UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
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, | 33,567,677 |
par value $1.00 per share | (Number of shares outstanding |
(Title of Class) | May 11, 2015) |
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TABLE OF CONTENTS | Page No. | |
March 31, 2015 (Unaudited) and December 31, 2014 | ||
Three Months Ended March 31, 2015 and 2014 | ||
Consolidated Statements of Comprehensive Income (Unaudited) | ||
Three Months Ended March 31, 2015 and 2014 | ||
Three Months Ended March 31, 2015 and 2014 | ||
Three Months Ended March 31, 2015 and 2014 | ||
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Part I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, 2015 | December 31, 2014 | ||||||
(Unaudited) | (*) | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 17,038 | $ | 15,519 | |||
Interest-earning deposits | 85,614 | 143,008 | |||||
Cash and cash equivalents | 102,652 | 158,527 | |||||
CDs held for investment | 27,685 | 27,784 | |||||
Investment securities available-for-sale, at fair value | 65,338 | 64,211 | |||||
Investment securities held-to-maturity, at amortized cost | 77,972 | 81,583 | |||||
Total investment securities | 143,310 | 145,794 | |||||
Loans held for sale | 3,516 | 2,882 | |||||
Loans | 458,637 | 452,256 | |||||
Allowance for loan losses | (9,790 | ) | (9,377 | ) | |||
Net loans | 448,847 | 442,879 | |||||
Accrued interest receivable | 1,547 | 1,627 | |||||
Bank premises and equipment, net | 11,787 | 11,895 | |||||
FHLB stock | 4,564 | 4,788 | |||||
Investment in life insurance | 14,640 | 14,590 | |||||
Foreclosed assets | 3,265 | 3,782 | |||||
Other assets | 5,427 | 6,248 | |||||
TOTAL ASSETS | $ | 767,240 | $ | 820,796 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 206,879 | $ | 251,723 | |||
Money market, NOW accounts and savings accounts | 175,862 | 175,731 | |||||
Time deposits, $100,000 and over | 134,675 | 143,336 | |||||
Other time deposits | 86,095 | 90,395 | |||||
Total deposits | 603,511 | 661,185 | |||||
Borrowings | 90,000 | 90,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 12,000 | 12,000 | |||||
Accrued interest payable | 1,727 | 1,704 | |||||
Other liabilities | 5,208 | 2,806 | |||||
TOTAL LIABILITIES | 724,818 | 780,067 | |||||
Commitments (Note F) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 80,000,000 shares authorized; 33,488,962 and 32,032,327 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively | 33,489 | 32,032 | |||||
Additional paid-in capital | 31,223 | 32,520 | |||||
Accumulated deficit | (23,601 | ) | (24,579 | ) | |||
Accumulated other comprehensive income | 1,311 | 756 | |||||
Total shareholders' equity | 42,422 | 40,729 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 767,240 | $ | 820,796 |
(*) 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)
(Amounts in thousands, except share data)
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Interest and dividend income: | |||||||
Loans, including fees | $ | 6,364 | $ | 6,366 | |||
Taxable investments | 845 | 655 | |||||
Dividends | 79 | 82 | |||||
Interest-earning deposits | 176 | 158 | |||||
Total interest and dividend income | 7,464 | 7,261 | |||||
Interest expense: | |||||||
Deposits | 644 | 735 | |||||
Borrowings | 769 | 1,002 | |||||
Subordinated debentures | 49 | 49 | |||||
Subordinated promissory notes | 252 | 252 | |||||
Total interest expense | 1,714 | 2,038 | |||||
Net interest income | 5,750 | 5,223 | |||||
Provision for loan losses | — | — | |||||
Net interest income after provision for loan losses | 5,750 | 5,223 | |||||
Non-interest income: | |||||||
Service charges on deposit accounts | 415 | 400 | |||||
Other service charges, commissions and fees | 790 | 850 | |||||
Gains on sale of investment securities available-for-sale, net | 56 | 124 | |||||
Recovery of impairment loss and gain on redemption of equity securities | — | 89 | |||||
Income from investment in life insurance | 50 | 54 | |||||
Indemnification from third party payment processor clients | 179 | 538 | |||||
Other non-interest income | 40 | 47 | |||||
Total non-interest income | 1,530 | 2,102 | |||||
Non-interest expenses: | |||||||
Salaries | 2,616 | 2,216 | |||||
Employee benefits | 556 | 486 | |||||
Occupancy expenses | 329 | 290 | |||||
Equipment expenses | 237 | 299 | |||||
Professional and consulting fees | 766 | 567 | |||||
FDIC assessments | 175 | 454 | |||||
Foreclosed asset-related costs, net | 103 | 364 | |||||
Collection expenses | 135 | 182 | |||||
Other operating expenses | 1,385 | 1,110 | |||||
Total non-interest expenses | 6,302 | 5,968 | |||||
Income before income taxes | 978 | 1,357 | |||||
Income tax benefit | — | — | |||||
Net income | $ | 978 | $ | 1,357 | |||
Basic net income per common share | $ | 0.03 | $ | 0.17 | |||
Diluted net income per common share | $ | 0.03 | $ | 0.17 | |||
Weighted Average Shares Outstanding, Basic | 32,034,791 | 8,036,990 | |||||
Weighted Average Shares Outstanding, Diluted | 32,097,274 | 8,049,359 |
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 (UNAUDITED)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Net income | $ | 978 | $ | 1,357 | |||
Other comprehensive income: | |||||||
Securities available-for-sale: | |||||||
Unrealized holding gains on available-for-sale securities | 627 | 648 | |||||
Tax effect | — | — | |||||
Reclassification of gains recognized in net income | (56 | ) | (124 | ) | |||
Tax effect | — | — | |||||
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity | (16 | ) | (28 | ) | |||
Tax effect | — | — | |||||
Total other comprehensive income | 555 | 496 | |||||
Comprehensive income | $ | 1,533 | $ | 1,853 |
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)
(Amounts in thousands, except share data)
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2013 | 7,977,657 | $ | 7,978 | $ | 34,269 | $ | (20,390 | ) | $ | (234 | ) | $ | 21,623 | |||||||||
Net income | — | — | — | 1,357 | — | 1,357 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 496 | 496 | ||||||||||||||||
Stock based compensation | — | — | — | — | — | — | ||||||||||||||||
Issuance of common stock | 889,996 | 890 | 39 | — | — | 929 | ||||||||||||||||
BALANCE, MARCH 31, 2014 | 8,867,653 | $ | 8,868 | $ | 34,308 | $ | (19,033 | ) | $ | 262 | $ | 24,405 |
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 | 32,032,327 | $ | 32,032 | $ | 32,520 | $ | (24,579 | ) | $ | 756 | $ | 40,729 | ||||||||||
Net income | — | — | — | 978 | — | 978 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 555 | 555 | ||||||||||||||||
Stock based compensation | — | — | 143 | — | — | 143 | ||||||||||||||||
Issuance of common stock | 10,635 | 11 | 6 | — | — | 17 | ||||||||||||||||
Issuance of restricted stock | 1,446,000 | 1,446 | (1,446 | ) | — | — | — | |||||||||||||||
BALANCE, MARCH 31, 2015 | 33,488,962 | $ | 33,489 | $ | 31,223 | $ | (23,601 | ) | $ | 1,311 | $ | 42,422 |
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)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 978 | $ | 1,357 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for depreciation and amortization | 176 | 220 | |||||
Net amortization of bond premiums and discounts | 263 | 325 | |||||
Stock based compensation | 143 | — | |||||
Gain on sale of investment securities | (56 | ) | (124 | ) | |||
(Gain) loss on sale of foreclosed assets, net | (16 | ) | 20 | ||||
Valuation adjustment on foreclosed assets | 116 | 212 | |||||
Earnings on bank-owned life insurance | (50 | ) | (54 | ) | |||
Earnings from mortgage banking operations | (111 | ) | (110 | ) | |||
Originations of mortgage loans held for sale | (5,879 | ) | (4,723 | ) | |||
Proceeds from sale of loans held for sale | 5,364 | 4,470 | |||||
Recovery of impairment loss on redemption of securities | — | (89 | ) | ||||
Changes in assets and liabilities: | |||||||
Other assets | 821 | 124 | |||||
Accrued interest receivable | 80 | 67 | |||||
Other liabilities | 597 | 245 | |||||
Accrued interest payable | 23 | 38 | |||||
Net cash provided by operating activities | 2,449 | 1,978 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sales and calls of investment securities available-for-sale | 2,609 | 13,406 | |||||
Proceeds from paydowns of investment securities available-for-sale | 1,157 | 261 | |||||
Proceeds from paydowns of investment securities held-to-maturity | 3,409 | 3,472 | |||||
Purchases of investment securities available-for-sale | (2,538 | ) | (3,462 | ) | |||
Redemption of certificates of deposit | 99 | 3,185 | |||||
Redemption of FHLB stock | 224 | 298 | |||||
Net (increase) decrease in loans outstanding | (6,595 | ) | 9,563 | ||||
Purchases of bank premises and equipment | (68 | ) | (30 | ) | |||
Proceeds from sales of foreclosed assets | 1,036 | 1,119 | |||||
Net cash (used in) provided by investing activities | (667 | ) | 27,812 | ||||
Cash flows from financing activities: | |||||||
Net decrease in deposit accounts | (57,674 | ) | (8,388 | ) | |||
Proceeds from issuance of common stock | 17 | 929 | |||||
Net cash used in financing activities | (57,657 | ) | (7,459 | ) | |||
Change in cash and cash equivalents | (55,875 | ) | 22,331 | ||||
Cash and cash equivalents at beginning of period | 158,527 | 128,629 | |||||
Cash and cash equivalents at end of period | $ | 102,652 | $ | 150,960 |
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Supplemental disclosures of cash flow information: | |||||||
Interest paid on deposits and borrowings | $ | (1,691 | ) | $ | (2,000 | ) | |
Supplemental disclosures of noncash investing and financing activities: | |||||||
Unrealized gains on investment securities available-for-sale | $ | 571 | $ | 496 | |||
Amortization of net losses on investment securities transferred to held-to-maturity | (16 | ) | — | ||||
Transfer of loans to foreclosed assets | 619 | 253 | |||||
Loans transferred from held for sale to held for investment | 105 | — | |||||
Loans transferred from held for investment to held for sale | 113 | — | |||||
Available for sale securities purchased, not yet settled | 1,805 | — |
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 - 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 months ended March 31, 2015 and 2014, 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 subsidiary, Four Oaks Bank & Trust Company (the “Bank”). Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.
