UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012
Commission File Number 000-22787
FOUR OAKS FINCORP, INC. |
(Exact name of registrant as specified in its charter) |
NORTH CAROLINA | 56-2028446 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification Number) |
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524 |
(Address of principal executive office, including zip code) |
(919) 963-2177 |
(Registrant’s telephone number, including area code) |
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. xYES oNO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) xYES oNO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
oYES xNO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, | 7,747,798 |
par value $1.00 per share | (Number of shares outstanding |
(Title of Class) | as of May 9, 2012) |
-1-
TABLE OF CONTENTS | Page No. | |
-2-
Part I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2012 | December 31, | ||||||
(Unaudited) | 2011(*) | ||||||
(Amounts in thousands, except share data) | |||||||
ASSETS | |||||||
Cash and due from banks | $ | 12,886 | $ | 13,969 | |||
Interest-earning deposits | 167,471 | 150,997 | |||||
Investment securities available for sale, at fair value | 112,466 | 92,790 | |||||
Investment securities held to maturity, at amortized cost | 24,455 | 20,445 | |||||
Loans | 579,678 | 602,232 | |||||
Allowance for loan losses | (19,383 | ) | (21,141 | ) | |||
Net loans | 560,295 | 581,091 | |||||
Accrued interest receivable | 1,958 | 1,985 | |||||
Bank premises and equipment, net | 15,967 | 16,024 | |||||
FHLB stock | 6,553 | 6,553 | |||||
Investment in life insurance | 13,912 | 13,827 | |||||
Foreclosed assets | 13,216 | 12,159 | |||||
Other assets | 5,350 | 6,796 | |||||
Total assets | $ | 934,529 | $ | 916,636 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 151,144 | $ | 138,123 | |||
Money market, NOW accounts and savings accounts | 156,677 | 150,185 | |||||
Time deposits, $100,000 and over | 314,212 | 317,630 | |||||
Other time deposits | 138,173 | 139,951 | |||||
Total deposits | 760,206 | 745,889 | |||||
Borrowings | 112,000 | 112,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 12,000 | 12,000 | |||||
Accrued interest payable | 1,512 | 1,437 | |||||
Other liabilities | 5,938 | 3,246 | |||||
Total liabilities | 904,028 | 886,944 | |||||
Commitments (Note B) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 20,000,000 shares authorized; 7,684,740 and 7,663,387 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively | 7,685 | 7,663 | |||||
Additional paid-in capital | 34,088 | 34,048 | |||||
Accumulated deficit | (12,519 | ) | (13,071 | ) | |||
Accumulated other comprehensive income | 1,247 | 1,052 | |||||
Total shareholders' equity | 30,501 | 29,692 | |||||
Total liabilities and shareholders' equity | $ | 934,529 | $ | 916,636 |
(*) Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
-3-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
(Amounts in thousands, except share data) | |||||||
Interest and dividend income: | |||||||
Loans, including fees | $ | 8,472 | $ | 9,674 | |||
Investment securities: | |||||||
Taxable | 494 | 900 | |||||
Dividends | 67 | 63 | |||||
Interest-earning deposits and Federal funds sold | 132 | 45 | |||||
Total interest and dividend income | 9,165 | 10,682 | |||||
Interest expense: | |||||||
Deposits | 1,897 | 2,383 | |||||
Borrowings | 1,014 | 1,004 | |||||
Subordinated debentures | 59 | 51 | |||||
Subordinated promissory notes | 258 | 255 | |||||
Total interest expense | 3,228 | 3,693 | |||||
Net interest income | 5,937 | 6,989 | |||||
Provision for loan losses | (247 | ) | 2,631 | ||||
Net interest income after provision for loan losses | 6,184 | 4,358 | |||||
Non-interest income: | |||||||
Service charges on deposit accounts | 469 | 473 | |||||
Other service charges, commissions and fees | 608 | 657 | |||||
Gains on sale of investment securities available for sale | 12 | 151 | |||||
Total other-than-temporary impairment loss | (62 | ) | (138 | ) | |||
Portion of loss recognized in other comprehensive income | 62 | — | |||||
Net impairment loss recognized in earnings | — | (138 | ) | ||||
Income from investment in life insurance | 85 | 114 | |||||
Other non-interest income | — | 96 | |||||
Total non-interest income | 1,174 | 1,353 | |||||
Non-interest expenses: | |||||||
Salaries | 2,539 | 2,608 | |||||
Employee benefits | 511 | 528 | |||||
Occupancy expenses | 332 | 338 | |||||
Equipment expenses | 387 | 421 | |||||
Professional and consulting fees | 550 | 384 | |||||
FDIC assessments | 541 | 636 | |||||
Foreclosed asset-related costs, net | 358 | 556 | |||||
Collection expenses | 472 | 220 | |||||
Other | 1,116 | 1,147 | |||||
Total non-interest expenses | 6,806 | 6,838 | |||||
Income (loss) before income taxes | 552 | (1,127 | ) | ||||
Provision for income taxes | — | — | |||||
Net income (loss) | $ | 552 | $ | (1,127 | ) | ||
Basic net income (loss) per common share | $ | 0.07 | $ | (0.15 | ) | ||
Diluted net income (loss) per common share | $ | 0.07 | $ | (0.15 | ) | ||
Weighted Average Shares Outstanding, Basic | 7,667,845 | 7,599,666 | |||||
Weighted Average Shares Outstanding, Diluted | 7,667,845 | 7,599,666 |
The accompanying notes are an integral part of the consolidated financial statements.
-4-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
(Amounts in thousands) | |||||||
Net income (loss) | $ | 552 | $ | (1,127 | ) | ||
Other comprehensive income: | |||||||
Securities available for sale: | |||||||
Unrealized gains on securities held for sale | 401 | 533 | |||||
Tax effect | (161 | ) | (263 | ) | |||
Reclassification of gains recognized in net income | (12 | ) | (151 | ) | |||
Tax effect | 5 | 60 | |||||
Reclassification of impairment loss recognized in net income | — | 138 | |||||
Tax effect | — | (55 | ) | ||||
Portion of other-than-temporary loss recognized in other comprehensive income | (62 | ) | — | ||||
Tax effect | 24 | — | |||||
Total other comprehensive income | 195 | 262 | |||||
Comprehensive income (loss) | $ | 747 | $ | (865 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
-5-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
(Amounts in thousands, except share data) | ||||||||||||||||||||||
BALANCE, DECEMBER 31, 2011 | 7,663,387 | $ | 7,663 | $ | 34,048 | $ | (13,071 | ) | $ | 1,052 | $ | 29,692 | ||||||||||
Net income | — | — | — | 552 | — | 552 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 195 | 195 | ||||||||||||||||
Issuance of common stock | 21,353 | 22 | 15 | — | — | 37 | ||||||||||||||||
Stock based compensation | — | — | 25 | — | — | 25 | ||||||||||||||||
BALANCE, MARCH 31, 2012 | 7,684,740 | $ | 7,685 | $ | 34,088 | $ | (12,519 | ) | $ | 1,247 | $ | 30,501 |
The accompanying notes are an integral part of the consolidated financial statements.
-6-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
(Amounts in thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 552 | $ | (1,127 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operations: | |||||||
Provision for loan losses | (247 | ) | 2,631 | ||||
Provision for depreciation and amortization | 298 | 321 | |||||
Net amortization of bond premiums and discounts | 454 | 247 | |||||
Stock based compensation | 25 | 26 | |||||
Gain on sale of investment securities | (12 | ) | (151 | ) | |||
Net loss foreclosed assets | 170 | 5 | |||||
Valuation adjustment on foreclosed assets | 225 | 551 | |||||
Income from investment in life insurance | (85 | ) | (114 | ) | |||
Impairment loss on investment securities available for sale | — | 138 | |||||
Changes in assets and liabilities: | |||||||
Other assets | 1,315 | 1,274 | |||||
Accrued interest receivable | 27 | (248 | ) | ||||
Other liabilities | 2,692 | 2,149 | |||||
Accrued interest payable | 75 | 39 | |||||
Net cash provided by operating activities | 5,489 | 5,741 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sales and calls of investment securities available for sale | 5,358 | 19,483 | |||||
Proceeds from paydowns of investment securities available for sale | 2,940 | 3,862 | |||||
Proceeds from paydowns of investment securities held to maturity | 1,166 | — | |||||
Purchases of investment securities available for sale | (27,947 | ) | (6,223 | ) | |||
Purchases of investment securities held to maturity | (5,319 | ) | — | ||||
Net decrease (increase) in loans | 18,528 | (1,862 | ) | ||||
Purchase of bank premises and equipment | (241 | ) | (215 | ) | |||
Proceeds from sales of foreclosed assets | 1,099 | 237 | |||||
Net capitalized expenditures on foreclosed assets | (36 | ) | (31 | ) | |||
Net cash (used in) provided by investing activities | (4,452 | ) | 15,251 | ||||
Cash flows from financing activities: | |||||||
Increase in deposit accounts | 14,317 | 13,754 | |||||
Proceeds from issuance of common stock | 37 | 51 | |||||
Net cash provided by financing activities | 14,354 | 13,805 | |||||
Net increase in cash and cash equivalents | 15,391 | 34,797 | |||||
Cash and cash equivalents at beginning of period | 164,966 | 98,394 | |||||
Cash and cash equivalents at end of period | $ | 180,357 | $ | 133,191 | |||
Schedule of noncash investing and financing activities: | |||||||
Unrealized gains on investment securities available for sale, net | $ | 195 | $ | 262 | |||
Transfers of loans to foreclosed assets | $ | 2,515 | $ | 178 | |||
Payable, settlement for investments securities purchased | $ | 1,716 | $ | 9,815 |
The accompanying notes are an integral part of the consolidated financial statements.
-7-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
In management’s opinion, the financial information contained in the accompanying unaudited consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month period ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts and transactions of Four Oaks Fincorp, Inc., a bank holding company incorporated under the laws of the State of North Carolina (the “Company”), and its wholly-owned subsidiaries, Four Oaks Bank & Trust Company (the “Bank”) and Four Oaks Mortgage Services, LLC, the Company’s mortgage origination subsidiary. All significant intercompany transactions have been eliminated. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.
The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. This Quarterly Report should be read in conjunction with such Annual Report.
