UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 Identification |
incorporation or organization) | Number) |
6114 U.S. 301 South | |
Four Oaks, North Carolina | 27524 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: | (919) 963-2177 |
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Preferred Share Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO x
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:
YES x NO o
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).
YES x NO o
Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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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 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 Act): oYES xNO
$23,817,672
(Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant
based on the price at which the registrant’s Common Stock, par value $1.00 per share
was sold on June 30, 2015)
33,664,216
(Number of shares of Common Stock, par value $1.00 per share, outstanding as of March 25, 2016)
Documents Incorporated by Reference | Where Incorporated | |
(1) | Proxy Statement for the 2016 Annual Meeting of Shareholders | Part III |
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Forward-Looking Information
Information set forth in this Annual Report on Form 10-K under the caption “Business” and “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, 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 comply with the 2015 Written Agreement (the "2015 Written Agreement") we entered with the Federal Reserve Bank of Richmond (the “FRB”) on July 30, 2015, the failure of assumptions underlying the establishment of the allowance for possible loan losses, our ability to maintain an effective internal control environment, the low trading volume of our common stock and the risks discussed in Item 1A. Risk Factors below.
Any forward-looking statements contained in this Annual Report on Form 10-K 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.
PART I
Item 1 - Business
Overview
Four Oaks Bank & Trust Company (referred to herein as the “Bank”) was incorporated under the laws of the State of North Carolina in 1912. On February 5, 1997, the Bank formed Four Oaks Fincorp, Inc. (referred to herein as the “Company”; references herein to “we,” “us” and “our” refer to the Company and its consolidated subsidiaries, unless the context otherwise requires) for the purpose of serving as a holding company for the Bank. Our corporate offices and banking offices are located in eastern and central North Carolina. We have no significant assets other than cash, the capital stock of the Bank and its membership interest in Four Oaks Mortgage Services, L.L.C. (inactive), as well as $11,000 in securities available-for-sale.
In addition, we have an interest in Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing trust preferred securities. The Trust is not included in the consolidated financial statements of the Company.
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The Bank continues to remain a community-focused bank engaging in general commercial banking business to the communities we serve. The Bank provides a full range of banking services, including such services as:
Deposit Accounts | Loan Products | Wealth Management | Bank Access Services | Merchant Services | Other Services | ||||||
ü | Checking | ü | Mortgage | ü | Financial Planning Services | ü | Internet Banking | ü | Remote Deposit Capture | ü | Cashier's Checks |
ü | Savings | ü | Equity Line of Credit | ü | Wealth Management Services | ü | Telephone Banking | ü | ATM Cards | ü | Traveler's Check Cards |
ü | Free Checking & Savings Program | ü | Agriculture | ü | Investment Services | ü | Mobile Banking | ü | VISA Debit Cards | ü | Gift Cards |
ü | Money Market | ü | Commercial/ Business | ü | Individual Retirement Account (IRA) | ü | Night Depository | ü | Automated Clearing House (ACH) Origination | ü | Safe Deposit Box |
ü | Certificates of Deposit (CD) | ü | Real Estate | ü | Life Insurance | ü | Bill Pay Service | ||||
ü | Christmas Club | ü | Home Improvement | ü | Long Term Care | ü | Prepaid and Payroll Cards | ü | Wire Services | ||
ü | Overdraft Privilege | ü | Construction | ü | Annuities | ü | Free Notary Services (bank customers only) | ||||
ü | E-Statements | ü | Consumer | ü | Electronic Funds Transfer (EFT) Services | ||||||
ü | Mobile Check Capture | ü | Credit Cards |
The wealth management services listed above are made available through an arrangement with Lincoln Financial Services Corporation acting as a registered broker-dealer performing the brokerage services. The securities involved in these services are not deposits or other obligations of the Bank and are not insured by the Federal Deposit Insurance Corporation (“FDIC”).
Residential mortgages are underwritten by Four Oaks Mortgage Company, a division of Four Oaks Bank & Trust Company. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms.