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, 2014. This Quarterly Report should be read in conjunction with such Annual Report.
Certain amounts previously presented in the Company's 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, or Shareholders' Equity as previously reported.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The existing recognition and measurement guidance for debt issuance costs are not affected by this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. The Company does not believe the adoption of this update will have a material impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not believe the adoption of this update will have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date the financial statements are issued. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. If the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables financial statement users to understand the principal conditions or events that raised substantial doubt, management’s evaluation of the conditions and management’s plans to alleviate the substantial doubt. If substantial doubt exists about an entity’s ability to continue as a going concern, and the substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update become effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not believe the adoption of this update will have a material impact on the Company’s consolidated financial statements.
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In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are effective for annual and interim periods beginning after December 15, 2014. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. On April 1, 2015, the FASB voted to propose to defer the effective date of the new revenue recognition standard by one year. Based on the proposed decision, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact of adoption of the new standard on its consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, Receivables–Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This update clarifies that an in-substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This amendment is effective for annual and interim periods beginning after December 15, 2014. The adoption of the new guidance did not have a material impact on the Company's consolidated 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.
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NOTE B - NET INCOME PER SHARE
Basic net income per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income 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 to outstanding stock options.
Basic and diluted net income per common share have been computed based upon net income 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 (amounts in thousands, except share data):
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Net income available to common shareholders | $ | 978 | $ | 1,357 | |||
Weighted average number of common shares - basic | 32,034,791 | 8,036,990 | |||||
Effect of dilutive stock options | 15,869 | 12,369 | |||||
Effect of dilutive restricted stock awards | 46,614 | — | |||||
Weighted average number of common shares - dilutive | 32,097,274 | 8,049,359 | |||||
Basic earnings per common share | $ | 0.03 | $ | 0.17 | |||
Diluted earnings per common share | $ | 0.03 | $ | 0.17 | |||
Anti-dilutive awards | 176,857 | 192,930 |
During 2014, 24.0 million shares of common stock were issued in connection with the Company's shareholder rights offering and concurrent private placement standby offering in which a net of $22.2 million of capital was raised. Consequently, the weighted average shares of common stock increased 24.0 million for the quarter ended March 31, 2015 as compared to the same period in 2014. Additionally, the Company issued 1,446,000 shares of restricted stock on January 20, 2015 pursuant to the Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan. Refer to Note I for additional information on the restricted stock grant.
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NOTE C – INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale and securities held-to-maturity as of March 31, 2015 and December 31, 2014 are as follows (amounts in thousands):
March 31, 2015 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 20,746 | $ | 931 | $ | 11 | $ | 21,666 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 13,309 | 141 | 8 | 13,442 | |||||||||||
FNMA & FHLMC | 30,109 | 110 | — | 30,219 | |||||||||||
Equity securities | 11 | — | — | 11 | |||||||||||
Total | $ | 64,175 | $ | 1,182 | $ | 19 | $ | 65,338 |
March 31, 2015 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,570 | $ | 9 | $ | 8 | $ | 3,571 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 71,098 | 1,006 | 131 | 71,973 | |||||||||||
FNMA | 3,304 | 62 | — | 3,366 | |||||||||||
Total | $ | 77,972 | $ | 1,077 | $ | 139 | $ | 78,910 |
December 31, 2014 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 16,412 | $ | 686 | $ | 20 | $ | 17,078 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 16,204 | 163 | 103 | 16,264 | |||||||||||
FNMA & FHLMC | 30,992 | — | 134 | 30,858 | |||||||||||
Equity securities | 11 | — | — | 11 | |||||||||||
Total | $ | 63,619 | $ | 849 | $ | 257 | $ | 64,211 |
December 31, 2014 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,584 | $ | — | $ | 28 | $ | 3,556 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 74,482 | 887 | 244 | 75,125 | |||||||||||
FNMA | 3,517 | 44 | — | 3,561 | |||||||||||
Total | $ | 81,583 | $ | 931 | $ | 272 | $ | 82,242 |
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The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
# Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||||||
Securities Available-for-Sale: | |||||||||||||||||||||||||||||
Taxable municipal securities | 1 | $ | 784 | $ | 11 | — | $ | — | $ | — | $ | 784 | $ | 11 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 1 | 4,978 | 8 | — | — | — | 4,978 | 8 | |||||||||||||||||||||
Total temporarily impaired securities | 2 | $ | 5,762 | $ | 19 | — | $ | — | $ | — | $ | 5,762 | $ | 19 |
March 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Held-to-Maturity: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | — | $ | — | $ | — | 3 | $ | 1,613 | $ | 8 | $ | 1,613 | $ | 8 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 2 | 2,566 | 7 | 6 | 11,143 | 124 | 13,709 | 131 | |||||||||||||||||||||
Total temporarily impaired securities | 2 | $ | 2,566 | $ | 7 | 9 | $ | 12,756 | $ | 132 | $ | 15,322 | $ | 139 |
December 31, 2014 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Available-for-Sale: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 2 | $ | 2,580 | $ | 20 | — | $ | — | $ | — | $ | 2,580 | $ | 20 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 2 | 7,425 | 103 | — | — | — | 7,425 | 103 | |||||||||||||||||||||
FNMA & FHLMC | 6 | 30,858 | 134 | — | — | — | 30,858 | 134 | |||||||||||||||||||||
Total temporarily impaired securities | 10 | $ | 40,863 | $ | 257 | — | $ | — | $ | — | $ | 40,863 | $ | 257 |
December 31, 2014 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Held-to-Maturity: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | — | $ | — | $ | — | 10 | $ | 3,556 | $ | 28 | $ | 3,556 | $ | 28 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 6 | 7,594 | 41 | 6 | 12,240 | 203 | 19,834 | 244 | |||||||||||||||||||||
Total temporarily impaired securities | 6 | $ | 7,594 | $ | 41 | 16 | $ | 15,796 | $ | 231 | $ | 23,390 | $ | 272 |
-13-
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
The unrealized gains and losses on securities at March 31, 2015 resulted from changing market interest rates compared to the yields available at the time the underlying securities were purchased. As of March 31, 2015, there were 9 of 54 Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS") and 4 of 34 taxable municipal securities that contained net unrealized losses. Management identified no impairment related to credit quality. For debt securities in an unrealized loss position, the Company does not intend to sell and it is not likely that the Company will be required to sell these securities before the anticipated recovery of the amortized cost basis. As a result, no other than temporary impairment losses were recognized during the three months ended March 31, 2015.
-14-
The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2015 by expected maturities are shown on the following table (amounts in thousands). 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.
March 31, 2015 | |||||||
Securities Available-for-Sale: | Amortized Cost | Fair Value | |||||
Taxable municipal securities: | |||||||
Due within one year | $ | — | $ | — | |||
Due after one year through five years | — | — | |||||
Due after five years through ten years | — | — | |||||
Due after ten years | 20,746 | 21,666 | |||||
Total taxable municipal securities | 20,746 | 21,666 | |||||
Mortgage-backed securities - GNMA/FNMA & FHLMC: | |||||||
Due within one year | — | — | |||||
Due after one year through five years | — | — | |||||
Due after five years through ten years | — | — | |||||
Due after ten years | 43,418 | 43,661 | |||||
Total mortgage-backed securities - GNMA/FNMA & FHLMC | 43,418 | 43,661 | |||||
Other securities: | |||||||
Equity securities | 11 | 11 | |||||
Total other securities | 11 | 11 | |||||
Total available-for-sale securities | $ | 64,175 | $ | 65,338 | |||
Securities Held-to-Maturity: | |||||||
Taxable municipal securities: | |||||||
Due within one year | $ | 101 | $ | 101 | |||
Due after one year through five years | 1,614 | 1,615 | |||||
Due after five years through ten years | 1,855 | 1,855 | |||||
Due after ten years | — | — | |||||
Total taxable municipal securities | 3,570 | 3,571 | |||||
Mortgage-backed securities - GNMA/FNMA: | |||||||
Due within one year | — | — | |||||
Due after one year through five years | — | — | |||||
Due after five years through ten years | 4,831 | 4,951 | |||||
Due after ten years | 69,571 | 70,388 | |||||
Total mortgage-backed securities - GNMA/FNMA | 74,402 | 75,339 | |||||
Total held-to-maturity securities | $ | 77,972 | $ | 78,910 |
Securities with a carrying value of approximately $100.9 million and $101.8 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Sales and calls of securities available-for-sale for the three months ended March 31, 2015 and 2014 of $2.6 million and $13.4 million generated net realized gains of $56,000 and $124,000, respectively, and no gross realized losses for either period.
