Mail Stop 4561
August 3, 2007
Robert E. Marziano
President
Bank of the Carolinas Corporation
135 Boxwood Village Drive
Mocksville, North Carolina 27028
RE: Bank of the Carolinas Corporation
Form S-4, filed on June 29, 2007
File Number 333-144237
Dear Mr. Marziano:
We have reviewed the above referenced Form S-4, as well as
the
Form 10-K and related 1934 Act filings of Bank of the Carolinas
Corporation, and have the following comments. Where we have
indicated, we think you should revise your document in response to
these comments. If you disagree, we will consider your
explanation
as to why our comment is inapplicable or a revision is
unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with information so we
may
better understand your disclosure. After reviewing this
information,
we may raise additional comments.
The purpose of our review process is to assist you in your
compliance with the applicable disclosure requirements and to
enhance
the overall disclosure in your filing. We look forward to working
with you in these respects. We welcome any questions you may have
about our comments or any other aspect of our review. Feel free
to
call us at the telephone numbers listed at the end of this letter.
General
1. Please confirm that no financial projections or forcasts where
provided by Randolph to BankCorp or their advisors, or by BankCorp
to
Randolph or their advisors. If projections have crossed, then
they
must be provided in the registration statement.
Prospectus Cover
2. To make your document easier to understand, please eliminate
the
use of defined terms. Use abbreviations that are well know and
unnecessary to define, such as the FDIC or intuitively
understandable. Please consider replacing BankCorp with Carolinas
or
another term that would be more intuitively understandable.
3. Where you indicate the symbol and trading market for BankCorp,
briefly describe the nature and volume of trading in Randolph
shares
and include price information. Please also address the market for
the shares in the summary section under an appropriate subheading.
Summary, page 5
4. Please revise to describe BankCorp and Randolph under
appropriate
subheadings. Include their market area, their principal types of
deposits and lending, give total assets and disclose any other
material information about each that a shareholder needs from the
outset. For example, consider disclosing the recent net loss for
Randolph and the reasons for this situation. Discuss this loss
more
fully in the body of the text, including the extent to which this
was
a one time event, or whether further problems are anticipated.
5. If Randolph or BankCorp is materially changing their
operations,
for example, as a result of the MOU, please describe this in the
summary and provide more complete disclosure in the body of the
filing. In any event, provide more complete disclosure of the
banks
operating strategy in the body of the text.
6. For BankCorp, discuss the reasons for the significant reliance
on
brokered and time deposits. Quantify the total amount and
percentage
of these types of deposits and explain the business reasons for
this
situation. Provide more complete explanation in the body of the
text
and quantify the risk factor on page 19.
7. Where appropriate in the forepart, disclose the MOU under which
Randolph is operating and describe this situation. Here and in
the
body of the text, disclose whether it is management`s opinion that
all of the terms have been met, or whether this is the conclusion
of
the regulatory agencies.
Each share of Randolph common stock..., page 5
8. Give the dollar value of the stock to be received, as of the
date
the agreement was entered into and as of latest date feasible.
Note
also on page 29.
The exchange ratio..., page 6
9. Please specifically quantify the threshold prices that will
trigger change, both at 80% and 120%, then calculate the exchange
ratio at those amounts. Note also for the body of the text.
10. It appears that the average closing price of BankCorp may
already
be at or nearly at this level. If this is the case, address this
in
concrete terms and disclose whether or not both parties are
willing
to continue.
Randolph`s officers and directors have special interests..., page
9
11. Quantify the aggregate dollar amounts that Randolph officers
and
directors will receive as a result of this transaction, for
example,
as a result of any change of control payments to be received.
Note
also for each individual, as material. Provide similar
information
in the body of the text.
Bancorp`s and BOC`s directors..., page 9
12. Name the four Randolph directors that will become directors of
BankCorp. Also, file as exhibits the consents of the persons
named
to be directors, as required by Item 438 of Regulation C. Note
also
on page 45. If it has not been decided who are the four directors
who will become BankCorp director, please disclose that.
There are various other conditions..., page 11
13. Please revise to briefly describe the conditions referenced in
this section.
Risk Factors, page 16
14. As a separate risk factor, please consider addressing the
negative impact on earnings per BankCorp share resulting from this
transaction and the impact that might have on the market price.
If
the boards did not consider this matter in reaching their
recommendations, please confirm this supplementally. If either or
both did consider this, disclose this consideration at an
appropriate
place in the filing.
15. Please revise this section to delete statements that "you
cannot
assure" an event, or similar language. If you could assure such
events the risk factor would not be warranted.
