secured by Real Estate
At December 31, 2015
One-to-
four
Home
family equity
real
estate
Commercial Construction
and
Development Consumer
Unallocated Total
Commercial
business
Balance at January 1, 2015
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2015
$ 2,888
489
221
(220)
(1,050) —
150
576
$ 2,903
151
3,283
(231)
—
350
3,402
(In thousands)
1,069
(320)
(90)
479
30
(21)
(20)
38
1,138
27
1,430
(3)
(70)
743
2,100
9,035
114
306
—
— (1,230)
—
2,336
420 10,141
Loans Secured by Real Estate
At December 31, 2014
One-to-
four
Home
family equity
real
estate
Commercial Construction
and
Development Consumer
Unallocated Total
Commercial
business
Balance at January 1, 2014
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2014
231
$ 2,472
338
(10)
(80) —
158
—
$ 2,888
221
2,855
356
(28)
100
3,283
(In thousands)
1,418
(634)
(172)
457
42
(59)
(24)
71
1,069
30
339
629
(59)
521
1,430
734
(620)
—
8,091
—
(363)
—
1,307
114
9,035
126
The following table disaggregates our allowance for loan losses and recorded investment in loans by im-
pairment methodology.
Loans Secured by Real Estate
Commercial Construction
One-to-
four
Home
family equity
real
estate
and
Commercial
Development Consumer business Unallocated Total
(In thousands)
At December 31, 2016:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment
$
27
29
Collectively evaluated for
impairment
2,609
2,636
$
168
197
92
3,252
3,344
—
1,132
1,132
—
80
80
9
—
157
2,796
2,805
494
494
10,531
10,688
Loans receivable ending
balances:
Individually evaluated for
impairment
$
4,668
108
5,247
507
24
267
—
10,821
Collectively evaluated for
406,731 35,918
impairment
Total loans receivable $411,399 36,026
440,097
445,344
115,175
115,682
5,690
5,714
163,834
164,101
— 1,167,445
— 1,178,266
At December 31, 2015:
Allowance for loan losses
ending balances:
Individually evaluated for
impairment
$
15
—
Collectively evaluated for
impairment
2,888
2,903
$
151
151
343
3,059
3,402
120
1,018
1,138
—
27
27
9
—
487
2,091
2,100
420
420
9,654
10,141
Loans receivable ending
balances:
Individually evaluated for
impairment
$
3,968
—
12,499
500
65
482
—
17,514
Collectively evaluated for
impairment
340,960 23,256
Total loans receivable $344,928 23,256
329,159
341,658
90,862
91,362
5,114
5,179
115,858
116,340
—
—
905,209
922,723
127
2016 Form 10-K
The following table presents impaired loans individually evaluated for impairment in the segmented port-
folio categories as of December 31, 2016 and 2015. 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.
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, 2016
Recorded
Investment
Unpaid
Principal
Balance
Average
Interest
Income
Related Recorded
Allowance Investment Recognized
(In thousands)
$
$
4,125
—
4,011
507
24
258
8,925
543
108
1,236
—
—
9
1,896
4,668
108
5,247
507
24
267
10,821
4,366
—
4,011
507
24
258
9,166
543
108
1,236
—
—
9
1,896
4,909
108
5,247
507
24
267
11,062
—
—
—
—
—
—
—
27
29
92
—
—
9
157
27
29
92
—
—
9
157
2,241
—
3,896
496
18
292
6,943
553
41
1,266
—
—
9
1,869
2,794
41
5,162
496
18
301
8,812
100
—
217
1
2
9
329
19
2
—
—
—
—
21
119
2
217
1
2
9
350
128
At and for the Year Ended December 31, 2015
Average
Recorded Principal Related Recorded
Unpaid
Interest
Income
Investment Balance Allowance Investment Recognized
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
$
Consumer loans
Commercial business loans
With an allowance recorded:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
$
3,175
—
10,681
25
65
473
14,419
793
—
1,818
475
—
9
3,095
3,968
—
12,499
500
65
482
17,514
5,572
28
11,226
1,863
362
1,668
20,719
793
—
1,818
475
—
9
3,095
6,365
28
13,044
2,338
362
1,677
23,814
—
—
—
—
—
—
—
15
—
343
120
—
9
487
15
—
343
120
—
9
487
3,106
59
11,003
225
181
1,304
15,878
522
—
838
245
—
66
1,671
3,628
59
11,841
470
181
1,370
17,549
225
32
698
1
40
208
1,204
25
—
24
12
—
3
64
250
32
722
13
40
211
1,268
129
2016 Form 10-K
At and for the Year Ended December 31, 2014
Unpaid
Average
Interest
Income
Recorded Principal Related Recorded
Investment Balance Allowance Investment Recognized
(In thousands)
With no related allowance recorded:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
$
Consumer loans
Commercial business loans
With an allowance recorded:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Total:
Loans secured by real estate:
One-to-four family
Home equity
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
$
2,008
63
11,346
—
29
1,730
15,176
1,241
—
260
267
1
—
1,769
3,249
63
11,606
267
30
1,730
16,945
3,731
410
11,892
1,733
506
2,927
21,199
1,241
—
260
267
1
—
1,769
4,972
410
12,152
2,000
507
2,927
22,968
—
—
—
—
—
—
—
364
—
30
90
1
—
485
364
—
30
90
1
—
485
5,144
4
16,939
348
23
2,405
24,863
673
—
265
184
4
—
1,126
5,817
4
17,204
532
27
2,405
25,989
128
1
1,293
(26)
11
275
1,682
29
—
19
1
1
—
50
157
1
1,312
(25)
12
275
1,732
The Company was not committed to advance additional funds in connection with impaired loans as of
December 31, 2016 or 2015.
130
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, 2016 and 2015.
Real estate loans
At December 31, 2016
One-to-
Commercial Construction
four
family
Home
equity
real
estate
and
Development Consumer
Total
Commercial
business
30-59 days past due $
60-89 days past due
90 days or more
past due
Total past due
Current
Total loans
receivable
$
(In thousands)
3,864
635
3,170
7,669
403,730
379
497
108
984
35,042
206
—
334
540
444,804
62
—
507
569
115,113
55
3
26
84
5,630
136
—
4,702
1,135
16
152
163,949
4,161
9,998
1,168,268
411,399
36,026
445,344
115,682
5,714
164,101
1,178,266
At December 31, 2015
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
$
—
275
—
—
(In thousands)
—
—
—
182
1,960
2,235
342,693
—
—
23,256
235
417
341,241
499
499
90,863
1
—
25
26
5,153
50
—
51
457
—
50
116,290
2,719
3,227
919,496
$ 344,928
23,256
341,658
91,362
5,179
116,340
922,723
Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or
more past due, unless the obligation is both well-secured and in the process of collection. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest payments received while the loan 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.
131
2016 Form 10-K
The following is a schedule of loans receivable, by portfolio segment, on nonaccrual at December 31, 2016
and 2015.
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,
2016
2015
(In thousands)
$
$
3,256
108
1,703
507
27
24
5,625
2,032
—
1,686
499
50
35
4,302
There were no loans past due 90 days or more and still accruing at December 31, 2016 or 2015.
The Company uses several metrics as credit quality indicators of current or potential risks as part of the
ongoing monitoring of credit quality of its loan portfolio. The credit quality indicators are periodically
reviewed and updated on a case-by-case basis. The Company uses the following definitions for the internal
risk rating grades, listed from the least risk to the highest risk.
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 atten-
tion. 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 capaci-
ty 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.
132
The following is a schedule of the credit quality of loans receivable, by portfolio segment, as of
December 31, 2016 and 2015.
Real estate loans
One-to-
Commercial Construction
At December 31, 2016
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)
$ 407,612
438
3,349
35,903
15
108
442,323
1,318
1,703
114,751
424
507
5,683
19
12
162,235
1,849
17
1,168,507
4,063
5,696
$ 411,399
36,026
445,344
115,682
5,714
164,101
1,178,266
$ 408,143
35,918
443,641
115,175
5,687
164,077
1,172,641
—
3,256
—
108
—
1,703
—
507
—
27
—
24
—
5,625
nonperforming
3,256
Total loans receivable $ 411,399
108
36,026
1,703
445,344
507
115,682
27
5,714
24
164,101
5,625
1,178,266
At December 31, 2015
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)
$ 342,173
532
2,233
23,256
—
—
331,671
8,152
1,835
90,700
172
490
5,131
—
48
115,268
919
153
908,199
9,775
4,759
$ 344,938
23,256
341,658
91,362
5,179
116,340
922,733
$ 342,906
23,256
339,972
90,863
5,129
116,305
918,431
—
2,032
—
—
—
1,686
—
499
—
50
—
35
—
4,302
nonperforming
Total loans receivable
2,032
$ 344,938
—
23,256
1,686
341,658
499
91,362
50
5,179
35
116,340
4,302
922,733
133
2016 Form 10-K
Activity in loans to officers, directors and other related parties for the years ended December 31, 2016 and
2015 is summarized as follows:
Balance at beginning of year
New loans
Repayments
Balance at end of year
At December 31,
2016
2015
(In thousands)
11,867
15,062
(12,895)
14,034
12,233
5,986
(6,352)
11,867
$
$
In management’s opinion, related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with an unrelated person
and generally do not involve more than the normal risk of collectability.
Loans serviced for the benefit of others under loan participation arrangements amounted to $1.3 million
and $1.5 million at December 31, 2016 and 2015, respectively.
Troubled Debt Restructurings
There were two commercial real estate loans designated as a troubled debt restructuring during the year
ended December 31, 2016. All loans were designated as a troubled debt restructuring due to a change in
payment structure. The pre-modification and post-modification recorded investment were $196,000.
