Exhibit 10.3

BANK OF THE CAROLINAS

MANAGEMENT INCENTIVE COMPENSATION PLAN

2007 ANNUAL PLAN RULES

The 2007 Annual Plan Rules for the operation of the Management Incentive
Compensation Plan shall be as described below. All capitalized terms used in
these rules that are defined in the Plan shall have the same meanings as are
assigned to them in the Plan. In the event that any of these rules are
inconsistent with any term of the Plan, the Plan term will control.

 

A. Participants

The employees of the Bank listed on Exhibit A are the Participants in the Plan
for 2007.

 

B. Maximum Potential Awards

Each Participant’s “Maximum Potential Award” under the Plan for 2007 is the
dollar amount listed on Exhibit A and is the maximum incentive award that can be
paid to that Participant under the Plan for 2007.

 

C. Individual Performance Goals

Each Participant’s 2007 individual performance goals under the Plan are listed
on Exhibit B.

 

D. Calculation of Incentive Awards Payable to Participants

Each Participant’s incentive award for 2007 will be calculated as described
below based on both (i) the extent to which his or her individual performance
goals are met for the year and (ii) the amount of the Bank’s earnings for 2007,
before taxes and before any deduction for the payment of incentive awards under
the Plan (“Pre-tax, Pre-Incentive Income”).

 

  1. At the end of 2007, the Committee will determine the extent to which each
Participant’s individual goals have been met. Subject to Paragraph D.2. below,
each Participant will be eligible to receive a percentage (from 0.0% to 100.0%)
of his or her Maximum Potential Award equal to the aggregate of the percentages
listed on Exhibit B beside the descriptions of his or her individual goals that
are met for 2007. To the extent that any such performance goal is not met for
2007, the Participant will not be eligible to receive the percentage of his or
her Maximum Potential Award related to that goal.

 

  2. The amount of incentive award that may be paid to each Participant will be
the “Applicable Percentage” (from 0.0% to 100.0%) of the amount calculated under
Paragraph D.1. above based on the Bank’s 2007 Pre-tax, Pre-incentive Income as
indicated on Exhibit C attached to these Plan Rules. No incentive award will be
paid to Participants unless the Bank’s 2007 Pre-tax, Pre-incentive Income
exceeds $3,800,000, and 100% of the amount calculated for each Participant under
Paragraph D.1. above will be paid if the Bank's Pre-tax, Pre-incentive Income
equals or exceeds $6,200,000.

 

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E. Incentive Award Amounts Subject to Approval by Board of Directors

The Committee will determine the amounts of incentive awards payable to
Participants for 2007. However, as provided in the Plan, the amount of each
Participant’s incentive award for 2007 shall be subject to the approval of the
Board of Directors, based on the Committee’s recommendation, prior to payment,
and the Board may, at its discretion, decline to pay, or reduce the amount of,
an incentive award payable to any Participant for any reason satisfactory to it.

 

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Exhibit A

Bank of the Carolinas

2007 MANAGEMENT INCENTIVE PLAN PARTICIPANTS

 

Employee

   Title    Location   

2007

Current

Salary

  

Maximum

Potential Award

           

Percent of
Current

Salary

   

Dollar

Amount

Senior Management Participants

             

Robert Marziano

   CEO    Sr. Management Team    $ 280,000    35 %   $ 98,000

Ed Jordan

   Pres/COO    Sr. Management Team    $ 135,600    35 %   $ 47,460

Eric Rhodes

   CFO    Sr. Management Team    $ 106,700    35 %   $ 37,345

Retail and Other Participants

             

Harry Hill

   Commercial Loan Officer, Sr.    Mocksville/Davie Co.    $ 120,060    30 %   $
36,018

[Participants who are not named executive officers have been omitted.]

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Exhibit B

2007 INDIVIDUAL PERFORMANCE GOALS

Senior Management Participants

Robert Marziano, Ed Jordan, Eric Rhodes

 

1.    Improve bank profitability with an ROAE (calculated before taxes and
before deduction for payment of incentive awards under the Plan) of 9.50%    30
% 2.    Maintain overall CAMEL rating of 2 or better    30 % 3.    Control
charge-offs to no more than 0.25% of average loans    20 % 4.    Maintain a
ratio of Non-performing Assets of no more than 1.0% of Average Assets    20 %

Retail and Other Participants

Harry Hill

 

1.    Loan volume average per month $1,750,000    40 % 2.    Past due loans by $
amount must average 1% or less    15 % 3.    All exceptions must average at or
below stated goals per month    15 % 4.    Non-performing assets must average
below 1% or less per month    15 % 5.    Charge offs must be less than 0.25% for
the year    15 %

[Participants who are not named executive officers are omitted.]

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Exhibit C

APPLICABLE PERCENTAGES FOR PARTICIPANTS

 

2007 Pre-tax,
Pre-incentive Income

   Applicable Percentage  

$3,400,000 or below

   0.0 %

3,500,000

   0.0 %

3,600,000

   0.0 %

3,700,000

   0.0 %

3,800,000

   4.0 %

3,900,000

   8.0 %

4,000,000

   12.0 %

4,100,000

   16.0 %

4,200,000

   20.0 %

4,300,000

   24.0 %

4,400,000

   28.0 %

4,500,000

   32.0 %

4,600,000

   36.0 %

4,700,000

   40.0 %

4,800,000

   44.0 %

4,900,000

   48.0 %

5,000,000

   52.0 %

5,100,000

   56.0 %

5,200,000

   60.0 %

5,300,000

   64.0 %

5,400,000

   68.0 %

5,500,000

   72.0 %

5,600,000

   76.0 %

5,700,000

   80.0 %

5,800,000

   84.0 %

5,900,000

   88.0 %

6,000,000

   92.0 %

6,100,000

   96.0 %

6,200,000 and above

   100.0 %