Going Concern Considerations
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. During 2010 and 2011, the Company experienced significant losses, rapidly escalating impaired loans and declining capital levels. Improvements in negative trends were noted during the latter part of 2011 and continued into the first quarter of 2012 when positive net income was reported. Management believes that its current operations and its cash availability are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business. While management does not anticipate further significant deterioration in the Bank's loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that the Company and the Bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
Net income for the first quarter ended March 31, 2012 was $552,000 compared to a net loss of $1.1 million for the same period of 2011. For the first quarter of 2012, the decrease in provision for loan losses was $(247,000) compared to an increase of $2.6 million for the same period in 2011 and were primarily composed of specific reserves previously established. Net charge offs for the first three months of 2012 were $1.5 million compared to $2.6 million for the comparable period in 2011. At March 31, 2012 the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.78%, 7.37%, and 4.50%, respectively, compared to 10.31%, 6.97% and 4.41%, respectively, at December 31, 2011. At March 31, 2012, the Bank’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.25%, 8.97% and 5.47%, respectively, compared to 9.75%, 8.47%, and 5.40%, respectively, at December 31, 2011. The Company and the Bank entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”) that imposes certain restrictions on the Company and the Bank, as described in Notes I and J. A material failure to comply with the Written Agreement’s terms could subject the Company to additional regulatory actions and further restrictions on its business, which may have a material adverse effect on the Company’s future results of operations and financial condition.
In order for the Company and the Bank to be well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is also working to reduce its balance sheet to improve capital ratios and actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2012.
Cash and cash equivalents at March 31, 2012 were approximately $180.4 million, of which approximately $20.8 million has been
-8-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
earmarked for scheduled broker deposit maturities during 2012. Based on our liquidity analysis, management does not anticipate that the Company will be unable to meet its obligations as they become due. If unanticipated market factors emerge, or if the Company is not successful in its efforts to comply with the requirements set forth in the Written Agreement, the FRB and/or the NCCOB may take further enforcement or other actions. These actions might include greater restrictions on the Company’s operations, a revocation of its charter and the placement of the Bank into receivership if the situation materially deteriorates. The Company is in substantial compliance with the provisions of the Written Agreement.
NOTE B - COMMITMENTS
At March 31, 2012, loan commitments were as follows (in thousands):
Undisbursed lines of credit | $ | 38,354 | |
Commitments to extend credit | 20,717 | ||
Financial stand-by letters of credit | 453 | ||
Performance stand-by letters of credit | 1,526 | ||
Legally binding commitments | 61,050 | ||
Credit card lines | 13,566 | ||
Total | $ | 74,616 |
NOTE C - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share represents income or losses charged to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options.
Basic and diluted net income (loss) per common share have been computed based upon net income (loss) as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
Three Months Ended | |||||
March 31, | |||||
2012 | 2011 | ||||
Weighted average number of common shares used in computing basic net income (loss) per common share | 7,667,845 | 7,545,825 | |||
Effect of dilutive stock options | — | — | |||
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income (loss) per share | 7,667,845 | 7,545,825 |
For the three month period ended March 31, 2012 the average stock price was less than the exercise price for all outstanding stock options thus causing all stock options to be considered anti-dilutive. Given the net loss for the three Months ended March 31, 2011, all options were considered to be anti-dilutive. For the three months ended March 31, 2012 and 2011, there were 350,006 and 352,356 antidilutive stock options outstanding, respectively, which represented all of the options outstanding for both periods.
-9-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE D– INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available for sale and securities held to maturity as of March 31, 2012 and December 31, 2011 are as follows:
March 31, 2012 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Available for Sale | (Amounts in thousands) | ||||||||||||||
Taxable municipal securities | $ | 17,039 | $ | 1,226 | $ | — | $ | 18,265 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 92,196 | 966 | 147 | 93,015 | |||||||||||
Trust preferred securities | 1,175 | — | 153 | 1,022 | |||||||||||
Equity securities | 170 | 4 | 10 | 164 | |||||||||||
Total | $ | 110,580 | $ | 2,196 | $ | 310 | $ | 112,466 |
March 31, 2012 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Held to Maturity | (Amounts in thousands) | ||||||||||||||
Mortgage-backed securities | |||||||||||||||
GNMA | $ | 24,455 | $ | 131 | $ | 22 | $ | 24,564 | |||||||
Total | $ | 24,455 | $ | 131 | $ | 22 | $ | 24,564 | |||||||
December 31, 2011 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Available for Sale: | (Amounts in thousands) | ||||||||||||||
Taxable municipal securities | $ | 17,046 | $ | 873 | $ | — | $ | 17,919 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 72,839 | 841 | 51 | 73,629 | |||||||||||
Trust preferred securities | 1,175 | — | 90 | 1,085 | |||||||||||
Equity securities | 170 | 2 | 15 | 157 | |||||||||||
Total | $ | 91,230 | $ | 1,716 | $ | 156 | $ | 92,790 |
��
December 31, 2011 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Held to Maturity | (Amounts in thousands) | ||||||||||||||
Mortgage-backed securities | |||||||||||||||
GNMA | $ | 20,445 | $ | 48 | $ | 37 | $ | 20,456 | |||||||
Total | $ | 20,445 | $ | 48 | $ | 37 | $ | 20,456 | |||||||
-10-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011.
March 31, 2012 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||||
Securities Available for Sale: | |||||||||||||||||||||||
Taxable municipal securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 22,925 | 129 | 6,292 | 18 | 29,217 | 147 | |||||||||||||||||
Trust preferred securities | — | — | 409 | 91 | 409 | 91 | |||||||||||||||||
Equity securities | $ | — | $ | — | $ | 20 | $ | 10 | $ | 20 | $ | 10 | |||||||||||
Total temporarily impaired securities | $ | 22,925 | $ | 129 | $ | 6,721 | $ | 119 | $ | 29,646 | $ | 248 | |||||||||||
Other than temporary impairment | |||||||||||||||||||||||
Trust preferred securities | $ | — | $ | — | $ | 613 | $ | 62 | $ | 613 | $ | 62 | |||||||||||
Total other than temporarily impaired securities | $ | — | $ | — | $ | 613 | $ | 62 | $ | 613 | $ | 62 |
March 31, 2012 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||||
Securities Held to Maturity | |||||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | $ | 8,342 | $ | 22 | $ | — | $ | — | $ | 8,342 | $ | 22 | |||||||||||
Total temporarily impaired securities | $ | 8,342 | $ | 22 | $ | — | $ | — | $ | 8,342 | $ | 22 |
December 31, 2011 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||||
Securities Available for Sale: | |||||||||||||||||||||||
Taxable municipal securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 12,100 | 51 | — | — | 12,100 | 51 | |||||||||||||||||
Trust preferred securities | — | — | 481 | 19 | 481 | 19 | |||||||||||||||||
Equity securities | 170 | 15 | — | — | 170 | 15 | |||||||||||||||||
$ | 12,270 | $ | 66 | $ | 481 | $ | 19 | $ | 12,751 | $ | 85 | ||||||||||||
Total temporarily impaired securities | |||||||||||||||||||||||
Trust preferred securities | $ | — | $ | — | $ | 604 | $ | 71 | $ | 604 | $ | 71 | |||||||||||
Total other than temporarily impaired securities | $ | — | $ | — | $ | 604 | $ | 71 | $ | 604 | $ | 71 |
-11-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
December 31, 2011 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||||
Securities Held to Maturity | |||||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | $ | 8,043 | $ | 37 | $ | — | $ | — | $ | 8,043 | $ | 37 | |||||||||||
Total temporarily impaired securities | $ | 8,043 | $ | 37 | $ | — | $ | — | $ | 8,043 | $ | 37 |
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
The unrealized gains and losses on debt securities at March 31, 2012 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Six of eighteen GNMA collateralized mortgage obligations, three of eight GNMA adjustable rate mortgage securities, and two trust preferred securities contained unrealized losses at March 31, 2012. Management identified no impairment related to credit quality. At March 31, 2012, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the three months ended March 31, 2012.
A trust preferred security, containing unrealized losses at March 31, 2012, was previously deemed other than temporarily impaired as of and for the year-ended December 31, 2011. As a result of management's determination that $75,000 of the $146,000 unrealized losses at December 31, 2011 related to credit quality of the security, the basis in the investment was adjusted from $750,000 to $675,000. As of March 31, 2012, the fair value of the trust preferred security was $613,000, which resulted in an aggregate unrealized loss on the trust preferred security of $62,000. Management continued to monitor the creditworthiness of the issuer during the first quarter of 2012 in considering key factors such as the levels of nonperforming assets and loan concentrations, regulatory capital levels, brokered deposit reliance and stability core deposits. In its previous determination of the credit loss related to this investment, including the probability of repayment of principal and interest, management considered and evaluated the deteriorating credit profile/rating for this issuer over a prolonged period of time consisting of six quarters. The deteriorating creditworthiness was deemed to be a result of continued elevated levels of nonperforming assets and loan concentrations, declining regulatory capital levels, high levels of brokered deposits, and runoff in core deposits quarter over quarter. Management has continued to monitor the creditworthiness of the issuer during the first quarter of 2012 in considering similar key factors. As of the most recently available financial information, the issuer's market value, credit rating, income, and capital ratios have all increased. At the same time, the issuer's nonperforming assets (NPAs) are decreasing. Based on this information and knowledge of the current market environment, management has concluded that the unrealized loss for this trust preferred security as of March 31, 2012 is not credit related and will therefore be recognized in other comprehensive income for the three months ended March 31, 2012.
The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.
-12-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
2012 | |||
Balance of credit losses on debt securities at the beginning of the period | $ | 75 | |
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized | — | ||
Balance of credit losses on debt securities at the end of the period | $ | 75 |
The amortized cost and fair value of available for sale, and held to maturity securities at March 31, 2012 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale | |||||||
Amortized Cost | Fair Value | ||||||
(Amounts in thousands) | |||||||
Taxable municipal securities | |||||||
Due within one year | $ | — | $ | — | |||
Due after one year through five years | 510 | 539 | |||||
Due after five years through ten years | 11,290 | 12,107 | |||||
Due after ten years | 5,239 | 5,619 | |||||
Total available for sale securities | 17,039 | 18,265 | |||||
Mortgage-backed securities - GNMA | |||||||
Due within one year | 1,187 | 1,183 | |||||
Due after one year through five years | 55,179 | 55,892 | |||||
Due after five years through ten years | 35,830 | 35,940 | |||||
Due after ten years | — | — | |||||
Total mortgage-backed securities - GNMA | 92,196 | 93,015 | |||||
Debt securities | |||||||
Trust preferred securities | 1,175 | 1,022 | |||||
Equity securities | 170 | 164 | |||||
Total debt securities | $ | 1,345 | $ | 1,186 | |||
Total available for sale and debt securities | $ | 110,580 | $ | 112,466 | |||
Held to Maturity | |||||||
Amortized Cost | Fair Value | ||||||
(Amounts in thousands) | |||||||
Mortgage-backed securities -GNMA | |||||||
Due within one year | $ | — | $ | — | |||
Due after one year through five years | 18,063 | 18,192 | |||||
Due after five years through ten years | 6,392 | 6,372 | |||||
Due after ten years | — | — | |||||
Total held to maturity securities | $ | 24,455 | $ | 24,564 | |||
Securities with a carrying value of approximately $126.1 million and $102.5 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
-13-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Proceeds from sales and calls of investment securities available for sale amounted to $5.4 million and $19.5 million for the three months ended March 31, 2012 and 2011, respectively. Sales and calls of securities available for sale and equity securities during the three months ended March 31, 2012 and 2011 generated gross realized gains of $11,538 and $150,901, respectively.