Our market area is concentrated in eastern and central North Carolina. From its headquarters located in Four Oaks and its sixteen other locations, the Bank serves a major portion of Johnston County, and parts of Wake, Harnett, Duplin, Sampson, and Moore counties. In Four Oaks, the main office is located at 6144 US 301 South. The Bank also operates a branch office in Clayton at 102 East Main Street, two in Smithfield at 128 North Second Street, and 403 South Brightleaf Boulevard, one in Garner at 200 Glen Road, one in Raleigh at 1408 Garner Station Boulevard, one in Benson at 200 East Church Street, one in Fuquay-Varina at 325 North Judd Parkway Northeast, one in Wallace at 406 East Main Street, one in Holly Springs at 201 West Center Street, one in Harrells at 590 Tomahawk Highway, one in Zebulon at 805 North Arendell Avenue, and one in Dunn at 115 Four Oaks Place. The Bank additionally operates a loan production office in Southern Pines at 105 Commerce Avenue, one in Raleigh at 5909 Falls of Neuse Road, and one in Apex at 1091 Investment Boulevard.
Johnston County has a diverse economy and is not dependent on any one particular industry. The leading industries in the area include retail trade, manufacturing, pharmaceuticals, government, services, construction, wholesale trade and agriculture. The majority of the Bank’s customers are individuals and small to medium-size businesses. The deposits and loans are well diversified with no material concentration in a single industry or group of related industries. There are no seasonal factors that would have any material adverse effect on the Bank’s business, and the Bank does not rely on foreign sources of funds or income.
On March 22, 2013, the Bank sold selected deposits and assets associated with two branches located in Rockingham and Southern Pines, North Carolina. The transaction was consummated pursuant to a definitive purchase and assumption agreement with First Bank of Troy, North Carolina, which was entered into on September 26, 2012. Under the terms of the purchase and assumption agreement, First Bank assumed the selected customer deposits of both branches offset by the purchase of (i) the aggregate net book value of the real property and related tangible personal property of the Rockingham, North Carolina branch as well as the cash on hand at the Rockingham and Southern Pines, North Carolina branches, (ii) the aggregate of certain loans for both branches, and (iii) a 1% premium of the deposits assumed.
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On March 24, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Kenneth R. Lehman (the “Standby Investor”) and, on June 18, 2014, the Company commenced its previously announced rights offering (the “Rights Offering”). On August 15, 2014, the Company concluded the Rights Offering and concurrent standby offering to the Standby Investor (the “Standby Offering”), in which the Company issued an aggregate of 24,000,000 shares of common stock at $1.00 per share for aggregate gross proceeds of $24.0 million (the maximum permissible pursuant to the terms of the Rights Offering and Standby Offering). During the third quarter of 2014, the Company identified problem assets and began the disposition process under the asset resolution plan (the "Asset Resolution Plan"), as required by the Securities Purchase Agreement. The Asset Resolution Plan was completed in the fourth quarter of 2015.
The following table sets forth certain of our financial data and ratios for the years ended December 31, 2015 and 2014 derived from our audited financial statements and notes. This information should be read in conjunction with and is qualified in its entirety by reference to the more detailed audited financial statements and notes thereto included in this report:
2015 | 2014 | |||||||
(in thousands, except ratios) | ||||||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) | |||
Average equity capital accounts | $ | 51,830 | $ | 31,990 | ||||
Ratio of net income (loss) to average equity capital accounts | 38.6 | % | (13.1 | )% | ||||
Average daily total deposits | $ | 570,759 | $ | 659,905 | ||||
Ratio of net income (loss) to average daily total deposits | 3.5 | % | (0.6 | )% | ||||
Average daily loans | $ | 458,679 | $ | 474,327 | ||||
Ratio of average daily loans to average daily total deposits | 80.4 | % | 71.9 | % |
Employees
At December 31, 2015, we employed 179 full time employees and 6 part time employees. Our employees are extremely important to our continued success and the Bank considers its relationship with its employees to be good. Management continually seeks ways to improve upon their benefits and well being.
