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 September 30, 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, | 7,785,518 |
par value $1.00 per share | (Number of shares outstanding |
(Title of Class) | as of November 9, 2012) |
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TABLE OF CONTENTS | Page No. | |
September 30, 2012 (Unaudited) and December 31, 2011 | ||
Three and Nine Months Ended September 30, 2012 and 2011 | ||
Three and Nine Months Ended September 30, 2012 and 2011 | ||
Nine Months Ended September 30, 2012 | ||
Nine Months Ended September 30, 2012 and 2011 | ||
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Part I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2012 | December 31, | ||||||
(Unaudited) | 2011(*) | ||||||
(amounts in thousands, except share data) | |||||||
ASSETS | |||||||
Cash and due from banks | $ | 12,515 | $ | 13,969 | |||
Interest-earning deposits | 209,504 | 150,997 | |||||
Cash and cash equivalents | 222,019 | 164,966 | |||||
Investment securities available for sale, at fair value | 82,514 | 92,790 | |||||
Investment securities held to maturity, at amortized cost | 21,882 | 20,445 | |||||
Total investment securities | 104,396 | 113,235 | |||||
Loans | 540,382 | 602,232 | |||||
Allowance for loan losses | (16,921 | ) | (21,141 | ) | |||
Net loans | 523,461 | 581,091 | |||||
Accrued interest receivable | 1,865 | 1,985 | |||||
Bank premises and equipment, net | 15,487 | 16,024 | |||||
FHLB stock | 6,415 | 6,553 | |||||
Investment in life insurance | 14,073 | 13,827 | |||||
Foreclosed assets | 14,647 | 12,159 | |||||
Other assets | 4,804 | 6,796 | |||||
Total assets | $ | 907,167 | $ | 916,636 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 184,599 | $ | 138,123 | |||
Money market, NOW accounts and savings accounts | 166,369 | 150,185 | |||||
Time deposits, $100,000 and over | 252,522 | 317,630 | |||||
Other time deposits | 132,154 | 139,951 | |||||
Total deposits | 735,644 | 745,889 | |||||
Borrowings | 112,000 | 112,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 12,000 | 12,000 | |||||
Accrued interest payable | 1,699 | 1,437 | |||||
Other liabilities | 4,687 | 3,246 | |||||
Total liabilities | 878,402 | 886,944 | |||||
Commitments (Note B) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 20,000,000 shares authorized; 7,785,518 and 7,663,387 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 7,786 | 7,663 | |||||
Additional paid-in capital | 34,174 | 34,048 | |||||
Accumulated deficit | (14,652 | ) | (13,071 | ) | |||
Accumulated other comprehensive income | 1,457 | 1,052 | |||||
Total shareholders' equity | 28,765 | 29,692 | |||||
Total liabilities and shareholders' equity | $ | 907,167 | $ | 916,636 |
(*) Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(amounts in thousands, except share data) | |||||||||||||||
Interest and dividend income: | |||||||||||||||
Loans, including fees | $ | 7,654 | $ | 8,863 | $ | 23,981 | $ | 28,064 | |||||||
Investment securities: | |||||||||||||||
Taxable | 417 | 615 | 1,384 | 2,221 | |||||||||||
Dividends | 68 | 56 | 223 | 184 | |||||||||||
Interest-earning deposits and Federal funds sold | 163 | 115 | 460 | 310 | |||||||||||
Total interest and dividend income | 8,302 | 9,649 | 26,048 | 30,779 | |||||||||||
Interest expense: | |||||||||||||||
Deposits | 1,561 | 2,107 | 5,296 | 6,810 | |||||||||||
Borrowings | 1,029 | 1,026 | 3,056 | 3,047 | |||||||||||
Subordinated debentures | 57 | 51 | 173 | 154 | |||||||||||
Subordinated promissory notes | 260 | 261 | 776 | 774 | |||||||||||
Total interest expense | 2,907 | 3,445 | 9,301 | 10,785 | |||||||||||
Net interest income | 5,395 | 6,204 | 16,747 | 19,994 | |||||||||||
Provision for loan losses | 2,089 | 4,706 | 1,803 | 9,832 | |||||||||||
Net interest income after provision for loan losses | 3,306 | 1,498 | 14,944 | 10,162 | |||||||||||
Non-interest income: | |||||||||||||||
Service charges on deposit accounts | 508 | 526 | 1,440 | 1,521 | |||||||||||
Other service charges, commissions and fees | 661 | 631 | 1,962 | 1,911 | |||||||||||
Gains on sale of investment securities available for sale | 349 | 414 | 1,006 | 849 | |||||||||||
Total other-than-temporary impairment loss | — | (131 | ) | (56 | ) | (416 | ) | ||||||||
Portion of loss recognized in other comprehensive income | — | — | 56 | — | |||||||||||
Net impairment loss recognized in earnings | — | (131 | ) | — | (416 | ) | |||||||||
Income from investment in life insurance | 78 | 94 | 246 | 295 | |||||||||||
Other non-interest income | 267 | 1 | 387 | 97 | |||||||||||
Total non-interest income | 1,863 | 1,535 | 5,041 | 4,257 | |||||||||||
Non-interest expenses: | |||||||||||||||
Salaries | 2,560 | 2,594 | 7,652 | 7,860 | |||||||||||
Employee benefits | 467 | 402 | 1,455 | 1,425 | |||||||||||
Occupancy expenses | 335 | 337 | 995 | 1,011 | |||||||||||
Equipment expenses | 340 | 423 | 1,108 | 1,252 | |||||||||||
Professional and consulting fees | 622 | 589 | 1,915 | 1,727 | |||||||||||
FDIC assessments | 527 | 530 | 1,645 | 1,897 | |||||||||||
Foreclosed asset-related costs, net | 870 | 343 | 1,963 | 1,148 | |||||||||||
Collection expenses | 290 | 288 | 1,288 | 735 | |||||||||||
Other | 1,319 | 1,114 | 3,720 | 3,353 | |||||||||||
Total non-interest expenses | 7,330 | 6,620 | 21,741 | 20,408 | |||||||||||
Loss before income taxes | (2,161 | ) | (3,587 | ) | (1,756 | ) | (5,989 | ) | |||||||
Benefit for income taxes | — | — | (175 | ) | — | ||||||||||
Net loss | $ | (2,161 | ) | $ | (3,587 | ) | $ | (1,581 | ) | $ | (5,989 | ) | |||
Basic net loss per common share | $ | (0.28 | ) | $ | (0.47 | ) | $ | (0.20 | ) | $ | (0.79 | ) | |||
Diluted net loss per common share | $ | (0.28 | ) | $ | (0.47 | ) | $ | (0.20 | ) | $ | (0.79 | ) | |||
Weighted Average Shares Outstanding, Basic | 7,769,887 | 7,617,328 | 7,729,454 | 7,585,694 | |||||||||||
Weighted Average Shares Outstanding, Diluted | 7,769,887 | 7,617,328 | 7,729,454 | 7,585,694 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(amounts in thousands) | |||||||||||||||
Net loss | $ | (2,161 | ) | $ | (3,587 | ) | $ | (1,581 | ) | $ | (5,989 | ) | |||
Other comprehensive income (loss): | |||||||||||||||
Securities available for sale: | |||||||||||||||
Unrealized gains on securities held for sale | 709 | 2,352 | 1,738 | 5,098 | |||||||||||
Tax effect | (279 | ) | (907 | ) | (681 | ) | (1,927 | ) | |||||||
Reclassification of gains recognized in net income | (349 | ) | (414 | ) | (1,006 | ) | (849 | ) | |||||||
Tax effect | 135 | 160 | 388 | 327 | |||||||||||
Reclassification of impairment loss recognized in net income | — | 131 | — | 416 | |||||||||||
Tax effect | — | (51 | ) | — | (160 | ) | |||||||||
Portion of other-than-temporary loss recognized in other comprehensive income | — | — | (56 | ) | — | ||||||||||
Tax effect | — | — | 22 | — | |||||||||||
Total other comprehensive income | 216 | 1,271 | 405 | 2,905 | |||||||||||
Comprehensive loss | $ | (1,945 | ) | $ | (2,316 | ) | $ | (1,176 | ) | $ | (3,084 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
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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 loss | — | — | — | (1,581 | ) | — | (1,581 | ) | ||||||||||||||
Other comprehensive income | — | — | — | — | 405 | 405 | ||||||||||||||||
Issuance of common stock | 122,131 | 123 | 76 | — | — | 199 | ||||||||||||||||
Stock based compensation | — | — | 50 | — | — | 50 | ||||||||||||||||
BALANCE, SEPTEMBER 30, 2012 | 7,785,518 | $ | 7,786 | $ | 34,174 | $ | (14,652 | ) | $ | 1,457 | $ | 28,765 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | |||||||
September 30, | |||||||
2012 | 2011 | ||||||
(amounts in thousands) | |||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (1,581 | ) | $ | (5,989 | ) | |
Adjustments to reconcile net loss to net cash provided by operations: | |||||||
Provision for loan losses | 1,803 | 9,832 | |||||
Provision for depreciation and amortization | 873 | 943 | |||||
Net amortization of bond premiums and discounts | 1,409 | 572 | |||||
Stock based compensation | 50 | 73 | |||||
Gain on sale of investment securities | (1,006 | ) | (849 | ) | |||
Loss on sale of foreclosed assets, net | 237 | 289 | |||||
Valuation adjustment on foreclosed assets | 1,726 | 859 | |||||
Income from investment in life insurance | (246 | ) | (295 | ) | |||
Impairment loss on investment securities available for sale | — | 416 | |||||
Changes in assets and liabilities: | |||||||
Other assets | 1,720 | 1,973 | |||||
Accrued interest receivable | 120 | 553 | |||||
Other liabilities | 1,441 | (2,365 | ) | ||||
Accrued interest payable | 262 | (243 | ) | ||||
Net cash provided by operating activities | 6,808 | 5,769 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sales and calls of investment securities available for sale | 37,937 | 77,350 | |||||
Proceeds from paydowns of investment securities available for sale | 9,314 | 10,044 | |||||
Proceeds from paydowns of investment securities held to maturity | 3,454 | — | |||||
Purchases of investment securities available for sale | (36,273 | ) | (42,262 | ) | |||
Purchases of investment securities held to maturity | (5,319 | ) | (12,542 | ) | |||
Purchase of bank owned life insurance | — | (1,898 | ) | ||||
Proceeds from sale of loans | — | 5,133 | |||||
Proceeds from loan participation sale | — | 4,984 | |||||
Redemption of FHLB stock | 138 | 142 | |||||
Net decrease in loans | 47,346 | 36,570 | |||||
Purchase of bank premises and equipment | (336 | ) | (455 | ) | |||
Proceeds from sales of foreclosed assets | 4,043 | 2,704 | |||||
Net capitalized expenditures on foreclosed assets | (13 | ) | (15 | ) | |||
Net cash provided by investing activities | 60,291 | 79,755 | |||||
Cash flows from financing activities: | |||||||
Net repayments from borrowings | — | (135 | ) | ||||
Decrease in deposit accounts | (10,245 | ) | (26,530 | ) | |||
Proceeds from issuance of common stock | 199 | 219 | |||||
Net cash used in financing activities | (10,046 | ) | (26,446 | ) | |||
Net increase in cash and cash equivalents | 57,053 | 59,078 | |||||
Cash and cash equivalents at beginning of period | 164,966 | 98,394 | |||||
Cash and cash equivalents at end of period | $ | 222,019 | $ | 157,472 | |||
Schedule of noncash investing and financing activities: | |||||||
Total other comprehensive income | $ | 405 | $ | 2,905 | |||
Transfers of loans to foreclosed assets | $ | 8,481 | $ | 5,706 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
NOTE A - ORGANIZATION AND GOING CONCERN CONSIDERATIONS
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 and nine month periods ended September 30, 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. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. As of October 19, 2012, mortgage origination will become a division of Four Oaks Bank & Trust Company, and Four Oaks Mortgage Services, LLC will no longer be active. The related partnership agreement for mortgage origination with PrimeLending will no longer exist.
