General
Surrey Bancorp (the Company) began operations on May 1, 2003 and was created for the purpose of acquiring all the outstanding shares of
common stock of Surrey Bank & Trust. The Company is subject to regulation by the Federal Reserve.
Surrey Bank & Trust (the
Bank) was incorporated on July 15, 1996 as a North Carolina banking corporation and opened for business on July 22, 1996. As such, the Bank operates under the laws of the State of North Carolina. As a state chartered, nonmember
bank, the Bank is subject to regulation, supervision and regular examination by the North Carolina Banking Commission (the Commission) through the North Carolina Commissioner of Banks (the Commissioner) and its applicable
federal regulator is the Federal Deposit Insurance Corporation (the FDIC). The North Carolina Banking Commission and the FDIC have the power to enforce compliance with applicable banking statutes and regulations.
The principal business of the Company is to provide comprehensive individual and corporate financial services through its main and branch offices in
Mount Airy, North Carolina and branch offices in Stuart, Virginia and Pilot Mountain, North Carolina. These services include demand and time deposits as well as commercial, installment, mortgage and other consumer lending services, insurance and
investment services.
Competitive Conditions
The principal areas and methods of competition in the banking industry are the services that are offered, the pricing of those services, the convenience and availability of the services and the degree of
expertise and personal manner with which those services are offered. The Company encounters strong competition from other commercial banks, including the largest North Carolina banks, operating in Mount Airy, North Carolina, and the surrounding
area. In the conduct of certain aspects of its business, the Bank also competes with credit unions, insurance companies, money market mutual funds, and other non-bank financial institutions, some of which are not subject to the same degree of
regulation as the Company. Many of these competitors have substantially greater resources and lending abilities than the Company and offer certain services, such as investment banking, trust, interstate and international banking services, that the
Company does not provide.
Material Customers
Deposits are derived from a broad base of customers in the Companys trade area. No material portion of deposits have been obtained from a single person or a few persons (including Federal, State,
and local governments and agencies thereunder), the loss of which would have a materially adverse effect on the business of the Company.
The
majority of loans and commitments to extend credit have been granted to customers in the Companys market area. The majority of such customers are depositors. The Company generally does not extend credit to any single borrower or group of
related borrowers in excess of approximately $5,000,000. Although the Company has a reasonably diversified portfolio, it has loan concentrations relating to customers who are in the following industries: residential real estate, real estate leasing
and development, fabricated metal products manufacturing, motion picture and sound recording industries, accommodations, repairs and maintenance industries, trucking, nursing and residential care facilities, amusement facilities and motor vehicle
and parts dealers. Total loans and loan commitments to these industry groups at December 31, 2012 and 2011 are summarized in the table below:
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Loans and Commitments
December 31,
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Industry
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2012
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2011
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Real Estate
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$
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21,511,000
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$
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21,907,000
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Fabricated Metal Products Manufacturing
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11,259,000
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10,736,000
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Motion Picture and Sound Recording Industries
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11,116,000
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11,368,000
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Accommodations
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8,061,000
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Repair and Maintenance Industries
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6,745,000
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5,271,000
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Truck Transportation
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6,278,000
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7,606,000
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Nursing and Residential Care Facilities
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5,976,000
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6,102,000
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Amusement, Gambling, and Recreation Industries
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4,774,000
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6,055,000
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Motor Vehicle and Parts Dealers
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4,767,000
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4,633,000
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Utilities
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4,194,000
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2,775,000
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Construction of Buildings
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3,731,000
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3,053,000
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Wood Product Manufacturing
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3,313,000
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3,095,000
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Heavy and Civil Engineering Construction
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2,952,000
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5,854,000
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Wood Product Manufacturing
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3,095,000
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3,095,000
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Construction of Buildings
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3,053,000
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3,053,000
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Food Service and Drinking Places
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2,267,000
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2,867,000
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Rights
No patents, trademarks, licenses, franchises or concessions held are of material significance to the Company.
New Services
No new services were added
to the Companys operations in 2012.