Competition
Commercial banking in North Carolina is extremely competitive due in large part to North Carolina’s early adoption of statewide branching. As a result, many commercial banks have branches located in several communities. The Bank competes in its market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions. At June 2015, we operated branches in Johnston, Wake, Sampson, Duplin, and Harnett counties, North Carolina. At that time in Johnston County, North Carolina, the Bank’s primary market, there were a total of 38 branches represented by 12 FDIC insured financial institutions. The Bank ranked second among the 12 banks with approximately $331 million or 23% of the Johnston County deposit market share. Many of the Bank’s competitors have broader geographic markets and higher lending limits than those of the Bank and are also able to provide more services and make greater use of media advertising. Therefore, in our market area, the Bank has significant competition for deposits and loans from other depository institutions. Other financial institutions such as credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit with varying degrees of regulatory restrictions also compete in our market area. Additionally, credit unions have been permitted to expand their membership criteria and expand their loan services to include traditional bank services such as commercial lending creating a greater competitive disadvantage for tax-paying financial institutions.
The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of the Bank’s competitors. See “Holding Company Regulation” below for a description of this legislation. In addition, as a result of interstate banking, out-of-state commercial banks may acquire North Carolina banks and heighten the competition among banks in North Carolina.
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Although the competition in its market areas is expected to continue to be significant, the Bank believes that it has certain competitive advantages that distinguish it from its competition such as: a strong local brand, its affiliation with the community, and its emphasis on providing specialized services to small and medium-sized businesses as well as professional and upper-income individuals. The Bank offers its customers modern, high-tech banking without forsaking community values such as prompt, friendly, and personalized service. Being responsive and sensitive to individualized needs helps the Bank to attract and retain customers. To continue attracting new customers, the Bank also relies on goodwill and referrals from our shareholders and satisfied customers, as well as traditional media. To enhance a positive image in the community and support one of the Bank's values, we participate in many local events, and our officers and directors serve on boards of local civic and charitable organizations.
Supervision and Regulation
Holding companies, banks and many of their non-bank affiliates are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting us and the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and are not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company or Bank. Supervision, regulation and examination of the Company and the Bank by bank regulatory agencies is intended primarily for the protection of the Bank’s depositors rather than the Company’s shareholders.
Holding Company Regulation
Overview
Four Oaks Fincorp, Inc. is a holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956 (the “BHCA”). As such, we are subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The Bank is also subject to the BHCA. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the bank holding company, (iii) acquiring all or substantially all of the assets of any bank or (iv) merging or consolidating with any other bank holding company.
The BHCA generally prohibits a bank holding company, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. For example, banking, operating a thrift institution, extending credit or servicing loans, leasing real or personal property, providing securities brokerage services, providing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities.
Pursuant to delegated authority, the FRB has authority to approve certain activities of holding companies within its district, including us, provided the nature of the activity has been approved by the Federal Reserve. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it believes that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.
Effective December 2, 2009, we elected to become a bank holding company, and therefore we are not subject to the financial holding company regulatory framework under the Gramm-Leach-Bliley Act (“GLBA”). However, the additional customer privacy protections introduced by the GLBA do apply to us and the Bank. The GLBA’s privacy provisions require financial institutions to, among other things: (i) establish and annually disclose a privacy policy, (ii) give consumers the right to opt out of disclosures to nonaffiliated third parties, with certain exceptions, (iii) refuse to disclose consumer account information to third-party marketers and (iv) follow regulatory standards to protect the security and confidentiality of consumer information.
Pursuant to the GLBA’s rulemaking provisions, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, and the Office of Thrift Supervision adopted regulations, establishing standards for safeguarding customer information. Such regulations provide financial institutions guidance in establishing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information.