There was one relationship totaling fourteen loans designated as a troubled debt restructuring during
the year ended December 31, 2015. All loans within this relationship were designated as a troubled debt
restructuring due to a change in payment structure. Eleven loans were within the one-to-four family loan
segment with a pre-modification and post-modification recorded investment of $749,000. Two loans were
within the commercial real estate loan segment with a pre-modification and post-modification recorded
investment of $147,000. One loan was within the commercial and industrial loan segment with a pre-mod-
ification and post-modification recorded investment of $14,000.
No loans restructured in the twelve months prior to December 31, 2016 or 2015 went into default during
the period ended December 31, 2016 or 2015.
At December 31, 2016, there were $6.4 million in loans designated as troubled debt restructurings of which
$5.2 million were accruing. At December 31, 2015, there were $14.4 million in loans designated as troubled
debt restructurings of which $13.2 million were accruing.
134
NOTE 7 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, 2016 and 2015 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,
2016
2015
(In thousands)
10,139
23,022
15,332
797
49,290
(12,236)
37,054
8,735
20,772
13,300
110
42,917
(10,355)
32,562
$
$
Depreciation expense included in operating expenses for the years ended December 31, 2016, 2015, and
2014 amounted to $2.0 million, $1.8 million, and $1.2 million, respectively. Construction in process pri-
marily relates to a vacant branch purchased for future use. Remaining estimated costs for completion of
the construction in process are expected to be approximately $150,000. There was no interest capitalized
during fiscal year 2016 or 2015.
NOTE 8 – REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Transactions in other real estate owned for the years ended December 31, 2016 and 2015 are summarized
below:
Balance at beginning of year
Additions
Sales
Write downs
Balance at end of year
At December 31,
2016
2015
(In thousands)
$
$
2,374
2,630
(3,810)
(15)
1,179
3,239
1,307
(2,172)
—
2,374
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
At December 31,
2016
2015
(In thousands)
$
$
—
—
1,179
1,179
773
484
1,117
2,374
135
2016 Form 10-K
NOTE 9 – MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets.
The value of mortgage servicing rights is included on the Company’s Consolidated Balance Sheets. The
unpaid principal balances of loans serviced for others were $2.2 billion and $2.0 billion, respectively, at
December 31, 2016 and 2015.
The economic estimated fair values of mortgage servicing rights were $21.0 million and $17.6 million,
respectively, at December 31, 2016 and 2015.
The estimated fair value of servicing rights at December 31, 2016 was determined using a net servicing fee
of 0.26%, discount rates ranging from 12.01% to 13.01%, constant prepayment rate (“CPR”) from 6.87%
to 7.60%, depending upon the stratification of the specific servicing right, and a weighted average delin-
quency rate of 1.55% as determined by a third party. The estimated fair value of servicing rights at De-
cember 31, 2015 was determined using a net servicing fee of 0.26%, discount rates ranging from 11.86% to
12.86%, constant prepayment rate (“CPR”) from 7.93% to 8.82%, depending upon the stratification of the
specific servicing right, and a weighted average delinquency rate of 1.36% as determined by a third party.
The following summarizes the activity in mortgage servicing rights, along with the aggregate activity in the
related valuation allowances, for the years ended December 31, 2016 and 2015:
MSR beginning balance
Amount capitalized
Amount sold
Amount amortized
MSR ending balance
December 31,
2016
2015
(In thousands)
11,433
5,911
—
(2,312)
15,032
10,181
3,238
—
(1,986)
11,433
$
$
There was no allowance for loss in fair value in mortgage servicing rights for the years ended December
31, 2016 and 2015.
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
$
$
2,603
2,603
2,522
2,242
2,150
2,912
15,032
The estimated amortization expense is based on current information regarding future loan payments and
prepayments. Amortization expense could change in future periods based on changes in the volume of
prepayments and economic factors.
136
At December 31, 2016 and 2015, servicing related impound funds of approximately $33.7 million, and
$22.8 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, 2016 and 2015, the Company had a blanket bond coverage of $10 million and an errors
and omissions coverage of $5.0 million.
NOTE 10 - DEPOSITS
Deposits outstanding by type of account at December 31, 2016 and 2015 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,
2016
2015
(In thousands)
$
229,905
191,851
48,648
292,639
163,054
158,581
39,147
223,906
467,937
27,280
495,217
$ 1,258,260
428,067
18,773
446,840
1,031,528
The aggregate amount of brokered certificates of deposit was $98.3 million and $97.1 million at December
31, 2016 and 2015, 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
$44.3 million and $51.5 million at December 31, 2016 and 2015, respectively.
The amounts and scheduled maturities of certificates of deposit at December 31, 2016 and 2015 are as
follows:
Maturing within one year
Maturing one through three years
Maturing after three years
At December 31,
2016
2015
(In thousands)
$
$
255,429
186,104
53,684
495,217
231,315
131,625
83,900
446,840
Included in the schedules above were deposits acquired in the acquisition of Congaree in June 2016. See
Note 2 “Business Combinations” for further details regarding the balances of deposits assumed.
The Company has pledged $19.1 million of securities as of December 31, 2016 to secure public agency
funds.
137
2016 Form 10-K
NOTE 11 – SHORT-TERM BORROWED FUNDS
Short-term borrowed funds at December 31, 2016 and 2015 are summarized as follows:
Short-term FHLB advances
Total short-term borrowed funds
At December 31,
2016
2015
Balance
$ 203,000
$ 203,000
Interest
Rate
Balance
(Dollars in thousands)
0.49%-1.20 % 120,000
120,000
Interest
Rate
0.28%-0.64%
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 mort-
gage, second lien residential mortgage, residential home equity line of credit, commercial mortgage and
multifamily mortgage portfolios under blanket lien agreements.
At December 31, 2016, the Company had total FHLB advances of $226.0 million outstanding with excess
collateral pledged to the FHLB during those periods that would support additional borrowings of approx-
imately $119.0 million. In addition, at December 31, 2016, the Company has pledged securities with a fair
value of $10.7 million for these advances.
Lines of credit with the Federal Reserve Bank of Richmond (“FRB”) are based on collateral pledged. The
Company has pledged approximately $269.5 million of certain non-mortgage commercial, acquisition and
development, and lot loan portfolios under blanket lien agreements to the FRB. At December 31, 2016,
the Company had lines available with the FRB for $159.0 million. At December 31, 2016 and 2015, the
Company had no FRB advances outstanding.
NOTE 12 – LONG-TERM DEBT
Long-term debt at December 31, 2016 and 2015 are summarized as follows:
Long-term FHLB advances, due 2018 through 2019
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
$
$
December 31, 2016
Interest
Rate
Balance
(Dollars in thousands)
23,000
5,155
10,310
38,465
1.11%-1.32 %
4.00 %
3.93 %
December 31, 2015
Interest
Rate
Balance
(Dollars in thousands)
Long-term FHLB advances, due 2017 through 2021
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
$
88,000
5,155
10,310
$ 103,465
0.35%-4.00
%
3.75%
3.38%
138
The following table presents the scheduled repayments of long-term debt as of December 31, 2016.
2017
2018
2019
2020
2021
Thereafter
Total
$
$
—
18,000
5,000
—
—
15,465
38,465
As of December 31, 2016, there were no principal amounts callable by the FHLB on advances.
At December 31, 2016 and 2015, statutory business trusts (“Trusts”) created by the Company had out-
standing trust preferred securities with an aggregate par value of $15.0 million. The trust preferred securi-
ties have floating interest rates ranging from 3.93% to 4.00% at December 31, 2016 and maturities ranging
from December 31, 2032 to January 7, 2034. The principal assets of the Trusts are $15.5 million of the
Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred
securities. The Trusts have issued $465,000 of common securities to the Company.
The trust preferred securities, the assets of the Trusts and the common securities issued by the Trusts are
redeemable in whole or in part beginning on or after December 31, 2008, or at any time in whole but not
in part from the date of issuance on the occurrence of certain events. The obligations of the Company
with respect to the issuance of the trust preferred securities constitutes a full and unconditional guarantee
by the Company of the Trusts’ obligations with respect to the trust preferred securities. Subject to certain
exceptions and limitations, the Company may elect from time to time to defer subordinated debenture
interest payments, which would result in a deferral of distribution payments on the related trust preferred
securities.
NOTE 13 - INCOME TAXES
Income tax expense for the years ended December 31, 2016 and 2015 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,
2015
(In thousands)
2016
2014
$
$
6,312
736
7,048
770
30
800
7,848
6,722
645
7,367
(307)
—
(307)
7,060
2,331
229
2,560
752
136
888
3,448
139
2016 Form 10-K
A reconciliation from expected Federal tax expense to actual income tax expense for the years ended De-
cember 31, 2016 and 2015 using the base federal tax rates of 35% follows:
For the Years
Ended December 31,
2015
(In thousands)
2016
2014
Computed federal income taxes
State income tax, net of federal benefit
Tax exempt interest
Change in valuation allowance
Cash surrender value of life insurance
Stock based compensation
Other, net
Total income tax expense
$
$
8,896
424
(778)
113
(316)
(471)
(20)
7,848
7,518
391
(731)
44
(254)
—
92
7,060
4,116
190
(497)
73
(256)
—
(178)
3,448
The FASB issued guidance to simplify several aspects of the accounting for share-based payment award
transactions, including income tax consequences. In addition to other changes, the guidance changes the
accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-
in capital to recognition as income tax expense or benefit in the period they occur. The Company early
adopted the new guidance in the second quarter of 2016. A tax benefit of $454,000 was recorded during
the year ended December 31, 2016 as a result of share awards vesting/exercised.
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, 2016 and 2015:
Deferred tax assets:
Loan loss reserve
Unrealized loss on available-for-sale securities
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
Unrealized gain on interest rate swaps
Unrealized gain on securities available for sale
Total gross deferred tax liabilities
Deferred tax assets, net
$
$
At December 31,
2016
2015
(In thousands)
3,956
1,049
—
80
1,522
1,076
170
504
1,209
70
974
10,610
(402)
10,208
(1,714)
(153)
—
(1,867)
8,341
3,722
—
13
85
289
1,448
264
295
(56)
209
947
7,216
(289)
6,927
(1,454)
—
(200)
(1,654)
5,273
140
Deferred tax assets are recognized for future deductible amounts resulting from differences in the finan-
cial statement and tax bases of assets and liabilities and operating loss carry forwards. A valuation allow-
ance 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.
