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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20429
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2007
SEC Commission File No.: 000-52195
BANK OF THE CAROLINAS CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA | 20-4989192 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | |
135 Boxwood Village Drive Mocksville, North Carolina | 27028 | |
(Address of principal executive offices) | (Zip Code) Identification No.) |
Registrant’s telephone number, including area code:(336) 751-5755
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.
Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨Nox
On August 3, 2007 there were 3,852,992 outstanding shares of the registrant’s common stock.
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BANK OF THE CAROLINAS CORPORATION
FORM 10-Q
June 30, 2007
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Bank of the Carolinas Corporation
(In thousands, except share and per share data)
June 30 2007 | December 31 2006* | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 5,364 | $ | 5,626 | ||||
Interest-bearing deposits in banks | 3,418 | 7,777 | ||||||
Federal funds sold | 969 | 6,449 | ||||||
Securities available for sale | 64,563 | 55,677 | ||||||
Loans | 355,750 | 354,555 | ||||||
Less, Allowance for loan losses | (3,425 | ) | (3,732 | ) | ||||
Total Loans, net | 352,325 | 350,823 | ||||||
Premises and equipment | 12,303 | 11,142 | ||||||
Accrued interest receivable | 2,771 | 2,449 | ||||||
Other real estate owned | 993 | 1,000 | ||||||
Deferred tax assets | 842 | 768 | ||||||
Goodwill | 591 | 591 | ||||||
Bank owned life insurance | 9,105 | 8,937 | ||||||
Other assets | 3,609 | 3,339 | ||||||
Total assets | $ | 456,853 | $ | 454,578 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Deposits: | ||||||||
Non-interest bearing demand deposits | $ | 30,613 | $ | 26,317 | ||||
Interest bearing demand deposits | 62,296 | 67,214 | ||||||
Savings deposits | 12,012 | 10,021 | ||||||
Large denomination time deposits | 142,665 | 153,017 | ||||||
Other time deposits | 139,407 | 126,152 | ||||||
Total deposits | 386,993 | 382,721 | ||||||
Borrowings | 26,500 | 31,000 | ||||||
Securities sold under agreements to repurchase | 2,111 | — | ||||||
Other liabilities | 2,556 | 3,143 | ||||||
Total liabilities | 418,160 | 416,864 | ||||||
Commitments and contingencies (Note 3) | ||||||||
Shareholders’ Equity: | ||||||||
Common stock, par value $5 per share: 15,000,000 shares authorized; Issued and outstanding 3,852,992 shares in 2007 and 3,826,792 in 2006 | 19,265 | 19,134 | ||||||
Additional paid-in capital | 11,505 | 11,444 | ||||||
Retained earnings | 8,281 | 7,293 | ||||||
Accumulated other comprehensive loss | (358 | ) | (157 | ) | ||||
Total stockholders’ equity | 38,693 | 37,714 | ||||||
Total liabilities and stockholders’ equity | $ | 456,853 | $ | 454,578 | ||||
*Derived from audited consolidated financial statements. |
See accompanying notes.
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Bank of the Carolinas Corporation
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Interest Income | ||||||||||||
Interest and fees on loans | $ | 7,285 | $ | 6,558 | $ | 14,594 | $ | 12,363 | ||||
Interest on securities | 699 | 544 | 1,313 | 1,021 | ||||||||
Interest on federal funds sold | 183 | 31 | 361 | 169 | ||||||||
Interest on deposits in other banks | 2 | 5 | 5 | 6 | ||||||||
Total interest income | 8,169 | 7,138 | 16,273 | 13,559 | ||||||||
Interest Expense | ||||||||||||
Interest on deposits | 4,311 | 2,993 | 8,561 | 5,669 | ||||||||
Interest on borrowed funds | 303 | 374 | 588 | 645 | ||||||||
Total interest expense | 4,614 | 3,367 | 9,149 | 6,314 | ||||||||
Net Interest Income | 3,555 | 3,771 | 7,124 | 7,245 | ||||||||
Provision for loan losses | 412 | 180 | 474 | 297 | ||||||||
Net interest income after provision for loan losses | 3,143 | 3,591 | 6,650 | 6,948 | ||||||||