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Mergers and Acquisitions
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “IBBEA”) permits interstate acquisitions of banks and bank holding companies without geographic limitation, subject to any state requirement that the bank has been organized for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the U.S. and no more than 30% of such deposits in any state (or such lesser or greater amount set by state law).
In addition, the IBBEA permits a bank to merge with a bank in another state as long as neither of the states has opted out of the IBBEA prior to May 31, 1997. In 1995, the State of North Carolina “opted in” to such legislation. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo interstate branching. As a result of North Carolina having opted-in, unrestricted interstate de novo branching is permitted in North Carolina.
Additional Restrictions and Oversight
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie-in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding company or any of its other subsidiaries.
The Federal Reserve may issue cease and desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve also regulates certain debt obligations, changes in control of bank holding companies and capital requirements.
Under the provisions of North Carolina law, we are registered with and subject to supervision by the North Carolina Office of the Commissioner of Banks (the "NCCOB").
Dodd-Frank Act
On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and impacts all financial institutions including our holding company and the Bank. The Dodd-Frank Act contains significant regulatory and compliance changes, including, among other things.
• | enhanced authority over troubled and failing banks and their holding companies; |
• | increased capital and liquidity requirements; |
• | increased regulatory examination fees; and |
• | specific provisions designed to improve supervision and safety and soundness by imposing restrictions and limitations on the scope and type of banking and financial activities. |
In addition, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system that will be enforced by new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of Comptroller of the Currency, the FDIC, and the Consumer Financial Protection Bureau (the "CFPB"). The Dodd-Frank Act requires the various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act are not yet known and may not be known for many months or years. However, a few changes pursuant to the Dodd-Frank Act that may have an impact on us include, but are not limited to,
• | elimination of the federal law prohibition on the payment of interest on commercial demand deposit accounts; |
• | expansion of the assessment base for determining deposit insurance premiums to include liabilities other than just deposits; |
• | new regulations regarding debit card fees; |
• | heightened capital standards; |
• | increased requirements and limitations with respect to transactions with affiliates and insiders; and |
• | enhanced corporate governance and executive compensation requirements. |
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Consumer Financial Protection Bureau
The Dodd-Frank Act creates the CFPB, a new, independent federal agency that is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
Source of Strength Requirements
Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources, and, if the Bank becomes undercapitalized, the Company may be required to guarantee the Bank’s compliance with capital restoration plans filed with their bank regulators, subject to certain limits.
Ability-to-Repay and Qualified Mortgage Rule
Pursuant to the Dodd-Frank Act, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring creditors to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Creditors are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the creditor to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the creditor can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are “higher-priced” (e.g., subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g., prime loans) are given a safe harbor of compliance.
Bank Regulation
Overview
The Bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the NCCOB and the Federal Reserve. The Federal Reserve and the NCCOB regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations, and other similar corporate actions, and to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The Federal Reserve and the NCCOB regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, issuances of securities, capital adequacy, loss reserves, and compliance with the Community Reinvestment Act of 1977 (the “CRA”), as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are also subject to state usury laws and certain federal laws concerning interest rates.
Insurance Assessments
The deposit accounts of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to a maximum of $250,000 per insured depositor. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies, and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.
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The Bank is subject to insurance assessments imposed by the FDIC. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 and further amended by the Dodd-Frank Act.
Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. The FDIC's assessment rate calculator is based on a number of elements to measure the risk each institution poses to the DIF, and the assessment rate is applied to average consolidated total assets minus average tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act also changed the minimum designated reserve ratio of the DIF, requiring the fund reserve ratio to reach 1.35% by September 30, 2020 (rather than 1.15% by the end of 2016).