A portion of the annual change in the net deferred income tax asset relates to unrealized gains and losses
on debt and equity securities and interest rate swaps. The deferred income tax benefit related to the
unrealized gains and losses on debt and equity securities and interest rate swaps of $1,096,000 and $251,000
for the years ended December 31, 2016 and 2015, 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 $800,000 of deferred tax expense and $307,000 of deferred tax benefit for the years
ended December 31, 2016 and 2015 reflected in the Consolidated Statement of Operations. The valuation
allowances relate to state net operating loss carry-forwards. It is management’s belief that the realization
of the remaining net deferred tax assets is more likely than not. Tax returns for 2013 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.
The Company has federal net operating losses of $3.3 million and $0 at December 31, 2016 and 2015,
respectively. These net operating losses expire at various times beginning in the year of 2028. The Com-
pany has state net operating losses of $10.7 million and $9.0 million at December 31, 2016 and 2015,
respectively. These net operating losses expire at various times beginning in the year 2026. As a result of
the Congaree Bancshares ownership change in 2016, Section 382 of the Internal Revenue Code places
an annual limitation on the amount of federal net operating loss carry-forwards which the Company may
utilize. The Company expects all Section 382 limited carry-forwards to be realized within the applicable
carry-forward period.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements to lease certain office facilities under non-cancellable operat-
ing lease agreements expiring on various dates through the year 2021. Some of these leases provide for the
payment of property taxes and insurance and contain various renewal options. The exercise of the renewal
options are dependent on future events. Accordingly, the following summary does not reflect possible
additional payments due if renewal options are exercised.
Future minimum lease payments (in thousands), by year and in the aggregate, under non-cancellable op-
erating leases with initial or remaining terms in excess of on year are as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
After Year 5
Total
$
$
1,207
1,191
973
903
515
1,800
6,589
141
2016 Form 10-K
The Company’s rental expense for its office facilities for the years ended December 31, 2016, 2015, and
2014 totaled $1.1 million, $1.0 million, and $729,000, respectively.
In the course of ordinary business, the Company is, from time to time, named a party to legal actions and
proceedings, primarily related to the collection of loans and foreclosed assets. In accordance with general-
ly 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.
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
common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is
recognized over the required service period, generally defined as the vesting period for stock option awards
and as the restriction period for restricted stock awards. For awards with graded vesting, compensation
cost is recognized on a straight-line basis over the requisite service period for the entire award.
On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a
20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.
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 a 2013 Equity Incentive Plan under which an aggregate of 1,200,000 shares of
common stock have been reserved for issuance by the Company. The plan provides for the grant of stock
options and restricted stock awards to our officers, employees, directors, advisors, and consultants. The
options are granted at an exercise price at least equal to the fair value of the common stock at the date of
grant and expire ten years from the date of the grant. The vesting period for both option grants, restricted
stock grants, and restricted stock units will vary based on the timing of the grant. As of December 31, 2016
a total of 371,345 shares were remaining in the plan to be issued.
The expense recognition of employee stock option, restricted stock awards, and restricted stock units
resulted in net expense of approximately $1.3 million, $874,000, and $617,000 during the twelve months
ended December 31, 2016, 2015 and 2014, respectively.
Information regarding the 2016 grants as well as other relevant disclosure related to the share-based
compensation plans of the Company is presented below.
Stock Options
Activity in the Company’s stock option plans is summarized in the following table. All information has
been retroactively adjusted for stock splits.
142
At and For the Years Ended December 31,
2016
Weighted
Average
Exercise
Price
Shares
2015
Weighted
Average
Exercise
Price
Shares
191,570 $
49,970
(3,360)
—
238,180 $
6.61
16.60
8.02
—
8.69
148,881 $
56,705
(14,016)
—
191,570 $
4.53
11.68
3.46
—
6.61
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at end of year
150,007 $
5.27
131,578 $
4.37
The aggregate intrinsic value of 238,180 and 191,570 stock options outstanding at December 31, 2016 and
2015 was $5.3 million and $2.1 million, respectively. The aggregate intrinsic value of 150,007 and 131,578
stock options exercisable at December 31, 2016 and 2015 was $3.8 million and $1.8 million, respectively.
Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the
exercise price of the stock option.
Information pertaining to options outstanding at December 31, 2016 and 2015, is as follows:
At December 31, 2016
Exercise
Prices
$
$
$
$
$
$
4.17
8.54
11.58
16.19
16.56
16.83
Exercise
Prices
$
$
$
$
$
4.17
8.03
8.54
11.58
16.19
Options Exercisable
Options Outstanding
Weighted Avg.
Remaining Years
Number
Weighted
Average
Outstanding Contractual Life Exercise Price Outstanding Exercise Price
4.17
8.54
11.58
—
124,930
6,576
18,501
—
Weighted
Average
Number
$
$
124,930
6,576
55,504
1,200
41,970
8,000
238,180
6.3
7.3
8.06
8.56
9.06
9.21
7.3
$
4.17
8.54
11.58
16.19
16.56
16.83
8.69
—
150,007
$
—
5.27
At December 31, 2015
Options Outstanding
Options Exercisable
Number
Weighted Avg.
Remaining Years
Weighted
Average
Outstanding Contractual Life Exercise Price Outstanding Exercise Price
4.17
8.03
8.54
—
—
4.37
124,930
3,360
3,288
—
—
131,578
124,930
3,360
6,576
55,504
1,200
191,570
4.17
8.03
8.54
11.58
16.19
6.61
7.3
0.8
8.32
9.07
9.56
7.8
Weighted
Average
Number
$
$
$
$
143
2016 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 2016 and 2015:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
2016
1%
6 years
37%
1.59%
2015
1%
6 years
32%
1.51%
As of December 31, 2016, there was $230,000 of total unrecognized compensation cost related to non-vest-
ed stock option grants under the plans. The cost is expected to be recognized over a weighted-average
period of 1.72 years as of December 31, 2016.
Restricted Stock Grants
The Company from time-to-time also grants shares of restricted stock to key employees and non-employ-
ee directors. These awards help align the interests of these employees and directors with the interests of
the stockholders of the Company by providing economic value directly related to increases in the value of
the Company’s stock. These awards typically hold service requirements over various vesting periods. 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 vest-
ing of the shares, as long as employed by the Company, the key employees and non-employee directors will
have the right to vote such shares and to receive dividends paid with respect to such shares. All restricted
shares will fully vest in the event of change in control of the Company.
Nonvested restricted stock for the year ended December 31, 2016 and 2015 is summarized in the following
table. All information has been retroactively adjusted for stock splits.
At and For the Years Ended December 31,
Restricted stock grants
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2016
Weighted
Average
Grant- Date
Fair Value
$
Shares
285,805
40,056
(112,954)
(1,000)
211,907
$
5.87
17.30
6.69
14.71
7.55
2015
Weighted
Average
Grant- Date
Fair Value
4.86
12.05
5.54
4.94
5.87
$
$
Shares
352,680
48,890
(104,365)
(11,400)
285,805
144
The vesting schedule of these shares as of December 31, 2016 is as follows:
2017
2018
2019
2020
2021
Thereafter
Shares
157,064
33,464
19,629
1,750
—
—
211,907
As of December 31, 2016, there was $755,000 of total unrecognized compensation cost related to nonvest-
ed restricted stock granted under the plans. The cost is expected to be recognized over a weighted-average
period of 0.96 years as of December 31, 2016.
Restricted Stock Units
The Company from time-to-time also grants performance restricted stock units (“RSUs”) to key employ-
ees. These awards help align the interests of these employees with the interests of the shareholders of the
Company by providing economic value directly related to the performance of the Company. Performance
RSU grants contain a two year performance period. The Company communicates the specific threshold,
target, and maximum performance RSU awards and performance targets to the applicable key employees
at the beginning of a performance period. Dividends are not paid in respect to the awards and the holder
does not have the right to vote the shares during the performance period. The value of the RSUs awarded
is established as the fair market value of the stock at the time of the grant. The Company recognizes ex-
penses on a straight-line basis typically over the period the performance target is to be achieved.
Nonvested RSUs for the year ended December 31, 2016 is summarized in the following table.
At and For the Years Ended
December 31, 2016
Weighted
Average
Restricted stock units
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
Shares
24,912
20,170
(24,912)
—
20,170
Grant- Date
Fair Value
11.58
$
16.31
11.58
$
16.31
As of December 31, 2016, there was $181,000 of total unrecognized compensation cost related to nonvest-
ed RSUs granted under the plan. This cost is expected to be recognized over a weighted-average period of
1.05 years as of December 31, 2016.
145
2016 Form 10-K
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, in-
cluding 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 instru-
ments. Because no market value exists for a significant portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors.
The Company has used management’s best estimate of fair value based on the above assumptions. Thus
the fair values presented may not be the amounts that could be realized in an immediate sale or settlement
of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale
or settlement are not taken into consideration in the fair values presented.
The Company determines the fair value of its financial instruments based on the fair value hierarchy 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 instru-
ment’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
Quoted prices (unadjusted) in active markets for identical assets and liabilities for the in-
strument 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 cor-
roborated 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.
146
Level 3
Unobservable inputs that are supported by little, if any, market activity for the asset or liabili-
ty. Level 3 assets and liabilities include financial instruments whose value is determined using
pricing models, discounted cash flow models and similar techniques, and may also include the
use of market prices of assets or liabilities that are not directly comparable to the subject asset
or liability. These methods of valuation may result in a significant portion of the fair value
being derived from unobservable assumptions that reflect The Company’s own estimates for
assumptions that market participants would use in pricing the asset or liability. This category
primarily includes collateral-dependent impaired loans, other real estate, certain equity in-
vestments, 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 avail-
able-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, prepay-
ment assumptions and other factors such as credit loss assumptions.