-15-
NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis. Each class of loans is subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Loans are primarily made in the Company's market area in North Carolina, principally Johnston County, and parts of Wake, Harnett, Duplin, Sampson, and Moore counties. There have been no significant changes to the loan class definitions outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
During the third quarter of 2014, the Company transferred loans from held for investment to held for sale in anticipation of near term loan sales as a result of the Company's previously disclosed asset resolution plan (the "Asset Resolution Plan"). These loans are not included in the tables within Note D; however, additional details about these loans have been added to provide information on the credit quality of these assets.
The classification of loan segments as of March 31, 2015 and December 31, 2014 are summarized as follows (amounts in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Commercial and industrial | $ | 26,155 | $ | 24,286 | |||
Commercial construction and land development | 53,345 | 53,642 | |||||
Commercial real estate | 208,342 | 200,510 | |||||
Residential construction | 28,912 | 28,130 | |||||
Residential mortgage | 132,212 | 135,022 | |||||
Consumer | 6,613 | 7,248 | |||||
Consumer credit cards | 2,174 | 2,276 | |||||
Business credit cards | 1,277 | 1,251 | |||||
Other | 281 | 499 | |||||
Gross loans | 459,311 | 452,864 | |||||
Less: | |||||||
Net deferred loan fees | (674 | ) | (608 | ) | |||
Net loans before allowance | 458,637 | 452,256 | |||||
Allowance for loan losses | (9,790 | ) | (9,377 | ) | |||
Total net loans | $ | 448,847 | $ | 442,879 | |||
Loans held for sale | $ | 3,516 | $ | 2,882 |
-16-
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 at least a quarterly basis, which includes a review of loans both specifically and collectively evaluated for impairment.
The following tables are an analysis of the allowance for loan losses by loan segment as of and for the three months ended March 31, 2015 and 2014 and as of and for the twelve months ended December 31, 2014 (amounts in thousands). These tables do not include loans classified as held for sale.
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 119 | $ | 5,105 | $ | 2,382 | $ | 436 | $ | 1,206 | $ | 89 | $ | 40 | $ | 9,377 | |||||||||||||||
Provision for loan losses | 14 | (322 | ) | 108 | (24 | ) | 214 | 15 | (5 | ) | — | ||||||||||||||||||||
Loans charged-off | (9 | ) | — | (4 | ) | — | (148 | ) | (54 | ) | — | (215 | ) | ||||||||||||||||||
Recoveries | 46 | 319 | 184 | — | 46 | 32 | 1 | 628 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 37 | 319 | 180 | — | (102 | ) | (22 | ) | 1 | 413 | |||||||||||||||||||||
Balance, end of period | $ | 170 | $ | 5,102 | $ | 2,670 | $ | 412 | $ | 1,318 | $ | 82 | $ | 36 | $ | 9,790 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 508 | $ | 125 | $ | — | $ | — | $ | 3 | $ | — | $ | 636 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 170 | $ | 4,594 | $ | 2,545 | $ | 412 | $ | 1,318 | $ | 79 | $ | 36 | $ | 9,154 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 27,432 | $ | 53,345 | $ | 208,342 | $ | 28,912 | $ | 132,212 | $ | 8,787 | $ | 281 | $ | 459,311 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 6,123 | $ | 4,103 | $ | — | $ | 2,125 | $ | 3 | $ | — | $ | 12,354 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 27,432 | $ | 47,222 | $ | 204,239 | $ | 28,912 | $ | 130,087 | $ | 8,784 | $ | 281 | $ | 446,957 |
(1) At March 31, 2015, there were $210,000 in impaired loans collectively evaluated for impairment with $31,000 in reserves established.
-17-
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2014 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 487 | $ | 5,037 | $ | 2,981 | $ | 713 | $ | 2,146 | $ | 188 | $ | 38 | $ | 11,590 | |||||||||||||||
Provision for loan losses | (96 | ) | 556 | (86 | ) | (12 | ) | (321 | ) | 9 | (50 | ) | — | ||||||||||||||||||
Loans charged-off | (23 | ) | (153 | ) | (207 | ) | — | (67 | ) | (42 | ) | — | (492 | ) | |||||||||||||||||
Recoveries | 39 | 42 | 159 | — | 142 | 15 | 21 | 418 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 16 | (111 | ) | (48 | ) | — | 75 | (27 | ) | 21 | (74 | ) | |||||||||||||||||||
Balance, end of period | $ | 407 | $ | 5,482 | $ | 2,847 | $ | 701 | $ | 1,900 | $ | 170 | $ | 9 | $ | 11,516 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 265 | $ | 509 | $ | 874 | $ | 137 | $ | 470 | $ | — | $ | — | $ | 2,255 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 142 | $ | 4,973 | $ | 1,973 | $ | 564 | $ | 1,430 | $ | 170 | $ | 9 | $ | 9,261 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 26,801 | $ | 62,599 | $ | 208,783 | $ | 28,626 | $ | 146,841 | $ | 9,230 | $ | 446 | $ | 483,326 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 796 | $ | 11,180 | $ | 12,429 | $ | 695 | $ | 9,714 | $ | 553 | $ | — | $ | 35,367 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 26,005 | $ | 51,419 | $ | 196,354 | $ | 27,931 | $ | 137,127 | $ | 8,677 | $ | 446 | $ | 447,959 |
(1) At March 31, 2014, there were $1.8 million in impaired loans collectively evaluated for impairment with $233,000 in reserves established.
Twelve Months Ended | |||||||||||||||||||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 487 | $ | 5,037 | $ | 2,981 | $ | 713 | $ | 2,146 | $ | 188 | $ | 38 | $ | 11,590 | |||||||||||||||
Provision for loan losses | (84 | ) | 2,778 | 2,382 | (106 | ) | 3,041 | (36 | ) | (21 | ) | 7,954 | |||||||||||||||||||
Loans charged-off | (492 | ) | (3,107 | ) | (3,315 | ) | (171 | ) | (4,847 | ) | (183 | ) | — | (12,115 | ) | ||||||||||||||||
Recoveries | 208 | 397 | 334 | — | 866 | 120 | 23 | 1,948 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (284 | ) | (2,710 | ) | (2,981 | ) | (171 | ) | (3,981 | ) | (63 | ) | 23 | (10,167 | ) | ||||||||||||||||
Balance, end of period | $ | 119 | $ | 5,105 | $ | 2,382 | $ | 436 | $ | 1,206 | $ | 89 | $ | 40 | $ | 9,377 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 516 | $ | 4 | $ | — | $ | — | $ | 4 | $ | — | $ | 524 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 119 | $ | 4,589 | $ | 2,378 | $ | 436 | $ | 1,206 | $ | 85 | $ | 40 | $ | 8,853 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 25,537 | $ | 53,642 | $ | 200,510 | $ | 28,130 | $ | 135,022 | $ | 9,524 | $ | 499 | $ | 452,864 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 6,678 | $ | 3,801 | $ | — | $ | 2,030 | $ | 471 | $ | — | $ | 12,980 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 25,537 | $ | 46,964 | $ | 196,709 | $ | 28,130 | $ | 132,992 | $ | 9,053 | $ | 499 | $ | 439,884 |
(1) At December 31, 2014, there were $436,000 in impaired loans collectively evaluated for impairment with $139,000 in reserves established.
-18-
Credit Risk
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. There have been no significant changes in credit grade definitions as outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
The following tables are an analysis of the creditworthiness by loan class and credit card portfolio exposure as of March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,934 | $ | — | $ | — | $ | — | $ | — | $ | 1,813 | $ | 4 | $ | 3,751 | |||||||||||||||
2 - Satisfactory Quality | 984 | 672 | 1,856 | — | 14,508 | 246 | 10 | 18,276 | |||||||||||||||||||||||
3 - Satisfactory Quality - Merits Attention | 10,202 | 10,981 | 88,927 | 2,602 | 52,981 | 1,148 | 119 | 166,960 | |||||||||||||||||||||||
4 - Low Satisfactory | 12,721 | 34,990 | 111,586 | 25,539 | 56,068 | 3,316 | 33 | 244,253 | |||||||||||||||||||||||
5 - Special Mention | 307 | 1,636 | 3,781 | 771 | 7,057 | 67 | 115 | 13,734 | |||||||||||||||||||||||
6-8 - Substandard (1) | 7 | 5,066 | 2,192 | — | 1,598 | 23 | — | 8,886 | |||||||||||||||||||||||
$ | 26,155 | $ | 53,345 | $ | 208,342 | $ | 28,912 | $ | 132,212 | $ | 6,613 | $ | 281 | $ | 455,860 |
Consumer - Credit Card | Business- Credit Card | ||||||
Performing | $ | 2,163 | $ | 1,254 | |||
Non Performing | 11 | 23 | |||||
Total | $ | 2,174 | $ | 1,277 | |||
Total Loans | $ | 459,311 |
(1) The above table includes loans held for investment only. As of March 31, 2015, there were $2.3 million in Risk Grade 6 loans classified as loans held for sale.