-14-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE E – LOANS
The classification of loans as of March 31, 2012 and December 31, 2011 are summarized as follows:
March 31, 2012 | December 31, 2011 | ||||||
(in thousands) | |||||||
Commercial and industrial loans | $ | 31,767 | $ | 40,345 | |||
Commercial construction and land development | 110,666 | 113,762 | |||||
Commercial real estate | 205,290 | 214,740 | |||||
Residential construction | 26,900 | 26,707 | |||||
Residential mortgage | 191,206 | 192,972 | |||||
Consumer | 10,885 | 11,451 | |||||
Other | 3,020 | 2,330 | |||||
Gross loans | 579,734 | 602,307 | |||||
Less: | |||||||
Net deferred loan fees | (56 | ) | (75 | ) | |||
Net loans before allowance | 579,678 | 602,232 | |||||
Allowance for loan losses | (19,383 | ) | (21,141 | ) | |||
Total net loans | $ | 560,295 | $ | 581,091 |
Loan balances throughout Note E are shown at gross loan amounts before any reduction of deferred loan fees of $56,000 at March 31, 2012 and $75,000 at December 31, 2011, respectively.
Nonperforming assets at March 31, 2012 and December 31, 2011 consist of the following:
March 31, 2012 | December 31, 2011 | ||||||
(amounts in thousands) | |||||||
Loans past due ninety days or more and still accruing | $ | 39 | $ | 60 | |||
Nonaccrual loans | 56,306 | 60,141 | |||||
Foreclosed assets | 13,216 | 12,159 | |||||
Total | $ | 69,561 | $ | 72,360 |
Loans are primarily made in the Company’s market area of North Carolina, principally Johnston County, and parts of Wake, Harnett, Duplin, Sampson, Lee, Moore and Richmond counties. Real estate loans can be affected by the condition of the local real estate market. Commercial, consumer and other loans can be affected by the local economic conditions.
To provide greater transparency on non-performing assets, disclosures required by Accounting Standards Update (“ASU”) 2010-20 have been included below. Allowance for loan losses is reported by portfolio class and further detail of credit quality indicators are provided by class of loans.
-15-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Allowance for Loan Losses and Recorded Investment in Loans
As of and for the three months ended March 31, 2012 and 2011 and as of December 31, 2011 (in thousands):
The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.
Following is an analysis of the allowance for loan losses by loan class:
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2012 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||||||||||
Allowances for loan losses: | |||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 2,730 | $ | 8,799 | $ | 3,800 | $ | 740 | $ | 4,630 | $ | 413 | $ | 29 | $ | 21,141 | |||||||||||||||
Provision for loan losses | (164 | ) | 839 | (847 | ) | (365 | ) | 209 | 88 | (7 | ) | (247 | ) | ||||||||||||||||||
Loans charged-off | (249 | ) | (1,173 | ) | (340 | ) | — | (151 | ) | (120 | ) | — | (2,033 | ) | |||||||||||||||||
Recoveries | 26 | 320 | 60 | — | 85 | 31 | — | 522 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (223 | ) | (853 | ) | (280 | ) | — | (66 | ) | (89 | ) | — | (1,511 | ) | |||||||||||||||||
Balance, end of period | $ | 2,343 | $ | 8,785 | $ | 2,673 | $ | 375 | $ | 4,773 | $ | 412 | $ | 22 | $ | 19,383 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 1,100 | $ | 2,366 | $ | 382 | $ | 114 | $ | 1,980 | $ | — | $ | — | $ | 5,942 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 1,243 | $ | 6,419 | $ | 2,291 | $ | 261 | $ | 2,793 | $ | 412 | $ | 22 | $ | 13,441 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Ending Balance | $ | 31,767 | $ | 110,666 | $ | 205,290 | $ | 26,900 | $ | 191,206 | $ | 10,885 | $ | 3,020 | $ | 579,734 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 2,183 | $ | 35,591 | $ | 24,958 | $ | 1,511 | $ | 26,112 | $ | 73 | $ | — | $ | 90,428 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 29,584 | $ | 75,075 | $ | 180,332 | $ | 25,389 | $ | 165,094 | $ | 10,812 | $ | 3,020 | $ | 489,306 |
-16-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2011 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 2,049 | $ | 8,375 | $ | 4,038 | $ | 2,848 | $ | 4,291 | $ | 415 | $ | 84 | $ | 22,100 | |||||||||||||||
Provision for loan losses | 385 | 1,120 | 34 | 174 | 846 | 70 | 1 | 2,630 | |||||||||||||||||||||||
Loan allowance before net (charge-offs) recoveries | 2,434 | 9,495 | 4,072 | 3,022 | 5,137 | 485 | 85 | 24,730 | |||||||||||||||||||||||
Loans charged-off | (728 | ) | (1,041 | ) | (288 | ) | (241 | ) | (509 | ) | (142 | ) | — | (2,949 | ) | ||||||||||||||||
Recoveries | 165 | 4 | 9 | 95 | 36 | 34 | — | 343 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (563 | ) | (1,037 | ) | (279 | ) | (146 | ) | (473 | ) | (108 | ) | — | (2,606 | ) | ||||||||||||||||
Balance, end of period | $ | 1,871 | $ | 8,458 | $ | 3,793 | $ | 2,876 | $ | 4,664 | $ | 377 | $ | 85 | $ | 22,125 | |||||||||||||||
Twelve Months Ended | |||||||||||||||||||||||||||||||
December 31, 2011 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||||||||||
Allowances for loan losses: | |||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 2,049 | $ | 8,375 | $ | 4,038 | $ | 2,848 | $ | 4,291 | $ | 415 | $ | 84 | $ | 22,100 | |||||||||||||||
Provision for loan losses | 2,443 | 7,755 | 1,079 | (1,811 | ) | 1,694 | 335 | (55 | ) | 11,440 | |||||||||||||||||||||
Loan allowance before net (charge-offs) recoveries | 4,492 | 16,130 | 5,117 | 1,037 | 5,985 | 750 | 29 | 33,540 | |||||||||||||||||||||||
Loans charged-off | (2,181 | ) | (7,735 | ) | (1,802 | ) | (588 | ) | (2,126 | ) | (477 | ) | — | (14,909 | ) | ||||||||||||||||
Recoveries | 419 | 404 | 485 | 291 | 771 | 140 | — | 2,510 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (1,762 | ) | (7,331 | ) | (1,317 | ) | (297 | ) | (1,355 | ) | (337 | ) | — | (12,399 | ) | ||||||||||||||||
Balance, end of period | $ | 2,730 | $ | 8,799 | $ | 3,800 | $ | 740 | $ | 4,630 | $ | 413 | $ | 29 | $ | 21,141 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 1,237 | $ | 2,942 | $ | 1,448 | $ | 114 | $ | 1,618 | $ | — | $ | — | $ | 7,359 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 1,493 | $ | 5,857 | $ | 2,352 | $ | 626 | $ | 3,012 | $ | 413 | $ | 29 | $ | 13,782 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Ending Balance | $ | 40,345 | $ | 113,762 | $ | 214,740 | $ | 26,707 | $ | 192,972 | $ | 11,451 | $ | 2,330 | $ | 602,307 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 2,419 | $ | 37,922 | $ | 26,075 | $ | 1,242 | $ | 25,327 | $ | 86 | $ | — | $ | 93,071 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 37,926 | $ | 75,840 | $ | 188,665 | $ | 25,465 | $ | 167,645 | $ | 11,365 | $ | 2,330 | $ | 509,236 |
-17-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Credit Quality Indicators
March 31, 2012
The Company uses an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. The credit grades have been defined as follows:
• | Grade 1 - Lowest Risk |
Loans secured by properly margined liquid collateral such as certificates of deposit, government securities, cash value of life insurance, stock actively traded on one of the major stock exchanges, etc. Repayment is definite and being handled as agreed. Maintains a strong, liquid financial condition as evidenced by a current financial statement in the Bank.
•Grade 2 - Satisfactory Quality
Loans secured by properly margined collateral with a definite repayment agreement in effect. Unsecured loans with repayment agreements that are definite, realistic, and are being handled as agreed. Repayment source well defined by proven income, cash flow, trade asset turn, etc. Multiple repayment sources exist. Individual and businesses will typically have a sound financial condition.
•Grade 3 – Satisfactory - Merits Attention
Loans being repaid as agreed that require close following because of complexity, information or underwriting deficiencies, emerging signs of weakness or non-standard terms. Secured loans repaying as agreed where collateral value or marketability are questionable but do not materially affect risk. Repayment sources well defined by proven income, cash flow, trade asset turn, etc., but may be weaker than Grade 2. Loans to weak individuals or business borrowers with a strong endorser or guarantor. Fully collectible, unsecured loans or loans secured by other than approved collateral for which an acceptable repayment agreement has not been established.
•Grade 4 - Low Satisfactory
New Loans - Applicants with excessive minor exceptions as defined by the Risk Grade forms. Applicants with major credit history or beacon score issues as defined by the Risk Grade forms. Applicants with two or more major exceptions with mitigating factors identified on the Fair Lending form.
Existing Loans - Borrower’s ability to repay from primary (intended) repayment sources is not clearly sufficient to ensure performance as contracted; but the loan is performing as contracted, and secondary repayment sources are clearly sufficient to protect against the risk of principal or income loss; and it is reasonable to expect that the circumstances causing repayment capacity to be uncertain will be resolved within six months. Access to alternative financing sources exists but may be limited to institutions specializing in higher risk financing.
•Grade 5 - Special Mention
Special Mention risk loans include the following characteristics: Loans currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the bank’s position at some future date. Potential weaknesses exist, generally the result of deviations from prudent lending practices, such as over advances on collateral or unproven primary repayment sources. Loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do increase the level of risk may also warrant this rating. Such trends may be in the borrower’s options, credit quality or financial strength. New loans with exceptions where no mitigating factors are justified.
• | Grade 6 -8 - Substandard or Worse |
Substandard, Doubtful, and Loss are additional risk grades not available on the Grading Form. Loans are not typically made if graded Substandard or worse at inception, without management's approval. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.