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.
Certain amounts previously presented in our Consolidated Financial Statements for the prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior periods' Statements of Operations, Comprehensive Income (Loss), or Shareholders' Equity as previously reported.
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. In 2012 increases in loan chargeoffs and writedowns of foreclosed assets are due to initiatives by the Special Assets department which was developed to work with nonperforming assets to either return them to performing status or to remove them from the Company's books. Management expects some losses to result from this team's efforts as the process for moving these assets accelerates. Management still 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 loss for the nine months ended September 30, 2012 was $1.6 million compared to a net loss of $6.0 million for the same period of 2011. In comparing the nine months ended September 30, 2012 and 2011, there was a significant decline in provision for loan losses. The $8.0 million decrease in provision for loan losses can be attributed to improvement in problem loans and net charge-offs over the period, improvements in credit oversight processes, as well as, $79.9 million fewer loans outstanding. A loan loss provision was made in the amount of $1.8 million for the nine months ended September 30, 2012 compared to a provision for loan losses of $9.8 million for the same period in 2011. Net charge offs for the first nine months of 2012 were $6.0 million compared to $9.6 million for the comparable period in 2011. For more detail on the changes to the Allowance for Loan and Lease Losses and provision refer to the related areas of the Management Discussion and Analysis.
At September 30, 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 11.27%, 7.09%, and 4.04%, respectively, compared to 10.31%, 6.97% and 4.41%, respectively, at December 31, 2011. At September 30, 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 10.77%, 9.49% and 5.36%, 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”)
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
that imposes certain restrictions on the Company and the Bank, as described in Notes I, Subordinated Notes and J, Regulatory Restrictions. 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 remain 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 continues to evaluate 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.
Cash and cash equivalents at September 30, 2012 were approximately $222.0 million, of which approximately $46.2 million has been earmarked for scheduled broker deposit maturities during 2012 and approximately $15.6 million for 2013. 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. At this time the Company is in substantial compliance with the provisions of the Written Agreement.
NOTE B - COMMITMENTS
The following table presents loan commitments at September 30, 2012.
September 30, 2012 | |||
(amounts in thousands) | |||
Commitments to extend credit | $ | 27,735 | |
Undisbursed lines of credit | 17,651 | ||
Financial stand-by letters of credit | 481 | ||
Performance stand-by letters of credit | 1,270 | ||
Legally binding commitments | 47,137 | ||
Unused credit card lines | 13,033 | ||
Total | $ | 60,170 |
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE C - NET LOSS PER SHARE
Basic net loss per share represents losses charged to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net 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 loss per common share have been computed based upon net 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 | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
Weighted average number of common shares used in computing basic net loss per common share | 7,769,887 | 7,617,328 | 7,729,454 | 7,585,694 | |||||||
Effect of dilutive stock options | — | — | — | — | |||||||
Weighted average number of common shares and dilutive potential common shares used in computing diluted net loss per share | 7,769,887 | 7,617,328 | 7,729,454 | 7,585,694 |
For the three and nine month periods ended September 30, 2012 and 2011 all stock options are considered anti-dilutive due to the reported net losses. For the three months ended September 30, 2012 and 2011, there were 277,289 and 340,581 anti-dilutive stock options outstanding, respectively, which represented all of the options outstanding for both periods. For the nine months ended September 30, 2012 and 2011, there were 277,289 and 340,581 anti-dilutive stock options outstanding, respectively, which represented all of the options outstanding for both periods.
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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 September 30, 2012 and December 31, 2011 are as follows:
September 30, 2012 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Available for Sale | (amounts in thousands) | ||||||||||||||
Taxable municipal securities | $ | 13,224 | $ | 1,375 | $ | — | $ | 14,599 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 59,504 | 997 | 18 | 60,483 | |||||||||||
FNMA | 6,205 | 16 | — | 6,221 | |||||||||||
Trust preferred securities | 1,175 | — | 144 | 1,031 | |||||||||||
Equity securities | 170 | 12 | 2 | 180 | |||||||||||
Total | $ | 80,278 | $ | 2,400 | $ | 164 | $ | 82,514 |
September 30, 2012 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Securities Held to Maturity: | (amounts in thousands) | ||||||||||||||
Mortgage-backed securities - GNMA | $ | 21,882 | $ | 360 | $ | — | $ | 22,242 | |||||||
Total | $ | 21,882 | $ | 360 | $ | — | $ | 22,242 |
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 |
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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 September 30, 2012 and December 31, 2011.
September 30, 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: | |||||||||||||||||||||||
Mortgage-backed securities - GNMA | $ | 4,722 | $ | 18 | $ | — | $ | — | $ | 4,722 | $ | 18 | |||||||||||
Trust preferred securities | — | — | 412 | 88 | 412 | 88 | |||||||||||||||||
Equity securities | $ | 2 | $ | 2 | $ | — | $ | — | $ | 2 | $ | 2 | |||||||||||
Total temporarily impaired securities | $ | 4,724 | $ | 20 | $ | 412 | $ | 88 | $ | 5,136 | $ | 108 | |||||||||||
Other than temporary impairment | |||||||||||||||||||||||
Trust preferred securities | $ | — | $ | — | $ | 619 | $ | 56 | $ | 619 | $ | 56 | |||||||||||
Total other than temporarily impaired securities | $ | — | $ | — | $ | 619 | $ | 56 | $ | 619 | $ | 56 |
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: | |||||||||||||||||||||||
Mortgage-backed securities - GNMA | $ | 12,100 | $ | 51 | $ | — | $ | — | $ | 12,100 | $ | 51 | |||||||||||
Trust preferred securities | — | — | 481 | 19 | 481 | 19 | |||||||||||||||||
Equity securities | 170 | 15 | — | — | 170 | 15 | |||||||||||||||||
Total temporarily impaired securities | $ | 12,270 | $ | 66 | $ | 481 | $ | 19 | $ | 12,751 | $ | 85 | |||||||||||
Other than temporary impairment | |||||||||||||||||||||||
Trust preferred securities | $ | — | $ | — | $ | 604 | $ | 71 | $ | 604 | $ | 71 | |||||||||||
Total other than temporarily impaired securities | $ | — | $ | — | $ | 604 | $ | 71 | $ | 604 | $ | 71 |
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,
-12-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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 September 30, 2012 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Two of sixteen GNMA collateralized mortgage obligations and two trust preferred securities contained unrealized losses at September 30, 2012. Management identified no impairment related to credit quality. At September 30, 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 temporarily impairment losses were recognized during the three and nine months ended September 30, 2012.
The unrealized gains and losses on equity securities at September 30, 2012 resulted from changes in market values and available third party valuations. One of ten equity securities contains unrealized losses at September 30, 2012. Management has identified no other-than-temporary impairment in equity securities value that remains unrecognized.
A trust preferred security, with unrealized losses at September 30, 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 September 30, 2012, the fair value of the trust preferred security was $619,000, which resulted in an aggregate unrealized loss on the trust preferred security of $56,000. Management continued to monitor the creditworthiness of the issuer during the third 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 of 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. Management has continued to monitor the creditworthiness of the issuer during the third quarter of 2012 in considering similar key factors. As of the most recently available financial information, the issuer's income, margin, capital, liquidity and credit rating 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 September 30, 2012 is not credit related and will therefore be recognized in other comprehensive income for the three and nine months ended September 30, 2012.
A trust preferred security, with an unrealized loss of $88,000 at September 30, 2012, was deemed to be temporarily impaired. Management continued to monitor the creditworthiness of the issuer during the third quarter of 2012 in considering key factors. The allowance for loan losses have shown some improvement over the past few quarters, liquidity ratios have increased over the last few quarters and the risk based capital is showing improvements over the past few quarters. All interest payments have been made and no deferrals have been announced to management's knowledge. The unrealized loss of the trust preferred security will be considered temporary unless and until there is deterioration in the credit quality of the entity evidenced by discontinuance of interest payments or regulatory orders. The entity's credit rating has been stable over recent quarters.