Supervision and Regulation
Banking is a complex, highly regulated industry. The primary goals of banking regulations are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In
furtherance of these goals, Congress and the North Carolina General Assembly have created largely autonomous regulatory agencies and enacted numerous laws that govern banks, their holding companies and the banking industry. The descriptions of and
references to the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.
As a North Carolina bank, Surrey Bank & Trust is subject to regulation, supervision and regular examination by the Commissioner and the FDIC.
The Commissioner and the FDIC have the power to enforce compliance with applicable banking statutes and regulations.
Federal Regulation
As a bank holding company, Surrey Bancorp is subject to regulation, supervision and regular examinations by the Federal Reserve. The Bank
Holding Company Act provides that a bank holding company must obtain the prior approval of the Federal Reserve for the acquisition of more than five percent of the voting stock or substantially all the assets of any bank or bank holding company. In
addition, the Bank Holding Company Act restricts the extension of credit to any bank holding company by its subsidiary bank. The Bank Holding Company Act also provides that, with certain exceptions, a bank holding company may not engage in any
activities other than those of banking or managing or controlling banks and other authorized subsidiaries or own or control more than five percent of the voting shares of any company that is not a bank. The Federal Reserve has deemed limited
activities to be closely related to banking and therefore permissible for a bank holding company.
As a North Carolina bank, Surrey
Bank & Trust is subject to regulation, supervision and regular examination by the FDIC. The FDIC is required to conduct regular on-site examinations of the operations of the Bank and enforces federal laws that set specific requirements for
bank capital, the payment of dividends, loans to officers and directors, and types and amounts of loans and investments made by commercial banks. Among other things, the FDIC must approve the establishment of branch offices, conversions, mergers,
assumption of deposit liabilities between insured banks and uninsured banks or institutions, and the acquisition or establishment of certain subsidiary corporations. The FDIC can also prevent capital or surplus diminution in transactions where the
deposit accounts of the resulting, continuing or assumed bank are insured by the FDIC.
Transactions with Affiliates
. A bank may not engage in specified transactions (including, for
example, loans) with its affiliates unless the terms and conditions of those transactions are substantially the same or at least as favorable to the bank as those prevailing at the time for comparable transactions with or involving other
nonaffiliated entities. In the absence of comparable transactions, any transaction between a bank and its affiliates must be on terms and under circumstances, including credit standards, which in good faith would be offered or would apply to
nonaffiliated companies. In addition, transactions referred to as covered transactions between a bank and its affiliates may not exceed 10% of the banks capital and surplus per affiliate and an aggregate of 20% of its capital and
surplus for covered transactions with all affiliates. Certain transactions with affiliates, such as loans, also must be secured by collateral of specific types and amounts. The Bank also is prohibited from purchasing low quality assets from an
affiliate. Every company under common control with the Bank is deemed to be an affiliate of the Bank.
Loans to Insiders
. Federal law
also constrains the types and amounts of loans that the Bank may make to its executive officers, directors and principal shareholders. Among other things, these loans are limited in amount, must be approved by the Banks board of directors in
advance, and must be on terms and conditions as favorable to the Bank as those available to an unrelated person.
Regulation of Lending
Activities
. Loans made by the Bank are also subject to numerous federal and state laws and regulations, including the Truth-In-Lending Act, Federal Consumer Credit Protection Act, the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act and adjustable rate mortgage disclosure requirements. Remedies to the borrower or consumer and penalties to the Bank are provided if the Bank fails to comply with these laws and regulations. The scope and requirements of these laws
and regulations have expanded significantly in recent years.
Branch Banking
. All banks located in North Carolina are authorized to
branch statewide. Accordingly, a bank located anywhere in North Carolina has the ability, subject to regulatory approval, to establish branch facilities near any of our facilities and within our market area. If other banks were to establish branch
facilities near our facilities, it is uncertain whether these branch facilities would have a material adverse effect on our business. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( the Dodd-Frank Act),
national and state banks may branch within the state where the head office is located, to the extent permitted by that state. National and state banks may also branch de novo into another state to the same extent a bank headquartered in that state
could branch within that state, subject to certain deposit concentration limits. Federal regulations prohibit an out-of-state bank from using interstate branching authority primarily for the purpose of deposit production. These regulations include
guidelines to insure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the host state communities served by the out-of-state bank.