Non-interest income | ||||||||||||
Customer service fees | 266 | 245 | 502 | 466 | ||||||||
Mortgage loan broker fees | 31 | 22 | 62 | 81 | ||||||||
Investment services | 56 | 5 | 99 | 5 | ||||||||
Income from bank owned life insurance | 86 | 51 | 168 | 100 | ||||||||
Other income | 33 | 45 | 70 | 73 | ||||||||
Total non-interest income | 472 | 368 | 901 | 725 | ||||||||
Noninterest Expense | ||||||||||||
Salaries and benefits | 1,418 | 1,462 | 2,935 | 2,817 | ||||||||
Occupancy and equipment | 421 | 335 | 839 | 672 | ||||||||
Data processing expense | 186 | 181 | 376 | 354 | ||||||||
Other | 754 | 673 | 1,416 | 1,274 | ||||||||
Total non-interest expense | 2,779 | 2,651 | 5,566 | 5,117 | ||||||||
Income before income taxes | 836 | 1,308 | 1,985 | 2,556 | ||||||||
Income taxes | 244 | 467 | 613 | 911 | ||||||||
Net Income | $ | 592 | $ | 841 | $ | 1,372 | $ | 1,645 | ||||
Earnings Per Share | ||||||||||||
Basic | $ | 0.15 | $ | 0.22 | $ | 0.36 | $ | 0.43 | ||||
Diluted | $ | 0.15 | $ | 0.21 | $ | 0.35 | $ | 0.42 | ||||
Dividends Declared | $ | 0.05 | $ | 0.05 | $ | 0.10 | $ | 0.10 | ||||
See accompanying notes.
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Bank of the Carolinas Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended | Six Months Ended | |||||||
June 30, 2007 | June 30, 2006 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 1,372 | $ | 1,645 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 474 | 297 | ||||||
Deferred tax benefit | 52 | 2 | ||||||
Stock based compensation expense | 11 | 6 | ||||||
Depreciation and amortization | 348 | 320 | ||||||
Loss on sale of other real estate owned | 12 | — | ||||||
Loss on disposal of fixed assets | 3 | — | ||||||
Income from bank owned life insurance | (168 | ) | (100 | ) | ||||
Net amortization/accretion of premiums and discounts on investments | 39 | 37 | ||||||
Net change in other assets | (895 | ) | (312 | ) | ||||
Net change in other liabilities | (588 | ) | 312 | |||||
Net cash provided by operating activities | 660 | 2,207 | ||||||
Cash Flows from Investing Activities: | ||||||||
Decrease in federal funds sold | 5,480 | 13,216 | ||||||
Purchases of premises and equipment | (1,512 | ) | (380 | ) | ||||
Purchases of securities available-for-sale | (19,979 | ) | (9,746 | ) | ||||
Proceeds from sales, calls, maturities and principal repayments of securities available for sale | 10,726 | 2,806 | ||||||
Sale (purchase) of FHLB stock | 165 | (583 | ) | |||||
Acquisition of other real estate owned | — | (249 | ) | |||||
Proceeds from the sale of other real estate owned | 282 | 90 | ||||||
Net Increase in loans | (2,124 | ) | (34,213 | ) | ||||
Net cash used in investing activities | (6,962 | ) | (29,059 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net Increase in deposits | 4,272 | 23,405 | ||||||
Net originations (repayments) of other borrowings | (4,500 | ) | 9,600 | |||||
Increase in repurchase agreements | 2,111 | — | ||||||
Proceeds from exercise of stock options | 167 | — | ||||||
Tax effect of stock options exercised | 14 | — | ||||||
Cash dividends paid | (383 | ) | (383 | ) | ||||
Net cash provided by financing activities | 1,681 | 32,622 | ||||||
Net increase (decrease) in cash and cash equivalents | (4,621 | ) | 5,770 | |||||
Cash and cash equivalents at beginning of period | 13,403 | 5,155 | ||||||
Cash and cash equivalents at end of period | $ | 8,782 | $ | 10,925 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 9,632 | $ | 5,976 | ||||
Cash paid during the period for income taxes | $ | 794 | $ | 733 | ||||
Noncash investing and financing activities: | ||||||||
Increase (decrease) in fair value of securities available for sale, net of tax | $ | (201 | ) | $ | (121 | ) | ||
Dividends declared | 193 | 191 | ||||||
Foreclosed real estate | 287 | 381 | ||||||
Transfer from OREO to premise and equipment | — | 1,382 | ||||||
See accompanying notes.