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.
Three Months Ended | Nine Months Ended | ||||||
September 30, | September 30, | ||||||
2012 | 2012 | ||||||
(amounts in thousands) | |||||||
Balance of credit losses on debt securities at the beginning of the period | $ | 75 | 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 | $ | 75 |
-13-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The amortized cost and fair value of available for sale, and held to maturity securities at September 30, 2012 by contractual maturities are shown on the following table. 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 after one year through five years | $ | 257 | $ | 272 | |||
Due after five years through ten years | 8,772 | 9,654 | |||||
Due after ten years | 4,195 | 4,673 | |||||
Total taxable municipal securities | 13,224 | 14,599 | |||||
Mortgage-backed securities - GNMA/FNMA: | |||||||
Due within one year | 566 | 569 | |||||
Due after one year through five years | 48,321 | 49,143 | |||||
Due after five years through ten years | 10,704 | 10,781 | |||||
Due after ten years | 6,118 | 6,211 | |||||
Total mortgage-backed securities - GNMA/FNMA | 65,709 | 66,704 | |||||
Other securities: | |||||||
Trust preferred securities | 1,175 | 1,031 | |||||
Equity securities | 170 | 180 | |||||
Total other securities | 1,345 | 1,211 | |||||
Total available for sale securities | $ | 80,278 | $ | 82,514 | |||
Held to Maturity | |||||||
Amortized Cost | Fair Value | ||||||
(amounts in thousands) | |||||||
Mortgage-backed securities -GNMA: | |||||||
Due after one year through five years | $ | 21,882 | $ | 22,242 | |||
Total held to maturity securities | $ | 21,882 | $ | 22,242 |
Securities with a carrying value of approximately $102.4 million and $112.0 million at September 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Proceeds from sales and calls of investment securities available for sale for the three months ended September 30, 2012 and 2011 were $10.7 million and $28.1 million, respectively. For the nine months ended September 30, 2012 and 2011 proceeds from sales and calls of investment securities were $37.9 million and $77.4 million, respectively. Sales and calls of securities available for sale and equity securities during the three months ended September 30, 2012 and 2011 generated gross realized gains of $349,000 and $414,000, respectively and no gross realized losses were recognized. Sales and calls of securities available for sale and equity securities for the nine months ended September 30, 2012 and 2011 generated gross realized gains of $1.0 million for each period, and gross losses of zero and $157,000, respectively.
-14-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE E – LOANS
The classification of loans as of September 30, 2012 and December 31, 2011 are summarized as follows:
September 30, 2012 | December 31, 2011 | ||||||
(amounts in thousands) | |||||||
Commercial and industrial loans | $ | 31,201 | $ | 40,345 | |||
Commercial construction and land development | 102,776 | 113,762 | |||||
Commercial real estate | 186,850 | 214,740 | |||||
Residential construction | 22,922 | 26,707 | |||||
Residential mortgage | 182,230 | 192,972 | |||||
Consumer | 10,007 | 11,451 | |||||
Other | 4,484 | 2,330 | |||||
Gross loans | 540,470 | 602,307 | |||||
Less: | |||||||
Net deferred loan fees | (88 | ) | (75 | ) | |||
Net loans before allowance | 540,382 | 602,232 | |||||
Allowance for loan losses | (16,921 | ) | (21,141 | ) | |||
Total net loans | $ | 523,461 | $ | 581,091 |
Nonperforming assets at September 30, 2012 and December 31, 2011 consist of the following:
September 30, 2012 | December 31, 2011 | ||||||
(amounts in thousands) | |||||||
Loans past due ninety days or more and still accruing | $ | 15 | $ | 60 | |||
Nonaccrual loans | 43,775 | 60,141 | |||||
Foreclosed assets | 14,647 | 12,159 | |||||
Total | $ | 58,437 | $ | 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
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.
The following tables are an analysis of the allowance for loan losses by loan class, as of and for the three and nine months ended September 30, 2012 and 2011 and as of and for the twelve months ended December 31, 2011.
Three Months Ended | |||||||||||||||||||||||||||||||
September 30, 2012 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
Allowances for loan losses: | (amounts in thousands) | ||||||||||||||||||||||||||||||
Balance, beginning of period, July 1, 2012 | $ | 1,786 | $ | 8,010 | $ | 3,290 | $ | 401 | $ | 4,438 | $ | 482 | $ | 11 | $ | 18,418 | |||||||||||||||
Provision for loan losses | (493 | ) | 1,783 | 733 | (108 | ) | 103 | 16 | 55 | 2,089 | |||||||||||||||||||||
Loans charged-off | (241 | ) | (2,580 | ) | (791 | ) | (1 | ) | (508 | ) | (75 | ) | — | (4,196 | ) | ||||||||||||||||
Recoveries | 142 | 145 | 123 | — | 170 | 30 | — | 610 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (99 | ) | (2,435 | ) | (668 | ) | (1 | ) | (338 | ) | (45 | ) | — | (3,586 | ) | ||||||||||||||||
Balance, end of period | $ | 1,194 | $ | 7,358 | $ | 3,355 | $ | 292 | $ | 4,203 | $ | 453 | $ | 66 | $ | 16,921 | |||||||||||||||
-16-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, 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, January 1, 2012 | $ | 2,730 | $ | 8,799 | $ | 3,800 | $ | 740 | $ | 4,630 | $ | 413 | $ | 29 | $ | 21,141 | |||||||||||||||
Provision for loan losses | (1,109 | ) | 2,349 | 531 | (412 | ) | 83 | 324 | 37 | 1,803 | |||||||||||||||||||||
Loans charged-off | (681 | ) | (4,735 | ) | (1,277 | ) | (36 | ) | (786 | ) | (405 | ) | — | (7,920 | ) | ||||||||||||||||
Recoveries | 254 | 945 | 301 | — | 276 | 121 | — | 1,897 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (427 | ) | (3,790 | ) | (976 | ) | (36 | ) | (510 | ) | (284 | ) | — | (6,023 | ) | ||||||||||||||||
Balance, end of period | $ | 1,194 | $ | 7,358 | $ | 3,355 | $ | 292 | $ | 4,203 | $ | 453 | $ | 66 | $ | 16,921 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 258 | $ | 2,815 | $ | 1,762 | $ | 68 | $ | 2,342 | $ | — | $ | — | $ | 7,245 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 936 | $ | 4,543 | $ | 1,593 | $ | 224 | $ | 1,861 | $ | 453 | $ | 66 | $ | 9,676 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Ending balance | $ | 31,201 | $ | 102,776 | $ | 186,850 | $ | 22,922 | $ | 182,230 | $ | 10,007 | $ | 4,484 | $ | 540,470 | |||||||||||||||
Less: ending Balance: individually evaluated for impairment | 1,233 | 32,382 | 20,052 | 1,404 | 20,960 | 45 | — | 76,076 | |||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 29,968 | $ | 70,394 | $ | 166,798 | $ | 21,518 | $ | 161,270 | $ | 9,962 | $ | 4,484 | $ | 464,394 |
-17-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Three Months Ended | |||||||||||||||||||||||||||||||
September 30, 2011 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
Allowances for loan losses: | (amounts in thousands) | ||||||||||||||||||||||||||||||
Balance, beginning of period, July 1, 2011 | $ | 2,602 | $ | 6,982 | $ | 3,689 | $ | 2,327 | $ | 5,824 | $ | 410 | $ | 65 | $ | 21,899 | |||||||||||||||
Provision for loan losses | 1,402 | 4,580 | 68 | (899 | ) | (445 | ) | 22 | (22 | ) | 4,706 | ||||||||||||||||||||
Loans charged-off | (925 | ) | (2,327 | ) | (454 | ) | (72 | ) | (735 | ) | (89 | ) | — | (4,602 | ) | ||||||||||||||||
Recoveries | 27 | 86 | 5 | 17 | 153 | 46 | — | 334 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (898 | ) | (2,241 | ) | (449 | ) | (55 | ) | (582 | ) | (43 | ) | — | (4,268 | ) | ||||||||||||||||
Balance, end of period | $ | 3,106 | $ | 9,321 | $ | 3,308 | $ | 1,373 | $ | 4,797 | $ | 389 | $ | 43 | $ | 22,337 | |||||||||||||||
Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, 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, January 1, 2011 | $ | 2,049 | $ | 8,375 | $ | 4,038 | $ | 2,848 | $ | 4,291 | $ | 415 | $ | 84 | $ | 22,100 | |||||||||||||||
Provision for loan losses | 2,674 | 6,504 | 388 | (1,180 | ) | 1,338 | 149 | (41 | ) | 9,832 | |||||||||||||||||||||
Loans charged-off | (2,011 | ) | (5,782 | ) | (1,238 | ) | (583 | ) | (1,494 | ) | (288 | ) | — | (11,396 | ) | ||||||||||||||||
Recoveries | 394 | 224 | 120 | 288 | 662 | 113 | — | 1,801 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (1,617 | ) | (5,558 | ) | (1,118 | ) | (295 | ) | (832 | ) | (175 | ) | — | (9,595 | ) | ||||||||||||||||
Balance, end of period | $ | 3,106 | $ | 9,321 | $ | 3,308 | $ | 1,373 | $ | 4,797 | $ | 389 | $ | 43 | $ | 22,337 | |||||||||||||||
Ending Balance: individually evaluated for impairment | $ | 1,266 | $ | 3,459 | $ | 869 | $ | 187 | $ | 1,484 | $ | — | $ | — | $ | 7,265 | |||||||||||||||
Ending Balance: collectively evaluated for impairment | $ | 1,840 | $ | 5,862 | $ | 2,439 | $ | 1,186 | $ | 3,313 | $ | 389 | $ | 43 | $ | 15,072 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Ending balance | $ | 42,068 | $ | 118,644 | $ | 216,962 | $ | 33,577 | $ | 194,232 | $ | 12,261 | $ | 2,651 | $ | 620,395 | |||||||||||||||
Less ending balance: individually evaluated for impairment | 2,672 | 40,572 | 27,123 | 3,512 | 25,184 | 80 | — | 99,143 | |||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 39,396 | $ | 78,072 | $ | 189,839 | $ | 30,065 | $ | 169,048 | $ | 12,181 | $ | 2,651 | $ | 521,252 |
-18-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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, January 1, 2011 | $ | 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 | |||||||||||||||||||||
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 | |||||||||||||||
Less: 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 |
Credit Quality Indicators
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
-19-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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 is an additional risk grade not available on the Grading Form. Loans are not typically made if the grade is Special Mention at inception, without management approval loans. These 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. Loans are not typically made if graded special mention at inception, without management's approval. Potential weaknesses exist generally as a result of deviations from prudent lending practices, such as over advances on collateral or unproven primary repayment sources. Loans where adverse economic conditions 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. Also may include 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.