USA Patriot Act of 2001
The USA Patriot Act of 2001 is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat money laundering and terrorist financing. Title III of the USA Patriot Act of 2001 contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFA”). The anti-money laundering provisions of IMLAFA impose affirmative obligations on a broad range of financial institutions, including banks, brokers, and dealers. Among other requirements, IMLAFA requires all financial institutions to establish anti-money laundering programs that include, at minimum, internal policies, procedures, and controls; specific designation of an anti-money laundering compliance officer; ongoing employee training programs; and an independent audit function to test the anti-money laundering program. IMLAFA requires financial institutions that establish, maintain, administer, or manage private banking accounts for non-United States persons or their representatives to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. Additionally, IMLAFA provides for the Department of Treasury to issue minimum standards with respect to customer identification at the time new accounts are opened. As of the date of this filing, we believe that IMLAFA has not had a material impact on the Bank’s operations. The Bank has established policies and procedures to ensure compliance with the IMLAFA, which are overseen by an Anti-Money Laundering Officer who was appointed by our Board of Directors.
Community Reinvestment Act
Banks are also subject to the CRA, which requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. Each institution is assigned one of the following four ratings of its record in meeting community credit needs: “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The regulatory agency's assessment of a bank's record is made available to the public and our most recent examination returned a rating of satisfactory. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.
In addition, the GLBA’s “CRA Sunshine Requirements” call for financial institutions to disclose publicly certain written agreements made in fulfillment of the CRA. Banks that are parties to such agreements also must report to federal regulators the amount and use of any funds expended under such agreements on an annual basis, along with such other information as regulators may require. This annual reporting requirement is effective for any agreements made after May 12, 2000.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for, among other things, (i) publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.
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A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. Institutions that fail to comply with capital or other standards are restricted in the scope of permissible activities and are subject to enforcement action by the federal banking agencies.
Written Agreement
In late May 2011, the Company and the Bank entered into a Written Agreement (the "2011 Written Agreement") with the FRB and the NCCOB. Working closely with its regulatory partners, the Company demonstrated substantial business and risk management progress and was deemed in compliance with the 2011 Written Agreement. The Company's 2014 capital raise, continued asset quality improvements, and implementation of the Asset Resolution Plan were critical to the Bank's ability to demonstrate the required compliance. As a result, on July 30, 2015, the 2011 Written Agreement was terminated by the FRB and the NCCOB. In connection with the termination of the 2011 Written Agreement, the Bank entered into the 2015 Written Agreement with only the FRB, which is unrelated to the Bank’s financial condition. Under the terms of the 2015 Written Agreement, the Bank submitted the following plans for approval:
•a written plan to assure ongoing board oversight of the Bank's management and operations;
•a written program for the review of new products, services, or business lines; and
• | an enhanced written program for conducting appropriate levels of customer due diligence by the Bank. |
In addition, the Bank agreed that it will:
• | within ten days of approval by the FRB, adopt the approved programs specified in the second and third bullets, above; and |
• | within 30 days after the end of each calendar quarter following the date of the 2015 Written Agreement, submit to FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2015 Written Agreement and the results thereof. |
The Bank has implemented the plans described above. The Bank continues to make progress in improving each of these areas and believes that it will be able to demonstrate full compliance with this agreement in the future.
Consumer Laws and Regulations
The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Fair Housing Act and the Servicemembers Civil Relief Act. The laws and related regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
Transactions with Affiliates
Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with such bank. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.
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Loans to Directors, Executive Officers and Principal Shareholders
State member banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and Regulation O on loans to executive officers, directors and principal shareholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% shareholder of a bank and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% shareholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal shareholders generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.
Banks are also subject to the requirements and restrictions of Regulation O on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the BHCA prohibits extensions of credit to executive officers, directors, and greater than 10% shareholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.
Capital Requirements
The Federal Reserve has established risk-based capital guidelines for bank holding companies and state member banks. The minimum standard for the ratio of capital to risk-weighted assets (including certain off balance sheet obligations, such as standby letters of credit) is 8%. At least half of this capital must consist of common equity, retained earnings and a limited amount of perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill items and certain other items (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of mandatory convertible debt securities and a limited amount of other preferred stock, subordinated debt and loan loss reserves.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts (“Leverage Ratio”) equal to 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of between 4% and 5%.