-18-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The following tables illustrate the segments of loans by grade:
Credit Risk Profile by Creditworthiness Class
As of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 2,319 | $ | — | $ | — | $ | — | $ | 137 | $ | 1,987 | $ | 38 | $ | 4,481 | |||||||||||||||
2 - Satisfactory Quality | 434 | 785 | 3,120 | 132 | 11,560 | 257 | 3 | 16,291 | |||||||||||||||||||||||
3 - Satisfactory | |||||||||||||||||||||||||||||||
- Merits Attention | 9,951 | 23,070 | 58,489 | 2,498 | 67,799 | 4,944 | 1,087 | 167,838 | |||||||||||||||||||||||
4 - Low Satisfactory | 13,071 | 40,266 | 102,103 | 21,405 | 69,374 | 1,356 | 1,890 | 249,465 | |||||||||||||||||||||||
5 - Special mention | 2,147 | 5,298 | 16,312 | 862 | 16,045 | 147 | 2 | 40,813 | |||||||||||||||||||||||
6 - Substandard | 2,735 | 41,247 | 25,266 | 2,003 | 26,291 | 238 | — | 97,780 | |||||||||||||||||||||||
$ | 30,657 | $ | 110,666 | $ | 205,290 | $ | 26,900 | $ | 191,206 | $ | 8,929 | $ | 3,020 | $ | 576,668 |
December 31, 2011 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 2,421 | $ | — | $ | — | $ | — | $ | 136 | $ | 1,952 | $ | 40 | $ | 4,549 | |||||||||||||||
2 - Satisfactory Quality | 483 | 974 | 2,942 | 497 | 12,720 | 288 | 6 | 17,910 | |||||||||||||||||||||||
3 - Satisfactory | |||||||||||||||||||||||||||||||
- Merits Attention | 10,696 | 26,907 | 63,887 | 1,971 | 68,172 | 5,183 | 298 | 177,114 | |||||||||||||||||||||||
4 - Low Satisfactory | 20,070 | 36,852 | 98,007 | 20,756 | 68,668 | 1,515 | 1,984 | 247,852 | |||||||||||||||||||||||
5 - Special mention | 2,593 | 8,673 | 22,311 | 1,849 | 15,226 | 165 | 2 | 50,819 | |||||||||||||||||||||||
6 - Substandard | 3,066 | 40,356 | 27,593 | 1,634 | 28,050 | 256 | — | 100,955 | |||||||||||||||||||||||
$ | 39,329 | $ | 113,762 | $ | 214,740 | $ | 26,707 | $ | 192,972 | $ | 9,359 | $ | 2,330 | $ | 599,199 |
Credit Card Portfolio Exposure
As of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | |||||||
Consumer - Credit Card | Business- Credit Card | ||||||
Performing | $ | 1,949 | $ | 1,078 | |||
Non Performing | 7 | 32 | |||||
Total | $ | 1,956 | $ | 1,110 |
December 31, 2011 | |||||||
Consumer- Credit Card | Business- Credit Card | ||||||
Performing | $ | 2,082 | $ | 991 | |||
Non Performing | 10 | 25 | |||||
Total | $ | 2,092 | $ | 1,016 |
-19-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Age Analysis of Past Due Loans
As of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual and Greater than 90 Days Past Due (1) | Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||
Commercial & industrial | $ | 155 | $ | 575 | $ | 730 | $ | 29,927 | $ | 30,657 | $ | — | |||||||||||
Commercial construction and land Development | 2,805 | 27,332 | 30,137 | 80,529 | 110,666 | — | |||||||||||||||||
Commercial real estate | 2,358 | 14,370 | 16,728 | 188,562 | 205,290 | — | |||||||||||||||||
Residential construction | 568 | 1,346 | 1,914 | 24,986 | 26,900 | — | |||||||||||||||||
Residential mortgage | 2,585 | 12,635 | 15,220 | 175,986 | 191,206 | — | |||||||||||||||||
Consumer | 82 | 48 | 130 | 8,799 | 8,929 | — | |||||||||||||||||
Consumer credit cards | 31 | 7 | 38 | 1,918 | 1,956 | 7 | |||||||||||||||||
Business credit cards | 41 | 32 | 73 | 1,037 | 1,110 | 32 | |||||||||||||||||
Other loans | 90 | — | 90 | 2,930 | 3,020 | — | |||||||||||||||||
Total | $ | 8,715 | $ | 56,345 | $ | 65,060 | $ | 514,674 | $ | 579,734 | $ | 39 |
(1) | Nonaccrual and greater than 90 Days Past Due is comprised of notes in non-accrual status with the exception of consumer and business credit cards of $39,000 that are over 90 days past due and still accruing interest. |
December 31, 2011 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual and Greater than 90 Days Past Due (1) | Total Past Due | Current | Total Loans | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||
Commercial & industrial | $ | 129 | $ | 779 | $ | 908 | $ | 38,421 | $ | 39,329 | $ | — | |||||||||||
Commercial construction and land Development | 1,221 | 29,538 | 30,759 | 83,003 | 113,762 | — | |||||||||||||||||
Commercial real estate | 1,647 | 14,830 | 16,477 | 198,263 | 214,740 | — | |||||||||||||||||
Residential construction | 180 | 1,469 | 1,649 | 25,058 | 26,707 | — | |||||||||||||||||
Residential mortgage | 3,479 | 13,466 | 16,945 | 176,027 | 192,972 | — | |||||||||||||||||
Consumer | 103 | 59 | 162 | 9,197 | 9,359 | — | |||||||||||||||||
Consumer credit cards | 62 | 35 | 97 | 1,995 | 2,092 | 35 | |||||||||||||||||
Business credit cards | 15 | 25 | 40 | 976 | 1,016 | 25 | |||||||||||||||||
Other loans | — | — | — | 2,330 | 2,330 | — | |||||||||||||||||
Total | $ | 6,836 | $ | 60,201 | $ | 67,037 | $ | 535,270 | $ | 602,307 | $ | 60 |
(1) | Nonaccrual and Greater than 90 Days Past Due is comprised of $60,000 of loans that were past due more than 90 days and still accruing interest. |
-20-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The following table illustrates the impaired loans by loan class:
Impaired Loans
As of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | |||||||||||||||||||
Year to Date | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 997 | $ | 1,238 | $ | — | $ | 974 | $ | 1 | |||||||||
Commercial construction and land development | 22,186 | 27,625 | — | 22,039 | 16 | ||||||||||||||
Commercial real estate other | 19,855 | 21,445 | — | 19,363 | 7 | ||||||||||||||
Residential construction | 391 | 438 | — | 391 | — | ||||||||||||||
Residential mortgage | 16,566 | 18,629 | — | 15,362 | 22 | ||||||||||||||
Consumer | 73 | 102 | — | 79 | — | ||||||||||||||
Other | — | — | — | — | — | ||||||||||||||
Subtotal: | 60,068 | 69,477 | — | 58,208 | 46 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 1,186 | $ | 1,426 | $ | 1,100 | $ | 1,201 | $ | 1 | |||||||||
Commercial construction and land development | 13,405 | 18,493 | 2,366 | 13,033 | — | ||||||||||||||
Commercial real estate other | 5,103 | 6,514 | 382 | 6,006 | — | ||||||||||||||
Residential construction | 1,120 | 1,419 | 114 | 1,120 | — | ||||||||||||||
Residential mortgage | 9,546 | 10,407 | 1,980 | 8,979 | 23 | ||||||||||||||
Consumer | — | — | — | — | — | ||||||||||||||
Other | — | — | — | — | — | ||||||||||||||
Subtotal: | 30,360 | 38,259 | 5,942 | 30,339 | 24 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | $ | 62,732 | $ | 76,741 | $ | 3,848 | $ | 62,616 | $ | 25 | |||||||||
Consumer | 73 | 102 | — | 79 | — | ||||||||||||||
Residential | 27,623 | 30,893 | 2,094 | 25,852 | 45 | ||||||||||||||
Grand Total | $ | 90,428 | $ | 107,736 | $ | 5,942 | $ | 88,547 | $ | 70 |
-21-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
December 31, 2011 | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | YTD Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 992 | $ | 1,459 | $ | — | $ | 1,262 | $ | 11 | |||||||||
Commercial construction and land development | 23,049 | 28,958 | — | 22,315 | 167 | ||||||||||||||
Commercial real estate other | 18,325 | 20,601 | — | 14,128 | 157 | ||||||||||||||
Residential construction | 98 | 98 | — | 98 | — | ||||||||||||||
Residential mortgage | 16,152 | 18,528 | — | 12,681 | 167 | ||||||||||||||
Consumer | 77 | 132 | — | 90 | — | ||||||||||||||
Other | — | — | — | — | — | ||||||||||||||
Subtotal: | 58,693 | 69,776 | — | 50,574 | 502 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 1,427 | $ | 1,597 | $ | 1,237 | $ | 967 | $ | 18 | |||||||||
Commercial construction and land development | 14,873 | 20,999 | 2,942 | 18,136 | 45 | ||||||||||||||
Commercial real estate other | 7,750 | 9,289 | 1,448 | 6,805 | 72 | ||||||||||||||
Residential construction | 1,144 | 1,363 | 114 | 1,363 | — | ||||||||||||||
Residential mortgage | 9,175 | 10,366 | 1,617 | 7,493 | 76 | ||||||||||||||
Consumer | 9 | 16 | 1 | 4 | — | ||||||||||||||
Other | — | — | — | — | — | ||||||||||||||
Subtotal: | 34,378 | 43,630 | 7,359 | 34,768 | 211 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 66,416 | 82,903 | 5,627 | 63,613 | 470 | ||||||||||||||
Consumer | 86 | 148 | 1 | 94 | — | ||||||||||||||
Residential | 26,569 | 30,355 | 1,731 | 21,635 | 243 | ||||||||||||||
Grand Total | $ | 93,071 | $ | 113,406 | $ | 7,359 | $ | 85,342 | $ | 713 |
Loans on Nonaccrual Status
As of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | December 31, 2011 | ||||||
Commercial & industrial | $ | 575 | $ | 779 | |||
Commercial construction and land development | 27,332 | 29,538 | |||||
Commercial real estate | 14,370 | 14,830 | |||||
Residential construction | 1,346 | 1,469 | |||||
Residential mortgage | 12,635 | 13,466 | |||||
Consumer | 48 | 59 | |||||
Other | — | — | |||||
Total | $ | 56,306 | $ | 60,141 |
-22-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Troubled Debt Restructurings
For the three months ending March 31, 2012 (amounts in thousands):
Loans are classified as a troubled debt restructuring (“TDR”) when, for economic or legal reasons related to the debtor's financial difficulties, the bank grants a concession to the debtor that would not otherwise be considered. Generally, these loans are restructured due to a borrower's inability to repay or meet the contractual obligations under the loan, which predominantly occurs, because of cash flow problems. The Bank only restructures loans for borrowers in financial difficulty that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow potential of the underlying collateral or business. We may grant concessions by (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based on a bankruptcy plan.