-20-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Credit Risk Profile by Creditworthiness Class
The following tables are an analysis of the creditworthiness class by loan class, as of September 30, 2012 and December 31, 2011.
September 30, 2012 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||||||||||
1 - Lowest Risk | $ | 2,036 | $ | — | $ | — | $ | — | $ | 70 | $ | 1,588 | $ | 34 | $ | 3,728 | |||||||||||||||
2 - Satisfactory Quality | 543 | 623 | 2,530 | 13 | 11,885 | 291 | — | 15,885 | |||||||||||||||||||||||
3 - Satisfactory | |||||||||||||||||||||||||||||||
- Merits Attention | 10,440 | 22,544 | 51,938 | 1,581 | 67,786 | 4,667 | 2,551 | 161,507 | |||||||||||||||||||||||
4 - Low Satisfactory | 14,818 | 38,177 | 96,932 | 18,831 | 68,410 | 1,161 | 1,899 | 240,228 | |||||||||||||||||||||||
5 - Special mention | 695 | 7,608 | 15,298 | 627 | 13,528 | 72 | — | 37,828 | |||||||||||||||||||||||
6-8 - Substandard | 1,570 | 33,824 | 20,152 | 1,870 | 20,551 | 149 | — | 78,116 | |||||||||||||||||||||||
$ | 30,102 | $ | 102,776 | $ | 186,850 | $ | 22,922 | $ | 182,230 | $ | 7,928 | $ | 4,484 | $ | 537,292 |
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) | |||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||
6-8 - 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 |
-21-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Credit Card Portfolio Exposure
The following tables are an analysis of the credit card portfolio exposure, as of September 30, 2012 and December 31, 2011.
September 30, 2012 | |||||||
Consumer - Credit Card | Business- Credit Card | ||||||
(amounts in thousands) | |||||||
Performing | $ | 2,069 | $ | 1,094 | |||
Non Performing | 10 | 5 | |||||
Total | $ | 2,079 | $ | 1,099 |
December 31, 2011 | |||||||
Consumer- Credit Card | Business- Credit Card | ||||||
(amounts in thousands) | |||||||
Performing | $ | 2,082 | $ | 991 | |||
Non Performing | 10 | 25 | |||||
Total | $ | 2,092 | $ | 1,016 |
-22-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Age Analysis of Past Due Loans
The following tables are an age analysis of past due loans by loan class, as of September 30, 2012 and December 31, 2011.
September 30, 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 | |||||||||||||||||||
(amounts in thousands) | ||||||||||||||||||||||||
Commercial & industrial | $ | 654 | $ | 171 | — | $ | 825 | $ | 29,277 | $ | 30,102 | $ | — | |||||||||||
Commercial construction and land Development | 3,488 | 21,360 | 24,848 | 77,928 | 102,776 | — | ||||||||||||||||||
Commercial real estate | 1,791 | 10,799 | 12,590 | 174,260 | 186,850 | — | ||||||||||||||||||
Residential construction | — | 900 | 900 | 22,022 | 22,922 | — | ||||||||||||||||||
Residential mortgage | 2,587 | 10,519 | 13,106 | 169,124 | 182,230 | — | ||||||||||||||||||
Consumer | 122 | 26 | 148 | 7,780 | 7,928 | — | ||||||||||||||||||
Consumer credit cards | 67 | 10 | 77 | 2,002 | 2,079 | 10 | ||||||||||||||||||
Business credit cards | 39 | 5 | 44 | 1,055 | 1,099 | 5 | ||||||||||||||||||
Other loans | — | — | — | 4,484 | 4,484 | — | ||||||||||||||||||
Total | $ | 8,748 | $ | 43,790 | $ | 52,538 | $ | 487,932 | $ | 540,470 | $ | 15 |
(1) | Nonaccrual and Greater than 90 Days Past Due includes $15,000 of consumer and business credit cards that were past due more than 90 days and still accruing interest, as well as $43.8 million of loans in nonaccrual status. |
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 | ||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||
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 includes $60,000 of consumer and business credit cards that were past due more than 90 days and still accruing interest, as well as $60.1 million of loans in nonaccrual status. |
-23-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Impaired Loan by Loan Class
The following table illustrates the impaired loans by loan class as of September 30, 2012 and December 31, 2011.
September 30, 2012 | |||||||||||||||||||||||||||
Quarter to Date | Year to Date | ||||||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||
(amounts in thousands) | |||||||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||||||
Commercial and industrial | $ | 552 | $ | 576 | $ | — | $ | 672 | $ | 9 | $ | 772 | $ | 20 | |||||||||||||
Commercial construction and land development | 16,035 | 19,600 | — | 17,083 | 121 | 19,542 | 189 | ||||||||||||||||||||
Commercial real estate other | 13,764 | 14,786 | — | 15,822 | 119 | 16,044 | 220 | ||||||||||||||||||||
Residential construction | 734 | 948 | — | 505 | 6 | 416 | 9 | ||||||||||||||||||||
Residential mortgage | 12,116 | 13,832 | — | 12,795 | 216 | 14,134 | 320 | ||||||||||||||||||||
Consumer | 45 | 72 | — | 55 | 2 | 61 | 2 | ||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||
Subtotal: | 43,246 | 49,814 | — | 46,932 | 473 | 50,969 | 760 | ||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||
Commercial and industrial | $ | 681 | $ | 861 | $ | 258 | $ | 695 | $ | 16 | $ | 1,054 | $ | 25 | |||||||||||||
Commercial construction and land development | 16,347 | 21,229 | 2,815 | 16,861 | 68 | 15,610 | 111 | ||||||||||||||||||||
Commercial real estate other | 6,288 | 7,190 | 1,762 | 6,289 | 70 | 7,019 | 121 | ||||||||||||||||||||
Residential construction | 670 | 690 | 68 | 786 | — | 907 | — | ||||||||||||||||||||
Residential mortgage | 8,844 | 9,518 | 2,342 | 9,726 | 90 | 9,009 | 157 | ||||||||||||||||||||
Consumer | — | — | — | — | — | 5 | — | ||||||||||||||||||||
Other | — | — | — | — | — | — | — | ||||||||||||||||||||
Subtotal: | 32,830 | 39,488 | 7,245 | 34,357 | 244 | 33,604 | 414 | ||||||||||||||||||||
Totals: | |||||||||||||||||||||||||||
Commercial | $ | 53,667 | $ | 64,242 | $ | 4,835 | $ | 57,422 | $ | 403 | $ | 60,041 | $ | 686 | |||||||||||||
Consumer | 45 | 72 | — | 55 | 2 | 66 | 2 | ||||||||||||||||||||
Residential | 22,364 | 24,988 | 2,410 | 23,812 | 312 | 24,466 | 486 | ||||||||||||||||||||
Grand Total | $ | 76,076 | $ | 89,302 | $ | 7,245 | $ | 81,289 | $ | 717 | $ | 84,573 | $ | 1,174 |
-24-
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 | |||||||||||||||
(amounts in thousands) | |||||||||||||||||||
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
The following table illustrates nonaccrual loans by loan class as of September 30, 2012 and December 31, 2011.
September 30, 2012 | December 31, 2011 | ||||||
(amounts in thousands) | |||||||
Commercial & industrial | $ | 171 | $ | 779 | |||
Commercial construction and land development | 21,360 | 29,538 | |||||
Commercial real estate | 10,799 | 14,830 | |||||
Residential construction | 900 | 1,469 | |||||
Residential mortgage | 10,519 | 13,466 | |||||
Consumer | 26 | 59 | |||||
Other | — | — | |||||
Total | $ | 43,775 | $ | 60,141 |
-25-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
Troubled Debt Restructurings
For the three and nine months ended September 30, 2012
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. The Bank then 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 as part of 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 monthly payments. If the borrower does not perform under the restructured terms, the loan would remain on or be 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.
The following table presents a breakdown of these TDRs by loan class and the type of concession made to the borrower, for the three and nine months ended September 30, 2012.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||
September 30, 2012 | September 30, 2012 | |||||||||||||||||||||
Number of loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||
(amounts in thousands, except number of loans) | ||||||||||||||||||||||
Below market interest rate | ||||||||||||||||||||||
Residential mortgage | — | $ | — | $ | — | 1 | $ | 395 | $ | 395 | ||||||||||||
Subtotal | — | — | — | 1 | 395 | 395 | ||||||||||||||||
Extended payment terms | ||||||||||||||||||||||
Commercial real estate | — | $ | — | $ | — | 1 | $ | 123 | $ | 123 | ||||||||||||
Residential mortgage | — | — | — | 1 | 48 | 48 | ||||||||||||||||
Subtotal | — | — | — | 2 | 171 | 171 | ||||||||||||||||
Other | ||||||||||||||||||||||
Commercial real estate | — | $ | — | $ | — | 1 | $ | 28 | $ | 28 | ||||||||||||
Consumer | — | — | — | 2 | 49 | 49 | ||||||||||||||||
Subtotal | — | — | — | 3 | 77 | 77 | ||||||||||||||||
Total | — | $ | — | $ | — | 6 | $ | 643 | $ | 643 |
-26-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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 September 30, 2012, there were 2 payment defaults on loans totaling $24,000 which were modified during the prior twelve months. For the nine months ended September 30, 2012, payment defaults occurred on 5 loans totaling $60,000 which were modified during the previous 12 months. The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2012.