Reserve Requirements
. Pursuant to regulations of the Federal Reserve, the Bank must maintain average daily reserves against its transaction
accounts. During 2012, no reserves were required to be maintained on the first $11.5 million of transaction accounts, but reserves equal to 3.0% were required to be maintained on the aggregate balances of those accounts between $11.5 million and
$71.0 million, and additional reserves were required to be maintained on aggregate balances in excess of $71.0 million in an amount equal to 10.0% of the excess. These percentages are subject to annual adjustment by the Federal Reserve, which has
advised that for 2013, no reserves will be required to be maintained on the first $12.4 million of transaction accounts, but reserves equal to 3.0% must be maintained on the aggregate balances of those accounts between $12.4 million and $79.5
million, and additional reserves are required on aggregate balances in excess of $79.5 million in an amount equal to 10.0% of the excess. Because required reserves must be maintained in the form of vault cash or in an account at a Federal Reserve
Bank bearing nominal interest, the effect of the reserve requirement is to reduce the amount of the institutions interest-earning assets and interest income. As of December 31, 2012, the Bank met its reserve requirements.
Community Reinvestment
. Under the Community Reinvestment Act (CRA), as implemented by regulations of the federal bank regulatory
agencies, an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for banks, nor does it limit a banks discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the
federal bank regulatory agencies, in connection with their examination of insured banks, to assess the banks records of meeting the credit needs of their communities,
using the ratings of outstanding, satisfactory, needs to improve, or substantial noncompliance, and to take that record into account in its
evaluation of certain applications by those banks. All banks are required to make public disclosure of their CRA performance ratings. The Bank received a satisfactory rating in its most recent CRA examination.
Governmental Monetary Policies
. The commercial banking business is affected not only by general economic conditions but also by the monetary
policies of the Federal Reserve, a federal banking regulatory agency that regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions
in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution
of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.
Dividends
. As a bank holding
company that does not, as an entity, currently engage in separate business activities of a material nature, the Companys ability to pay cash dividends depends upon the cash dividends the Company receives from the Bank. The Companys
primary source of income is dividends paid by the Bank. The Company must pay all of its operating expenses from funds it receives from the Bank. North Carolina banking law permits the payment of dividends if the distribution will not
reduce the banks capital below applicable capital requirements. Also, under federal banking law, no cash dividend may be paid if the Bank is undercapitalized or insolvent or if payment of the cash dividend would render the Bank
undercapitalized or insolvent and no cash dividend may be paid by the Bank if it is in default of any deposit insurance assessment due to the FDIC. Therefore, shareholders may receive dividends from the Company only to the extent that funds are
available at the holding company or from the Bank. In addition, the Federal Reserve generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent
with the bank holding companys capital needs, asset quality and overall financial condition. The Federal Reserve may impose restrictions on the Companys payment of cash dividends since it is required to maintain its own adequate
regulatory capital and is expected to serve as a source of financial strength and to commit resources to the Bank.
Deposit Insurance
Assessments
. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 permanently raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. To obtain this deposit protection, banks must
pay assessments to the FDIC. The FDIC assesses insurance premiums on a banks deposits at a variable rate depending on the probability that the Deposit Insurance Fund will incur a loss with respect to that bank. Banks assigned to higher risk
classifications (that is, banks that pose a higher risk of loss to their respective deposit insurance funds) pay assessments at higher rates than institutions that pose a lower risk. The FDIC determines the deposit insurance assessment rates on the
basis of a banks capital classification and supervisory evaluations. Each of these categories has three subcategories, resulting in nine assessment risk classifications. The three subcategories with respect to capital are
well-capitalized, adequately capitalized and less than adequately capitalized (that would include undercapitalized, significantly undercapitalized and critically
undercapitalized banks). The three subcategories with respect to supervisory concerns are healthy, supervisory concern and substantial supervisory concern. A bank is deemed healthy if it is
financially sound with only a few minor weaknesses. A bank is deemed subject to supervisory concern if it has weaknesses that, if not corrected, could result in significant deterioration of the bank and increased risk to the DIF of the
FDIC. A bank is deemed subject to substantial supervisory concern if it poses a substantial probability of loss to the DIF. In addition, the FDIC can impose special assessments in certain instances. Effective April 11, 2011, the
insurance assessment rate schedule for banks was revised. The new schedule charges a rate of from 0.025% to 0.09% at the lowest assessment category up to a maximum assessment of 0.45% on a banks average deposit base. In an effort to encourage
banks to limit the FDICs exposure, the new insurance assessment rate formula also:
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Reduces the assessment rate paid by a bank by up to 0.05% based on the amount of unsecured debt held by the institution; and
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Increases a banks assessment if it is already considered risky and brokered deposits make up more than 10% of the institutions domestic
deposits.