Loans being renewed or modified are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. All loans graded a “5” or worse at or prior to renewal or modification are also reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine if a concession has been made. If the Bank determines the answer to both of the above items is yes, the loan will be classified as a TDR. If the Bank determines the answer to either of these questions is no, the loan is not classified as a TDR. Documentation to support this review and determination of classification is maintained with the credit file.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual until such time as continued performance has been demonstrated, which is typically a period of at least six consecutive payments. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured terms. However, all TDRs are considered to be impaired and are evaluated as such in the quarterly allowance calculation.
For the three months ended March 31, 2012, the Bank modified 5 loans totaling $615,000 which were deemed TDRs. The following table presents a breakdown of these TDRs by loan class and the type of concession made to the borrower. (amounts in thousands):
-23-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Three Months Ended | |||||||||||
March 31, 2012 | |||||||||||
Number of loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||
Below market interest rate | |||||||||||
Commercial & industrial | — | $ | — | $ | — | ||||||
Commercial real estate | — | — | — | ||||||||
Residential mortgage | 1 | 395 | 395 | ||||||||
Subtotal | 1 | 395 | 395 | ||||||||
Extended payment terms | |||||||||||
Commercial & industrial | — | $ | — | $ | — | ||||||
Commercial real estate | 1 | 123 | 123 | ||||||||
Residential mortgage | 1 | 48 | 48 | ||||||||
Subtotal | 2 | 171 | 171 | ||||||||
Other | |||||||||||
Consumer | 2 | 49 | 49 | ||||||||
Subtotal | 2 | 49 | 49 | ||||||||
Total | 5 | $ | 615 | $ | 615 |
Current Bank policy considers a loan to be in payment default at the time that the loan is placed on nonaccrual. For the three months ended March 31, 2012, payment defaults occurred on 9 loans totaling $2.2 million which were modified during the previous 12 months. The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the three months ended March 31, 2012. (amounts in thousands):
Three Months Ended | |||||||
March 31, 2012 | |||||||
Number of loans | Recorded Investment | ||||||
Below market interest rate | |||||||
Commercial real estate | 3 | $ | 201 | ||||
Residential mortgage | — | — | |||||
Subtotal | 3 | 201 | |||||
Extended payment terms | |||||||
Commercial & industrial | 1 | $ | — | ||||
Commercial real estate | 2 | 1,912 | |||||
Residential mortgage | 3 | 79 | |||||
Subtotal | 6 | 1,991 | |||||
Total | 9 | $ | 2,192 |
The table below details successes and failures of troubled debt restructurings that we have entered into during the previous 12 months. There have been 32 TDRs executed during the previous 12 months, of which 13 have resulted in default by the borrower and the current recorded investment in these notes is $3.5 million. Additionally, there were no notes that have been paid in full, 14 notes totaling $3.2 million are paying as agreed in the restructure, and 5 notes totaling $338,000 were converted to non-accrual. (amounts in thousands):
-24-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
For the 12 month period ended March 31, 2012 | ||||||||||||||||||||||||||||
Paid in full | Paying as restructured | Converted to non-accrual | Foreclosure/Default | |||||||||||||||||||||||||
Number of loans | Recorded Investment | Number of loans | Recorded Investment | Number of loans | Recorded Investment | Number of loans | Recorded Investment | |||||||||||||||||||||
Below market interest rate | — | $ | — | 4 | $ | 844 | 2 | $ | 182 | 1 | $ | 19 | ||||||||||||||||
Extended payment terms | — | — | 7 | 1,567 | 3 | 156 | 8 | 3,509 | ||||||||||||||||||||
Forgiveness of principal | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Other | — | — | 3 | 784 | — | — | 4 | — | ||||||||||||||||||||
Total | — | $ | — | 14 | $ | 3,195 | 5 | $ | 338 | 13 | $ | 3,528 |
-25-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE F – FAIR VALUE MEASUREMENT
The Company records securities available for sale at fair value on a recurring basis. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”) establishes a fair value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. ASC 820 clarifies fair value in terms of the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.
Outlined below is the application of the fair value hierarchy established by ASC 820 to the Company’s financial assets that are carried at fair value.
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions.
Fair Value Measured on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis, as described below.
Investment Securities Available for Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by the Government National Mortgage Association (“GNMA”), municipal bonds and corporate debt securities.
Securities classified as Level 3 include trust preferred securities. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Management has continued to monitor the creditworthiness of the issuers of trust preferred securities during the first quarter of 2012 in considering similar key factors. As of the most recently available financial information, the issuer's market value, credit rating, income, and capital ratios have all increased.
Below is a table that presents information about assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 (amounts in thousands):
-26-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Fair Value Measurements at | |||||||||||||||||||
March 31, 2012, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
Description | 3/31/2012 | 3/31/2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 18,265 | $ | 18,265 | $ | — | $ | 18,265 | $ | — | |||||||||
Mortgage-backed securities GNMA | 93,015 | 93,015 | — | 93,015 | — | ||||||||||||||
Trust preferred securities | 1,022 | 1,022 | — | — | 1,022 | ||||||||||||||
Equity securities | 164 | 164 | 164 | — | — | ||||||||||||||
Total available for sale securities | $ | 112,466 | $ | 112,466 | $ | 164 | $ | 111,280 | $ | 1,022 |
Fair Value Measurements at | |||||||||||||||||||
December 31, 2011, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
Description | 12/31/2011 | 12/31/2011 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 17,919 | $ | 17,919 | $ | — | $ | 17,919 | $ | — | |||||||||
Mortgage-backed securities GNMA | 73,629 | 73,629 | — | 76,329 | — | ||||||||||||||
Trust preferred securities | 1,085 | 1,085 | — | 1,085 | |||||||||||||||
Equity securities | 157 | 157 | 157 | — | — | ||||||||||||||
Total available for sale securities | $ | 92,790 | $ | 92,790 | $ | 157 | $ | 94,248 | $ | 1,085 |
The tables below present the reconciliation for the three months ended March 31, 2012 and 2011 for all Level 3 assets that are measured at fair value on a recurring basis.
For the Three Months Ended | |||||||
March 31, | |||||||
Available-for-sale Securities | |||||||
2012 | 2011 | ||||||
(Dollars in thousands) | |||||||
Beginning Balance | $ | 1,085 | $ | 1,299 | |||
Total realized and unrealized gains or (losses): | |||||||
Included in earnings | — | (138 | ) | ||||
Included in other comprehensive income | (63 | ) | 246 | ||||
Purchases, issuances and settlements | — | — | |||||
Transfers in (out) of Level 3 | — | — | |||||
Ending Balance | $ | 1,022 | $ | 1,407 |
-27-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Fair Value Measured on a Nonrecurring Basis. The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables” and ASC 450, “Contingencies”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC 820, impaired loans with an allowance established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value that relies upon comparable values from identical sources, the Company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans totaled $90.4 million at March 31, 2012. Of such loans, $30.4 million had specific loss allowances aggregating $5.9 million at that date for a net fair value of $24.4 million. Of those specific allowances, all were determined using Level 3 inputs. Of the remaining balance of impaired loans, the Company has determined that no specific allowance remains.
Impaired Loans
The Company does not record loans held-for-investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired loans is estimated using one of several methods, including collateral value (through appraisal processes), market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, the majority of impaired loans were evaluated based on the fair value of the collateral. The Company records impaired loans as nonrecurring Level 3. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Nonrecurring measurements: | |||||||
Impaired loans | $ | 24,418 | Discounted appraisals | Collateral discounts | 15-70% | ||
Other real estate owned | $ | 13,216 | Discounted appraisals | Collateral discounts | 20 | % |
Foreclosed Assets
The carrying values of foreclosed assets are adjusted to not exceed the net realizable value upon transfer of the loans to foreclosed assets. Net realizable value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Through the three month period ended March 31, 2012, the Company recognized approximately $225,000 in valuation reductions on foreclosed assets resulting in the adjustment of the fair value of foreclosed assets to $13.2 million at March 31, 2012. As of and for the year ended December 31, 2011, there was $2.8 million recognized in valuation adjustments on foreclosed assets resulting in a fair value of foreclosed assets of $12.2 million as of that date.
Below are tables that present information about individually identified impaired loans and foreclosed assets measured at fair value at March 31, 2012 and December 31, 2011 (amounts in thousands):
-28-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Fair Value Measurements at | |||||||||||||||||||
March 31, 2012, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
3/31/2012 | 3/31/2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Impaired loans | $ | 24,418 | $ | 24,418 | $ | — | $ | — | $ | 24,418 | |||||||||
Foreclosed assets | $ | 13,216 | $ | 13,216 | $ | — | $ | — | $ | 13,216 |
Fair Value Measurements at | |||||||||||||||||||
December 31, 2011, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
12/31/2011 | 12/31/2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Impaired loans | $ | 27,018 | $ | 27,018 | $ | — | $ | — | $ | 27,018 | |||||||||
Foreclosed assets | $ | 12,159 | $ | 12,159 | $ | — | $ | — | $ | 12,159 |
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 825, “Financial Instruments” requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instruments’ values and should not be considered an indication of the fair value of the Company taken as a whole. The following methods and assumptions were used to estimate the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amounts of cash and due from banks, interest bearing due from banks, approximate to the fair values due to the liquid nature of the financial instruments and are classified as Level 1.
Investment Securities
Fair values of investment securities available for sale are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value for investment securities held to maturity is determined using discounted cash flow analysis
Loans
The Company does not record loans at fair value on a recurring basis. The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for current liquidity and market discount assumption. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.
FHLB Stock
-29-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amount of certificates of deposit approximates their fair value at the reporting date. Fair value for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Subordinated Debentures, and Subordinated Notes
The fair value of subordinated debentures and subordinated promissory notes is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements, resulting in a Level 3 classification.
Borrowings
The fair value of borrowings as of March 31, 2012 is based on the monthly mark to market schedule published by the lender FHLB, which is indicative of current rates for similar borrowings of comparable remaining duration, resulting in a Level 2 classification.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate fair value.