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2012 | ||||||||||||||
Number of loans | Recorded Investment | Number of loans | Recorded Investment | ||||||||||||
(amounts in thousands, except number of loans) | |||||||||||||||
Below market interest rate: | |||||||||||||||
Commercial real estate | 1 | $ | — | $ | 1 | $ | — | ||||||||
Subtotal | 1 | — | 1 | — | |||||||||||
Extended payment terms: | |||||||||||||||
Residential mortgage | — | $ | — | 1 | $ | 36 | |||||||||
Subtotal | — | — | 1 | 36 | |||||||||||
Other: | |||||||||||||||
Commercial real estate | 1 | $ | 24 | 1 | $ | 24 | |||||||||
Consumer | — | — | 2 | — | |||||||||||
Subtotal | 1 | 24 | 3 | 24 | |||||||||||
Total | 2 | $ | 24 | 5 | $ | 60 |
The table below details successes and failures of TDRs that we have entered into during the twelve months ended September 30, 2012. There have been 9 TDRs executed during the previous 12 months, of which 4 have resulted in default by the borrower and the current recorded investment in these notes is $0. Additionally, there were no notes that have been paid in full, 4 notes totaling $576,000 are paying as agreed in the restructure, and 1 note totaling $24,000 was converted to non-accrual.
For the 12 month period ended September 30, 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 | |||||||||||||||||||||
(amounts in thousands, except number of loans) | ||||||||||||||||||||||||||||
Below market interest rate | — | $ | — | 1 | $ | 395 | — | $ | — | 1 | $ | — | ||||||||||||||||
Extended payment terms | — | — | 2 | 108 | — | — | 1 | — | ||||||||||||||||||||
Forgiveness of principal | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Other | — | — | 1 | 73 | 1 | 24 | 2 | — | ||||||||||||||||||||
Total | — | $ | — | 4 | $ | 576 | 1 | $ | 24 | 4 | $ | — |
-27-
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 third quarter of 2012 in considering similar key factors. As of the date of the most recently available financial information, the issuer's market value, credit rating, income, and capital ratios have all increased.
As of September 30, 2012, the fair value of the Company's investments in available-for-sale Level 3 trust preferred securities was $1.0 million. These securities consist of 2 single issuer trust preferred securities and are floating rate securities based off of three month LIBOR plus a spread of 5.0% and a weighted average maturity of 6 years and 1 equity security that has no readily determinable value. The issuers of these securities are community bank financial institutions operating primarily in North Carolina.
To estimate their fair value, the Company's third party investment pricing organization used a valuation model, which is based on a discounted cash flow approach. While both securities have call features associated with them, given the current economic and
-28-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
regulatory environment, it has been assumed that for valuation purposes, these securities will be outstanding until maturity. The most significant input for the valuation model is the discount rate used in the analysis. Both the actual floating rate and estimated market rate of the securities are swapped to a comparable fixed rate using the LIBOR swap curve as of the valuation date. In the current environment, a fixed rate of 9.0% was used given the presence of preferred shares issued to the US Treasury under the Capital Purchase Program. The present value of the difference between the two rates is taken to determine the market value of the security.
The following table presents information about assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011.
Fair Value Measurements at | |||||||||||||||||||
September 30, 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 | 9/30/2012 | 9/30/2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
(amounts in thousands) | |||||||||||||||||||
Taxable municipal securities | $ | 14,599 | $ | 14,599 | $ | — | $ | 14,599 | $ | — | |||||||||
Mortgage-backed securities GNMA | 66,704 | 66,704 | — | 66,704 | — | ||||||||||||||
Trust preferred securities | 1,031 | 1,031 | — | — | 1,031 | ||||||||||||||
Equity securities | 180 | 180 | 57 | 123 | — | ||||||||||||||
Total available for sale securities | $ | 82,514 | $ | 82,514 | $ | 57 | $ | 81,426 | $ | 1,031 |
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) | ||||||||||||||
(amounts in thousands) | |||||||||||||||||||
Taxable municipal securities | $ | 17,919 | $ | 17,919 | $ | — | $ | 17,919 | $ | — | |||||||||
Mortgage-backed securities GNMA | 73,629 | 73,629 | — | 73,629 | — | ||||||||||||||
Trust preferred securities | 1,085 | 1,085 | — | — | 1,085 | ||||||||||||||
Equity securities | 157 | 157 | 157 | — | — | ||||||||||||||
Total available for sale securities | $ | 92,790 | $ | 92,790 | $ | 157 | $ | 91,548 | $ | 1,085 |
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-29-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The following table presents the reconciliation for the three and nine months ended September 30, 2012 and 2011 for all Level 3 assets that are measured at fair value on a recurring basis.
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Securities available-for-sale | Securities available-for-sale | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(amounts in thousands) | |||||||||||||||
Beginning Balance | $ | 1,019 | $ | 1,224 | $ | 1,085 | $ | 1,299 | |||||||
Total realized and unrealized gains or (losses): | |||||||||||||||
Included in earnings | — | (131 | ) | — | (416 | ) | |||||||||
Included in other comprehensive income | 12 | 3 | (54 | ) | 213 | ||||||||||
Purchases, issuances and settlements | — | — | — | — | |||||||||||
Transfers in (out) of Level 3 | — | — | — | — | |||||||||||
Ending Balance | $ | 1,031 | $ | 1,096 | $ | 1,031 | $ | 1,096 | |||||||
Fair Value Measured on a Nonrecurring Basis. The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Impaired 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 September 30, 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 $76.1 million at September 30, 2012. Of such loans, $32.8 million had specific loss allowances aggregating $7.2 million at that date for a net fair value of $25.6 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.
The following table presents the carrying amount of certain assets with nonrecurring fair value measurement at September 30, 2012.
Total Carrying Amount in the Consolidated Balance Sheet | |||||
September 30, 2012 | |||||
(amounts in thousands, except percentages) | |||||
Nonrecurring measurements: | |||||
Impaired loans | $ | 25,585 | Collateral discounts | 15-70% | |
Foreclosed assets | $ | 14,647 | Discounted appraisals | 10-30% |
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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 nine month period ended September 30, 2012, the Company recognized approximately $1.7 million in valuation reductions on foreclosed assets resulting in the adjustment of the fair value of foreclosed assets to $14.6 million at September 30, 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.
The following table presents information about individually identified impaired loans and foreclosed assets measured at fair value at September 30, 2012 and December 31, 2011.
Fair Value Measurements at | |||||||||||||||||||
September 30, 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 | |||||||||||||||
9/30/2012 | 9/30/2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
(amounts in thousands) | |||||||||||||||||||
Impaired loans | $ | 25,585 | $ | 25,585 | $ | — | $ | — | $ | 25,585 | |||||||||
Foreclosed assets | $ | 14,647 | $ | 14,647 | $ | — | $ | — | $ | 14,647 |
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) | |||||||||||||||
(amounts in thousands) | |||||||||||||||||||
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.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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
The carrying value of Federal Home Loan Bank (FHLB) stock approximates fair value based on the redemption provisions of the FHLB.
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 September 30, 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.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
The following table presents information for financial assets and liabilities as of September 30, 2012 and December 31, 2011.
September 30, 2012 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | (amounts in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 222,019 | $ | 222,019 | $ | 222,019 | $ | — | $ | — | |||||||
Securities available for sale | 82,514 | 82,514 | 57 | 81,426 | 1,031 | ||||||||||||
Securities held to maturity | 21,882 | 22,242 | — | 22,242 | — | ||||||||||||
Loans, net | 523,461 | 500,941 | — | — | 500,941 | ||||||||||||
FHLB stock | 6,415 | 6,415 | — | 6,415 | — | ||||||||||||
Accrued interest receivable | 1,865 | 1,865 | — | 1,865 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 735,644 | $ | 731,516 | $ | 437,476 | $ | 294,040 | $ | — | |||||||
Subordinated debentures and promissory notes | 24,372 | 15,598 | — | — | 15,598 | ||||||||||||
Borrowings | 112,000 | 127,136 | — | 127,136 | — | ||||||||||||
Accrued interest payable | 1,699 | 1,699 | — | 1,699 | — |
December 31, 2011 | ||||||||
Carrying Value | Estimated Fair Value | |||||||
Financial assets: | (amounts in thousands) | |||||||
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 | ||||||
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 |
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE H – OTHER RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Standards
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, Presentation of Comprehensive Income, 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 2011-05 are included in Consolidated Statements of Comprehensive Income (Loss). 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 2011-12, Presentation of Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU did not have any impact on the Company's consolidated financial statements or results of operations.
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.
In July 2012, the FASB issued an update ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment which permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We are evaluating the impact of ASU 2012-02; however, we do not expect the adoption of this guidance to have a material impact on our financial statements.
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.
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 J 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, second and third quarters of 2012. The Company exercised its right to defer regularly scheduled interest payments on its outstanding TPS and as of September 30, 2012, $442,000 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.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
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 nine months ended September 30, 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. The Bank’s actual capital amounts and ratios are also presented in the table below.