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Bank of the Carolinas Corporation
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited) (In thousands, except share and per share data)
Common Stock | Additional Capital | Retained Earnings | Accumulated Loss | Total Equity | ||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance, December 31, 2005 | 3,825,192 | $ | 19,126 | $ | 11,419 | $ | 4,583 | $ | (477 | ) | $ | 34,651 | ||||||||
Stock based compensation expense | 6 | 6 | ||||||||||||||||||
Cash dividends declared ($.10 per share) | (383 | ) | (383 | ) | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 1645 | 1,645 | ||||||||||||||||||
Other comprehensive income | (121 | ) | (121 | ) | ||||||||||||||||
Total comprehensive income | 1,524 | |||||||||||||||||||
Balance, June 30, 2006 | 3,825,192 | $ | 19,126 | $ | 11,425 | $ | 5,845 | $ | (598 | ) | $ | 35,798 | ||||||||
Balance, December 31, 2006 | 3,826,792 | $ | 19,134 | $ | 11,444 | $ | 7,293 | $ | (157 | ) | $ | 37,714 | ||||||||
Stock options exercised | 26,200 | 131 | 36 | 167 | ||||||||||||||||
Current Income tax benefit on options exercised | 14 | 14 | ||||||||||||||||||
Stock based compensation expense | 11 | 11 | ||||||||||||||||||
Cash dividends declared ($.10 per share) | (384 | ) | (384 | ) | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 1,372 | 1,372 | ||||||||||||||||||
Other comprehensive income | (201 | ) | (201 | ) | ||||||||||||||||
Total comprehensive income | 1,171 | |||||||||||||||||||
Balance, June 30, 2007 | 3,852,992 | $ | 19,265 | $ | 11,505 | $ | 8,281 | $ | (358 | ) | $ | 38,693 | ||||||||
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Notes to Consolidated Financial Statements
June 30, 2007 and 2006
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of BankCorp’s management, the financial information included in these unaudited financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended June 30, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.
The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007.
The results presented here are for Bank of the Carolinas Corporation (“BankCorp”), the parent company of Bank of the Carolinas (“the Bank”). The organization and business of BankCorp, accounting policies followed by BankCorp and other relevant information are contained in the notes to the financial statements filed as part of BankCorp’s annual report on Form 10-K for the year ended December 31, 2006. This quarterly report should be read in conjunction with the annual report. Because BankCorp has no separate operations and conducts no business on its own other than owning the Bank, this discussion concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, BankCorp and the Bank are collectively referred to as the “Company” unless otherwise noted.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. When applicable, the weighted average shares outstanding for the diluted earnings per share computations are adjusted to reflect the assumed conversion of shares available under stock options using the treasury stock method.
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Earnings per share have been computed based on the following:
Six months ended | ||||
June 30, | ||||
2007 | 2006 | |||
Weighted average number of common shares outstanding used to calculate basic earnings per share | 3,833,146 | 3,825,192 | ||
Additional potential common shares due to stock options | 114,237 | 138,450 | ||
Weighted average number of common shares outstanding used to calculate diluted earnings per share | 3,947,383 | 3,963,642 | ||
Three months ended | ||||
June 30, | ||||
2007 | 2006 | |||
Weighted average number of common shares outstanding used to calculate basic earnings per share | 3,837,533 | 3,825,192 | ||
Additional potential common shares due to stock options | 105,831 | 139,468 | ||
Weighted average number of common shares outstanding used to calculate diluted earnings per share | 3,943,364 | 3,964,660 | ||
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is a 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, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.
The Company’s risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At June 30, 2007, outstanding financial instruments whose contract amounts represent credit risk were approximately:
(in thousands) | |||
Loan commitments | $ | 57,973 | |
Letters of credit | $ | 1,566 |
On April 12, 2007, the Company entered into a definitive agreement with Randolph Bank & Trust Company whereby Randolph Bank will be merged into the Bank. Randolph Bank & Trust Company is headquartered in Asheboro, North Carolina and is a full-service community bank with offices in Randolph and Alamance Counties. As of March 31, 2007 Randolph Bank had total assets of $281.0 million, total loans of $185.9 million and total deposits of $232.5 million. Randolph Bank’s common shareholders will receive 2.67 shares of Bank of the Carolinas Corporation for each Randolph Bank share held. Randolph Bank’s preferred shareholders will receive the face value of their shares plus prorated dividends. The merger transaction is subject to the approval of the shareholders of both companies, and to receipt of required state and federal bank regulatory approvals. Subject to those contingencies, it is expected that the transaction will be consummated during the fourth quarter of 2007.