-19-
December 31, 2014 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 2,099 | $ | — | $ | — | $ | — | $ | — | $ | 1,638 | $ | — | $ | 3,737 | |||||||||||||||
2 - Satisfactory Quality | 606 | 630 | 2,206 | — | 14,794 | 314 | 11 | 18,561 | |||||||||||||||||||||||
3 - Satisfactory Quality - Merits Attention | 9,506 | 10,625 | 81,761 | 1,893 | 53,007 | 3,556 | 225 | 160,573 | |||||||||||||||||||||||
4 - Low Satisfactory | 11,932 | 34,709 | 110,683 | 26,074 | 56,359 | 1,186 | 146 | 241,089 | |||||||||||||||||||||||
5 - Special Mention | 143 | 1,892 | 3,989 | — | 8,720 | 62 | 117 | 14,923 | |||||||||||||||||||||||
6-8 - Substandard (1) | — | 5,786 | 1,871 | 163 | 2,142 | 492 | — | 10,454 | |||||||||||||||||||||||
$ | 24,286 | $ | 53,642 | $ | 200,510 | $ | 28,130 | $ | 135,022 | $ | 7,248 | $ | 499 | $ | 449,337 |
Consumer- Credit Card | Business- Credit Card | ||||||
Performing | $ | 2,263 | $ | 1,248 | |||
Non Performing | 13 | 3 | |||||
Total | $ | 2,276 | $ | 1,251 | |||
Total Loans | $ | 452,864 |
(1) The above table includes loans held for investment only. As of December 31, 2014, there were $2.5 million in Risk Grade 6 loans classified as held for sale.
Asset Quality
The following tables are an age analysis of past due loans, including those on nonaccrual by loan class, as of March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | |||||||||||||||||||||||
30-89 Days Past Due (1) | Nonaccrual(1) | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | 43 | $ | 7 | $ | — | $ | 50 | $ | 26,105 | $ | 26,155 | |||||||||||
Commercial construction & land development | 119 | 4,849 | 66 | 5,034 | 48,311 | 53,345 | |||||||||||||||||
Commercial real estate | — | 1,310 | 96 | 1,406 | 206,936 | 208,342 | |||||||||||||||||
Residential construction | — | — | — | — | 28,912 | 28,912 | |||||||||||||||||
Residential mortgage | 583 | 743 | — | 1,326 | 130,886 | 132,212 | |||||||||||||||||
Consumer | 65 | 4 | — | 69 | 6,544 | 6,613 | |||||||||||||||||
Consumer credit cards | 52 | — | 11 | 63 | 2,111 | 2,174 | |||||||||||||||||
Business credit cards | 15 | — | 23 | 38 | 1,239 | 1,277 | |||||||||||||||||
Other loans | 84 | — | — | 84 | 197 | 281 | |||||||||||||||||
Total | $ | 961 | $ | 6,913 | $ | 196 | $ | 8,070 | $ | 451,241 | $ | 459,311 |
(1) The above table includes loans held for investment only. As of March 31, 2015, there were $26,000 in loans 30-89 past due and $1.7 million in loans on nonaccrual classified as loans held for sale.
-20-
December 31, 2014 | |||||||||||||||||||||||
30-89 Days Past Due (1) | Nonaccrual (1) | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | 14 | $ | — | $ | — | $ | 14 | $ | 24,272 | $ | 24,286 | |||||||||||
Commercial construction & land development | 27 | 5,533 | — | 5,560 | 48,082 | 53,642 | |||||||||||||||||
Commercial real estate | — | 983 | — | 983 | 199,527 | 200,510 | |||||||||||||||||
Residential construction | — | — | — | — | 28,130 | 28,130 | |||||||||||||||||
Residential mortgage | 1,058 | 1,271 | — | 2,329 | 132,693 | 135,022 | |||||||||||||||||
Consumer | 82 | 472 | — | 554 | 6,694 | 7,248 | |||||||||||||||||
Consumer credit cards | 46 | — | 14 | 60 | 2,216 | 2,276 | |||||||||||||||||
Business credit cards | 41 | — | 3 | 44 | 1,207 | 1,251 | |||||||||||||||||
Other loans | 84 | — | — | 84 | 415 | 499 | |||||||||||||||||
Total | $ | 1,352 | $ | 8,259 | $ | 17 | $ | 9,628 | $ | 443,236 | $ | 452,864 |
(1) The above table includes loans held for investment only. As of December 31, 2014, there were $67,000 in loans 30-89 days past due and $1.9 million in loans on nonaccrual classified as held for sale.
Nonperforming assets
Nonperforming assets at March 31, 2015 and December 31, 2014 consist of the following (amounts in thousands):
March 31, 2015 | December 31, 2014 | ||||||
Loans past due ninety days or more and still accruing | $ | 196 | $ | 17 | |||
Nonaccrual loans | 6,913 | 8,259 | |||||
Foreclosed assets | 3,265 | 3,782 | |||||
Loans held for sale - nonperforming | 1,722 | 1,865 | |||||
Total nonperforming assets | $ | 12,096 | $ | 13,923 |
As of March 31, 2015, there were $1.7 million of loans held for sale that were in nonaccrual status and therefore considered nonperforming.
Impaired Loans
Impaired loans are those loans for which the Bank does not expect full repayment of all principal and accrued interest when due either under the terms of the original loan agreement or within reasonably modified contractual terms. If the loan has been restructured, such as in the case of a troubled debt restructuring ("TDR"), the loan continues to be considered impaired for the duration of the restructured loan term. Whereas loans which are classified as Substandard (Risk Grade 6) are not necessarily impaired, all loans which are classified as Doubtful (Risk Grade 7) are considered impaired.
Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of a number of available methods; a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan, through the observable market value of the loan or should the loan be collateral dependent, upon the fair market value of the underlying assets securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or reserve or charge-off, and is incorporated into the Bank's allowance for loan and lease losses.
When a loan has been designated as impaired and full collection of principal and interest under the contractual terms is not assured, the impaired loan will be placed into nonaccrual status and interest income will not be recognized. Payments received against such loans are initially applied fully to the principal balance of the note until the principal balance is satisfied. Subsequent payments are thereupon applied to the accrued interest balance which only then results in the recognition of interest income. Payments received against accruing impaired loans are applied in the same manner as that of accruing loans which have not been deemed impaired. The recorded investment in impaired notes does not include deferred fees or accrued interest and management deems this amount to be immaterial.
-21-
The following tables illustrate the impaired loans by loan class as of March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
Recorded Investment (1) | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial construction & land development | 4,899 | 7,988 | — | 4,956 | 5 | ||||||||||||||
Commercial real estate | 3,390 | 4,696 | — | 3,390 | 35 | ||||||||||||||
Residential mortgage | 2,125 | 2,374 | — | 2,167 | 20 | ||||||||||||||
Subtotal: | 10,414 | 15,058 | — | 10,513 | 60 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | 7 | 7 | 1 | 7 | — | ||||||||||||||
Commercial construction & land development | 1,283 | 2,160 | 517 | 1,289 | 27 | ||||||||||||||
Commercial real estate | 751 | 985 | 130 | 754 | 8 | ||||||||||||||
Residential mortgage | 101 | 113 | 15 | 103 | — | ||||||||||||||
Consumer | 8 | 9 | 4 | 8 | — | ||||||||||||||
Subtotal: | 2,150 | 3,274 | 667 | 2,161 | 35 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 10,330 | 15,836 | 648 | 10,396 | 75 | ||||||||||||||
Consumer | 8 | 9 | 4 | 8 | — | ||||||||||||||
Residential | 2,226 | 2,487 | 15 | 2,270 | 20 | ||||||||||||||
Grand Total | $ | 12,564 | $ | 18,332 | $ | 667 | $ | 12,674 | $ | 95 |
(1) The above table includes loans held for investment only. As of March 31, 2015, there were $2.2 million in impaired loans classified as held for sale and there were no reserves recorded for these loans.
-22-
December 31, 2014 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
Recorded Investment (1) | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial construction & land development | $ | 5,445 | $ | 6,454 | $ | — | $ | 6,715 | $ | 15 | |||||||||
Commercial real estate | 3,468 | 4,295 | — | 4,103 | 139 | ||||||||||||||
Residential mortgage | 2,030 | 1,614 | — | 2,279 | 59 | ||||||||||||||
Consumer | 467 | 729 | — | 524 | — | ||||||||||||||
Subtotal: | 11,410 | 13,092 | — | 13,621 | 213 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial construction & land development | 1,433 | 2,656 | 580 | 1,866 | 92 | ||||||||||||||
Commercial real estate | 372 | 379 | 17 | 378 | 19 | ||||||||||||||
Residential mortgage | 192 | 169 | 61 | 224 | 5 | ||||||||||||||
Consumer | 8 | 6 | 5 | 8 | — | ||||||||||||||
Subtotal: | 2,005 | 3,210 | 663 | 2,476 | 116 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 10,718 | 13,784 | 597 | 13,062 | 265 | ||||||||||||||
Consumer | 475 | 735 | 5 | 532 | — | ||||||||||||||
Residential | 2,222 | 1,783 | 61 | 2,503 | 64 | ||||||||||||||
Grand Total: | $ | 13,415 | $ | 16,302 | $ | 663 | $ | 16,097 | $ | 329 |
(1) The above table includes loans held for investment only. As of December 31, 2014, there were $2.4 million in impaired loans classified as held for sale and there were no reserves recorded for these loans.