Actual | Minimum For Capital Adequacy Purposes | Minimum To be Well Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
As of September 30, 2012: | (amounts in thousands, except ratios) | |||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 55,187 | 10.77 | % | $ | 40,903 | 8.0 | % | $ | 51,129 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 48,650 | 9.49 | % | 20,452 | 4.0 | % | 30,677 | 6.0 | % | |||||||||||
Tier I Capital (to Average Assets) | 48,650 | 5.36 | % | 36,217 | 4.0 | % | 45,271 | 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 September 30, 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 11.27%, 7.09%, and 4.04%, and 10.31%, 6.97%, and 4.41%, respectively.
In late May 2011, the Company and the Bank entered into the Written Agreement with the FRB and the 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 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:
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
• | 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 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. The Bank also created a separate Special Assets department and added additional resources to provide adequate attention and expertise to problem loan management. 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.
On June 28, 2012, The Federal Reserve Bank of Richmond notified the Bank that we are considered to be well-capitalized. Since that date nothing has come to the attention of management that would change this status.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
NOTE K - SUBSEQUENT EVENT
On September 26, 2012, Four Oaks Bank & Trust Company, the Company's wholly-owned subsidiary (the “Bank”), and First Bank entered into a Purchase and Assumption Agreement, pursuant to which First Bank will purchase certain assets and assume certain liabilities of two branch offices of the Bank located in Rockingham, North Carolina and Southern Pines, North Carolina. The purchase price for the assets will be computed as the sum of (i) a premium of 1% on the deposits at the branches, (ii) the aggregate value of the acquired loans, (iii) the aggregate net book value of the real property and related tangible personal property at the Rockingham branch, and (iv) the aggregate face value of the cash on hand at the Rockingham branch. The current value of the deposits is approximately $64 million, and the current value of the loans to be acquired is approximately $22 million. The actual amount of deposits will be determined at the time of closing. First Bank also has the option to purchase certain loans from these branches, but in no event shall the number of acquired loans exceed $32 million, the loans they plan to acquire have not yet been identified. The completion of the branch sale is subject to regulatory approvals required by state and federal bank regulatory authorities and normal and customary closing conditions. Subject to satisfaction of such conditions, the Bank and First Bank expect to close the branch sale in the first quarter of 2013.
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.
On September 26, 2012, Four Oaks Bank & Trust Company, the Company's wholly-owned subsidiary (the “Bank”), and First Bank entered into a Purchase and Assumption Agreement, pursuant to which First Bank will purchase certain assets and assume certain liabilities of two branch offices of the Bank located in Rockingham, North Carolina and Southern Pines, North Carolina. The purchase price for the assets will be computed as the sum of (i) a premium of 1% on the deposits at the branches, (ii) the aggregate value of the acquired loans, (iii) the aggregate net book value of the real property and related tangible personal property at the Rockingham branch, and (iv) the aggregate face value of the cash on hand at the Rockingham branch. The current value of the deposits is approximately $64 million, and the current value of the loans to be acquired is approximately $22 million. The actual amount of deposits will be determined at the time of closing. First Bank also has the option to remove certain loans and add additional loans prior to closing, but in no event shall the number of acquired loans exceed $32 million. The completion of the branch sale is subject to regulatory approvals required by state and federal bank regulatory authorities and normal and customary closing conditions. Subject to satisfaction of such conditions, the Bank and First Bank expect to close the branch sale in the first quarter of 2013.
Regulatory Update
In late May 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”). 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 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; |
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• | 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 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. The Bank also created a separate Special Assets department and added additional resources to provide adequate attention and expertise to problem loan management. 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
September 30, 2012 and December 31, 2011
The Company’s total assets decreased from $916.6 million at December 31, 2011 to $907.2 million at September 30, 2012, a decrease of $9.4 million, or 1.03%. The Company’s liquid assets, consisting of cash and cash equivalents and investment securities, increased $48.2 million to $326.4 million during the nine months ended September 30, 2012 compared to liquid assets of $278.2 million as of December 31, 2011 primarily from a net increase in cash and cash equivalents of $57.1 million, offset by a decrease in investment securities available for sale and held to maturity of $8.8 million. Gross loans decreased by $61.9 million or 10.27% from $602.2 million at December 31, 2011 to $540.4 million at September 30, 2012. The Company’s loan portfolio declined due to payoffs, paydowns and charge-offs. Deposits decreased $10.2 million or 1.37% from $745.9 million at December 31, 2011 to $735.6 million at September 30, 2012, due to a decrease in total time deposits of $72.9 million, offset by an increase of $46.5
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million in noninterest-bearing demand deposits, and an increase in interest-bearing demand deposits of $16.2 million. Wholesale deposits decreased $63.6 million to $82.7 million at September 30, 2012 as compared to $146.3 million at December 31, 2011, due to maturities and early calls made by the Bank in order to reduce brokered deposit levels.
Total shareholders’ equity decreased approximately $927,000 from $29.7 million at December 31, 2011 to $28.8 million at September 30, 2012. The decrease resulted primarily from a net loss of $1.6 million, offset by an increase in other comprehensive income of $405,000.
Results of Operations for the Three Months Ended
September 30, 2012 and 2011
Net Loss. Net loss for the three months ended September 30, 2012 was $2.2 million, or $0.28 loss per basic and diluted share, as compared to a net loss of $3.6 million, or $0.47 loss per basic and diluted share, for the three months ended September 30, 2011, a positive change of $1.4 million or $0.19 per basic and diluted share. The primary reasons for net loss in the third quarter of 2012 relates to a reduction in net interest income of $809,000 and an increase in non-interest expense of $710,000, primarily due to the increase in writedowns of foreclosed assets of $626,000, all of which was only partially offset by an increase in non-interest income of $328,000 for the quarter ended September 30, 2012.
Net Interest Income. 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 September 30, 2012 was $5.4 million, as compared to $6.2 million for the quarter ended September 30, 2011, a decrease of $809,000. The reduction in net interest income is primarily due to reductions in the loan portfolio and lower yields on investments. The average balance on loans decreased from $640.1 million for the quarter ended September 30, 2011, to $546.2 million for the quarter ended September 30, 2012. Yields on investment securities decreased from 2.47% to 1.49%, net of paydowns of mortgage backed securities, for the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011. Interest expense decreased primarily as a result of early calls of brokered deposits. Average time deposits decreased from $479.9 million to $395.1 million for the quarter ended September 30, 2012 compared to the same quarter for 2011. Interest rates also declined 18 basis points from 1.64% for the quarter ended at September 30, 2011 compared to 1.46% for the same period in 2012. Net interest margin decreased 29 basis points from 2.77% to 2.48% for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2012.
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. 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 $58.4 million at September 30, 2012 from $72.4 million at December 31, 2011. This decrease was primarily due to
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loans being returned to accruing status as well as loan charge offs, payoffs and paydowns. During the three months ended September 30, 2012, a $2.1 million provision was made for the allowance for loans losses, compared to a $4.7 million provision for the three months ended September 30, 2011. Net charge-offs as a percentage of average loans increased 1 basis point, from 0.65% for the three month period ended September 30, 2011 to 0.66% for the three month period ended September 30, 2012. Non-accrual loans at September 30, 2012 were $43.8 million representing a decrease from $63.5 million at September 30, 2011, and from $60.1 million at December 31, 2011. At September 30, 2012, impaired loans, which include non-accrual loans, troubled debt restructuring and other impaired notes, were $76.1 million. Of these loans, $32.8 million have specific loss allowances that aggregate $7.2 million. A decline in net charge offs, improvement in problem loans, and improvement of internal processes led us to decrease our allowance for loan losses to 3.13% of gross loans at September 30, 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 quarter ended September 30, 2012 increased $328,000 to $1.9 million from $1.5 million for the same period ended September 30, 2011, primarily due to an increase of $266,000 in other non-interest income, representing the premiums on sale of the guaranteed portion of SBA loans, a reduction of $131,000 in other-than-temporary impairment loss, offset by a decrease of $65,000 in gains on sales of investment securities available for sale.
Non-Interest Expenses. Non-interest expense increased $710,000 to $7.3 million for the quarter ended September 30, 2012 as compared to $6.6 million for the quarter ended September 30, 2011, primarily due to increased writedowns on foreclosed assets of $626,000.
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 historical negative credit quality trends and cumulative losses in 2010 and 2011, we did not consider any current or future taxable earnings in determining the recoverability of the deferred tax assets, and have therefore maintained 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. For the three months ended September 30, 2012, no income tax benefit was recorded.
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Results of Operations for the Nine Months Ended
September 30, 2012 and 2011
Net Loss. Net loss for the nine months ended September 30, 2012 was $1.6 million, or $0.20 loss per basic and diluted share, as compared to a net loss of $6.0 million, or $0.79 loss per basic and diluted share, for the nine months ended September 30, 2011, an improvement of $4.4 million or $0.59 per basic and diluted share. The primary reasons for this improvement is a decrease in the loan loss provision of $8.0 million, and an increase in non-interest income of $784,000, offset by a decrease in net interest income of $3.2 million, an increase in non-interest expense of $1.3 million, as well as an adjustment of $175,000 to income tax expense to correct an underaccrual of prior period income tax receivable.
Net Interest Income. The primary component of earnings for the Bank is net interest income, which 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 nine months ended September 30, 2012 was $16.7 million, a decrease of $3.2 million compared to the nine months ended September 30, 2011. The decrease was primarily a result of the decrease in the loan portfolio. The average balance of total loans decreased from $665.7 million for the nine months ended September 30, 2011, compared to $569.8 million for the same period ended September 30, 2012. The average interest rate for investment securities declined 102 basis points from 2.62% for the nine months ending September 30, 2011, compared to 1.60%, net of paydowns of mortgage backed securities, for the same period ended September 30, 2012. Also time deposits decreased an average of $78.1 million, from an average of $507.2 million for the nine months ended September 30, 2011 compared to an average of $429.0 million for the same period in 2012. Additionally, the average rates for time deposits decreased 13 basis points, from 1.67% for the nine months ended September 30, 2011, to 1.54% for the same period in 2012. Net interest margin decreased 38 basis points from 2.94% to 2.56% for the nine month period ended September 30, 2012 as compared to the same period ended September 30, 2011.