FHLB stock - The carrying amount of these financial instruments approximates fair value.
Other investments – The carrying amount of these financial instruments approximates fair value.
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 expi-
ration 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 com-
mitments 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
147
2016 Form 10-K 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 experi-
ence, 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 inter-
est 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 interest rate swap agreements. Fair val-
ues for these instruments are based on quoted market prices, when available. As such, the fair value ad-
justments for derivatives with fair values based on quoted market prices are recurring Level 1.
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 calcula-
tion 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 - The fair value of other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. Further adjustments are made to reflect current market conditions.
There is no discount for liquidity included in the expected cash flow assumptions. Loans receivable are
classified within Level 3 of the valuation hierarchy.
Bank-owned life insurance - The cash surrender value of bank owned life insurance policies held by the
Bank approximates fair values of the policies.
Accrued interest receivable - The fair value approximates the carrying value.
Mortgage servicing rights - The Company initially measures servicing assets and liabilities retained related
to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For
subsequent measurement purposes, the Company measures servicing assets and liabilities based on the
lower of cost or market.
Deposits - The estimated fair value of demand deposits, savings accounts, and money market accounts is
the amount payable on demand at the reporting date. The estimated fair value of fixed maturity certificates
148
of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of
similar remaining maturities.
Short-term borrowed funds - The carrying amounts of federal funds purchased, borrowings under re-
purchase agreements, and other short-term borrowings maturing within 90 days approximate their fair
values. Estimated fair values of other short-term borrowings are estimated using discounted cash flow
analyses based on the Company’s current incremental borrowing rates for similar types of borrowing
arrangements.
Long-term debt - The estimated fair values of the Company’s long-term debt are estimated using discount-
ed cash flow analyses based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.
Commitments to extend credit – The carrying amounts of these commitments are considered to be a rea-
sonable 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,
2016 and 2015 are as follows:
Financial assets:
Cash and due from banks
Interest-bearing cash
Securities available for sale
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, 2016
Fair Value
Total
Level 1
Level 2
Level 3
(In thousands)
$
9,761
14,591
335,352
11,072
1,768
2,219
31,569
1,167,578
28,984
5,373
15,032
9,761
14,591
335,352
11,072
1,768
2,219
31,569
1,173,118
28,984
5,373
20,961
9,761
14,591
—
—
—
953
—
—
—
—
—
—
—
335,352
—
—
1,266
31,569
—
28,984
5,373
—
—
—
—
11,072
1,768
—
—
1,173,118
—
—
20,961
1,258,260
203,000
38,465
342
327
1,256,119
202,455
38,442
342
327
—
—
—
195
—
1,256,119
202,455
38,442
147
327
—
—
—
—
—
149
2016 Form 10-K
The carrying amount and estimated fair value of the Company’s off-balance sheet financial instruments at
December 31, 2016 and 2015 are as follows:
Off-Balance Sheet Financial Instruments:
Commitments to extend credit
Standby letters of credit
At December 31,
2016
Notional
Amount
Estimated
Fair Value
Notional
Amount
(In thousands)
2015
Estimated
Fair Value
$ 111,446
2,248
—
—
70,365
1,357
—
—
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.
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, 2015
Fair Value
Total
Level 1
Level 2
Level 3
(In thousands)
$
10,206
16,421
306,474
17,053
9,919
1,760
1,945
41,774
912,582
28,082
4,333
11,433
10,206
16,421
306,474
17,965
9,919
1,760
1,945
41,774
917,043
28,082
4,333
17,564
10,206
16,421
—
—
—
—
180
—
—
—
—
—
—
—
306,474
17,965
—
—
1,765
41,774
—
28,082
4,333
—
—
—
—
—
9,919
1,760
—
—
917,043
—
—
17,564
1,031,528
120,000
103,465
306
333
1,029,406
119,880
105,551
306
333
—
—
—
306
—
1,029,406
119,880
105,551
—
333
—
—
—
—
—
Following is a description of valuation methodologies used for assets recorded at fair value on a recurring
and non-recurring basis.
Investment Securities Available-for-sale
Measurement is on a recurring basis upon quoted market prices, if available. If quoted market prices are
not available, fair values are measured using independent pricing models or other model-based valuation
techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected
150
credit losses, and liquidity. At December 31, 2016 and 2015, the Company’s investment securities available-
for-sale are recurring Level 2 except for trust preferred securities which are determined to be Level 3.
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.
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 liquida-
tion 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. Loans which are deemed to be impaired
are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such
fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.
Derivative Assets and Liabilities
The primary use of derivative instruments is related to the mortgage banking activities of the Company.
The Company’s wholesale mortgage banking subsidiary enters into interest rate lock commitments relat-
ed 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
151
2016 Form 10-K 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 de-
termining 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 pipe-
line to interest rate changes from the date of the commitment through loan origination, and then period
end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios
(or conversely the “pull-through” percentages) are applied to the determined fair value of the unclosed
mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments
are recognized based on interest rate changes, changes in the probability that the commitment will be
exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the
market price movement of the same type of security between the trade date and the balance sheet date.
These instruments are defined as Level 2 within the valuation hierarchy.
Derivative instruments not related to mortgage banking activities include interest rate swap agreements.
Fair values for these instruments are based on quoted market prices, when available. As such, the fair
value adjustments for derivatives with fair values based on quoted market prices in an active market are
recurring Level 1.
Other Real Estate Owned (OREO)
OREO is carried at the lower of carrying value or fair value on a non-recurring basis. Fair value is based
upon independent appraisals or management’s estimation of the collateral and is considered a Level 3
measurement. When the OREO value is based upon a current appraisal or when a current appraisal is not
available or there is estimated further impairment, the measurement is considered a Level 3 measurement.
Mortgage Servicing Rights
A mortgage servicing right asset represents the amount by which the present value of the estimated future
net cash flows to be received from servicing loans are expected to more than adequately compensate the
Company for performing the servicing. 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 on a quarterly basis. The quarterly determination of fair value of
servicing rights is provided by a third party and is estimated using a present value cash flow model. The
most important assumptions used in the valuation model are the anticipated rate of the loan prepayments
and discount rates. Although some assumptions in determining fair value are based on standards used by
market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the
valuation hierarchy. See Note 9 for a description of inputs for fair value of servicing rights as of December
31, 2016 and 2015.
152
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2016
and 2015:
Quoted market price
in active markets
(Level 1)
Significant other
observable inputs
(Level 2)
(In thousands)
Significant other
unobservable inputs
(Level 3)
December 31, 2016
Available-for-sale investment securities:
Municipal securities
US government agencies
Collateralized loan obligations
Corporate securities
Mortgage-backed securities:
Agency
Non-agency
Trust preferred securities
Loans held for sale
Derivative assets:
Cash flow hedges:
Interest rate swaps
Non-hedging derivatives:
Interest rate swaps
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps
Mortgage-backed securities forward sales commitments
Total
December 31, 2015
Available-for-sale investment securities:
Municipal securities
US government agencies
Collateralized loan obligations
Mortgage-backed securities:
Agency
Non-agency
Trust preferred securities
Loans held for sale
Derivative assets:
Cash flow hedges:
Interest rate swaps
Non-hedging derivatives:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Mortgage-backed securities forward sales commitments
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps
Total
—
—
—
—
—
—
—
—
421
532
—
—
195
—
1,148
—
—
—
—
—
—
—
180
—
—
—
—
306
486
$
$
$
$
153
93,212
3,386
76,249
491
90,986
63,864
7,164
31,569
—
—
1,113
153
—
147
368,334
62,475
7,096
38,758
113,855
75,536
8,754
41,774
—
1,246
340
179
—
—
350,013
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2016 Form 10-K
Assets measured at fair value on a nonrecurring basis are as follows as of December 31, 2016 and 2015:
December 31, 2016
Impaired loans:
Loans secured by real estate:
One-to-four family
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Real estate owned:
One-to-four family
Commercial real estate
Construction and development
Mortgage servicing rights
Total
December 31, 2015
Impaired loans:
Loans secured by real estate:
One-to-four family
Commercial real estate
Construction and development
Consumer loans
Commercial business loans
Real estate owned:
One-to-four family
Commercial real estate
Construction and development
Mortgage servicing rights
Total
Quoted market
price
in active
markets
(Level 1)
Significant other
observable
inputs
(Level 2)
(In thousands)
Significant other
unobservable
inputs
(Level 3)
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,641
79
5,155
507
24
258
—
—
1,179
20,961
32,804
3,953
12,156
380
65
473
773
484
1,117
17,564
36,965
The Company predominantly lends with real estate serving as collateral on a substantial majority of loans.
Loans that are deemed to be impaired are primarily valued at fair values of the underlying real estate
collateral.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of Decem-
ber 31, 2016 and December 31, 2015, the significant unobservable inputs used in the fair value measure-
ments were as follows:
154
Impaired Loans
Real estate owned
Valuation Technique
Appraisal Value
Appraisal Value/
Comparison Sales/
Other estimates
December 31, 2016 and 2015
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
Mortgage Servicing
Rights
Discounted cash
flows
Comparable sales
Discount rates 12% - 13% - 2016 and 2015
Prepayment rate 7% - 8% - 2016
Prepayment rate 8% - 9% - 2015
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 instru-
ments. The Company uses the same credit policies in making commitments as for on-balance sheet instru-
ments. At December 31, 2016 and 2015, the Company had commitments to extend credit in the amount of
$111.4 million and $70.4 million, respectively. At December 31, 2016 and 2015, the Company had standby
letters of credit in the amount of $2.2 million and $1.4 million, 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 guaran-
teed under these letters of credit upon the borrower’s failure to perform its obligations to the beneficiary.