The trading volume in BankCorp common stock..., page 16
16. Please quantify the "thin" market in your stock.
Expanding Bancorp`s business..., page 17
17. This seems to be a laundry list of possible problems. Please
revise to delete the bullet items and give your principal concern.
A large percentage of Bancorp`s loans..., page 19
18. The third sentence of this risk factor is not clear. Please
revise.
Proposals to be Voted on..., page 21
19. Any measure for adjournment to solicit additional votes must
be
presented as a separate item for shareholder consideration.
Please
revise for both companies.
Background of the Merger, page 26
20. Please disclose the working relationship with the Stern Agee
principal, referenced at the top of page 27.
21. Explain why both companies submitted new proposals, as stated
in
the third paragraph. Describe any board consideration of the
prior
proposals and any communication with parties about their prior
proposals.
22. At the fourth paragraph, disclose why the board did not go
back
to Second Suitor to attempt a better offer from that party. Also
disclose the nature and value of the consideration made by the
second
suitor.
23. Disclose when any fairness opinions were presented to the
registrant and Randolph, and what the opinions concluded.
Recommendation or Boards..., page 28
24. Please indicate the pros and cons that the boards identified
as
reasons for and against their conclusions. If no negative factors
were identified, please say so.
25. In the fourth paragraph you reference "imminently required
information technology upgrades." Where appropriate disclose the
nature, timing and cost of these matters absent the merger.
Adjustments..., page 29
26. Please consider a table showing the exchange terms at the mid
range and maybe four other price levels, including $10.00 and
$17.00.
Financial Advisory Fees, page 36
27. In accordance with Item 1015 of Regulation M-A, please
disclose
all compensation between Sterne Agee and its affiliates and
Randolph
and its affiliates over the past two years. Note also regarding
the
similar work done for BankCorp.
Capitalization, page 51
Please revise your capitalization table to include the following
items:
* current maturities of long-term debt,
* long-term debt, and
* total capitalization (including current maturities of long-term
debt).
Related Person Transactions During 2006, page 69
28. Please revise to clarify that all loans with the related
parties,
not just those made in 2006, are on the same terms as those made
to
unaffiliated parties and are performing pursuant to their original
terms.
Management`s Discussion and Analysis of Financial Condition and
Results of Operation, page 72
Recent Developments
General
29. Please update this section of your MD&A (for Bank of the
Carolinas and Randolph Bank & Trust) to include information
through
June 30, 2007, or more recent as necessary.
30. Please disclose any known trends, events or uncertainties that
will impact your financial results. See Item 303(a)(3)(ii). Note
also for Randolph.
Audited Financial Statements
General
31. Please note the updating requirements of Rule 3-12 Regulation
S-X
and provide a current consent in any amendment.
Loans, page 74
32. For both companies, describe each of the principal types of
loans
that you make, the level of risk involved and the steps taken to
mitigate that risk.
Asset Quality, page 77
33. We note the increase in total nonperforming assets for both
banks
in 2006. Please discuss the reasons for this increase and whether
or
not management believes that the increase is a trend. We also
note
that in the Randolph table on page 110 they include a row,
"Allowance
for loan losses to nonperforming loans," which we do not find in
the
BankCorp material. We believe that information is helpful to the
reader and ask you to consider including that information in the
BankCorp material.
Banking Market, page 91
34. Please provide additional information to describe your actual
market area to the reader. For example, characterize the type of
business activity, give the population size and average income,
note
any significant trends in these values and compare them as
warranted
to state and national figures. Note also for Randolph.
Randolph Bank & Trust Company Financial Statements for the year
ended
December 31, 2006
Consolidated Statements of Cash Flows, F-37
35. We note your disclosure on page 109 that Randolph originates
1-4
family residential loans that may be sold in the secondary market
or
retained in Randolph`s portfolio. We also note that you recorded
a
loss on sale of loans totaling $116,391 during the
fiscal year ending December 31, 2006. Please refer to paragraph 9
of
SFAS 102 and revise to:
* describe your accounting policy with respect to loans sales;
distinguish between loans originated with the intent to sell and
those originated with the intent to hold for investment;
* disclose the reasons for the sales, for example, for liquidity
purposes;
* quantify the dollar amount of loans originated and / or
purchased
for sale during each of the periods presented;
* describe the nature of the loans sold and when you make the
determination to classify the loans as held-for-sale,
specifically,
at or subsequent to origination; and
* tell us how you determined that the proceeds from sales of loans
and any cash flows from originations and / or purchases
specifically
for resale should be reported as investing, rather than operating
activities.