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The Banks deposit insurance assessments may increase depending upon the risk category and subcategory,
if any, to which it is assigned. Any increase in insurance assessments could have an adverse effect on the Companys earnings.
The
Dodd-Frank Act established a statutory minimum reserve ratio of 1.35% of insured deposits for the Deposit Insurance Fund by September 30, 2020. On December 20, 2010, the FDIC increased the minimum reserve ratio to 2.0%. In order achieve
these levels, the FDIC has issued special deposit insurance assessments and raised deposit insurance rates. In addition, the Dodd-Frank Act authorizes the FDIC to make additional special assessments and, for the first time in its history, charge
examination fees.
Changes in Management
. Any depository institution that has been chartered less than two years, is not in compliance
with the minimum capital requirements of its primary federal banking regulator, or is otherwise in a troubled condition must notify its primary federal banking regulator of the proposed addition of any person to the board of directors or the
employment of any person as a senior executive officer of the institution at least 30 days before such addition or employment becomes effective. During this 30-day period, the applicable federal banking regulatory agency may disapprove of the
addition of such director or employment of such officer. The Bank is not subject to any such requirements.
Enforcement Authority
. The
federal banking laws also contain civil and criminal penalties available for use by the appropriate regulatory agency against certain institution-affiliated parties including management, employees and agents of a financial institution,
as well as independent contractors such as attorneys and accountants and others who participate in the conduct of the financial institutions affairs and who caused or are likely to cause more than minimum financial loss to or a significant
adverse affect on the institution, who knowingly or recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound practices. These practices can include the failure of an institution to timely file required reports
or the submission of inaccurate reports. These laws authorize the appropriate banking agency to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice,
including restitution, reimbursement, indemnification or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets or take other action as determined by the primary federal banking agency
to be appropriate.
Capital Adequacy
. The Federal Reserve has promulgated capital adequacy regulations for all bank holding companies
with assets in excess of $150 million. The Bank is also subject to capital requirements and limits on activities established by the FDIC. The Federal Reserves and the FDICs capital adequacy regulations are based upon a risk based
capital determination, whereby institutions adequacy is determined in light of the risk, both on- and off-balance sheet, contained in the companys assets. Different categories of assets are assigned risk weightings and are counted
at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a bank
holding company, Tier 1 capital consists primarily of common stock, related surplus, noncumulative perpetual preferred stock, minority interests in consolidated subsidiaries and a limited amount of qualifying cumulative preferred
securities. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease losses up to a maximum of 1.25% of risk weighted assets, limited other
types of preferred stock not included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are
excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The Tier 1 component must comprise at least 50% of qualifying total capital.
Every bank holding company and bank has to achieve and maintain a minimum Tier 1 capital ratio of at least 4.0% and a minimum total capital ratio of at least 8.0%. In addition, banks and bank holding
companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets (leverage capital ratio) of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum
leverage ratio of at least 4.0% for all other banks. The Federal Deposit Insurance Corporation and the Federal Reserve define Tier 1 capital for banks in the same manner for both the leverage ratio and the risk-based capital
ratio. However, the
Federal Reserve defines Tier 1 capital for bank holding companies in a slightly different manner. As of December 31, 2012, the Companys leverage capital ratio, Tier 1 risk-based
capital ratio and total risk-based capital ratio were 13.49%, 19.51% and 20.77%, respectively.