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NOTE 4. COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the balance sheet. Such items, along with net income, are considered components of comprehensive income. Accounting principles do not require per share amounts of comprehensive income to be disclosed. The information that follows reconciles net income to comprehensive income.
Three-months ended | Six-months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||||
(In thousands) | |||||||||||||||
Net Income | $ | 592 | $ | 841 | 1,372 | $ | 1,645 | ||||||||
Net unrealized loss on AFS securities, net of taxes | (290 | ) | (106 | ) | (201 | ) | (121 | ) | |||||||
Comprehensive income | $ | 302 | $ | 735 | 1,171 | $ | 1,524 | ||||||||
NOTE 5. INCOME TAXES
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement 109 (FIN 48). FIN 48 provides guidance on financial statement recognition and measurements of tax positions taken, or expected to be taken, in tax returns. The initial adoption of FIN 48 had no impact on the Company’s financial statements. As of January 1, 2007, there were no unrecognized tax benefits.
The amount of unrecognized tax benefits may increase or decrease for various reasons including adding amounts for current tax positions, expiration of open income tax returns due to statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Company’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in other non-interest expense in the Consolidated Statements of Income.
The Company’s federal and state income tax returns are open and subject to examination from the 2003 tax return year and forward.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued FASB Statement No. 157 Fair Value Measurements. This pronouncement creates a framework for consistently measuring fair value of financial assets and liabilities. SFAS 157 also requires increased disclosure of the assumptions used to determine fair values. This pronouncement is effective for fiscal years beginning after November 15, 2007, however early adoption is permitted. Management has not yet determined the impact of adopting FAS 157 on the consolidated financial statements.
In February 2007, the FASB issued FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.” FASB 159 allows companies to measure financial instruments at fair value. The statement will be effective as of the beginning of each fiscal year that begins after November 15, 2007. FASB has allowed companies the choice to adopt the standard early but the Bank has chosen not to take that option.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
Introduction
Bank of the Carolinas Corporation (“BankCorp”) is the parent holding company of Bank of the Carolinas (“the Bank”). Because BankCorp has no separate operations and conducts no business on its own other than owning the Bank, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, BankCorp and the Bank are collectively referred to herein as the “Company” unless otherwise noted.
The Bank began in December 1998 as a state chartered bank and currently has nine offices in the Piedmont region. The Bank competes for loans and deposits throughout the markets it serves. The Bank, like other financial institutions, derives most of its revenue from net interest income which is the difference between the income it earns from loans and securities minus the interest expense it incurs on deposits and borrowings.
Recent Developments
On June 27, 2007, the Company declared a cash dividend of $.05 per share on its common stock, payable July 25, 2007 to shareholders of record on July 11, 2007. A cash dividend has been paid for the past fifteen quarters.
On April 12, 2007, the Company announced it had entered into a definitive agreement with Randolph Bank & Trust Company whereby Randolph Bank will be merged into the Bank. The transaction is subject to shareholder and regulatory approval and is expected to be consummated in the fourth quarter of 2007.
CHANGES IN FINANCIAL CONDITION
Total Assets
At June 30, 2007, total assets were $456.9 million compared to $454.6 million at December 31, 2006, and $424.7 million at June 30, 2006 representing a 7.6 percent year over year increase.
Investment Securities
Investment securities totaled $64.6 million at June 30, 2007, compared to $55.7 million at December 31, 2006 and $54.0 million at June 30, 2006. Total investments increased $8.9 million or 16.0 percent from December 31, 2006 and $10.5 million or 19.5 percent from June 30, 2006.
At June 30, 2007, BankCorp held 42,642 shares of Randolph Bank and Trust Company stock which will be cancelled once the merger is consummated.
The investment portfolio includes U.S. Government Agency bonds, mortgage-backed securities, corporate bonds, municipal bonds, treasuries and equity securities all classified as available-for-sale and carried at fair value.
Loans and Allowance for Loan Losses
At June 30, 2007, the loan portfolio totaled $355.8 million and represented 77.9 percent of total assets compared to $354.6 million or 78.0 percent of total assets at December 31, 2006 and $333.8 million or 78.6 percent of total assets at June 30, 2006. Total loans increased $1.2 million from December 31, 2006 and $22.0 million or 6.6 percent from June 30, 2006. Real estate loans and commercial loans constituted approximately 69.9 percent and 27.7 percent, respectively, of the total loan portfolio at June 30, 2007.