-23-
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Loans in the process of renewal or modification are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. The Bank's policy with respect to accrual of interest on loans restructured in a TDR process 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 considered and the loan is considered performing. 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 and nonperforming 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.
The following table provides a summary of loans modified as TDRs at March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | 1,326 | $ | 2,741 | $ | 4,067 | $ | 508 | ||||||||
Commercial real estate | 2,442 | 785 | 3,227 | 20 | ||||||||||||
Residential mortgage | 835 | 49 | 884 | — | ||||||||||||
Consumer | 4 | — | 4 | 4 | ||||||||||||
Total modifications | $ | 4,607 | $ | 3,575 | $ | 8,182 | $ | 532 |
December 31, 2014 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | 1,336 | $ | 2,776 | $ | 4,112 | $ | 516 | ||||||||
Commercial real estate | 2,469 | 552 | 3,021 | 4 | ||||||||||||
Residential mortgage | 950 | 54 | 1,004 | — | ||||||||||||
Consumer | 4 | 467 | 471 | 4 | ||||||||||||
Total modifications | $ | 4,759 | $ | 3,849 | $ | 8,608 | $ | 524 |
(1) The above table includes loans held for investment only. At March 31, 2015, there were $199,000 in accruing TDRs and $677,000 in TDRs in nonaccrual and classified as held for sale compared to $203,000 and $932,000, respectively, at December 31, 2014.
There were no new TDRs made to borrowers for the three months ended March 31, 2015 and there were no TDR loans modified during the previous twelve months that had a payment default for the three months ended March 31, 2015.
The table below details TDRs that the Bank has entered into during the twelve months ended March 31, 2015.
Twelve Months Ended March 31, 2015 | |||||||||||||||||||||||||||
Paid in full | Paying as restructured | Converted to nonaccrual | 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) | |||||||||||||||||||||||||||
Extended payment terms | — | $ | — | 1 | $ | 4 | — | $ | — | — | $ | — | |||||||||||||||
Forgiveness of principal | 2 | — | — | — | — | — | — | — | |||||||||||||||||||
Total | 2 | $ | — | 1 | $ | 4 | — | $ | — | — | $ | — |
-24-
NOTE E – SUBORDINATED DEBT
The Company is currently prohibited by the Written Agreement, described in Note H - Regulatory Restrictions of these Notes to Consolidated Financial Statements, from paying interest on its subordinated promissory notes and on its subordinated debentures in connection with its trust preferred securities ("TPS") without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for the first quarter of 2015. The Company exercised its right to defer regularly scheduled interest payments on its outstanding TPS and as of March 31, 2015, $949,000 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, $1.00 par value per share, 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.
-25-
NOTE F - COMMITMENTS AND CONTINGENCIES
Commitments
The following table presents loan commitments at March 31, 2015 (amounts in thousands).
March 31, 2015 | |||
Commitments to extend credit | $ | 16,783 | |
Undisbursed lines of credit | 83,703 | ||
Financial stand-by letters of credit | 218 | ||
Performance stand-by letters of credit | 1,120 | ||
Legally binding commitments | 101,824 | ||
Unused credit card lines | 13,250 | ||
Total | $ | 115,074 |
Pledged Assets
Certain assets are pledged to secure municipal deposits, borrowings, and borrowing capacity, subject to certain limits, at the Federal Home Loan Bank (the "FHLB") and the Federal Reserve Bank of Richmond (the "FRB"), as well as for other purposes as required or permitted by law. FHLB borrowings are secured by cash, securities, and a floating lien covering the Company's loan portfolio of qualifying residential (1-4 units) first mortgage and commercial real estate loans. In addition, securities are pledged against the Company's ability to borrow funds from various short term lines of credit, and utilizing the discount window of the FRB. The following table provides the total market value of pledged assets by asset type at March 31, 2015 (amounts in thousands).
March 31, 2015 | |||
Cash | $ | — | |
Securities | 100,907 | ||
Loans | 27,102 |
Litigation Proceedings
There have been no material developments in the description of material litigation proceedings as reported in Note L to the consolidated financial statements filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
Additionally, the Company is party to certain legal actions in the ordinary course of its business. The Company believes these actions are routine in nature and incidental to the operation of its business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on its business, financial condition, results of operations, cash flows or prospects. If, however, the Company's assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, its business, financial condition, results of operations, cash flows and prospects could be adversely affected.
-26-
NOTE G – FAIR VALUE MEASUREMENT
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 have historically included equity securities traded on an active exchange, such as the New York Stock Exchange. As of March 31, 2015, there were no Level 1 securities. Level 2 securities include taxable municipalities, mortgage-backed securities issued by government sponsored entities, and certain equity securities. The Company’s mortgage-backed securities were primarily issued by GNMA, the Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"). As of March 31, 2015, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities. Securities historically classified as Level 3 include trust preferred securities in less liquid markets; however, as of March 31, 2015, there were no Level 3 securities.
The following table presents information about assets measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
March 31 2015, 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 | |||||||||||||||
Available-for-Sale Securities: | 3/31/2015 | 3/31/2015 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 21,666 | $ | 21,666 | $ | — | $ | 21,666 | $ | — | |||||||||
Mortgage-backed securities: | |||||||||||||||||||
GNMA | 13,442 | 13,442 | — | 13,442 | — | ||||||||||||||
FNMA & FHLMC | 30,219 | 30,219 | — | 30,219 | — | ||||||||||||||
Equity securities | 11 | 11 | — | 11 | — | ||||||||||||||
Total available-for-sale securities | $ | 65,338 | $ | 65,338 | $ | — | $ | 65,338 | $ | — |
Fair Value Measurements at | |||||||||||||||||||
December 31, 2014, 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 | |||||||||||||||
Available-for-Sale Securities: | 12/31/2014 | 12/31/2014 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 17,078 | $ | 17,078 | $ | — | $ | 17,078 | $ | — | |||||||||
Mortgage-backed securities: | |||||||||||||||||||
GNMA | 16,264 | 16,264 | — | 16,264 | — | ||||||||||||||
FNMA & FHLMC | 30,858 | 30,858 | — | 30,858 | — | ||||||||||||||
Equity securities | 11 | 11 | — | 11 | — | ||||||||||||||
Total available-for-sale securities | $ | 64,211 | $ | 64,211 | $ | — | $ | 64,211 | $ | — |
-27-
The following table presents the reconciliation for the three months ended March 31, 2015 and 2014 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands).
Three Months Ended | |||||||
March 31, | |||||||
Securities Available-for-Sale: | 2015 | 2014 | |||||
Beginning Balance | $ | — | $ | 1,025 | |||
Total realized and unrealized gains or (losses): | |||||||
Included in earnings | — | — | |||||
Included in other comprehensive income | — | — | |||||
Purchases, issuances and settlements | — | (615 | ) | ||||
Ending Balance | $ | — | $ | 410 |
Fair Value Measured on a Nonrecurring Basis.
The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale as a Level 2 valuation.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, when a loan is considered impaired, it is evaluated for impairment and written down to its estimated fair value or an allowance for loan losses is established. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When there is no observable market prices, an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.
Foreclosed Assets
Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3.
Assets measured at fair value on a non-recurring basis are included in the tables below at March 31, 2015 and December 31, 2014 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
March 31 2015, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
3/31/2015 | 3/31/2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Loans held for sale | $ | 3,516 | $ | 3,516 | $ | — | $ | 3,516 | $ | — | |||||||||
Impaired loans | 8,536 | 8,536 | — | — | 8,536 | ||||||||||||||
Foreclosed assets | 3,265 | 3,265 | — | — | 3,265 |
-28-
Fair Value Measurements at | |||||||||||||||||||
December 31, 2014, 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 | |||||||||||||||
12/31/2014 | 12/31/2014 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Loans held for sale | $ | 2,882 | $ | 2,882 | $ | — | $ | 2,882 | $ | — | |||||||||
Impaired loans | 9,855 | 9,855 | — | — | 9,855 | ||||||||||||||
Foreclosed assets | 3,782 | 3,782 | — | — | 3,782 |
Quantitative Information about Level 3 Fair Value Measurements
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2015 (amounts in thousands, except percentages).
Total Carrying Amount at March 31, 2015 | Valuation Methodology | Range of Inputs | |||||
Nonrecurring measurements: | |||||||
Impaired loans | $ | 8,536 | Collateral discounts | 9 - 50% | |||
Foreclosed assets | $ | 3,265 | Discounted appraisals | 10 - 30% |
Collateral discounts to determine fair value on impaired loans vary widely and result from the consideration of the following factors: the age of the most recent appraisal (i.e. an appraisal dating from an earlier period of real estate speculation could require as much as a 50% discount), the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.
The following table reflects the general range of collateral discounts for impaired loans by segment.