The Company can seek recovery of the amounts paid from the borrower and the letters of credit are
generally not collateralized. Commitments under standby letters of credit are usually one year or less. At
December 31, 2016, the Company has recorded no liability for the current carrying amount of the obliga-
tion 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, 2016 was approximately
$2.2 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 Company upon extension of credit, is based on management’s credit evaluation
of the party. Collateral held varies, but may include inventory, property and equipment, residential real
estate and income producing commercial properties.
The Company’s primary uses of derivative instruments are related to the mortgage banking activities.
As such, the Company holds derivative instruments, which consist of rate lock agreements related to
155
2016 Form 10-K
expected funding of fixed-rate mortgage loans to customers (interest rate lock commitments) and forward
commitments to sell mortgage-backed securities and individual fixed-rate mortgage loans. The Company’s
objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the
interest rate lock commitments and the mortgage loans that are held for sale. Derivative instruments not
related to mortgage banking activities primarily relate to interest rate swap agreements.
The Company’s derivative positions are presented with discussion in Note 5 - Derivatives.
NOTE 18 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan that covers substantially all employees of CresCom Bank, Carolina
Services (“CFC Participants”) and Crescent Mortgage (“CMC Participants”). Participants may contribute
up to the maximum allowed by the regulation. During fiscal 2016 and 2015, 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, 2016, 2015 and 2014, the Company made matching
contributions of $580,000, $474,000, and $415,000, respectively.
The Company had an arrangement with one executive whereby the Company made payments to an insur-
ance company on behalf of the executive. The advance is treated as a loan to the executive and the cash
surrender value of the payment to the insurance company is included in other assets in the accompanying
consolidated statements of financial condition. The cash surrender value of the advance at December
31, 2016 and 2015 is $254,000 and $253,000, respectively. The executive is entitled to the increase in cash
value above the Company’s original cash value insurance contributions. The executive pays the Company
imputed interest on the loan balance and the increase in the cash value is recorded as compensation to the
executives. The insurance policy premiums are paid in full by the executives. The executive is entitled to
receive a $1.0 million death benefit and the Company will receive a $1.8 million death benefit. Since the
executive pays the insurance premiums, the insurance proceeds would be taxable to the Company.
The Company incurred an aggregate payment of $40,000, $40,000 and $180,000 paid on behalf of the ex-
ecutive for the period ended December 31, 2016, 2015, and 2014, respectively.
NOTE 19 - EARNINGS PER COMMON SHARE
Basic earnings per common share are calculated by dividing net income by the weighted average number
of common shares outstanding during the period. Basic earnings per common share exclude the effect of
nonvested restricted stock. Diluted earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding plus the weighted average number of additional
common shares that would have been outstanding if the dilutive potential common shares had been is-
sued. Diluted earnings per common 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 stock-
holders 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.
156
On June 22, 2015, the Board of Directors of the Company declared a six-for-five stock split representing a
20% stock dividend to stockholders of record as of July 15, 2015, payable on July 31, 2015.
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, 2016, 2015, and 2014:
2016
December 31,
2015
2014
Basic
Diluted
Basic
Diluted
Basic
Diluted
Weighted average shares
outstanding
Effect of dilutive securities
Average shares outstanding
12,080,128
—
12,080,128
12,080,128
272,118
12,352,246
9,537,358
—
9,537,358
9,537,358
180,998
9,718,356
9,314,048
—
9,314,048
9,314,048
193,377
9,507,425
The average market price used in calculating the dilutive securities under the treasury stock method for
the years ended December 31, 2016, 2015, and 2014 was $20.38, $13.60, and $9.50, respectively.
For the years ended December 31, 2016, 2015 and 2014, the Company excluded 51,170, 56,705, and 6,576
option shares, respectively, from the calculation of diluted earnings per share during the period because
the exercise prices were greater than the average market price of the common shares, and therefore were
deemed not to be dilutive.
The following is a summary of the reconciliation of shares issued and outstanding and unvested restricted
stock awards as of December 31, 2016, 2015, and 2014 used for computing book value and tangible book
value:
2016
As of December 31,
2015
2014
Issued and outstanding shares
Less nonvested restricted stock awards
Period end dilutive shares
12,548,328
(211,908)
12,336,420
12,023,557
(285,805)
11,737,752
9,717,043
(365,160)
9,351,883
NOTE 20 - CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
The Company and the Bank are subject to various federal and state regulatory requirements, including
regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain man-
datory and possible additional discretionary actions that if undertaken could have a direct material effect
on the Company’s and the Bank’s financial statements.
157
2016 Form 10-K
Effective January 2, 2015, the Company and Bank are now subject to the new regulatory risk-based capital
rules adopted by the federal banking agencies implementing Basel III. Under the new capital guidelines,
applicable regulatory capital components consist of (1) common equity Tier 1 capital (common stock,
including related surplus, and retained earnings, plus limited amounts of minority interest in the form of
common stock, net of goodwill and other intangibles (other than mortgage servicing assets), deferred tax
assets arising from net operating loss and tax credit carry forwards above certain levels, mortgage servicing
rights above certain levels, gain on sale of securitization exposures and certain investments in the capital
of unconsolidated financial institutions, and adjusted by unrealized gains or losses on cash flow hedges
and accumulated other comprehensive income items (subject to the ability of a non-advanced approaches
institution to make a one-time irrevocable election to exclude from regulatory capital most components
of AOCI)), (2) additional Tier 1 capital (qualifying non-cumulative perpetual preferred stock, including
related surplus, plus qualifying Tier 1 minority interest and, in the case of holding companies with less than
$15 billion in consolidated assets at December 31, 2009, certain grandfathered trust preferred securities
and cumulative perpetual preferred stock in limited amounts, net of mortgage servicing rights, deferred
tax assets related to temporary timing differences, and certain investments in financial institutions) and (3)
Tier 2 capital (the allowance for loan and lease losses in an amount not exceeding 1.25% of standardized
risk-weighted assets, plus qualifying preferred stock, qualifying subordinated debt and qualifying total
capital minority interest, net of Tier 2 investments in financial institutions). Total Tier 1 capital, plus Tier
2 capital, constitutes total risk-based capital.
The required minimum ratios are as follows:
•
Common equity Tier 1 capital ratio (common equity Tier 1 capital to total
risk-weighted assets) of 4.5%
• Tier 1 Capital Ratio (Tier 1 capital to total risk-weighted assets) of 6%
• Total capital ratio (total capital to total risk-weighted assets) of 8%; and
• Leverage ratio (Tier 1 capital to average total consolidated assets) of 4%
The new capital guidelines also provide that all covered banking organizations must maintain a new capital
conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted
assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to
executive officers. The phase-in of the capital conservation buffer requirement began on January 1, 2016.
The final regulatory capital rules also incorporate these changes in regulatory capital into the prompt cor-
rective action framework, under which the thresholds for “adequately capitalized” banking organizations
are equal to the new minimum capital requirements. Under this framework, in order to be considered
“well capitalized”, insured depository institutions are required to maintain a Tier 1 leverage ratio of 5%, a
common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based capital ratio of 8% and a
total risk-based capital ratio of 10%.
158
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, 2016 and 2015 are as follows:
Actual
Amount Ratio
Minimum Capital
Required - Basel III
Phase-In Schedule
Ratio
Amount
Amount
(Dollars in thousands)
Minimum Capital
Required - Basel III
Fully Phased-In
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
Amount
December 31, 2016
Carolina Financial
Corporation
CET1 capital (to risk
weighted assets)
Tier 1 capital (to risk
weighted assets)
Total capital (to risk
weighted assets)
Tier 1 capital (to total
average assets)
CresCom Bank
CET1 capital (to risk
weighted assets)
Tier 1 capital (to risk
weighted assets)
Total capital (to risk
weighted assets)
Tier 1 capital (to total
average assets)
$ 157,876
12.87%
62,859
5.125%
85,857
7.000%
172,876
14.09%
81,257
6.625%
104,254
8.500%
183,564
14.97%
105,788
8.625%
128,785
10.500%
172,876
10.49%
65,911
4.000%
65,911
4.000%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
169,222
13.81%
62,811
5.125%
85,791
7.000%
79,663
6.50%
169,222
13.81%
81,195
6.625%
104,174
8.500%
98,046
8.00%
179,910
14.68%
105,706
8.625%
128,686
10.500%
122,558
10.00%
169,222
10.30%
65,701
4.000%
65,701
4.000%
82,126
5.00%
December 31, 2015
Carolina Financial Corporation
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Tier 1 capital (to total average assets)
CresCom Bank
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Tier 1 capital (to total average assets)
Actual
Amount Ratio
Minimum Required
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio
Amount
$ 138,213
153,213
163,353
153,213
139,025
139,025
149,165
139,025
13.97%
15.48%
16.51%
11.23%
14.08%
14.08%
15.10%
10.21%
44,527
59,370
79,160
54,557
44,442
59,256
79,008
54,466
4.50%
6.00%
8.00%
4.00%
4.50%
6.00%
8.00%
4.00%
N/A
N/A
N/A
N/A
64,194
79,008
98,760
68,082
N/A
N/A
N/A
N/A
6.50%
8.00%
10.00%
5.00%
159
2016 Form 10-K
A South Carolina state bank may not pay dividends from capital. All dividends must be paid out of undi-
vided 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 permit-
ted 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 Insti-
tutions. 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.
NOTE 21 – SUPPLEMENTAL SEGMENT INFORMATION
The Company has three reportable segments: community banking, wholesale mortgage banking (“mort-
gage banking”) and other. The community banking segment provides traditional banking services offered
through CresCom Bank. The mortgage banking segment provides mortgage loan origination and servicing
offered through Crescent Mortgage. The other segment provides managerial and operational support to
the other business segments through Carolina Services and Carolina Financial.
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on net income.
The Company accounts for intersegment revenues and expenses as if the revenue/expense transactions
were generated to third parties, that is, at current market prices.