The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory level, without significant reliance on intangible assets. The guidelines also
indicate that the Federal Reserve will continue to consider a Tangible Tier 1 Leverage Ratio in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less
intangibles not deducted from Tier 1 capital, to quarterly average total assets. As of December 31, 2012, the Federal Reserve had not advised the Company of any specific minimum Tangible Tier 1 Leverage Ratio applicable to it.
Prompt Corrective Action
. Banks are subject to restrictions on their activities depending on their level of capital. Federal prompt
corrective action regulations divide banks into five different categories, depending on their level of capital. Under these regulations, a bank is deemed to be well capitalized if it has a total risk-based capital ratio of 10% or
more, a core capital ratio of 6% or more and a leverage ratio of 5% or more, and if the bank is not subject to an order or capital directive to meet and maintain a certain capital level. Under these regulations, a bank is deemed to be
adequately capitalized if it has a total risk-based capital ratio of 8% or more, a core capital ratio of 4% or more and a leverage ratio of 4% or more (unless it receives the highest composite rating at its most recent examination and is
not experiencing or anticipating significant growth, in which instance it must maintain a leverage ratio of 3% or more). Under these regulations, a bank is deemed to be undercapitalized if it has a total risk-based capital ratio of less
than 8%, a core capital ratio of less than 4% or a leverage ratio of less than 3%. Under these regulations, a bank is deemed to be significantly undercapitalized if it has a risk-based capital ratio of less than 6%, a core capital ratio
of less than 3% and a leverage ratio of less than 3%. Under such regulations, a bank is deemed to be critically undercapitalized if it has a leverage ratio of less than or equal to 2%. In addition, the applicable federal banking agency
has the ability to downgrade a banks classification (but not to critically undercapitalized) based on other considerations even if the bank meets the capital guidelines.
If a bank is classified as undercapitalized, the bank is required to submit a capital restoration plan to the FDIC and the FDIC may also take certain actions to correct the capital position of the bank.
An undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain
circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank.
If a state bank is classified as
significantly undercapitalized, the FDIC would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital, changes in management, limits on
interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank is classified as critically undercapitalized, the bank must be placed
into conservatorship or receivership within 90 days, unless the FDIC determines otherwise.
The capital classification of a bank affects the
frequency of regulatory examinations of the bank and impacts the ability of the bank to engage in certain activities and affects the deposit insurance premiums paid by the bank. The FDIC is required to conduct a full-scope, on-site examination of
every bank on a periodic basis.
Banks also may be restricted in their ability to accept brokered deposits, depending on their capital
classification. Well capitalized banks are permitted to accept brokered deposits, but all banks that are not well capitalized are not permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are
adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank.
State Regulation
As a North Carolina-chartered bank, the Bank is also subject to extensive
supervision and regulation by the Commissioner. Effective October 1, 2012, the North Carolina banking laws were rewritten and recodified. Under
the revised banking laws, the Commissioner continues to enforce specific requirements for bank capital, the payment of dividends, loans to officers and directors, record keeping, and types and
amounts of loans and investments made by commercial banks. Among other things, the approval of the Commissioner is generally required before a North Carolina-chartered commercial bank may establish branch offices, merge with another financial
institution, or liquidate or sell substantially all of its assets.
Change of control
. North Carolina banking laws provide that no
person may directly or indirectly purchase or acquire voting stock of the Bank that would result in the change in control of the Bank unless the Commissioner has approved the acquisition. A person will be deemed to have acquired control
of the Bank if that person directly or indirectly (i) owns, controls or has power to vote 10% or more of the voting stock of the Bank, or (ii) otherwise possesses the power to direct or cause the direction of the management and policy of
the Bank.
Loans.
In its lending activities, the Bank is subject to North Carolina usury laws which generally limit or restrict the
rates of interest, fees and charges and other terms and conditions in connection with various types of loans. North Carolina banking law also limits the amount that may be loaned to any one borrower.
Dividends
. The ability of the Bank to pay dividends is restricted under applicable law and regulations. North Carolina banking law permits the
payment of dividends if the distribution will not reduce the banks capital below applicable capital requirements.