The following table presents information for financial assets and liabilities as of March 31, 2012 and December 31, 2011 (amounts in thousands):
March 31, 2012 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 180,357 | $ | 180,357 | $ | 180,357 | $ | — | $ | — | |||||||
Securities available for sale | 112,466 | 112,466 | 164 | 111,280 | 1,022 | ||||||||||||
Securities held to maturity | 24,455 | 24,564 | — | 24,564 | — | ||||||||||||
Loans, net | 560,295 | 536,074 | — | — | 536,074 | ||||||||||||
FHLB stock | 6,553 | 6,553 | — | 6,553 | — | ||||||||||||
Accrued interest receivable | 1,958 | 1,958 | — | 1,958 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 760,206 | $ | 756,229 | $ | 447,732 | $ | 308,497 | $ | — | |||||||
Subordinated debentures and promissory notes | 24,372 | 15,598 | — | — | 15,598 | ||||||||||||
Borrowings | 112,000 | 127,047 | — | 127,047 | |||||||||||||
Accrued interest payable | 1,512 | 1,512 | — | 1,512 | — | ||||||||||||
-30-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
December 31, 2011 | ||||||||
Carrying Value | Estimated Fair Value | |||||||
Financial assets: | ||||||||
Cash and cash equivalents | $ | 164,966 | $ | 164,966 | ||||
Securities available for sale | 92,790 | 92,790 | ||||||
Securities held to maturity | 20,445 | 20,456 | ||||||
Loans, net | 581,091 | 554,624 | ||||||
FHLB stock | 6,553 | 6,553 | ||||||
Investment in life insurance | 13,827 | 13,827 | ||||||
Accrued interest receivable | 1,985 | 1,985 | ||||||
Financial liabilities: | ||||||||
Deposits | $ | 745,889 | $ | 742,959 | ||||
Subordinated debentures and promissory notes | 24,372 | 15,598 | ||||||
Borrowings | 112,000 | 126,313 | ||||||
Accrued interest payable | 1,437 | 1,437 | ||||||
-31-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE H – OTHER RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards
On April 5, 2011, FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which amends Subtopic 310-40, Receivables: Troubled Debt Restructurings by Creditors. The objective of this ASU is to provide greater clarity and guidance to assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.
The ASU also states that as a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies: Loss Contingencies. An entity should disclose certain information required by and previously deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.
In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this ASU. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.
In May 2011, the FASB issued ASU No. 2011-04: Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The new ASU provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.
In June 2011, the FASB issued ASU No. 2011-05 which amends Comprehensive Income (Topic 220). The amendments require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The objective is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income. These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Disclosures required by ASU 2011-02 are included in Consolidated Statement of Comprehensive Income. The adoption of the disclosure requirements had no material impact on the Company's consolidated financial position, results of operations, and earnings per share.
In December 2011, The FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for annual and interim periods beginning on or after January 1, 2013, and the Company has not yet determined the financial statement impact.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
-32-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
NOTE I – SUBORDINATED NOTES
The Company is currently prohibited by the Written Agreement, described in Note A of these Notes to Consolidated Financial Statements, from paying interest on its subordinated promissory notes and on its subordinated debentures in connection with its trust preferred securities (TPS) without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for the first quarter of 2012. The Company exercised its right to defer regularly scheduled interest payments on its outstanding TPS and as of March 31, 2012, $328,000 of interest payments have been accrued for and deferred pursuant to the terms of the indenture governing the TPS. The Company may not pay any cash dividends on its Common Stock until it is current on interest payments on such TPS. The Company has not paid any cash dividends on its Common Stock since it suspended dividends in the fourth quarter of 2010. As a bank holding company, the Company’s ability to declare and pay dividends also depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
NOTE J - REGULATORY RESTRICTIONS
The Bank, as a North Carolina banking corporation, may pay dividends to the Company only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the bank. No dividends were paid to the Company by the Bank during the quarter ended March 31, 2012 or the years 2011 and 2010.
To be considered adequately capitalized, current federal regulations require that the Bank maintain a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Bank must maintain a leverage ratio, Tier 1 capital to average assets of 4%. To be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below.
In accordance with the Written Agreement, due to our elevated nonperforming assets, the Bank and the Company are considered adequately capitalized. Therefore, it cannot accept brokered deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interest rates paid on deposits of comparable size and maturity in the Bank’s normal market area for deposits accepted from within its normal market area, or the national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area. With respect to non-brokered deposits, as an adequately capitalized institution, the Bank cannot offer interest rates that are significantly higher than the prevailing rates in its normal market area. Moreover, if the Bank becomes less than adequately capitalized, it will be subject to additional interest restrictions and must adopt a capital restoration plan acceptable to the FDIC. The Bank also would become subject to increased regulatory oversight and would be increasingly restricted in the scope of its permissible activities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.
The Bank’s actual capital amounts and ratios are also presented in the table below (dollars in thousands):
-33-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Actual | Minimum For Capital Adequacy Purposes | Minimum To be Well Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 57,280 | 10.25 | % | $ | 44,704 | 8.0 | % | $ | 55,879 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 50,142 | 8.97 | % | 22,352 | 4.0 | % | 33,528 | 6.0 | % | |||||||||||
Tier I Capital (to Average Assets) | 50,142 | 5.47 | % | 38,805 | 4.0 | % | 48,506 | 5.0 | % | |||||||||||
As of December 31, 2011: | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 56,733 | 9.75 | % | $ | 46,584 | 8.0 | % | $ | 58,230 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 49,283 | 8.47 | % | 23,292 | 4.0 | % | 34,938 | 6.0 | % | |||||||||||
Tier I Capital (to Average Assets) | 49,283 | 5.40 | % | 36,514 | 4.0 | % | 45,642 | 5.0 | % |
The Company is also subject to capital requirements. At March 31, 2012 and December 31, 2011, the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.78%, 7.37%, and 4.50%, and 10.31%, 6.97%, and 4.41%, respectively.
In late May 2011, the Company and Four Oaks Bank & Trust Company, the Company's wholly-owned subsidiary (the “Bank”), entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond ( “FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”). Under the terms of the Written Agreement, the Bank developed and submitted for approval, within the time periods specified, plans to:
• | revise lending and credit administration policies and procedures at the Bank and provide relevant training; |
• | enhance the Bank's real estate appraisal policies and procedures; |
• | enhance the Bank's loan grading and independent loan review programs; |
• | improve the Bank's position with respect to loans, relationships, or other assets in excess of $750,000, which are now or in the future become past due more than 90 days, are on the Bank's problem loan list, or adversely classified in any report of examination of the Bank; and |
• | review and revise the Bank's current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance. |
In addition, the Bank has agreed that it will:
• | refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement; |
• | eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and |
• | take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB. |
In addition, the Company has agreed that it will:
• | refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval; |
• | refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and |
• | refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB. |
Under the terms of the Written Agreement, both the Company and the Bank have agreed to:
• | submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis; |
• | notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's |
-34-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
minimum ratios;
• | refrain from declaring or paying any dividends absent prior regulatory approval; |
• | comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and |
• | submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement. |
The Company is committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address the financial reporting material weaknesses, identified as of December 31, 2010, of identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also being addressed are the adequacy of credit resources, portfolio risk management and reporting,and consistency and compliance when dealing with loan workouts. A material failure to comply with the terms of the Written Agreement could subject the Company to additional regulatory actions and further restrictions on its business. These regulatory actions and resulting restrictions on the Company's business may have a material adverse effect on its future results of operations and financial condition.
Since the Company and the bank entered the Written Agreement, management has had frequent and regular communication with the FRB and NCCOB. This communication has involved:
• | updates on the progress involving each of the actions outlined in the Written Agreement; |
• | specific steps taken by the Company to remain in compliance with the Written Agreement; and |
• | communications, verbally and via interim internal reports, regarding the financial status of the Company including, but not limited to, the Company's key capital ratios. |
To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated. The Company is in substantial compliance with the provisions of the Written Agreement.
-35-
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the financial condition and results of operations of Four Oaks Fincorp, Inc. (the “Company”) and its subsidiaries and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report.
Regulatory Update
In late May 2011, the Company and Four Oaks Bank & Trust Company, the Company's wholly-owned subsidiary (the “Bank”), entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond ( “FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”). Under the terms of the Written Agreement, the Bank developed and submitted for approval, within the time periods specified, plans to:
• | revise lending and credit administration policies and procedures at the Bank and provide relevant training; |
• | enhance the Bank's real estate appraisal policies and procedures; |
• | enhance the Bank's loan grading and independent loan review programs; |
• | improve the Bank's position with respect to loans, relationships, or other assets in excess of $750,000, which are now or in the future become past due more than 90 days, are on the Bank's problem loan list, or adversely classified in any report of examination of the Bank; and |
• | review and revise the Bank's current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance. |
In addition, the Bank has agreed that it will:
• | refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement; |
• | eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and |
• | take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB. |
In addition, the Company has agreed that it will:
• | refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval; |
• | refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and |
• | refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB. |
Under the terms of the Written Agreement, both the Company and the Bank have agreed to:
• | submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis; |
• | notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios; |
• | refrain from declaring or paying any dividends absent prior regulatory approval; |
• | comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and |
• | submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement. |
The Company is committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address the financial reporting material weaknesses, identified as of December 31, 2010, of identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation
-36-
and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also being addressed are the adequacy of credit resources, portfolio risk management and reporting,and consistency and compliance when dealing with loan workouts. A material failure to comply with the terms of the Written Agreement could subject the Company to additional regulatory actions and further restrictions on its business. These regulatory actions and resulting restrictions on the Company's business may have a material adverse effect on its future results of operations and financial condition.
Since the Company and the bank entered the Written Agreement, management has had frequent and regular communication with the FRB and NCCOB. This communication has involved:
• | updates on the progress involving each of the actions outlined in the Written Agreement; |
• | specific steps taken by the Company to remain in compliance with the Written Agreement; and |
• | communications, verbally and via interim internal reports, regarding the financial status of the Company including, but not limited to, the Company's key capital ratios. |
To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated. The Company is in substantial compliance with the provisions of the Written Agreement.
Comparison of Financial Condition at
March 31, 2012 and December 31, 2011
The Company’s total assets increased from $916.6 million at December 31, 2011 to $934.5 million at March 31, 2012, an increase of $17.9 million, or 1.95%. The Company’s liquid assets, consisting of cash and cash equivalents and investment securities, increased $39.1 million to $317.3 million during the three months ended March 31, 2012 compared to liquid assets of $278.2 million as of December 31, 2011 primarily from increases in cash and cash equivalents of $15.4 million, and investment securities available for sale and held to maturity of $23.7 million. Gross loans decreased by $22.6 million or 3.75% from $602.2 million at December 31, 2011 to $579.7 million at March 31, 2012. The Company’s loan portfolio declined due to payoffs, paydowns and charge-offs. Deposits increased $14.3 million or 1.92% from $745.9 million at December 31, 2011 to $760.2 million at March 31, 2012, due to an increase in non-interest bearing, non-maturity deposits of $13.0 million and an increase in interest bearing demand deposits of $6.5 million, offset by a $8.3 million decrease in wholesale deposits.