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The allowance for loan losses is created by direct charges to income. Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management’s judgment in determining the amount charged to operating expense include past loan experience, composition of the loan portfolio, current economic conditions and probable losses.
The appropriateness of the allowance for loan losses is measured on a quarterly basis using an allocation model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. It must be emphasized, however, that the determination of the reserve using the Company’s procedures and methods rests upon various judgments and assumptions about current economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to their amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review the Company’s allowance. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the allowance is appropriate based on management’s current analysis.
The following table describes the activity in our allowance for loan losses for the six-month periods ended June 30, 2007 and 2006.
Six-months ended | ||||||||
June 30, | ||||||||
2007 | 2006 | |||||||
(dollars in thousands) | ||||||||
Balance at beginning of period | $ | 3,732 | $ | 3,315 | ||||
Provision for loan losses | 474 | 297 | ||||||
Charge-offs | (805 | ) | (117 | ) | ||||
Recoveries of loans previously charged-off | 24 | 9 | ||||||
Balance at end of period | $ | 3,425 | $ | 3,504 | ||||
Ratio of allowance for loan losses to total loans at end of period | 0.96 | % | 1.05 | % |
The decline in the ratio of allowance for loan losses to total loans as of June 30, 2007 versus the prior year was due to a decrease in the amount of impaired loans and their related reserves. The ratio of annualized net charge-offs to average loans was 0.44% for the six months ended June 30, 2007 versus .07% for same period in 2006. A significant portion of this increase was due to a charge-off on a credit involving a piece of multi-family real estate sold at foreclosure in the second quarter. Excluding the charge-off related to this one problem credit, the Company’s annualized net charge-off ratio would have been .17% as opposed to .44%.
Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Company also attempts to reduce repayment risks by adhering to internal credit underwriting policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies. A loan is placed in nonaccrual status when, in management’s judgment, the collection of interest appears doubtful. Nonperforming assets are defined as foreclosed properties, nonaccrual loans and accruing loans that are contractually past due 90 days or more.
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The following table summarizes information regarding our nonaccrual loans, other real estate owned, and certain other repossessed assets and loans, as of June 30, 2007 and December 31, 2006. On those dates, we had no loans categorized as troubled debt restructuring within the meaning of SFAS 15.
June 30, 2007 | December 31, 2006 | |||||||
(dollars in thousands) | ||||||||
Loans accounted for on a nonaccrual basis: | ||||||||
Real estate loans: | ||||||||
Land | $ | 456 | $ | — | ||||
Mortgage | — | 102 | ||||||
Commercial | 48 | 2,596 | ||||||
Construction | 976 | — | ||||||
Home Equity | — | — | ||||||
Commercial business and consumers | — | 82 | ||||||
Installment | — | — | ||||||
Total nonaccrual loans | 1,480 | 2,780 | ||||||
Accruing loans, which are contractually past due 90 days or more | 1,901 | 1,882 | ||||||
Total non-performing loans | 3,381 | 4,662 | ||||||
Other real estate owned, net | 993 | 1,000 | ||||||
�� | ||||||||
Total non-performing assets | $ | 4,374 | $ | 5,662 | ||||
Non-performing loans as a percentage of net loans | 0.96 | % | 1.33 | % | ||||
Total non-performing assets as a percentage of total assets | 0.96 | % | 1.25 | % |
Although non -performing assets were higher at December 31, 2006 than in prior years, they decreased after year end in total dollar amount and as a percentage of total assets. The amount at December 31, 2006 included a loan in the amount of $1.9 million that was placed on non-accrual in the fourth quarter of 2006 and subsequently was restored to an accruing status during the first quarter, and was paid off during the second quarter, of 2007.
Deposits
The Company’s deposit services include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. At June 30, 2007, total deposits were $387.0 million compared to $382.7 million at December 31, 2006 and $350.0 million at June 30, 2006. These figures represent increases of 1.1 percent over December 31, 2006 and 10.6 percent over June 30, 2006. At June 30, 2007, time deposits of $100,000 and over made up approximately 36.8 percent of total deposits versus 40.0 percent at December 31, 2006 and 31.8 percent at June 30, 2006. A majority of the Company’s deposits are generated primarily from within its banking market. The Company has continued to shift its focus on outsourced funds from institutional CD’s (which are solicited on the Internet through Express Data Corporation’s Quick-Rate CD Clearinghouse) to brokered deposits. At June 30, 2007, the Company had $68.0 million in brokered deposits amounting to approximately 17.6 percent of total deposits and $1.4 million in institutional certificates of deposits, amounting to approximately 0.3 percent of the Company’s total deposits. At December 31, 2006 and June 30, 2006, the Company’s deposits solicited on the Internet amounted to approximately 1.0 percent and 1.4 percent, respectively, of total deposits.