Loan Segment: | Range of Percentages |
Commercial construction and land development | 10.5% - 40% |
Commercial real estate | 12.5% - 50% |
Residential construction | 9% - 30% |
Residential mortgage | 9% - 20% |
All other segments | 9% - 20% |
As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance than that noted above.
-29-
Fair Value of Financial Instruments
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 cash equivalents are equal to the fair value due to the liquid nature of the financial instruments.
Certificate of Deposits
These investments are valued at carrying amounts for fair value purposes.
Securities Available-for-Sale and Securities Held-to-Maturity
Fair values of investment securities 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.
Loans Held For Sale
The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar
characteristics.
Loans
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 a 5% 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.
FHLB Stock
The carrying amount of FHLB stock approximates fair value.
Deposits
The fair value of non-maturing deposits such as noninterest-bearing demand, money market, NOW, and savings accounts, are by definition, equal to the amount payable on demand. Fair value for maturing deposits such as CDs and IRAs are estimated using a discounted cash flow approach that applies current interest rates to expected maturities.
Borrowings, Subordinated Debentures, and Subordinated Promissory Notes
The fair value of borrowings, 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.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximates fair value.
-30-
The following table presents information for financial assets and liabilities as of March 31, 2015 and December 31, 2014 (amounts in thousands).
March 31, 2015 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 102,652 | $ | 102,652 | $ | 102,652 | $ | — | $ | — | |||||||
Certificates of deposit | 27,685 | 27,685 | — | 27,685 | — | ||||||||||||
Securities available-for-sale | 65,338 | 65,338 | — | 65,338 | — | ||||||||||||
Securities held-to-maturity | 77,972 | 78,910 | — | 78,910 | — | ||||||||||||
Loans held for sale | 3,516 | 3,516 | — | 3,516 | — | ||||||||||||
Loans, net | 448,847 | 428,601 | — | — | 428,601 | ||||||||||||
FHLB stock | 4,564 | 4,564 | — | 4,564 | — | ||||||||||||
Accrued interest receivable | 1,547 | 1,547 | — | 1,547 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 603,511 | $ | 605,233 | $ | — | $ | 605,233 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 24,372 | 25,689 | — | — | 25,689 | ||||||||||||
Borrowings | 90,000 | 95,555 | — | 95,555 | — | ||||||||||||
Accrued interest payable | 1,727 | 1,727 | — | 1,727 | — |
December 31, 2014 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 158,527 | $ | 158,527 | $ | 158,527 | $ | — | $ | — | |||||||
Certificates of deposit | 27,784 | 27,784 | — | 27,784 | — | ||||||||||||
Securities available-for-sale | 64,211 | 64,211 | — | 64,211 | — | ||||||||||||
Securities held-to-maturity | 81,583 | 82,242 | — | 82,242 | — | ||||||||||||
Loans held for sale | 2,882 | 2,882 | — | 2,882 | — | ||||||||||||
Loans, net | 442,879 | 422,906 | — | — | 422,906 | ||||||||||||
FHLB stock | 4,788 | 4,788 | — | 4,788 | — | ||||||||||||
Accrued interest receivable | 1,627 | 1,627 | — | 1,627 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 661,185 | $ | 663,000 | $ | — | $ | 663,000 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 24,372 | 25,671 | — | — | 25,671 | ||||||||||||
Borrowings | 90,000 | 95,573 | — | 95,573 | — | ||||||||||||
Accrued interest payable | 1,704 | 1,704 | — | 1,704 | — |
-31-
NOTE H - REGULATORY RESTRICTIONS
North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. In addition, 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 three months ended March 31, 2015.
Current federal regulations require that the Bank maintain a minimum ratio of total capital to risk weighted assets of 8.0%, with at least 6.0% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Bank must maintain a common equity Tier 1 capital ratio of 4.5% and a leverage ratio of 4.0%. To be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. At March 31, 2015, the Bank was classified as well capitalized for regulatory capital purposes.
The Bank’s actual capital amounts and ratios are also presented in the table below (amounts in thousands, except ratios).
Actual | Minimum For Capital Adequacy Purposes | Minimum to be Well Capitalized under Prompt Corrective Action Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
As of March 31, 2015: | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 68,389 | 14.0 | % | $ | 39,089 | 8.0 | % | $ | 48,861 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 62,236 | 12.7 | % | 29,317 | 6.0 | % | 39,089 | 8.0 | % | |||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 62,236 | 12.7 | % | 21,987 | 4.5 | % | 31,760 | 6.5 | % | |||||||||||
Tier I Capital (to Average Assets) | 62,236 | 7.7 | % | 32,405 | 4.0 | % | 40,506 | 5.0 | % | |||||||||||
As of December 31, 2014: | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 66,498 | 14.7 | % | $ | 36,109 | 8.0 | % | $ | 45,136 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 60,810 | 13.5 | % | 18,054 | 4.0 | % | 27,082 | 6.0 | % | |||||||||||
Tier I Capital (to Average Assets) | 60,810 | 7.2 | % | 33,844 | 4.0 | % | 42,305 | 5.0 | % |
The Company is also subject to capital requirements that differ from the Bank. In order for the Company to be adequately capitalized, total capital to risk weighted assets, Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets must be 8.0%, 6.0%, 4.5%, and 4.0%, respectively. At March 31, 2015, the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 14.2%, 10.9%, 8.4%, and 6.6%, respectively, as compared to total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets of 15.0%, 11.6%, and 6.2%, respectively, at December 31, 2014.
In late May 2011, the Company and the Bank entered into a Written Agreement (the "Written Agreement") with the FRB and the North Carolina Commissioner of Banks (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 current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance. |
-32-
In addition, the Bank has agreed that it will:
• | refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement; |
• | eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and |
• | take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB. |
In addition, the Company has agreed that it will:
• | refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval; |
• | refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and |
• | refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB. |
Under the terms of the Written Agreement, both the Company and the Bank have agreed to:
• | submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis; |
• | notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios; |
• | refrain from declaring or paying any dividends absent prior regulatory approval; |
• | comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and |
• | submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement. |
In addition to the many improvements in the risk management and governance practices at the Bank, the results of the capital raise and asset resolution efforts have allowed the Company and the Bank to make significant progress towards compliance with the Written Agreement. Currently, the Bank is in full compliance with 19 of the 20 provisions contained in the Written Agreement and continues to address the remaining item that is in partial compliance. The Company and the Bank remain focused on each item in the Written Agreement to ensure progress continues and to ensure that each item is fully addressed and ultimately resolved. To ensure the efforts are effective, the Board of Directors of the Company (the "Board") established an Enforcement Action Committee that meets regularly to monitor progress on compliance with the Written Agreement.
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. |
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. To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated.
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NOTE I - RESTRICTED STOCK
On January 16, 2015, the Board of the Company approved and adopted the Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan (the “Plan”). On January 20, 2015, the Company awarded 1,446,000 shares of the Company’s common stock at $1.00 par value per share to certain employees, directors and third party service providers in the form of restricted stock. Awards of performance based restricted stock vest in two separate tranches, 15% at the end of the one-year period ending on December 31, 2015, and 85% at the end of the three-year period ending on December 31, 2018 (each such period, a “Performance Period”), in each case based on the attainment of the performance measures and goals for that Performance Period. The performance measures for the one-year period ending December 31, 2015 are (1) budgeted net income as set forth in the Company’s 2015 budget and (2) the Company having net income in each quarter of 2015. Budgeted net income must be achieved at the 70% threshold performance level in order for 10.5% of the awards to vest and at the 100% target performance level in order for 15% of the awards to vest. Where achievement against budgeted net income falls between these performance levels, the number of shares vested will be determined based on straight-line interpolation. If the performance goals are not met, 15% of the awards will be forfeited. The performance measures and related goals for the three-year period ending December 31, 2018 will be determined by the compensation committee of the Board (the "Committee"), in its sole discretion as administrator of the Plan, in the fourth quarter of 2015.
In general, awards of time based restricted stock also vest in two separate tranches, 15% at the end of the one-year period ending on December 31, 2015, and 85% at the end of the three-year period ending on December 31, 2018. In order for these shares to vest, the recipient of the award generally must be employed by the Company on the vesting date. Any restricted stock that has not vested at the time of the termination of the recipient's service relationship will be forfeited; although, the Committee has the power, in its sole and absolute discretion, to accelerate vesting where such termination is a result of the recipient's death or disability or in other termination situations.
The following table summarizes non-vested restricted stock awards as of the period ended March 31, 2015:
Restricted Stock | Weighted Average Grant-Date Fair Value | |||||
Balance as of December 31, 2014: | — | $ | — | |||
Granted | 1,446,000 | 1.52 | ||||
Vested | — | — | ||||
Forfeited | — | — | ||||
Balance as of March 31, 2015: | 1,446,000 | $ | 1.52 |
The Company recognized $135,000 in compensation expense related to restricted stock awards for the three months ended March 31, 2015 and the Company estimates there was $2.2 million in unrecognized compensation expense for restricted stock granted.
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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. Unless the context otherwise indicates, references in this report to "we," "us" and "our" refer to the Company and its subsidiaries.