Total shareholders’ equity increased approximately $809,000 from $29.7 million at December 31, 2011 to $30.5 million at March 31, 2012. The increase resulted primarily from net income of $552,000 and an increase in other comprehensive income of $195,000.
Results of Operations for the Three Months Ended
March 31, 2012 and 2011
Net Income. Net income for the three months ended March 31, 2012 was $552,000, or $0.07 per basic and diluted share, as compared to a net loss of $1.1 million, or $0.15 per basic and diluted share, for the three months ended March 31, 2011, a positive change of $1.7 million or $0.22 per basic and diluted share. The primary reasons for net income in the first quarter of 2012 are a decrease in loan losses resulting in quarterly loan loss provision of $(247,000) due to improved risk grade migration trends, and continued contraction of the loan portfolio. Reductions in other expenses due to cost cutting measures were offset by increased collection expense of $472,000.
Net Interest Income. Like most financial institutions, the primary component of earnings for the Bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread, and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.
Net interest income for the three months ended March 31, 2012 was $5.9 million, a decrease of $1.1 million compared to the three months ended March 31, 2011. Net interest income and margins decreased during the period, primarily due to the $22.6 million decrease in the loan portfolio, increases in nonaccrual loans, and lower yields on investments from March 31, 2011, resulting in a decrease in the Company’s net interest margin by 37 basis points from 3.09% during the three months ended March 31, 2011 to 2.72% during the three months ended March 31, 2012. The average cost on interest-bearing liabilities for the quarter ended
-37-
March 31, 2012 declined 6 basis points from 1.82% at March 31, 2011 to 1.76% at March 31, 2012. Average interest-earning assets decreased $37.8 million primarily due to increased liquid assets. Average interest-bearing liabilities decreased $77.1 million due to reductions of wholesale deposits.
Provision for Loan Losses. The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management’s consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. Although management attempts to maintain the allowance at a level deemed adequate, future additions to the allowance may be necessary based upon changes in market conditions or the status of the loans included in the loan portfolio. In addition, various regulatory agencies periodically review our allowance for loan losses. These agencies may require us to make adjustments based upon their judgments about information available to them at the time of their examination.
Our non-performing assets, which consist of loans past due 90 days or more, foreclosed assets, and loans in nonaccrual status, decreased to $69.6 million at March 31, 2012 from $72.4 million at December 31, 2011. This decrease was primarily due to the improvements in the housing market and real estate construction, and our improved processes for addressing these assets. The decrease in the provision for loan losses for the three months ended March 31, 2012 was $(247,000) as compared to an increase of $2.6 million for the same period in 2011. Net charge-offs as a percentage of average loans decreased 13 basis points, from 0.38% for the three month period ended March 31, 2011 to 0.25% for the three month period ended March 31, 2012. Non-accrual loans increased from $54.0 million at March 31, 2011 to $56.3 million at March 31, 2012, but declined from $60.1 million at December 31, 2011. In addition, the Company has $28.1 million in loans in the coastal North Carolina region which are collateralized by properties that have seen significant declines in value. The Company has evaluated these loans in determining its allowance for loan losses as of March 31, 2012, and has determined that its exposure to loss on these loans is either mitigated by the values of the underlying collateral or addressed by our current allowance for loan losses. At March 31, 2012, impaired loans, which include non-accrual loans, troubled debt restructuring and other impaired notes, were $90.4 million. Of these loans, $30.4 million have specific loss allowances that aggregate $5.9 million. Improved loan trends led us to decrease our allowance for loan losses to 3.34% of gross loans at March 31, 2012 as compared to 3.51% as of December 31, 2011. Management believes that the allowance is adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income for the first quarter ended March 31, 2012 decreased $179,000 to $1.2 million from $1.4 million for the same period ended March 31, 2011, primarily due to lower loan participation premiums, and lower income from bank-owned life insurance. Changes to our merchant program caused both non-interest income and non-interest expense to decline by over $100,000, offsetting each other and leaving a net $11,000 reduction to net income.
Non-Interest Expenses. Non-interest expense totaled $6.8 million for the quarters ended March 31, 2012 and 2011. Our full time equivalent employees decreased to 195 at March 31, 2012 from 206 at March 31, 2011. Reduction of staff and other cost cutting initiatives resulted in lower expenses, but increased collections expenses, insurance and professional fees, offset the reduction of other expenses. Further cost cutting efforts are underway for 2012, such as the closure of our Sanford office in May 2012.
Income Taxes. We regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. A valuation allowance is established when it is more likely than not that all or some portion of the deferred tax asset will not be realized. In order to determine if the deferred tax asset is realizable, we performed an analysis that evaluates historical pre-tax earnings, projected future earnings, credit quality trends, taxable temporary differences and the cause and probability of recurrence of those circumstances leading to current taxable losses. Based on continued negative credit quality trends and cumulative recent losses, we did not consider any future taxable earnings in determining the recoverability of the deferred tax assets, and have therefore established a full valuation allowance against the net deferred tax asset. The Company will not record tax expense or tax benefit until positive operating earnings utilizing existing tax loss carry forwards result in exhibited performance, which would support the reinstatement of deferred tax assets.
-38-
Asset Quality
Past due and nonaccrual loans as of March 31, 2012 and December 31, 2011, were as follows (in thousands):
March 31, 2012 | December 31, 2011 | ||||||
Nonaccrual loans: | |||||||
Commercial and industrial | $ | 575 | $ | 779 | |||
Commercial construction and land development | 27,332 | 29,538 | |||||
Commercial real estate | 14,370 | 14,830 | |||||
Residential construction | 1,346 | 1,469 | |||||
Residential mortgage | 12,635 | 13,466 | |||||
Consumer | 48 | 59 | |||||
Total nonaccrual loans | $ | 56,306 | $ | 60,141 | |||
Foreclosed assets: | |||||||
Commercial construction and land development | $ | 7,670 | $ | 6,863 | |||
Commercial real estate | 1,959 | 2,183 | |||||
Residential construction | 854 | 837 | |||||
Residential mortgage | 2,733 | 2,276 | |||||
Total foreclosed assets | $ | 13,216 | $ | 12,159 | |||
Past due 90 days or more and still accruing: | |||||||
Commercial and industrial | $ | — | $ | — | |||
Business credit cards | 32 | 25 | |||||
Commercial construction and land development | — | — | |||||
Commercial real estate | — | — | |||||
Residential construction | — | — | |||||
Residential mortgage | — | — | |||||
Consumer | — | — | |||||
Consumer credit cards | 7 | 35 | |||||
Total past due 90 days and still accruing | $ | 39 | $ | 60 | |||
Total nonperforming assets | $ | 69,561 | $ | 72,360 | |||
Nonaccrual loans to gross loans | 9.72 | % | 10.00 | % | |||
Nonperforming assets to total assets | 7.44 | % | 7.89 | % | |||
Allowance coverage of nonperforming loans | 34.40 | % | 35.12 | % |
Non-accrual loans as a percentage of gross loans has decreased to 9.72% as of March 31, 2012 compared to 10.00% as of December 31, 2011. The allowance for loan losses as a percentage of non-accrual loans has decreased to 34.40% as of March 31, 2012 compared to 35.12% as of December 31, 2011. The primary reason for the decline in this coverage ratio is due to the increasing amount of loans being reviewed for specific impairment, but with no related allowance recorded either because a deficiency has been charged off or a because there is no identified deficiency. These loans totaled $60.1 million as of March 31, 2012 compared to $58.7 million as of December 31, 2011, a 2.3% increase. The allowance for loan losses on the loans reviewed collectively as part of the Bank's ASC 450 analysis has decreased from $11.4 million as of December 31, 2011 to $11.2 million as of March 31, 2012, but the amount of loans reviewed as part of this analysis has decreased $2.6 million over the same period.
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons related to the debtor’s financial difficulties, the bank grants a concession to the debtor that would not otherwise be considered. Generally, these loans are restructured due to a borrower’s inability to repay or meet the contractual obligations under the loan, which predominantly occurs because of cash flow problems. We only restructure loans for borrowers in financial difficulty that demonstrate the willingness
-39-
and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow potential of the underlying collateral or business. We may grant concessions by (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based on a bankruptcy plan.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual until such time as continued performance has been demonstrated, which is typically a period of at least six consecutive payments. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured terms.
All TDRs are considered to be impaired and are evaluated as such in the allowance calculation. The allowance for loan losses allocated to performing TDRs totaled $1.0 million and $1.4 million at March 31, 2012 and December 31, 2011, respectively. The allowance for loan losses allocated to nonperforming TDRs totaled $982,000 and $1.3 million at March 31, 2012 and December 31, 2011, respectively.
March 31, 2012 | December 31, 2011 | ||||||
Performing TDRs: | |||||||
Commercial industrial | $ | 359 | $ | 360 | |||
Commercial construction and land development | 965 | 1,631 | |||||
Commercial real estate | 3,768 | 4,910 | |||||
Residential construction | 165 | 165 | |||||
Residential mortgage | 4,561 | 3,728 | |||||
Consumer | 13 | 15 | |||||
Total performing TDRs | $ | 9,831 | $ | 10,809 |
March 31, 2012 | December 31, 2011 | ||||||
Nonperforming TDRs: | |||||||
Commercial industrial | $ | 217 | $ | 315 | |||
Commercial construction and land development | 19,931 | 18,357 | |||||
Commercial real estate | 7,794 | 7,395 | |||||
Residential construction | 339 | 345 | |||||
Residential mortgage | 6,757 | 7,470 | |||||
Consumer | 6 | 8 | |||||
Total nonperforming TDRs | $ | 35,044 | $ | 33,890 |
Other impaired loans are loans which are currently performing and are not included as nonaccrual or restructured loans above, but about which we have serious doubts as to the borrower’s ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or restructured loans, so they are evaluated individually by management in assessing the adequacy of our allowance for loan losses. At March 31, 2012, we identified 185 loans totaling $35.4 million as other impaired loans.
At March 31, 2012 there were 190 foreclosed properties valued at a total of $13.2 million and 313 nonaccrual loans totaling $56.3 million. At December 31, 2011, there were 163 foreclosed properties valued at a total of $12.2 million and 357 nonaccrual loans totaling $60.1 million.
The gross interest income that would have been recorded for non-performing loans for the quarter ended March 31, 2012 and for the year ended December 31, 2011, was approximately $1.7 million and $12.4 million, respectively. The amount of interest recognized on other impaired loans and performing TDRs during the first three months of 2012 was approximately $41,000 and
-40-
$29,000, respectively. In addition, the Company has $28.1 million in loans in the coastal North Carolina region which are collateralized by properties that have seen significant declines in value. The Company has evaluated these loans in determining its allowance for loan losses as of March 31, 2012, and has determined that its exposure to loss on these loans is either mitigated by the values of the underlying collateral or reflected in our current allowance for loan losses.