Liquidity
Liquidity management is the process of managing assets and liabilities as well as their maturities to insure adequate funding for loan and deposit activity as well as continued growth of the Company. Sources of funding come from both the asset and liability side of the balance sheet. Asset side sources include cash and cash equivalents, federal funds sold and unpledged available for sale securities. These totaled $55.0 million at June 30, 2007 and $51.4 million at December 31, 2006. Liquidity sources from liabilities include deposits and lines of credit with other institutions. These sources are largely affected by our ability to attract and maintain deposits. Our deposits, together with equity capital, funded 93.1 percent of total assets at June 30, 2007. The Company has borrowing lines available from various correspondent banks and the Federal Home Loan Bank of Atlanta (FHLB) for short-term or long-term funding. At June 30, 2007, the Company had total borrowings of $26.5 million from the FHLB, with maturity dates on these borrowings extending through 2012. A blanket lien on residential 1-4 family dwellings and qualifying non-residential loans is in place with the FHLB to secure these advances. The Company closely monitors and evaluates its overall liquidity position. The Company believes its liquidity position at June 30, 2007 is adequate to meet its operating needs.
Interest Rate Sensitivity
Fluctuating interest rates, increased competition and changes in the regulatory environment continue to significantly affect the importance of interest-rate sensitivity management. Rate sensitivity arises when interest rates on assets change in a different period of time or in a different proportion to interest rates on liabilities. The primary objective of interest-rate sensitivity management is to
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prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates. The Company uses an asset/liability simulation model to project potential changes to the Company’s net interest margin, net income, and economic value of equity based on simulated changes to market interest rates, namely the prime rate. The Company is slightly liability sensitive over the next twelve months, which means that interest-earning liabilities could re-price more quickly than interest bearing assets. Theoretically, the Company’s net interest margin will decline if market interest rates rise or improve if market interest rates fall.
Capital Adequacy
Regulatory guidelines require banks to hold minimum levels of capital based upon the risk weighting of certain categories of assets as well as any off-balance sheet contingencies. Federal regulators have adopted risk-based capital and leverage capital guidelines for measuring the adequacy of a bank’s capital, and all applicable capital standards must be satisfied for us to be considered in compliance with regulatory requirements. On June 30, 2007, the Bank’s Total Capital Ratio and Tier 1 Capital Ratio were 10.71 percent and 9.81 percent, respectively, which were well above the minimum levels required by regulatory guidelines. At June 30, 2007, the Bank’s Leverage Capital Ratio was 8.01 percent, which was also well above the minimum level required by the regulatory guidelines. Banks are placed into one of four capital categories based on the above three separate capital ratios. The four categories are “well-capitalized”, “adequately capitalized”, “under-capitalized”, and “critically under-capitalized.” The Company is considered “well-capitalized” as of June 30, 2007.
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 2007 and June 30, 2006
The Company had net income of $592,000 or $.15 per diluted share for the three-month period ended June 30, 2007 and $841,000 or $.21 per diluted share for the three-month period ended June 30, 2006.
Net interest income, or the difference between income generated by earning assets (primarily loans, investment securities, and interest-bearing balances) and the expense incurred on interest bearing liabilities (primarily deposits and borrowed funds used to fund earning assets), is the Company’s primary source of earnings. The Company’s net interest income for the three-month period ended June 30, 2007 and 2006 was $3.6 million and $3.8 million, respectively. The decrease was primarily due to an increase in interest expense on deposits during the period. The majority of the increase in interest expense was due to deposit growth during the period as well as rising interest rates in the market, particularly for time deposit products.
The loan loss provision increased $232,000 in the second quarter of 2007 and was mainly the result of an increased level of charge-offs during the quarter, a significant portion of which was related to one problem credit. Excluding the charge-off related to this one problem credit, the Company’s annualized net charge-off ratio would have been .17% as opposed to .44% as reported.