Regulatory Update
In late May 2011, the Company and Four Oaks Bank & Trust Company, the Company's wholly-owned subsidiary (the "Bank"), entered into the Written Agreement with the Federal Reserve Bank of Richmond (the "FRB") and the North Carolina Office of the Commissioner of Banks (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 current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance. |
In addition, the Bank has agreed that it will:
• | refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement; |
• | eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and |
• | take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB. |
In addition, the Company has agreed that it will:
• | refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval; |
• | refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and |
• | refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB. |
Under the terms of the Written Agreement, both the Company and the Bank have agreed to:
• | submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis; |
• | notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios; |
• | refrain from declaring or paying any dividends absent prior regulatory approval; |
• | comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and |
• | submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement. |
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In addition to the many improvements in the risk management and governance practices at the Bank, the results of the capital raise and asset resolution efforts have allowed the Company and the Bank to make significant progress towards compliance with the Written Agreement. Currently, the Bank is in full compliance with 19 of the 20 provisions contained in the Written Agreement and continues to address the remaining item that is in partial compliance. The Company and the Bank remain focused on each item in the Written Agreement to ensure progress continues and to ensure that each item is fully addressed and ultimately resolved. To ensure the efforts are effective, the Board of Directors of the Company (the "Board") established an Enforcement Action Committee that meets regularly to monitor progress on compliance with the Written Agreement.
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. |
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. To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated.
Comparison of Financial Condition at March 31, 2015 and December 31, 2014
The Company’s total assets declined $53.6 million or 6.52% during the three month period ending March 31, 2015, from $820.8 million at December 31, 2014 to $767.2 million at March 31, 2015. Cash, cash equivalents, and investments were $278.2 million at March 31, 2015 compared to $336.9 million at December 31, 2014, a decrease of $58.7 million or 17.4%. Outstanding gross loans increased to $458.6 million at March 31, 2015 compared to $452.3 million at December 31, 2014 as we began to implement a strategy of portfolio loan growth.
Total liabilities were $724.8 million at March 31, 2015, a decrease of $55.3 million or 7.08%, from $780.1 million at December 31, 2014. Total deposits decreased $57.7 million or 8.72% during the three month period ended March 31, 2015, from $661.2 million at December 31, 2014, to $603.5 million at March 31, 2015. The decline in both assets and liabilities were the result of a $48.1 million reduction in deposits as the Company exits the Automated Clearing House ("ACH") third party payment processor business line. Management continues to actively monitor changes in these deposits as we work through the exit of this business line.
Total shareholders’ equity increased $1.7 million or 4.16%, from $40.7 million at December 31, 2014, to $42.4 million at March 31, 2015. This increase resulted primarily from net income generated during the first quarter, as well as increases in accumulated other comprehensive income on the available for sale securities portfolio and issuance of restricted stock.
Results of Operations for the Three Months Ended March 31, 2015 and 2014
Net Income. Net income for the three months ended March 31, 2015 was $978,000, or $0.03 net income per basic and diluted share, as compared to net income of $1.4 million, or $0.17 net income per basic and diluted share, for the three months ended March 31, 2014, a decrease of $379,000 or $0.14 per basic and diluted share. This decrease in profits is primarily due to declines in non-interest income and increases in non-interest expenses, while the per share reduction is due primarily to the issuance of 24.0 million shares as a result of the capital raise executed in 2014.
Net Interest Income. Net interest income is the difference between interest income, principally from loan and investment securities, and interest expense, largely 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.
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Net interest income increased to $5.7 million for the three months ended March 31, 2015 compared to $5.2 million as of this same period in 2014, an increase of $527,000. Interest income increased $203,000 primarily due to increases in investment income generated from additional investments purchased in the fourth quarter of 2014. There were additionally declines in interest expense due to a shift in deposit mix from time deposits to demand, savings, and money market deposits, as well as declining interest expense on borrowings due to the prepayment of $22.0 million in Federal Home Loan Bank long term borrowings executed in 2014.
Provision for Loan Losses. The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management’s consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. During the three months ended March 31, 2015 and March 31, 2014, no provision for the allowance for loan losses was recognized in earnings due to continued improvement in asset quality.
Non-Interest Income. Non-interest income decreased $572,000 to $1.5 million for the quarter ended March 31, 2015, as compared to $2.1 million for the quarter ended March 31, 2014. Of the total reduction, $359,000 was due to lower income received from ACH third party payment processor client indemnification as we exit this line of business. The settlements with the third party payment processor clients represent indemnification for legal costs already incurred and estimated to occur. Additionally contributing to the decline, are reductions totaling $157,000 due to reduced income recognized from the sale and redemption of investments and a reduction in other service charges, commissions, and fees due to lower premium income received on the sale of government guaranteed loans.
Non-Interest Expenses. Non-interest expense increased $334,000 to $6.3 million for the quarter ended March 31, 2015, as compared to $6.0 million for the quarter ended March 31, 2014. Non-interest expense increased primarily as a result of increases in salaries related expenses and professional and consulting fees. Salaries related expenses increased $400,000 due to personnel additions, implementation of a restricted stock plan, and accruals related to performance-based compensation for 2015. Professional and consulting fees were $199,000 greater for the three months ended March 31, 2015 as compared to the same quarter in 2014 and other operating expenses increased $275,000 for this same period. These increases are the result of a project to upgrade our technology platform, in partnership with our core processor, in order to offer additional products and services for our customers. As asset quality continued to improve, collections and foreclosure expenses for the three months ended March 31, 2015 declined $308,000 and FDIC insurance premiums declined $279,000 when compared to the same period in 2014.
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 prior years, 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.
Asset Quality
Nonperforming Assets
Nonperforming assets are comprised of nonperforming loans, accruing loans which are past due 90 days or more, repossessed assets, other real estate owned ("foreclosed assets"), and certain loans held for sale which are classified as nonperforming. As of March 31, 2015, nonperforming assets declined $1.8 million or 13.1% when compared to December 31, 2014. This decline continues to be the result of our aggressive asset resolution efforts as we focus efforts on resolving nonperforming assets while minimizing associated losses and completing the asset resolution plan (the "Asset Resolution Plan") that commenced in 2014.
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The following table describes our nonperforming asset portfolio by loan class as of March 31, 2015 and December 31, 2014 (amounts in thousands, except ratios).
March 31, 2015 | December 31, 2014 | ||||||
Nonaccrual loans: | |||||||
Commercial and industrial | $ | 7 | $ | — | |||
Commercial construction and land development | 4,849 | 5,533 | |||||
Commercial real estate | 1,310 | 983 | |||||
Residential mortgage | 743 | 1,271 | |||||
Consumer | 4 | 472 | |||||
Total nonaccrual loans | 6,913 | 8,259 | |||||
Past due 90 days or more and still accruing: | |||||||
Commercial construction and land development | 66 | — | |||||
Commercial real estate | 96 | — | |||||
Consumer credit cards | 11 | 14 | |||||
Business credit cards | 23 | 3 | |||||
Total past due 90 days and still accruing | 196 | 17 | |||||
Nonperforming loans held for sale | 1,722 | 1,865 | |||||
Foreclosed assets: | |||||||
Commercial and industrial | 23 | 44 | |||||
Commercial construction and land development | 2,252 | 2,613 | |||||
Commercial real estate | 128 | 485 | |||||
Residential mortgage | 862 | 640 | |||||
Total foreclosed assets | 3,265 | 3,782 | |||||
Total nonperforming assets | $ | 12,096 | $ | 13,923 | |||
Nonperforming loans to gross loans | 1.5 | % | 1.8 | % | |||
Nonperforming assets to total assets | 1.6 | % | 1.7 | % | |||
Allowance coverage of nonperforming loans | 137.7 | % | 113.3 | % |
Nonaccrual Loans
Loans are moved to nonaccrual status and recognition of interest income ceases when it is probable that full collectibility of principal and interest in accordance with the terms of the loan agreement may not occur. Nonaccrual loans held for investment as a percentage of gross loans held for investment has decreased to 1.5% as of March 31, 2015 compared to 1.8% as of December 31, 2014. At March 31, 2015, there were 36 nonaccrual loans held for investment totaling $6.9 million compared to 45 loans totaling $8.3 million at December 31, 2014. The amount of interest income for the three months ended March 31, 2015 that would have been reported on loans in nonaccrual status as of March 31, 2015 totaled $110,000. The allowance for loan losses as a percentage of nonperforming loans held for investment increased to 137.7% as of March 31, 2015 compared to 113.3% as of December 31, 2014.
Foreclosed Assets
At March 31, 2015, there were 55 foreclosed properties valued at a total of $3.3 million compared to 99 foreclosed properties valued at $3.8 million as of December 31, 2014. The continued decline in foreclosed assets resulted from sales of foreclosed properties and reductions in the number of properties being added to foreclosed assets each quarter.
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Nonperforming Loans Held for Sale
As part of the Asset Resolution Plan implemented in the third quarter of 2014, the Company transferred a portion of loans held for investment to loans held for sale in anticipation of near term loan sales. As of March 31, 2015, there were $1.7 million of loans held for sale that were in nonaccrual status and therefore considered nonperforming. These loans are not included in the $6.9 million in nonaccrual loans but have been included as nonperforming assets for the period.
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Company grants a concession through a modification of the original loan agreement that would not otherwise be considered. Loans in the process of renewal or modification are reviewed by the Company to determine if the risk grade assigned is accurate based on updated information. The Company's policy with respect to accrual of interest on loans restructured in a TDR process 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 considered and the loan is considered performing. 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 and nonperforming 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.