The Company’s reportable segments are strategic business units that offer different products and services.
They are managed separately because each segment has different types and levels of credit and interest
rate risk.
160
The following tables present selected financial information for the Company’s reportable business seg-
ments for the years ended December 31, 2016, 2015, and 2014:
For the Year Ended December 31, 2016
Community
Banking
Mortgage
Banking Other Eliminations
Total
$
Interest income
Interest expense
Net interest income (expense)
(Recovery of) provision for loan losses
Noninterest income from external
customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
$
59,242
8,149
51,093
(36)
8,389
966
38,260
966
21,258
6,384
14,874
(In thousands)
1,591
93
1,498
36
20,908
46
16,938
1
5,477
1,948
3,529
17
603
(586)
—
—
—
842
—
(1,428)
(526)
(902)
64
(92)
156
—
—
(1,012)
—
(967)
111
42
69
60,914
8,753
52,161
—
29,297
—
56,040
—
25,418
7,848
17,570
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$ 1,678,541
1,151,704
2,159
1,263,030
226,000
78,315
27,433
29,410
—
10,990
179,681
—
—
—
15,465
(252,801)
(11,559)
—
(4,770)
(10,990)
1,683,736
1,167,578
31,569
1,258,260
241,465
For the Year Ended December 31, 2015
Community
Banking
Mortgage
Banking Other Eliminations
Total
$
Interest income
Interest expense
Net interest income (expense)
(Recovery of) provision for loan losses
Noninterest income from external
customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
$
47,701
6,017
41,684
(67)
6,598
4
25,497
6,112
16,744
5,342
11,402
(In thousands)
1,819
100
1,719
67
21,080
81
15,789
964
6,060
2,228
3,832
16
587
(571)
—
1
7,072
7,913
—
(1,411)
(544)
(867)
68
(100)
168
—
—
(7,157)
—
(7,076)
87
34
53
49,604
6,604
43,000
—
27,679
—
49,199
—
21,480
7,060
14,420
Assets
Loans receivable, net
Loans held for sale
Deposits
Borrowed funds
$ 1,404,681
908,227
3,466
1,047,671
208,000
75,926
17,783
38,308
—
12,748
156,774
—
—
—
15,465
(227,712)
(13,428)
—
(16,143)
(12,748)
1,409,669
912,582
41,774
1,031,528
223,465
161
2016 Form 10-K
For the Year Ended December 31, 2014
Community
Banking
Mortgage
Banking Other Eliminations
Total
$
Interest income
Interest expense
Net interest income (expense)
(Recovery of) provision for loan losses
Noninterest income from external
customers
Intersegment noninterest income
Noninterest expense
Intersegment noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
$
36,075
5,061
31,014
(61)
4,084
—
19,548
5,186
10,425
3,157
7,268
(In thousands)
1,455
28
1,427
61
17,017
136
14,946
960
2,613
762
1,851
16
541
(525)
—
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
10,808
39,365
—
6,800
111,096
—
—
—
15,465
(172,450)
(7,567)
—
(2,119)
(6,801)
1,199,017
768,122
40,912
964,190
119,540
NOTE 22 – SUMMARIZED QUARTERLY INFORMATION (UNAUDITED)
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
2016 Quarter Ended (unaudited)
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
16,853
2,241
14,612
—
6,959
14,073
7,498
2,348
5,150
(In thousands)
16,208
2,252
13,956
—
8,873
13,890
8,939
2,998
5,941
14,493
2,173
12,320
—
7,189
15,809
3,700
864
2,836
13,360
2,087
11,273
—
6,276
12,268
5,281
1,638
3,643
0.42 $
0.41 $
0.48 $
0.47 $
0.24 $
0.23 $
0.31
0.30
$
$
$
$
162
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
2015 Quarter Ended (unaudited)
4th
Quarter
3rd
Quarter
2nd
Quarter
1st
Quarter
13,002
1,902
11,100
—
6,503
12,236
5,367
1,758
3,609
(In thousands)
12,512
1,623
10,889
—
7,322
12,381
5,830
1,949
3,881
12,633
1,579
11,054
—
7,264
12,407
5,911
1,994
3,917
11,457
1,500
9,957
—
6,590
12,175
4,372
1,359
3,013
0.37 $
0.36 $
0.41 $
0.40 $
0.41 $
0.41 $
0.32
0.31
$
$
$
$
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for the parent company are presented below:
Carolina Financial Corporation
Condensed Statements of Operations
2016
Dividend income from banking subsidiary
Interest income
Total income
Interest expense
General and administrative expenses
Total expenses
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed earnings
of subsidiaries
Equity in undistributed earnings of CresCom Bank
Equity in undistributed losses of Carolina Services
Total equity in undistributed earnings of subsidiaries
Net income
$
$
163
For the Years
Ended December 31,
2015
(In thousands)
1,700
16
1,716
587
733
1,320
—
18
18
599
847
1,446
(1,428)
(526)
(902)
18,472
—
18,472
17,570
396
(501)
897
13,587
(64)
13,523
14,420
2014
800
16
816
541
578
1,119
(303)
(415)
112
8,320
(121)
8,199
8,311
2016 Form 10-K
Carolina Financial Corporation
Condensed Balance Sheets
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 Cash Flows
At December 31,
2016
2015
(In thousands)
$
$
$
3,506
174,142
—
465
1
1,567
179,681
1,026
15,465
163,190
179,681
13,240
140,672
1,036
465
1
519
155,933
609
15,465
139,859
155,933
For the Years
Ended December 31,
2015
2016
2014
(In thousands)
$ 17,570
14,420
8,311
(18,472)
1,271
—
(482)
(232)
(163)
454
(54)
(15,966)
—
7,734
(8,232)
(13,523)
874
—
(86)
(224)
237
189
1,887
(20,000)
(250)
—
(20,250)
—
32,156
(8,199)
617
65
—
(130)
200
126
990
—
—
—
—
—
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
Vested stock awards surrendered in cashless exercise
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Excess tax benefit in connection with equity awards
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Equity contribution in bank subsidiaries
Equity contribution in non-bank subsidiaries
Acquisition of Congaree Bancshares, Inc
Net cash used in financing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
164
Proceeds from exercise of stock options
Cash dividends paid on common stock
Net cash provided by (used in) financing activities
Net increase 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,
2015
2016
2014
27
(1,475)
(1,448)
(9,734)
13,240
$ 3,506
(In thousands)
70
(1,142)
31,084
12,721
519
13,240
50
(855)
(805)
185
334
519
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. As of the end of the period covered by this Annual Report
on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation
of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of its disclosure controls and procedures. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was required to apply judgment in evaluating its controls and procedures.
Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) un-
der the Exchange Act, were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting. There were no changes in the Company’s internal con-
trol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended December 31, 2016, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over
financial reporting based on the criteria for effective internal control over financial reporting established
in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission in 2013. This assessment included controls over the preparation
of the schedules equivalent to the basic financial statements in accordance with the instructions for the
Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting
requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on
the assessment management determined that the Company maintained effective internal control over
financial reporting as of December 31, 2016.
Elliott Davis Decosimo, LLC, the independent registered public accounting firm, audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K. Their report is
165
2016 Form 10-K
included in Part III, Item 15. Exhibits and Financial Statements under the heading “Report of
Independent Registered Public Accounting Firm.” This Annual Report on Form 10-K does not include an
attestation report of the Company’s registered public accounting firm due to a transition period established
by rules of the Securities and Exchange Commission for an Emerging Growth Company.
ITEM 9B. OTHER INFORMATION
None
166
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 26, 2017 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 26, 2017 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 26, 2017 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 26, 2017 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 26, 2017 and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
(1)
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, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016,
2015, and 2014
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December
31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements
(2) 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.
167
2016 Form 10-K
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
Date: March 10, 2017
CAROLINA FINANCIAL CORPORATION
By: /s/ Jerold L. Rexroad
Jerold L. Rexroad
Chief Executive Officer
168
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
/s/ Jerold L. Rexroad
Jerold L. Rexroad
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William A. Gehman, III
William A. Gehman, III
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Date
March 10, 2017
March 10, 2017
/s/ G. Manly Eubank
G. Manly Eubank
/s/ W. Scott Brandon
W. Scott Brandon
/s/ Robert G. Clawson, Jr.
Robert G. Clawson, Jr.
/s/ Jeffery L. Deal
Jeffery L. Deal, M.D.
/s/ Michael P. Leddy
Michael P. Leddy
/s/ Robert M. Moïse
Robert M. Moïse, CPA
/s/ David L. Morrow
David L. Morrow
/s/ Thompson E. Penney
Thompson E. Penney
/s/ Daniel H Isaac, Jr.
Daniel H Isaac, Jr.
/s/ Claudius E. Watts IV
Claudius E. Watts IV
Chairman of the Board of Directors
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
Director
Director
Director
Director
Director
Director
Director
Director
Director
169
2016 Form 10-K
Exhibit No.