Notes to Consolidated Financial Statements
General
36. Please revise to include a note describing the pertinent
rights
and privileges of your securities outstanding (e.g. common and
preferred stock). Refer to SFAS 129.
Bank of the Carolinas Corporation and Randolph Bank & Trust
Company
Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial statements
Randolph Acquisition, F-72
37. It appears you have determined the estimated fair value of the
common stock to be issued ($36,235,000) based on the value of to
$36.74 per share (i.e. the estimated value of the Randolph common
stock). Tell us why you have not used the value of the commons
stock
of BankCorp as your basis in the estimated fair value of the
shares
to be issued since this is the consideration that will be used to
effect the merger. Please justify your accounting treatment or
revise to use the value of the BankCorp common stock. See also
our
comment below.
38. Please disclose how the price you used for the common stock
issued for Randolph to value the purchase price complies with EITF
99-12.
Note 2 - The purchase accounting and pro forma adjustments...
Adjustment E, F-74
39. We note you have included the cancelled Randolph common stock
options ($385) as an estimated acquisition cost. Please address
the
following issues:
* tell us how you computed the $385,000 for the cancelled options;
* clarify if the outstanding unexercised Randolph options
(covering
26,570 shares of common stock) have been included in the estimated
purchase price allocation table presented at the bottom of page F-
72;
and
* considering the points noted above, disaggregate the cash value
that will be paid for the cancelled options and present it as a
separate line item in the estimated purchase price allocation
table
on page F-72.
40. For each of the items identified in this adjustment (E),
provide
a narrative discussion explaining the nature of the cost and how
it
meets the criteria set forth in Article 11 of Regulation S-X. See
Rule 11-02 (b).
Adjustment I, F-74
41. We note this adjustment reflects the reduction in interest
income
resulting from federal funds used to eliminate Randolph`s
preferred
stock. Tell us how you determined this adjustment is factually
supportable and within the criteria set forth in Article 11 of
Regulation S-X. Elaborate in your response how you determined
that
federal funds versus any other combination of funding would be
used
to eliminate the preferred stock. Please advise or revise to
remove
this adjustment from the face of the pro forma combined financial
statements. Alternatively, we would not object to footnote
disclosure.
Opinions, Exhibit 5.1 and 8.1
42. You have filed your opinions as of "the date hereof" and have
stated that you are under no obligation to update your opinion.
Please either revise this language and issue your opinion as of
the
date of effectiveness of the registration statement, or represent
to
the staff your intention of filing your opinion with your
acceleration request.
Exhibit 8.1
43. Please revise to indicate that this opinion addresses all of
the
material federal income tax consequences.
44. Revise the first page and the text beginning on page 4 to
indicate that any representations relied upon are factual
representations only. Revise your opinion so that you are not
relying upon legal analysis performed by the companies, for
example,
as currently set out at items (h, n, p and t). Revise the rest of
your opinion accordingly.
45. Revise the next to last paragraph to remove the implication
that
this opinion cannot be relied upon by investors in the companies.
Exhibit 23.02 - Consent of Dixon Hughes PLLC for Randolph Bank &
Trust Company
46. We note your auditor consented to the use of the financial
statements included in the 2006 Annual report on Form 10-KSB of
Randolph Bank & Trust Company. Please revise to remove the
reference
to Form 10-KSB as that form has not been incorporated by
reference.
General
47. Please note that a number of these comments relate to
comparable
disclosure in the future filings of BankCorp. Please reflect
these
comments in your Form 10-K and other related filings where
appropriate.
* * * * *
Closing Comments
As appropriate, please amend your filing and respond to
these
comments. You may wish to provide us with marked copies of the
amendment to expedite our review by showing deleted sections as
strikethrough and added sections as underlining. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the
accuracy
and adequacy of the disclosure in the filing reviewed by the staff
to
be certain that they have provided all information investors
require
for an informed decision. Since the filing persons are in
possession
of all facts relating to their disclosure, they are responsible
for
the accuracy and adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide, in writing, a statement acknowledging that:
* the filing person is responsible for the adequacy and accuracy
of
the disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the filing person may not assert staff comments as a defense in
any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
If you have any accounting questions please contact Benjamin
Phippen at 202-551-3697, or Hugh West, Accounting Branch Chief, at
202-551-3872. Any other questions should be directed to David
Lyon
at 202-551-3421, or me at 202-551-3418.
Sincerely,
William Friar
Senior Financial Analyst
By FAX: E. Knox Proctor
Fax number 252-672-5477
Robert E. Marziano
Bank of the Carolinas
August 3, 2007
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