As of March 31, 2015, there were 19 restructured loans in accrual status compared to 20 as of December 31, 2014. Regardless of whether any individual TDR is performing, all TDRs are considered to be impaired and are evaluated as such in the allowance for loan losses calculation. As of March 31, 2015, the recorded investment in performing TDRs and their related allowance for loan losses totaled $4.6 million and $532,000, respectively. Outstanding nonperforming TDRs totaled $3.6 million with no related allowance for loan losses as of March 31, 2015. The amount of interest recognized for performing TDRs during the first three months of 2015 was approximately $78,000.
As noted above, the Company transferred a portion of loans to held for sale in anticipation of near term loan sales. As of March 31, 2015, there were 15 TDRs included in the loans held for sale classification. Of these 12 or $677,000 were performing and 3 or $199,000 were in nonaccrual status and are included as nonperforming assets for the period.
The following table presents performing and nonperforming TDRs at March 31, 2015 and December 31, 2014 (amounts in thousands).
Performing TDRs: | March 31, 2015 | December 31, 2014 | |||||
Commercial construction and land development | $ | 1,326 | $ | 1,336 | |||
Commercial real estate | 2,442 | 2,469 | |||||
Residential mortgage | 835 | 950 | |||||
Consumer | 4 | 4 | |||||
Total performing TDRs | $ | 4,607 | $ | 4,759 |
Nonperforming TDRs: | March 31, 2015 | December 31, 2014 | |||||
Commercial construction and land development | $ | 2,741 | $ | 2,776 | |||
Commercial real estate | 785 | 552 | |||||
Residential mortgage | 49 | 54 | |||||
Consumer | — | 467 | |||||
Total nonperforming TDRs | $ | 3,575 | $ | 3,849 |
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Allowance for Loan Losses and Summary of 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. 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 at least a quarterly 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.
The following table summarizes the Company's loan loss experience by class for the three months ended March 31, 2015 and 2014 (amounts in thousands, except ratios).
Three Months Ended | |||||||
March 31, | |||||||
2015 | 2014 | ||||||
Balance at beginning of period | $ | 9,377 | $ | 11,590 | |||
Charge-offs: | |||||||
Commercial and industrial | 9 | 23 | |||||
Commercial construction and land development | — | 153 | |||||
Commercial real estate | 4 | 207 | |||||
Residential mortgage | 148 | 67 | |||||
Consumer | 54 | 42 | |||||
Total charge-offs | 215 | 492 | |||||
Recoveries: | |||||||
Commercial and industrial | 46 | 39 | |||||
Commercial construction and land development | 319 | 42 | |||||
Commercial real estate | 184 | 159 | |||||
Residential mortgage | 46 | 142 | |||||
Consumer | 32 | 15 | |||||
Other | 1 | 21 | |||||
Total recoveries | 628 | 418 | |||||
Net recoveries (charge-offs) | 413 | (74 | ) | ||||
Additions charged to operations | — | — | |||||
Balance at end of period | $ | 9,790 | $ | 11,516 | |||
Ratio of net charge-offs to average gross loans | — | % | 0.02 | % |
The allowance for loan losses at March 31, 2015 was $9.8 million, which represents 2.1% of total loans held for investment compared to $11.5 million or 2.4% as of March 31, 2014. For the three months ended March 31, 2015, recoveries outpaced charge-offs resulting in a net loan recovery of $413,000 compared with net charge-offs of $74,000 for the prior year period.
The allowance for loan losses on individually reviewed impaired loans totaled $667,000 as of March 31, 2015, compared to $663,000 as of December 31, 2014, a 0.6% increase. The allowance for loan losses on the loans reviewed collectively increased from $8.9 million as of December 31, 2014 to $9.2 million as of March 31, 2015 as recoveries outpaced new charge-offs during the quarter as a result of continued improvements in credit quality and the efforts taken in connection with the Asset Resolution Plan during 2014.
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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 March 31, 2015, approximately 92% 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 stabilized, however, the Company continues to thoroughly review and monitor its commercial real estate concentration and the associated allowance and sets limits by sector and region based on this internal review.
The following table summarizes the Company’s allowance for loan losses and percent of total loans at March 31, 2015, and December 31, 2014 (amounts in thousands, except ratios).
March 31, 2015 | December 31, 2014 | ||||||||||||
Amount | % of loans in each category | Amount | % of loans in each category | ||||||||||
Commercial and industrial | $ | 170 | 6 | % | $ | 119 | 6 | % | |||||
Commercial construction and land development | 5,102 | 12 | % | 5,105 | 12 | % | |||||||
Commercial real estate | 2,670 | 45 | % | 2,382 | 44 | % | |||||||
Residential construction | 412 | 6 | % | 436 | 6 | % | |||||||
Residential mortgage | 1,318 | 29 | % | 1,206 | 30 | % | |||||||
Consumer | 82 | 2 | % | 89 | 2 | % | |||||||
Other | 36 | — | % | 40 | — | % | |||||||
Total | $ | 9,790 | 100 | % | $ | 9,377 | 100 | % |
Liquidity and Capital Resources
Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources. The term "liquidity" refers to our ability to generate adequate amounts of cash to meet our needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures our liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents (net of federal requirements to maintain reserves against deposit liabilities), investment securities eligible for pledging to secure borrowings, investments available-for-sale, loan repayments, loan sales, deposits and borrowings from the FHLB secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines. In addition to interest rate sensitive deposits and anticipated funding under credit commitments to customers, the Company's primary demands for liquidity are short term demand deposits held for funding ACH transactions for the third party payment processors. These deposits declined to $86.8 million as of March 31, 2015 compared to $134.9 million as of December 31, 2014. Management is actively monitoring the changes in these deposits and the Company has access to other funding sources to replace these deposits as needed to maintain adequate liquidity.
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.
On August 15, 2014, the Company closed its shareholder rights offering and concurrent private placement standby offering pursuant to the Securities Purchase Agreement dated March 24, 2014 between the Company and Kenneth R. Lehman, a private investor. In connection with the rights offering and standby offering, the Company issued an aggregate of 24,000,000 shares of its common stock at $1.00 per share for aggregate gross proceeds of $24.0 million.
Management believes that the Company’s liquidity sources are adequate to meet its operating needs for the next eighteen months. Total shareholders’ equity was $42.4 million or 5.53% of total assets at March 31, 2015 and $40.7 million or 4.96% of total assets at December 31, 2014. 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 $19.0 million that remains unused at March 31, 2015. As of March 31, 2015, the Company has the credit capacity to borrow up to $153.4 million from the FHLB with $90.0 million outstanding.
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The Company had total risk based capital of 14.2%, Tier 1 risk based capital of 10.9%, and leverage ratio of 6.6% at March 31, 2015, as compared to 15.0%, 11.6% and 6.2%, respectively, at December 31, 2014. The Bank had total risk based capital of 14.0%, Tier 1 risk based capital of 12.7%, and leverage ratio of 7.7% at March 31, 2015, as compared to 14.7%, 13.5%, and 7.2%, respectively, at December 31, 2014. Additionally, the Company and the Bank had common equity Tier 1 capital of 8.4% and 12.7%, respectively, at March 31, 2015.
The Company is currently prohibited by the Written Agreement from paying interest on its subordinated promissory notes and on its subordinated debentures in connection with its trust preferred securities ("TPS") without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for every quarter when approval was required. The Company exercised its right to defer regularly scheduled interest payments on its outstanding TPS and as of March 31, 2015, $949,000 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.
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 our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause our 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, 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, the risks discussed in Part II, Item 1A. Risk Factors, and other considerations described in connection with specific forward-looking statements and other cautionary elements specified in the Company's periodic filings with the Commission, including without limitation, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
Any forward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date hereof and we undertake no duty to update them if our view changes later, except as required by law. These forward-looking statements should not be relied upon as representing our view as of any date subsequent to the date hereof.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 4 – CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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 were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits to the Commission under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the Commission's rules and forms.
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) that occurred during the period covered by this Quarterly Report that the Company believes have materially affected or are 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, 2014.
We are party to certain other legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.
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, 2014.
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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 | Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-201579) filed with the Commission on January 16, 2015) |
10.2 | Form of Restricted Stock Award Agreement (Management Team) (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on January 22, 2015) |
10.3 | Form of Restricted Stock Award Agreement (Executive Team) (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on January 22, 2015) |
10.4 | Amendment No. 1 to the Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on April 2, 2015) |
10.5 | Amendment No. 2 to the Employment Agreement with David H. Rupp (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on April 2, 2015) |
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 Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 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; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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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: | May 14, 2015 | By: | /s/ Ayden R. Lee, Jr. |
Ayden R. Lee, Jr. | |||
Chairman, President and | |||
Chief Executive Officer | |||
Date: | May 14, 2015 | 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 | Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-201579) filed with the Commission on January 16, 2015) |
10.2 | Form of Restricted Stock Award Agreement (Management Team) (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on January 22, 2015) |
10.3 | Form of Restricted Stock Award Agreement (Executive Team) (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on January 22, 2015) |
10.4 | Amendment No. 1 to the Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on April 2, 2015) |
10.5 | Amendment No. 2 to the Employment Agreement with David H. Rupp (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Current Report on Form 8-K filed with the Commission on April 2, 2015) |
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 Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 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; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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