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. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance in 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 $58.4 million at September 30, 2012 from $72.4 million at December 31, 2011. This decrease was primarily due to loans being returned to accruing status as well as loan charge offs, payoffs and paydowns. During the nine months ended September 30, 2012, a $1.8 million provision was made for the allowance for loan losses compared to a $9.8 million provision for the nine months ended September 30, 2011. Net charge-offs as a percentage of average loans decreased 38 basis points, from 1.44% for the nine month period ended September 30, 2011 to 1.06% for the nine month period ended September 30, 2012. Non-accrual loans decreased from $60.1 million at December 31, 2011 to $43.8 million at September 30, 2012. At September 30, 2012, impaired loans, which include non-accrual loans, troubled debt restructurings, and other impaired loans, totaled $76.1 million. Of these loans, $32.8 million have specific loss allowances that aggregate $7.2 million. A decline in net charge offs, improvement in problem loans, and improvement of internal processes led us to decrease our allowance for loan losses to 3.13% of gross loans at September 30, 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 increased $784,000 for the nine months ended September 30, 2012 to $5.0 million as compared to $4.3 million for the same period in 2011. The increase resulted from a reduction in other-than-temporary impairment losses of $360,000 for the nine months ended September 30, 2012 compared to the same period in 2011. Also other non-interest income increased $290,000 for the nine months ended September 30, 2012, compared to the same period in 2011. This was a result of premiums on sales of the guaranteed portion of SBA loans which did not occur in the same period in 2011.
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Non-Interest Expenses. Non-interest expenses increased $1.3 million to $21.7 million for the nine months ended September 30, 2012 compared to $20.4 million for the nine months ended September 30, 2011. The primary increases in non-interest expenses were due to increases in professional and consulting fees of $188,000, foreclosed asset related costs of $815,000, loan collection expenses of $553,000, and other operating expenses of $367,000. These increases were offset by decreases in salaries and benefits of $178,000, equipment expense of $144,000, and FDIC assessment premiums of $252,000.
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 historical negative credit quality trends and cumulative losses, we did not consider any current or future taxable earnings in determining the recoverability of the deferred tax assets, and have therefore maintained 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. For the nine months ended September 30, 2012, an income tax benefit of $175,000 was recorded to reflect a higher current income tax receivable. As a result of the loss for the nine months ended September 30, 2012 no deferred tax asset was recorded.
Allowance for Loan Losses and Summary of Loan Loss Experience
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations, and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed. Management evaluates the adequacy of our allowance for loan losses on a monthly basis. The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations. Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
Management has developed a model for evaluating the adequacy of the allowance for loan losses. The model uses the Company’s internal grading system to determine which loans need to be assessed for impairment. The grade is initially assigned by the lending officer and reviewed by the loan administration function. The internal grading system is reviewed and tested periodically by an independent third party credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system.
The grading system is comprised of seven risk categories. Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan. Loans possessing a grade of 5 exhibit characteristics which indicate a higher risk that the loan may not be able to perform in accordance with the terms of the loan. Grade 6 loans are considered sub-standard and are generally impaired; however, certain of these loans continue to accrue interest, are not troubled debt restructurings (“TDRs”), and are not considered impaired. All loans that are on nonaccrual status, all TDRs, and all other impaired loans, are evaluated for specific reserves. Grade 7 and 8 loans are considered doubtful or loss, respectively, and would be included in nonaccrual loans.
Those loans that are identified through the Company’s internal loan grading system as impaired are evaluated individually under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310. Management orders a new appraisal based on where the loan is in the collection process and the age of the existing appraisal. Each loan is analyzed to determine the net value of collateral and an estimate of potential loss. The net value of collateral per the Company’s analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value. TDRs and nonaccrual loans are re-evaluated periodically to determine the adequacy of specific reserves and prior charge-offs.
Loans that are not assessed for specific reserves under FASB ASC 310 are reserved for under FASB ASC 450. The loans analyzed under FASB ASC 450 are first assigned a quantitative factor based on historical charge-off levels for the call report category using either the three year historical charge-offs, the two year historical charge-offs, or the last twelve months historical charge-offs. Depending on the economic cycle and where we are in the cycle, one of these methods will be chosen as most representative
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of the expectations for losses that are in the portfolio which are unidentified. Adding to the quantitative factor are qualitative factors which are more of a reflection of current economic conditions and trends. Together these two components comprise the reserve. Loans that are assessed for specific reserves are identified by being in nonaccrual, troubled debt restructuring or other impaired status. For each of these loans the collateral value less collection costs and distressed sale discounts is determined and any deficiency is identified. If collection is deemed to be collateral dependent, and the deficiency is greater than 10% of the net active principal balance or fair value, the deficiency is charged off and if not collateral dependent a specific reserve is established for the deficiency.
Using the data gathered during the quarterly evaluation process, the model calculates an acceptable level for the allowance for loan losses. Management and the Board of Directors are responsible for determining the appropriate level of the allowance for loan losses based on the model results.
The allowance for loan losses at September 30, 2012 was $16.9 million, which represents 3.13% of total loans outstanding compared to $22.3 million or 3.60% as of September 30, 2011. The allowance for loan losses at December 31, 2011 was $21.1 million or 3.51% of total loans.
The largest part of the reduction is within the general reserve and based on the banks continued improving loan trends and internal processes. The general reserve (ASC 450) is made up of a quantitative and qualitative reserve factor. The ASC 450 reserve is 2.08% as of September 30, 2012, compared to 2.89% as of September 30, 2011. One component of the ASC 450 general reserve is the two year rolling charge-off rate. The third quarter of 2012 was added as the most recent of the eight quarters in the two year rolling charge-off calculation and the quarter that aged out of the calculation was the highest quarter of charge-offs over the last twelve quarters. The quarter removed was also the peak charge-off quarter for 8 out of 14 loan categories. Several factors are evaluated under the qualitative portion of the reserve such as charge-off trends, the economic and regulatory environment, loan growth, concentrations, credit quality and problem loan trends, oversight of credit, and loan review. For the nine months ended September 30, 2012, net loan charge-offs were $6.0 million compared with $9.6 million for the prior year period and nonaccrual loans were $43.8 million and $60.1 million at September 30, 2012 and 2011, respectively. The decrease in nonaccruals is a result of a decrease in the amount and number of loans being moved to non-accrual status, payoffs and paydowns of non-accrual loans, loans being returned to accrual status, and charge-offs. Charge-offs in the third quarter are elevated compared to the prior three quarters. This may happen from time to time as the Bank continues to refine processes within the Bank's Special Assets function; however even at the elevated level the total charge-offs are still approximately half or less of peak charge-offs. Charge-offs associated with these process improvements are not expected to recur at the same level in future quarters.
The Company has $13.7 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 September 30, 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. As of September 30, 2012, the Brunswick County loan portfolio is reserved at more than four times the next highest reserve assigned.
While the Bank's economic and regulatory environment have not changed significantly, credit quality and problem loan trends show that the number and amount of loans being downgraded are declining. Additionally, the number and amount of loans being added to non-accrual status continue to decline each quarter while the number of loans being returned to accrual status are increasing. Loan review results consistently indicate few downgrade recommendations providing reassurance that the portfolio is graded appropriately. Credit oversight continues to be enhanced within the new Special Assets function and related processes as noted above. For example, the process for gathering information on and evaluating unobservable inputs, that contribute to the valuation of property underlying impaired loans and OREO, continue to be refined.
The Bank has also increased the number of loan settlements in the second and third quarters. The characteristics of the settlements vary and depending on the circumstances, may result in a net recovery or additional charge-off for the Bank.
The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.
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Asset Quality
The following table presents past due and nonaccrual loans as of September 30, 2012 and December 31, 2011.
September 30, 2012 | December 31, 2011 | ||||||
Nonaccrual loans: | (amounts in thousands, except ratios) | ||||||
Commercial and industrial | $ | 171 | $ | 779 | |||
Commercial construction and land development | 21,360 | 29,538 | |||||
Commercial real estate | 10,799 | 14,830 | |||||
Residential construction | 900 | 1,469 | |||||
Residential mortgage | 10,519 | 13,466 | |||||
Consumer | 26 | 59 | |||||
Total nonaccrual loans | $ | 43,775 | $ | 60,141 | |||
Foreclosed assets: | |||||||
Commercial and industrial | $ | 71 | $ | — | |||
Commercial construction and land development | $ | 6,071 | $ | 6,863 | |||
Commercial real estate | 3,354 | 2,183 | |||||
Residential construction | 752 | 837 | |||||
Residential mortgage | 4,399 | 2,276 | |||||
Total foreclosed assets | $ | 14,647 | $ | 12,159 | |||
Past due 90 days or more and still accruing: | |||||||
Business credit cards | $ | 5 | $ | 25 | |||
Consumer credit cards | 10 | 35 | |||||
Total past due 90 days and still accruing | $ | 15 | $ | 60 | |||
Total nonperforming assets | $ | 58,437 | $ | 72,360 | |||
Nonaccrual loans to gross loans | 8.10 | % | 9.99 | % | |||
Nonperforming assets to total assets | 6.44 | % | 7.89 | % | |||
Allowance coverage of nonperforming loans | 38.64 | % | 35.12 | % |
Non-accrual loans as a percentage of gross loans has decreased to 8.10% as of September 30, 2012 compared to 9.99% as of December 31, 2011. The allowance for loan losses as a percentage of non-accrual loans has increased to 38.64% as of September 30, 2012 compared to 35.12% as of December 31, 2011. The primary reason for the increase in the coverage ratio is due to the decrease in nonaccrual loans, and to the decrease in the dollar amount of loans being reviewed for specific impairment, but with no related allowance recorded either because a deficiency has been charged off or because there is no identified deficiency. The loans reviewed for specific impairment totaled $43.2 million as of September 30, 2012 compared to $58.7 million as of December 31, 2011, a 26.3% decrease. 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 $8.5 million as of September 30, 2012, and the amount of loans reviewed as part of this analysis has decreased $15.9 million over the same period.