Interest expense for the three-month period ending June 30, 2007 was $4.6 million compared to $3.4 million during the same period in 2006. This was an increase of $1.2 million or 37.0%. The majority of this increase was due to deposit growth during the period as well as rising interest rates in the market, particularly for time deposit products.
Non-interest income was $472,000 for the three-months compared to $368,000 for the three-month period ended June 30, 2006. The non-interest income total includes service charges on deposit accounts, bank owned life insurance, and mortgage broker fees. The $104,000 period over period increase was largely a result of $56,000 in income from our investment services division which was started in the second quarter of 2006 and a $35,000 increase in income from bank owned life insurance (BOLI). The Bank acquired additional BOLI at the end of 2006 which resulted in the period over period increase.
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Non-interest expense was $2.8 million for the three-months ended June 30, 2007, compared to $2.7 million for the same period in 2006 an increase of $128,000 or 4.8 percent. Salary expense decreased $44,000 over the same quarter in the previous year which was primarily a result of normal employee attrition. Occupancy expense increased $86,000 which was primarily due to increased expenses from the opening of our Winston-Salem office. Non-interest expense as a percentage of average assets actually decreased from 2.66% to 2.42% on an annualized year over year basis. The effective tax rate for the three-month period ended June 30, 2007 was 29.2 % compared to 35.7 % for the three-months ended June 30, 2006. The decrease in the effective tax rate is primarily due to greater percentage of the Company’s income being derived from tax exempt sources such as municipal bonds and bank owned life insurance (BOLI).
Six-Month Period Ended June 30, 2007 and June 30, 2006
The Company had net income of $1,372,000 or $.35 per diluted share for the six-month period ended June 30, 2007 and $1,645,000 or $.42 per diluted share for the six-month period ended June 30, 2006.
Net interest income, or the difference between income generated by earning assets (primarily loans, investment securities, and interest-bearing balances) and the expense incurred on interest bearing liabilities (primarily deposits and borrowed funds used to fund earning assets), is the Company’s primary source of earnings. The Company’s net interest income for the six-month period ended June 30, 2007 and 2006 was $7.1 million and $7.2 million, respectively.
Interest expense for the six-month period ending June 30, 2007 was $9.1 million compared to $6.3 million during the same period in 2006. This was an increase of $2.8 million or 44.9%. The majority of this increase was due to deposit growth during the period as well as rising interest rates in the market, particularly for time deposit products.
The net interest margin decreased to 3.35% at June 30, 2007 compared to 3.92% at June 30, 2006. This was a result of an 89 basis point increase in the cost of funds while the yield on assets only increased 32 basis points. This combination of pricing pressures led to the decrease in our net interest margin.
Non-interest income was $901,000 for the six-months compared to $725,000 for the six-month period ended June 30, 2006. The non-interest income total includes service charges on deposit accounts, bank owned life insurance, and mortgage broker fees. The $176,000 year over year increase was largely a result of $99,000 in income from our investment services division which was started in the second quarter of 2006 and a $68,000 increase in income from bank owned life insurance (BOLI). The Bank acquired additional BOLI at the end of 2006 which resulted in the year over year increase.
Non-interest expense was $5.6 million for the six-months ended June 30, 2007, compared to $5.1 million for the same period in 2006 an increase of $449,000 or 8.8 percent. Salary expense increased $118,000 over the same period in the previous year which was primarily a result of normal salary increases. Occupancy expense increased $167,000 which was primarily due to increased expenses from the opening of our Winston-Salem office. Non-interest expense as a percentage of average assets actually decreased from 2.59% to 2.44% on an annualized year over year basis. The effective tax rate for the six-month period ended June 30, 2007 was 30.9 % compared to 35.6 % for the six-months ended June 30, 2006. The decrease in the effective tax rate is primarily due to greater percentage of the Company’s income being derived from tax exempt sources such as municipal bonds and bank owned life insurance (BOLI).
DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS
This Report and its exhibits contain statements relating to our financial condition, results of operations, plans, strategies, trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts. Those statements, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company’s management about future events. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in the Company’s Annual Report on Form 10-K and in other documents the Company files with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the Commission’s website atwww.sec.gov. Other factors that could influence the accuracy of such forward-looking statements include, but are not limited to, (a) changes in competitive pressures among depository and other financial institutions or in the Company’s ability to compete successfully against the larger financial institutions in its banking
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markets; (b) the financial success or changing strategies of the Company’s customers; (c) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect the Company’s business; (d) changes in the interest rate environment and the level of market interest rates that reduce the Company’s net interest margins and/or the volumes and values of loans it makes and securities it holds; (e) changes in general economic or business conditions and real estate values in the Company’s banking markets (particularly changes that affect the Company’s loan portfolio, the abilities of its borrowers to repay their loans, and the values of loan collateral); (f) the Company’s ability to successfully integrate the business of merger partners into its business without unexpected costs or difficulty, disruption, deposit attrition, or loss of revenue, or its inability to fully realize expected costs savings of any acquisition; and (g) other developments or changes in our business that the Company does not expect. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligation, and do not intend, to update these forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rate risks. Interest rate risk is the result of differing maturities or re-pricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These changes can have a direct impact on the Company’s overall earnings. The current structure of the Company’s balance sheet is such that a significant increase in interest rates may negatively impact net interest income.
Management of the Company actively monitors interest rate risk through the development of and adherence to the Company’s asset/liability management policy. The Company has also established an Asset Liability Management Committee (“ALCO”) which monitors interest rate risk exposure, liquidity and funding strategies to ensure that their potential impact is within standards.
Item 4T. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report has been performed under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer. Based on that evaluation, those officers concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
In connection with the above evaluation of the effectiveness of the Company’s disclosure controls and procedures, no changes in the Company’s internal control over financial reporting was identified that occurred during the most recent fiscal quarter and that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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From time to time, the Company may be a party to various legal proceedings incident to its business. At June 30, 2007 there were no legal proceedings to which the Company was a party, or to which any of its property was subject, which were expected by management to result in a material loss.
Along with other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect the Company’s business, financial condition or future results. In addition to the risks described in the Annual Report on Form 10-K and investment risks that apply in the case of any financial institution, the Company’s business, financial condition and operating results could be harmed by other risks, including risks not yet identified or that the Company believes are immaterial or unlikely.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
Information regarding the results of voting at our annual meeting of shareholders held on May 24, 2007, was previously reported in our Current Report on Form 8-K dated May 24, 2007, and is incorporated herein from that report.
None
The following exhibits are being furnished or filed with this report.
2.01 | Agreement and Plan of Reorganization and Merger, dated as of April 12, 2007, by and between Randolph Bank & Trust Company and Bank of the Carolinas, and joined by Bank of the Carolinas Corporation (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated April 12, 2007) | |
10.01 | 2007 Omnibus Equity Plan (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated May 24, 2007) | |
10.02 | Management Incentive Compensation Plan and 2007 Annual Plan Rules (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated May 24, 2007) | |
22.01 | Published report regarding matters submitted to vote of security holders (incorporated by reference from the disclosure under Item 8.01 contained in the Company’s Current Report on Form 8-K dated May 24, 2007) | |
31.01 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (furnished herewith) | |
31.02 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (furnished herewith) | |
32.01 | Certification of our Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BANK OF THE CAROLINAS CORPORATION | ||||||||
Date: August 13, 2007 | By: | /s/ Robert E. Marziano | ||||||
Robert E. Marziano President and Chief Executive Officer | ||||||||
Date: August 13, 2007 | By: | /s/ Eric E. Rhodes | ||||||
Eric E. Rhodes Vice President and Chief Financial Officer |
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Exhibit Number | Description | |
2.01 | Agreement and Plan of Reorganization and Merger, dated as of April 12, 2007, by and between Randolph Bank & Trust Company and Bank of the Carolinas, and joined by Bank of the Carolinas Corporation (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated April 12, 2007) | |
10.01 | 2007 Omnibus Equity Plan (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated May 24, 2007) | |
10.02 | Management Incentive Compensation Plan and 2007 Annual Plan Rules (incorporated by reference from Exhibits to the Company’s Current Report on Form 8-K dated May 24, 2007) | |
22.01 | Published report regarding matters submitted to vote of security holders (incorporated by reference from the disclosure under Item 8.01 contained in the Company’s Current Report on Form 8-K dated May 24, 2007) | |
31.01 | Certification of our Chief Executive Officer pursuant to Rule 13a-14(a) (furnished herewith) | |
31.02 | Certification of our Chief Financial Officer pursuant to Rule 13a-14(a) (furnished herewith) | |
32.01 | Certifications of our Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) |
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