Holding
companies
. North Carolina banking law requires that bank holding companies register with the Commissioner and maintain that registration annually. The Commissioner must also approve any acquisition of control of a state-chartered bank by a bank
holding company.
Recent Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The
Dodd-Frank Act has had and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes as such, including, among other things, (i) enhanced resolution authority of troubled
and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and
(v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight
within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of
certain provisions of the Dodd-Frank Act that are expected to have an effect on the Company is set forth below.
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Increased Capital Standards and Enhanced Supervision.
The federal banking agencies are required to establish minimum leverage and risk-based
capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the
agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.
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The Consumer Financial Protection Bureau (Bureau).
The Dodd-Frank Act creates the Bureau within the Federal Reserve. The Bureau is
tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over
many of the statutes governing products and services offered to bank consumers, and is expected to standardize certain consumer products and to require banks to provide expanded access to account, transaction and fee information. In addition, the
Dodd-Frank Act permits states to adopt consumer protection laws and
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regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against
state-chartered institutions.
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Deposit Insurance.
The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal
Deposit Insurance Act also revise the assessment base against which an insured depository institutions deposit insurance premiums paid to the Deposit Insurance Fund (DIF) will be calculated. Under the amendments, the assessment
base will no longer be the institutions deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated
reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio
exceeds certain thresholds. The Dodd- Frank Act also allows depository institutions to pay interest on demand deposits.
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Transactions with Affiliates.
The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and
23B of the Federal Reserve Act, including an expansion of the definition of covered transactions and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.
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Transactions with Insiders.
Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the
expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain
asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institutions board of directors.
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Enhanced Lending Limits.
The Dodd-Frank Act strengthens the existing limits on a depository institutions credit exposure to one borrower.
Current banking law limits a depository institutions ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit
exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
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Compensation Practices
. The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe
and unsound practice any compensation plan of a bank holding company or other covered financial institution that provides an insider or other employee with excessive compensation or could lead to a material financial loss to
such firm. The Company does not believe the Dodd-Frank Act will materially impact the current compensation policies at the Company and Bank.
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Holding Company Capital Levels
. The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are
at least of the same nature as those applicable to financial institutions. All trust preferred securities, or TRUPs, issued by bank or thrift holding companies after May 19, 2010 will be counted as Tier II Capital (with an exception for certain
small bank holding companies). TRUPs issued prior to May 19, 2010 by bank holding companies with less than $15 billion in assets as of December 31, 2009, such as the Company, are exempt from these capital deductions.
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De Novo Interstate Branching
. The Dodd-Frank Act removes restrictions on interstate branching and allows banks to establish branch offices in
any state if the laws of that state permit a bank chartered in that state to establish the branch office. This provision may increase competition with the Bank by out-of-state financial institutions.
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Shareholder Voting
. The Dodd-Frank Act requires, at least once every three years, a non-binding shareholder vote on executive compensation.
Shareholders must also be given a non-binding vote on the frequency of such say-on-pay votes. If shareholders are asked to vote on a merger transaction, they must also be permitted a non-binding vote on any compensation paid to the
companys named executive officers in connection with the transaction. The Act also prohibits brokers from voting on any of these proposals without customer instructions.
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Drafting of many of the regulations called for in the Dodd-Frank Act remains in process and the associated rule-making process will likely take place
over the course of several more years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such regulations will have on
the operations of financial institutions generally and the Company, specifically, is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of the Companys business activities, require changes to certain of the
Companys business practices, impose upon the Company and Bank more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect the Companys business. These changes may also require the Company to invest
significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Future Legislation and Regulations
The Company cannot predict what new legislation might
be enacted or what regulations might be adopted or amended, or if enacted, adopted or amended, their effect on its operations. Any change in applicable law or regulation, state or federal, may have a material adverse effect on its business.
Environmental Laws
Compliance with federal, state, or local provisions regulating the discharge of materials into the environment has not had, nor is it expected to have in
the future, a material effect upon the Banks capital expenditures, earnings or competitive position.
Employees
All employees of the Company are compensated by the Companys subsidiary, the Bank. The Bank had nine (9) officers, fifty-nine
(59) full-time employees (including the officers), and fourteen (14) part-time employees as of December 31, 2012.