The loans added to non-accrual status each quarter continue to decline. Non-accrual numbers are decreased by charge-offs, pay offs, principal reductions, settlements, and loans being returned to accrual status. During the third quarter the Bank formalized a review of performing non-accrual loans to determine if any could be returned to accrual status. The loans were reviewed to determine if the bank expected full repayment of amounts owed over a reasonable timeframe. Among other things, the review included:
• | a review of the reason the loan was placed on non-accrual, |
• | a review of the loan status to determine if it was current, |
• | a review of the payment history to determine if consistent payments have been made for a sustained period of time, |
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• | a review of current payment terms to determine if repayment can be expected over a reasonable period of time |
• | a review of updated financial information, and |
• | performance of an updated cash flow analysis |
The review resulted in 25 loans totaling $7.2 million being returned to accrual status during the third quarter.
Loans are classified as a 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 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 September 30, 2012 and December 31, 2011, respectively. The allowance for loan losses allocated to nonperforming TDRs totaled $1.1 million and $1.3 million at September 30, 2012 and December 31, 2011, respectively.
The following table presents performing and nonperforming TDRs at September 30, 2012 and December 31, 2011.
September 30, 2012 | December 31, 2011 | ||||||
Performing TDRs: | (amounts in thousands) | ||||||
Commercial industrial | $ | 350 | $ | 360 | |||
Commercial construction and land development | 5,577 | 1,631 | |||||
Commercial real estate | 5,513 | 4,910 | |||||
Residential construction | 165 | 165 | |||||
Residential mortgage | 4,117 | 3,728 | |||||
Consumer | — | 15 | |||||
Total performing TDRs | $ | 15,722 | $ | 10,809 |
September 30, 2012 | December 31, 2011 | ||||||
Nonperforming TDRs: | (amounts in thousands) | ||||||
Commercial industrial | $ | 85 | $ | 315 | |||
Commercial construction and land development | 12,609 | 18,357 | |||||
Commercial real estate | 4,808 | 7,395 | |||||
Residential construction | — | 345 | |||||
Residential mortgage | 4,595 | 7,470 | |||||
Consumer | — | 8 | |||||
Total nonperforming TDRs | $ | 22,097 | $ | 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
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assessing the adequacy of our allowance for loan losses. At September 30, 2012, we identified 184 loans totaling $30.8 million as other impaired loans.
At September 30, 2012 there were 266 foreclosed properties valued at a total of $14.6 million and 225 nonaccrual loans totaling $43.8 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 nine months ended September 30, 2012 and September 30, 2011, was approximately $4.7 million and $6.8 million, respectively. The amount of interest recognized on other impaired loans and performing TDRs during the first nine months of 2012 was approximately $784,000 and $409,000, respectively.
The following table summarizes the Bank’s allocation of allowance for loan losses at September 30, 2012, and December 31, 2011.
September 30, 2012 | December 31, 2011 | ||||||||||||
Amount | % of Total Loans (1) | Amount | % of Total Loans (1) | ||||||||||
(amounts in thousands, except ratios) | |||||||||||||
Commercial and industrial | $ | 1,194 | 7 | % | $ | 2,730 | 13 | % | |||||
Commercial construction and land development | 7,358 | 43 | % | 8,799 | 41 | % | |||||||
Commercial real estate | 3,355 | 20 | % | 3,800 | 18 | % | |||||||
Residential construction | 292 | 2 | % | 740 | 4 | % | |||||||
Residential mortgage | 4,203 | 25 | % | 4,630 | 22 | % | |||||||
Consumer | 453 | 3 | % | 413 | 2 | % | |||||||
Other | 66 | — | % | 29 | — | % | |||||||
Total | $ | 16,921 | 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 and nine months ended September 30, 2012 and 2011 is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(amounts in thousands) | |||||||||||||||
Balance, beginning of period | $ | 18,418 | $ | 21,899 | $ | 21,141 | $ | 22,100 | |||||||
Provision for loan losses | 2,089 | 4,706 | 1,803 | 9,832 | |||||||||||
Allowance before net (charge-offs) recoveries | 20,507 | 26,605 | 22,944 | 31,932 | |||||||||||
Loans charged-off | (4,196 | ) | (4,602 | ) | (7,920 | ) | (11,396 | ) | |||||||
Recoveries | 610 | 334 | 1,897 | 1,801 | |||||||||||
Net (charge-offs) recoveries | (3,586 | ) | (4,268 | ) | (6,023 | ) | (9,595 | ) | |||||||
Balance, end of period | $ | 16,921 | $ | 22,337 | $ | 16,921 | $ | 22,337 |
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The following table summarizes the Bank's loan loss experience for the three and nine months ended September 30, 2012 and 2011.
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
(amounts in thousands, except ratios) | |||||||||||||||
Balance at beginning of period | $ | 18,418 | $ | 21,899 | $ | 21,141 | $ | 22,100 | |||||||
Charge-offs: | |||||||||||||||
Commercial and industrial | 230 | 914 | 637 | 1,972 | |||||||||||
Business credit cards | 11 | 13 | 44 | 39 | |||||||||||
Commercial construction and land development | 2,580 | 2,327 | 4,735 | 5,782 | |||||||||||
Commercial real estate | 791 | 453 | 1,277 | 1,238 | |||||||||||
Residential construction | 1 | 72 | 36 | 583 | |||||||||||
Residential mortgage | 508 | 735 | 786 | 1,494 | |||||||||||
Consumer | 74 | 74 | 388 | 193 | |||||||||||
Consumer credit card | 1 | 14 | 17 | 95 | |||||||||||
Total charge-offs | 4,196 | 4,602 | 7,920 | 11,396 | |||||||||||
Recoveries: | |||||||||||||||
Commercial and industrial | 140 | 26 | 252 | 394 | |||||||||||
Business credit cards | 2 | — | 2 | — | |||||||||||
Commercial construction and land development | 145 | 85 | 945 | 224 | |||||||||||
Commercial real estate | 123 | 6 | 301 | 120 | |||||||||||
Residential construction | — | 17 | — | 288 | |||||||||||
Residential mortgage | 170 | 156 | 276 | 662 | |||||||||||
Consumer | 29 | 41 | 115 | 107 | |||||||||||
Consumer credit card | 1 | 3 | 6 | 6 | |||||||||||
Total recoveries | 610 | 334 | 1,897 | 1,801 | |||||||||||
Net (charge-offs) | (3,586 | ) | (4,268 | ) | (6,023 | ) | (9,595 | ) | |||||||
Provision for loan losses - increase | 2,089 | 4,706 | 1,803 | 9,832 | |||||||||||
Balance at end of period | $ | 16,921 | $ | 22,337 | $ | 16,921 | $ | 22,337 | |||||||
Ratio of net charge-offs during the period to average gross loans outstanding during the period | 0.66 | % | 0.65 | % | 1.06 | % | 1.44 | % |
Because of 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 September 30, 2012 approximately 91.5% 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.
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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 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 September 30, 2012, the Company had $12.8 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 $28.8 million or 3.2% of total assets at September 30, 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 September 30, 2012, the Bank has the credit capacity to borrow up to $181.4 million, from the FHLB, with $112.0 million outstanding as of September 30, 2012 and December 31, 2011.
The Company had total risk based capital of 11.27%, tier 1 risk based capital of 7.09%, and leverage ratio of 4.04% at September 30, 2012, as compared to 10.31%, 6.97% and 4.41%, respectively, at December 31, 2011.
The Bank had total risk based capital of 10.77%, tier 1 risk based capital of 9.49%, and leverage ratio of 5.36% at September 30, 2012, as compared to 9.75%, 8.47%, and 5.40%, respectively, at December 31, 2011. At September 30, 2012 the Bank is well capitalized.
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 September 30, 2012, $442,000 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.
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Book value per share at September 30, 2012 and 2011 was $3.69 and $4.28, respectively. Tangible book value per share (shareholders' equity less other intangibles), at September 30, 2012 was $3.66 as compared to $4.24 at September 30, 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 September 30, 2012 and 2011.
September 30, 2012 | September 30, 2011 | ||||||
(amounts in thousands, except per share data) | |||||||
Total shareholders' equity | $ | 28,765 | $ | 32,663 | |||
Less: other intangibles | 267 | 323 | |||||
Net tangible book value | $ | 28,498 | $ | 32,340 | |||
Number of shares outstanding | 7,785,518 | 7,635,332 | |||||
Tangible book value | $ | 3.66 | $ | 4.24 | |||
Book value | $ | 3.69 | $ | 4.28 |
The Company and the Bank are committed to improving our financial position and target capital levels to maintain a “well capitalized” status under federal banking agencies' guidelines. Management continues to evaluate 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, including the proposed branch sale to First Bank, 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 that the Company will be successful in any efforts to raise additional capital.
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" (as defined in Rule 12b-2 under the Exchange Act), the Company is not required to include the information required by this item. Accordingly, the information is omitted from this report.
ITEM 4 – CONTROLS AND PROCEDURES
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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
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.
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ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. | Description |
10.1 | Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank |
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 September 30, 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. * |
* 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.
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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: | November 14, 2012 | By: | /s/ Ayden R. Lee, Jr. |
Ayden R. Lee, Jr. | |||
Chairman, President and | |||
Chief Executive Officer | |||
Date: | November 14, 2012 | By: | /s/ Nancy S. Wise |
Nancy S. Wise | |||
Executive Vice President and | |||
Chief Financial Officer |
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Exhibit Index
Exhibit No. | Description |
10.1 | Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank |
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 September 30, 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. * |
* 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.
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