2.1
3.1
3.2
3.3
4.1
EXHIBIT INDEX
Description
Agreement and Plan of Merger by and between Carolina Financial Corporation and Greer
Bancshares Incorporated, dated November 7, 2016 (1)
Restated Certificate of Incorporation filed on August 31, 2015 (2)
Amendment to the Restated Certificate of Incorporation(3)
Amended and Restated Bylaws (4)
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 (2) (3) (4)
4.2
Form of certificate of common stock (6)
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 (6)(7)
First Amendment to the Amended and Restated Employment Agreement between CresCom
Bank and M.J. Huggins, III dated September 21, 2012 (6)(7)
Amended and Restated Supplemental Executive Agreement by and between Carolina Finan-
cial Corporation and M.J. Huggins, III dated as of December 24, 2008 (6)(7)
Amended and Restated Employment Agreement by and between Crescent Bank and David
Morrow dated as of December 24, 2008 (6)(7)
First Amendment to the Amended and Restated Employment Agreement between CresCom
Bank and David Morrow dated as of September 19, 2012 (6)(7)
Amended and Restated Supplemental Executive Agreement by and between Carolina Finan-
cial Corporation and David Morrow dated as of December 24, 2008 (6)(7)
Employment Agreement by and between Carolina Financial Corporation and Jerold L. Rex-
road dated as of May 1, 2008 (6)(7)
First Amendment to the Employment Agreement between Carolina Financial Corporation
and Jerold L. Rexroad dated as of September 19, 2012 (6)(7)
10.9
Carolina Financial Corporation 2002 Stock Option Plan (6)(7)
10.10 Carolina Financial Corporation 2006 Recognition and Retention Plan (6)(7)
10.11 Carolina Financial Corporation 2014 Equity Incentive Plan (6)(7)
10.12
Form of Carolina Financial Corporation Elite LifeComp Agreement (6)(7)
170
10.13
Subservicing Agreement by and between Cenlar FSB and Crescent Mortgage Company dat-
ed January 1, 2004(6)
10.14
First Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of February 19, 2004 (6)
10.15
Second Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of February 1, 2006 (6)
10.16
Third Amendment to Subservicing Agreement by and between Cenlar FSB and Crescent
Mortgage Company dated as of January 1, 2011 (6)
10.17
Employment Agreement, dated January 21, 2015, by and between Crescent Mortgage Com-
pany and Fowler Williams (7)(8)
21.1
Subsidiaries of Carolina Financial Corporation (6)
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 end-
ed December 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i)
the Consolidated Balance Sheets as December 31, 2016 and December 31, 2015; (ii) Consol-
idated Statements of Operations for the years ended December 31, 2016 and 2015; (iii) Con-
solidated Statements of Comprehensive Income for the years ended December 31, 2016 and
2015 ; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the years ended
December 31, 2016 and 2015; and (vi) Notes to the Consolidated Financial Statements.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Incorporated by reference from the Company’s Registration Statement on Form S-3 filed on De-
cember 23, 2016.
Incorporated by reference from the Company’s Registration Statement on Form S-3 filed on August
31, 2015.
Incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement on Schedule
14A filed on March 31, 2016.
Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on
May 5, 2016.
Incorporated by reference from the Company’s Registration Statement on Form S-4 filed on
February 9, 2016.
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.
Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 2016 filed on May 9, 2016.
171
2016 Form 10-K CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We consent to incorporation by reference in the Registration Statement (No. 333-197152) on Form S-8,
the Registration Statement (No. 333-215312) on Form S-3, the Registration Statement (No. 333-206676)
on Form S-3, and the Registration Statement (No. 333-209440) on Form S-4 of Carolina Financial Corpo-
ration of our report dated March 10, 2017, relating to our audit of the consolidated financial statements
of Carolina Financial Corporation and Subsidiaries, which appear in this Annual Report on Form 10-K of
Carolina Financial Corporation for the year ended December 31, 2016.
/s/ Elliott Davis Decosimo, LLC
Greenville, South Carolina
March 10, 2017
200 East Broad Street, Suite 500, P.O. Box 6286, Greenville, SC 29606-6286
Phone: 864.242.3370 Fax: 864.232.7161 www.elliottdavis.com
172
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 cir-
cumstances 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 control 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
procedures 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 financial reporting to be designed under our supervision, to provide reasonable as-
surance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting prin-
ciples;
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 evalua-
tion; and
Disclosed in this report any change in the registrant’s internal control over financial re-
porting 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 re-
porting; and
173
2016 Form 10-K
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)
(b)
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 regis-
trant’s ability to record, process, summarize and report financial information; and
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 10, 2017
/s/ Jerold l. rexroad
Jerold L. Rexroad,
Chief Executive Officer
(Principal Executive Officer)
174
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 dis-
closure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control 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
procedures 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 financial reporting to be designed under our supervision, to provide reasonable as-
surance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting prin-
ciples;
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 evalua-
tion; and
Disclosed in this report any change in the registrant’s internal control over financial re-
porting 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 re-
porting; and
175
2016 Form 10-K
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)
(b)
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 regis-
trant’s ability to record, process, summarize and report financial information; and
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 10, 2017
/s/ William a. Gehman iii
William A. Gehman III
Chief Financial Officer
(Principal Financial and Accounting Officer)
176
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, 2016 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 10, 2017
/s/ William a. Gehman iii
William A. Gehman III
Chief Financial Officer
March 10, 2017
177
2016 Form 10-K (This page intentionally left blank)
SHAREHOLDER INFORMATION
288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
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 and Secretary
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 26, 2017 at 5:00 PM at:
Marina Inn at Grande Dunes
8121 Amalfi Place
Myrtle Beach, South Carolina 29572
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
288 Meeting Street
288 Meeting Street
288 Meeting Street
Charleston, SC 29401-1570
Charleston, SC 29401-1570
Charleston, SC 29401-1570
GARDEN CITY
GARDEN CITY
GARDEN CITY
2636 S Hwy 17
2636 S Hwy 17
2636 S Hwy 17
Murrells Inlet, SC 29576-7617
Murrells Inlet, SC 29576-7617
Murrells Inlet, SC 29576-7617
WEST ASHLEY
WEST ASHLEY
WEST ASHLEY
884 Orleans Road
884 Orleans Road
884 Orleans Road
Charleston, SC 29407-4937
Charleston, SC 29407-4937
Charleston, SC 29407-4937
LITCHFIELD/PAWLEYS ISLAND
LITCHFIELD/PAWLEYS ISLAND
LITCHFIELD/PAWLEYS ISLAND
13021 Ocean Highway
13021 Ocean Highway
13021 Ocean Highway
Pawleys Island, SC 29585-7080
Pawleys Island, SC 29585-7080
Pawleys Island, SC 29585-7080
JAMES ISLAND
JAMES ISLAND
JAMES ISLAND
430 Folly Road
430 Folly Road
430 Folly Road
LITTLE RIVER
LITTLE RIVER
LITTLE RIVER
1180 Highway 17
1180 Highway 17
1180 Highway 17
Charleston, SC 29412-2641
Charleston, SC 29412-2641
Charleston, SC 29412-2641
Little River, SC 29566-9208
Little River, SC 29566-9208
Little River, SC 29566-9208
MOUNT PLEASANT
MOUNT PLEASANT
MOUNT PLEASANT
1492 Stuart Engals Blvd.
1492 Stuart Engals Blvd.
1492 Stuart Engals Blvd.
Mount Pleasant, SC 29464-3378
Mount Pleasant, SC 29464-3378
Mount Pleasant, SC 29464-3378
SUMMERVILLE
SUMMERVILLE
SUMMERVILLE
200 N Cedar Street
200 N Cedar Street
200 N Cedar Street
Summerville, SC 29483-6404
Summerville, SC 29483-6404
Summerville, SC 29483-6404
NORTH CHARLESTON
NORTH CHARLESTON
NORTH CHARLESTON
8485 Dorchester Road
8485 Dorchester Road
8485 Dorchester Road
GREENVILLE
GREENVILLE
GREENVILLE
3695 E. North Street
3695 E. North Street
3695 E. North Street
Greenville, SC 29615
Greenville, SC 29615
Greenville, SC 29615
HEATH SPRINGS
HEATH SPRINGS
HEATH SPRINGS
202 N Main Street
202 N Main Street
202 N Main Street
Heath Springs, SC 29058
Heath Springs, SC 29058
Heath Springs, SC 29058
SUNSET BEACH
SUNSET BEACH
SUNSET BEACH
7290 Beach Drive SW
7290 Beach Drive SW
7290 Beach Drive SW
North Charleston, SC 29420-7307
North Charleston, SC 29420-7307
North Charleston, SC 29420-7307
Ocean Isle Beach, NC 28469-5436
Ocean Isle Beach, NC 28469-5436
Ocean Isle Beach, NC 28469-5436
CANE BAY
CANE BAY
CANE BAY
1724 State Road
1724 State Road
1724 State Road
Summerville, SC 29483-2842
Summerville, SC 29483-2842
Summerville, SC 29483-2842
HOLDEN BEACH
HOLDEN BEACH
HOLDEN BEACH
3178 Holden Beach Road SW
3178 Holden Beach Road SW
3178 Holden Beach Road SW
Holden Beach, NC 28462
Holden Beach, NC 28462
Holden Beach, NC 28462
SAINT GEORGE
SAINT GEORGE
SAINT GEORGE
5561 Memorial Blvd.
5561 Memorial Blvd.
5561 Memorial Blvd.
SHALLOTTE
SHALLOTTE
SHALLOTTE
200 Smith Avenue
200 Smith Avenue
200 Smith Avenue
Saint George, SC 29477-2475
Saint George, SC 29477-2475
Saint George, SC 29477-2475
Shallotte, NC 28470-4458
Shallotte, NC 28470-4458
Shallotte, NC 28470-4458
MYRTLE BEACH
MYRTLE BEACH
MYRTLE BEACH
991 38th Avenue N
991 38th Avenue N
991 38th Avenue N
Myrtle Beach, SC 29577-2832
Myrtle Beach, SC 29577-2832
Myrtle Beach, SC 29577-2832
SOUTHPORT
SOUTHPORT
SOUTHPORT
4945 Southport Supply Road SE
4945 Southport Supply Road SE
4945 Southport Supply Road SE
Southport, NC 28461-8742
Southport, NC 28461-8742
Southport, NC 28461-8742
NORTH MYRTLE BEACH
NORTH MYRTLE BEACH
NORTH MYRTLE BEACH
700 Main Street
700 Main Street
700 Main Street
North Myrtle Beach, SC 29582-3030
North Myrtle Beach, SC 29582-3030
North Myrtle Beach, SC 29582-3030
SOCASTEE
SOCASTEE
SOCASTEE
4506 Highway 707
4506 Highway 707
4506 Highway 707
Myrtle Beach, SC 29588
Myrtle Beach, SC 29588
Myrtle Beach, SC 29588
CONWAY
CONWAY
CONWAY
2069 E Hwy 501
2069 E Hwy 501
2069 E Hwy 501
Conway, SC 29526-9504
Conway, SC 29526-9504
Conway, SC 29526-9504
CONWAY
CONWAY
CONWAY
1230 16th Avenue
1230 16th Avenue
1230 16th Avenue
WHITEVILLE
WHITEVILLE
WHITEVILLE
110 N J K Powell Blvd.
110 N J K Powell Blvd.
110 N J K Powell Blvd.
Whiteville, NC 28472-3124
Whiteville, NC 28472-3124
Whiteville, NC 28472-3124
CHADBOURN
CHADBOURN
CHADBOURN
111 Strawberry Blvd.
111 Strawberry Blvd.
111 Strawberry Blvd.
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
ELIZABETHTOWN
ELIZABETHTOWN
ELIZABETHTOWN
306 S Poplar Street
306 S Poplar Street
306 S Poplar Street
Elizabethtown, NC 28337
Elizabethtown, NC 28337
Elizabethtown, NC 28337
TABOR CITY
TABOR CITY
TABOR CITY
105 Hickman Road
105 Hickman Road
105 Hickman Road
Conway, SC 29526-3479
Conway, SC 29526-3479
Conway, SC 29526-3479
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
ALL LOCATIONS
ALL LOCATIONS
ALL LOCATIONS
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
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2015 Annual Report
2015 Annual Report
2015 Annual Report
2016 Proxy Statement
2016 Proxy Statement
2016 Proxy Statement
CarolinaFC-AR-Wrap-2016-FINAL.indd Custom V
3/24/16 9:47 AM
CarolinaFC-AR-Wrap-2016-FINAL.indd Custom H
3/24/16 9:47 AM
178
HOME OFFICE
HOME OFFICE
HOME OFFICE
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
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.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
SHAREHOLDER INFORMATION
288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
288 Meeting Street, Charleston, SC 29401
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 and Secretary
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
Marina Inn at Grande Dunes
8121 Amalfi Place
Myrtle Beach, South Carolina 29572
The Annual Meeting of Stockholders will be held on Wednesday, April 26, 2017 at 5:00 PM at:
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
DOWNTOWN CHARLESTON
288 Meeting Street
288 Meeting Street
288 Meeting Street
Charleston, SC 29401-1570
Charleston, SC 29401-1570
Charleston, SC 29401-1570
GARDEN CITY
GARDEN CITY
LITTLE RIVER
1180 Highway 17
2636 S Hwy 17
2636 S Hwy 17
Little River, SC 29566-9208
Murrells Inlet, SC 29576-7617
Murrells Inlet, SC 29576-7617
WEST ASHLEY
WEST ASHLEY
WEST ASHLEY
884 Orleans Road
884 Orleans Road
884 Orleans Road
Charleston, SC 29407-4937
Charleston, SC 29407-4937
Charleston, SC 29407-4937
JAMES ISLAND
JAMES ISLAND
JAMES ISLAND
430 Folly Road
Charleston, SC 29412-2641
430 Folly Road
430 Folly Road
Charleston, SC 29412-2641
Charleston, SC 29412-2641
MOUNT PLEASANT
1492 Stuart Engals Blvd.
MOUNT PLEASANT
MOUNT PLEASANT
Mount Pleasant, SC 29464-3378
1492 Stuart Engals Blvd.
1492 Stuart Engals Blvd.
SUMMERVILLE
Mount Pleasant, SC 29464-3378
Mount Pleasant, SC 29464-3378
200 N Cedar Street
Summerville, SC 29483-6404
SUMMERVILLE
SUMMERVILLE
200 N Cedar Street
200 N Cedar Street
NORTH CHARLESTON
Summerville, SC 29483-6404
Summerville, SC 29483-6404
8485 Dorchester Road
North Charleston, SC 29420-7307
NORTH CHARLESTON
NORTH CHARLESTON
CANE BAY
8485 Dorchester Road
8485 Dorchester Road
1724 State Road
North Charleston, SC 29420-7307
North Charleston, SC 29420-7307
Summerville, SC 29483-2842
CANE BAY
CANE BAY
SAINT GEORGE
1724 State Road
1724 State Road
5561 Memorial Blvd.
Saint George, SC 29477-2475
Summerville, SC 29483-2842
Summerville, SC 29483-2842
MYRTLE BEACH
SAINT GEORGE
SAINT GEORGE
991 38th Avenue N
5561 Memorial Blvd.
5561 Memorial Blvd.
Myrtle Beach, SC 29577-2832
Saint George, SC 29477-2475
Saint George, SC 29477-2475
NORTH MYRTLE BEACH
MYRTLE BEACH
MYRTLE BEACH
700 Main Street
North Myrtle Beach, SC 29582-3030
991 38th Avenue N
991 38th Avenue N
Myrtle Beach, SC 29577-2832
Myrtle Beach, SC 29577-2832
SOCASTEE
4506 Highway 707
NORTH MYRTLE BEACH
NORTH MYRTLE BEACH
Myrtle Beach, SC 29588
700 Main Street
700 Main Street
CONWAY
North Myrtle Beach, SC 29582-3030
North Myrtle Beach, SC 29582-3030
2069 E Hwy 501
Conway, SC 29526-9504
SOCASTEE
SOCASTEE
4506 Highway 707
4506 Highway 707
CONWAY
Myrtle Beach, SC 29588
Myrtle Beach, SC 29588
1230 16th Avenue
Conway, SC 29526-3479
CONWAY
CONWAY
GARDEN CITY
2069 E Hwy 501
2069 E Hwy 501
2636 S Hwy 17
Conway, SC 29526-9504
Conway, SC 29526-9504
Murrells Inlet, SC 29576-7617
GREENVILLE
LITCHFIELD/PAWLEYS ISLAND
LITCHFIELD/PAWLEYS ISLAND
3695 E. North Street
13021 Ocean Highway
13021 Ocean Highway
Greenville, SC 29615
Pawleys Island, SC 29585-7080
Pawleys Island, SC 29585-7080
WEST COLUMBIA
2023 Sunset Boulevard
LITTLE RIVER
LITTLE RIVER
West Columbia, SC 29169
1180 Highway 17
1180 Highway 17
Little River, SC 29566-9208
Little River, SC 29566-9208
CAYCE
1219 Knox Abbot Drive
GREENVILLE
GREENVILLE
Cayce, SC 29033
3695 E. North Street
3695 E. North Street
HEATH SPRINGS
Greenville, SC 29615
Greenville, SC 29615
202 N Main Street
Heath Springs, SC 29058
HEATH SPRINGS
HEATH SPRINGS
202 N Main Street
202 N Main Street
SUNSET BEACH
Heath Springs, SC 29058
Heath Springs, SC 29058
7290 Beach Drive SW
Ocean Isle Beach, NC 28469-5436
SUNSET BEACH
SUNSET BEACH
HOLDEN BEACH
7290 Beach Drive SW
7290 Beach Drive SW
3178 Holden Beach Road SW
Ocean Isle Beach, NC 28469-5436
Ocean Isle Beach, NC 28469-5436
Holden Beach, NC 28462
HOLDEN BEACH
HOLDEN BEACH
SHALLOTTE
3178 Holden Beach Road SW
3178 Holden Beach Road SW
200 Smith Avenue
Shallotte, NC 28470-4458
Holden Beach, NC 28462
Holden Beach, NC 28462
SOUTHPORT
SHALLOTTE
SHALLOTTE
4945 Southport Supply Road SE
200 Smith Avenue
200 Smith Avenue
Southport, NC 28461-8742
Shallotte, NC 28470-4458
Shallotte, NC 28470-4458
WILMINGTON DOWNTOWN
115 N. 3rd Street
SOUTHPORT
SOUTHPORT
Wilmington, NC 28401
4945 Southport Supply Road SE
4945 Southport Supply Road SE
Southport, NC 28461-8742
Southport, NC 28461-8742
WILMINGTON OLEANDER
4710 Oleander Drive
WHITEVILLE
WHITEVILLE
Wilmington, NC 28401
110 N J K Powell Blvd.
110 N J K Powell Blvd.
WHITEVILLE
Whiteville, NC 28472-3124
Whiteville, NC 28472-3124
110 N J K Powell Blvd.
Whiteville, NC 28472-3124
CHADBOURN
CHADBOURN
CHADBOURN
111 Strawberry Blvd.
111 Strawberry Blvd.
111 Strawberry Blvd.
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
Chadbourn, NC 28431-1415
ELIZABETHTOWN
ELIZABETHTOWN
ELIZABETHTOWN
306 S Poplar Street
306 S Poplar Street
306 S Poplar Street
Elizabethtown, NC 28337
Elizabethtown, NC 28337
Elizabethtown, NC 28337
LITCHFIELD/PAWLEYS ISLAND
CONWAY
CONWAY
13021 Ocean Highway
1230 16th Avenue
1230 16th Avenue
Pawleys Island, SC 29585-7080
Conway, SC 29526-3479
Conway, SC 29526-3479
TABOR CITY
TABOR CITY
TABOR CITY
105 Hickman Road
105 Hickman Road
105 Hickman Road
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
Tabor City, NC 28463-1927
ALL LOCATIONS
ALL LOCATIONS
ALL LOCATIONS
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
1 (855) 273-7266 • www.haveanicebank.com
HOME OFFICE
HOME OFFICE
HOME OFFICE
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
6600 Peachtree Dunwoody Rd. NE/600 Embassy Row, Suite 650
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
Atlanta, GA 30328 • (800) 851- 0263 • www.crescentmortgage.com
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.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
DISCLAIMER – This annual report has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.
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2015 Annual Report
2016 Annual Report
2015 Annual Report
2016 Proxy Statement
2017 Proxy Statement
2016 Proxy Statement
CarolinaFC-AR-Wrap-2016-FINAL.indd Custom V
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