The following table summarizes the Bank’s allocation of allowance for loan losses at March 31, 2012, and December 31, 2011 (in thousands, except ratios):
March 31, 2012 | December 31, 2011 | ||||||||||||
Amount | % of Total Loans (1) | Amount | % of Total Loans (1) | ||||||||||
Commercial and industrial | $ | 2,343 | 12 | % | $ | 2,730 | 13 | % | |||||
Commercial construction and land development | 8,785 | 45 | % | 8,799 | 41 | % | |||||||
Commercial real estate | 2,673 | 14 | % | 3,800 | 18 | % | |||||||
Residential construction | 375 | 2 | % | 740 | 4 | % | |||||||
Residential mortgage | 4,773 | 25 | % | 4,630 | 22 | % | |||||||
Consumer | 412 | 2 | % | 413 | 2 | % | |||||||
Other | 22 | — | % | 29 | — | % | |||||||
Total | $ | 19,383 | 100 | % | $ | 21,141 | 100 | % |
(1) | Represents total of all outstanding loans in each category as a percentage of total loans outstanding. |
A summary of the allowance for the three months ended March 31, 2012 and 2011 is as follows (in thousands):
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
Balance, beginning of period | $ | 21,141 | $ | 22,100 | |||
Provision for loan losses | (247 | ) | 2,631 | ||||
Allowance before net (charge-offs) recoveries | 20,894 | 24,731 | |||||
Loans charged-off | 2,033 | 2,949 | |||||
Recoveries | 522 | 343 | |||||
Net (charge-offs) recoveries | (1,511 | ) | (2,606 | ) | |||
Balance, end of period | $ | 19,383 | $ | 22,125 |
The following table summarizes the Bank's loan loss experience for the three months ended March 31, 2012 and 2011 (amounts in thousands, except ratios):
-41-
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
Balance at beginning of period | $ | 21,141 | $ | 22,100 | |||
Charge-offs: | |||||||
Commercial and industrial | 227 | 728 | |||||
Business credit cards | 22 | — | |||||
Commercial construction and land development | 1,173 | 1,041 | |||||
Commercial real estate | 340 | 288 | |||||
Residential construction | — | 241 | |||||
Residential mortgage | 151 | 509 | |||||
Consumer | 113 | 61 | |||||
Consumer credit card | 7 | 81 | |||||
Total charge-offs | 2,033 | 2,949 | |||||
Recoveries: | |||||||
Commercial and industrial | 26 | 165 | |||||
Business credit cards | — | — | |||||
Commercial construction and land development | 60 | 4 | |||||
Commercial real estate | 320 | 9 | |||||
Residential construction | — | 95 | |||||
Residential mortgage | 85 | 36 | |||||
Consumer | 28 | 34 | |||||
Consumer credit card | 3 | — | |||||
Total recoveries | 522 | 343 | |||||
Net (charge-offs)/recoveries | (1,511 | ) | (2,606 | ) | |||
Provision for loan losses | (247 | ) | 2,631 | ||||
Balance at end of period | $ | 19,383 | $ | 22,125 | |||
Ratio of net charge-offs during the period to average gross loans outstanding during the period | 0.25 | % | 0.38 | % |
Because the nature of the Company’s primary markets and business, a significant portion of the loan portfolio is secured by commercial real estate, including residential and commercial acquisition, development, and construction properties. As of March 31, 2012 approximately 92.1% of the loan portfolio had real estate as a primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. Real estate values in many markets have declined over the past year, which may continue to negatively impact the ability of certain borrowers to repay their loans. The Company continues to thoroughly review and monitor its commercial real estate concentration and sets limits by sector and region based on this internal review.
The Company utilizes interest reserves on certain commercial real estate loans to fund the interest payments which are funded from loan proceeds. The decision to establish a loan-funded interest reserve upon origination of a loan is based on the feasibility of the project, the creditworthiness of the borrower and guarantors and the protection provided by the real estate and other collateral. For the lender, an interest reserve may provide an effective means for addressing the cash flow characteristics of a properly underwritten acquisition, development and construction loan. Similarly, for the borrower, interest reserves may provide the funds to service the debt until the property is developed, and cash flow is generated from the sale or lease of the developed property.
Although potentially beneficial to the lender and the borrower, the use of interest reserves carries certain risks. Of particular concern is the possibility that an interest reserve may not accurately reflect problems with a borrower’s willingness or ability to repay the debt consistent with the terms and conditions of the loan obligation. For example, a project that is not completed in a timely manner or falters once completed may appear to perform if the interest reserve keeps the loan current. In some cases, a
-42-
lender may extend, renew, or restructure the term of certain loans, providing additional interest reserves to keep the loan current. As a result, the financial condition of the project may not be apparent and developing problems may not be addressed in a timely manner. Consequently, a lender may end up with a matured loan where the interest reserve has been fully advanced, and the borrower’s financial condition has deteriorated. In addition, the project may not be complete, its sale or lease-up may not be sufficient to ensure timely repayment of the debt or the value of the collateral may have declined, exposing the lender to increasing credit losses. At March 31, 2012, the Company had $13.8 million of performing loans with interest reserves.
Liquidity and Capital Resources
The Company’s liquidity position is primarily dependent upon the Bank’s need to respond to loan demand, the short-term demand for funds caused by withdrawals from deposit accounts (other than time deposits) and the liquidity of its assets. The Bank’s primary liquidity sources include cash and amounts due from other banks, federal funds sold, and U.S. Government agency and other marketable investment securities. The Bank also has the ability to borrow funds from the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (“FHLB”) and to purchase federal funds from other financial institutions. The Company sold $12.0 million aggregate principal amount of subordinated promissory notes to certain accredited investors between May and August 2009. These notes are due ten years after the date of issuance, beginning May 15, 2019, and the Company is obligated to pay interest at an annualized rate of 8.5% payable in quarterly installments beginning on the third month anniversary of the date of issuance. The Company may prepay the notes at any time after the fifth anniversary of the date of issuance, subject to compliance with applicable law. Management believes that the Bank’s liquidity sources are adequate to meet its operating needs and the operating needs of the Bank for the next eighteen months. Total shareholders’ equity was $30.5 million or 3.3% of total assets at March 31, 2012 and $29.7 million or 3.2% of total assets at December 31, 2011. Supplementing customer deposits as a source of funding, we have available lines of credit from various correspondent banks to purchase federal funds on a short-term basis of approximately $16.0 million. As of March 31, 2012, the Bank has the credit capacity to borrow up to $186.9 million, from the FHLB, with $112.0 million outstanding as of March 31, 2012 and December 31, 2011.
The Company had total risk based capital of 10.78%, tier 1 risk based capital of 7.37%, and leverage ratio of 4.50% at March 31, 2012, as compared to 10.31%, 6.97% and 4.41%, respectively, at December 31, 2011.
The Bank had total risk based capital of 10.25%, tier 1 risk based capital of 8.97%, and leverage ratio of 5.47% at March 31, 2012, as compared to 9.75%, 8.47%, and 5.40%, respectively, at December 31, 2011.
The Company is currently prohibited by the Written Agreement from paying interest on its subordinated promissory notes and on its subordinated debentures in connection with its trust preferred securities ("TPS") without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for every quarter when approval was required.The Company exercised its right to defer regularly scheduled interest payments on its outstanding TPS and as of March 31, 2012, $328,000 of interest payments have been accrued for and deferred pursuant to the terms of the indenture governing the TPS. The Company may not pay any cash dividends on its Common Stock until it is current on interest payments on such TPS. The Company has not paid any cash dividends on its Common Stock since it suspended dividends in the fourth quarter of 2010. As a bank holding company, the Company’s ability to declare and pay dividends also depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
Book value per share at March 31, 2012 and 2011 was $3.97 and $4.59, respectively. Tangible book value per share (equity less other intangibles), at March 31, 2012 was $3.93 as compared to $4.54 at March 31, 2011. In addition to the traditional capital measure, management uses tangible book value, which is a non-GAAP financial measure, to evaluate the adequacy of shareholders' equity and to facilitate comparisons with peers. The following table presents this non-GAAP financial measure and provides a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure reported in the Company's consolidated financial statements at March 31 (amounts in thousands, except per share data):
March 31, 2012 | March 31, 2011 | ||||||
Total shareholders' equity | $ | 30,501 | $ | 34,667 | |||
Less: other intangibles | (292 | ) | (370 | ) | |||
Net tangible book value | $ | 30,209 | $ | 34,297 | |||
Number of shares outstanding | 7,684,474 | 7,559,670 | |||||
Tangible book value | $ | 3.93 | $ | 4.54 | |||
Book value | $ | 3.97 | $ | 4.59 |
-43-
The Company and the Bank are committed to improving our financial position and target capital levels to return to “well capitalized” status under federal banking agencies' guidelines. Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is also working to reduce its balance sheet to improve capital ratios and is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. One cost containment initiative expected to be complete in May 2012 by the closing of our Sanford office. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2012.
Forward-looking Information
Information set forth in this Quarterly Report on Form 10-Q, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause its actual operating results and financial position to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof, or other variations thereof, or comparable terminology.
We caution that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including, without limitation, our ability to comply with the Written Agreement, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, our ability to raise capital and continue as a going concern, the failure of assumptions underlying the establishment of the allowance for possible loan losses, our ability to maintain an effective internal control environment, the low trading volume of our common stock and other considerations described in connection with specific forward-looking statements and other cautionary elements specified in the Company's periodic filings with the Securities and Exchange Commission (the "Commission"), including without limitation, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company under SEC's scaled reporting requirements, the Company is not required to include the information required by this item. Accordingly, the information is omitted from this 10-Q filing.
ITEM 4 – CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report, the Company's disclosure controls and procedures are effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the Commission's rules and forms and is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report that the Company believes have materially affected or are reasonably likely to materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
-44-
There have been no material developments in the description of material legal proceedings as reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 1A - RISK FACTORS
There have been no material changes in the Company’s risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2011.
-45-
ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. | Description |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oak Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. * |
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.
-46-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC. | |||
Date: | May 15, 2012 | By: | /s/ Ayden R. Lee, Jr. |
Ayden R. Lee, Jr. | |||
Chairman, President and | |||
Chief Executive Officer | |||
Date: | May 15, 2012 | By: | /s/ Nancy S. Wise |
Nancy S. Wise | |||
Executive Vice President and | |||
Chief Financial Officer |
-47-
Exhibit Index
Exhibit No. | Description |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oak Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. * |
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.
-48-