The guidelines also provide that bank holding companies experiencing significant growth, whether through internal expansion or acquisitions, will be expected to maintain strong capital ratios well above the minimum supervisory levels without significant reliance on intangible assets. The same heightened requirements apply to bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as to other banking institutions if warranted by particular circumstances or the institution's risk profile. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised us of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to us.
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In early July 2013, the Federal Reserve approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision (“Basel III”) and address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Basel III and the regulations of the federal banking agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards. These new minimum capital requirements, which became effective for the Company and the Bank on January 1, 2015, require a common equity Tier 1 risk-adjusted, Tier 1 risk-adjusted, total regulatory capital and leverage ratio of 4.5%, 6.0%, 8.0%, and 4.0%, respectively. The new capital standards also revise the definitions and components of regulatory capital and include other requirements that phase in over time. One of these requirements includes the implementation of a capital conservation buffer which will require banks to hold an additional 2.5% above the minimum capital thresholds or limitations will be placed on dividends, distributions, and executive compensation. The buffer will be phased in beginning at 0.625% as of January 1, 2016, increasing each year and reaching the target 2.5% on January 1, 2019. We expect these changes to have little impact on the Company and Bank.
As of December 31, 2015, the Company had common equity Tier 1 risk-adjusted, Tier 1 risk-adjusted, total regulatory capital and Tier 1 leverage capital of approximately 11.3%, 12.4%, 16.0% and 8.8%, respectively. At December 31, 2015, the Bank had common equity Tier 1 risk-adjusted, Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 14.4%, 14.4%, 15.6% and 10.2%, respectively, of which all are materially greater than the minimum requirements to be considered well capitalized.
Dividends
Under the North Carolina Business Corporation Act (the "NCBCA"), the Bank may not pay a dividend or distribution, if after giving it, the effect would be that the Bank would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than its liabilities. North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. The Federal Reserve also imposes limits on the Bank's payment of dividends. All dividends paid by the Bank are paid to the Company, the sole shareholder of the Bank. The amount of future dividends paid by the Bank will be determined based on a number of factors including capital position and capital adequacy, ongoing operations and profitability, the risk profile of the institution and general market conditions.
During 2015, we paid no cash dividends on our common stock. In general, our ability to pay cash dividends is dependent in part upon the amount of dividends paid to us by the Bank. No dividends were paid to us by the Bank during 2015. In the past, we have received cash dividends from the Bank and may continue to do so from time to time in the future as necessary for cash flow purposes. Also, applicable federal banking law contains additional limitations and restrictions on the payment of dividends by a bank holding company. Accordingly, shareholders receive dividends from us only to the extent that funds are available from our operations or the Bank. In addition, the Federal Reserve generally prohibits bank holding companies from paying dividends unless the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.
Monetary Policy and Economic Controls
Both the Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve Board, whose actions directly affect the money supply which, in turn, affects banks’ lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve Board regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.
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Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers:
Name | Age | Year first employed | Positions and Offices with our Company & Business Experience During Past Five (5) Years |
David H. Rupp | 52 | 2014 | Director, Chief Executive Officer and President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company. Mr. Rupp became the President of the Company and the Bank in March 2015 and Chief Executive Officer in July 2015 after serving as Executive Vice President from September 2014 to March 2015 and Chief Operating Officer from September 2014 to July 2015. Mr. Rupp joined the Company and the Bank as Senior Vice President, Strategic Project Manager in June 2014. Prior to joining the Company and the Bank, he most recently served as Retail Banking and Mortgage President of VantageSouth Bank from 2012 to 2014. From 2009 to 2011, Mr. Rupp served as Chief Executive Officer of Greystone Bank and, from 2008 to 2009, he served as Senior Executive Vice President of Regions Financial Corporation. Prior to his employment with Regions Financial Corporation, Mr. Rupp held various positions at Bank of America and First Union Corporation. |
Deanna W. Hart | 38 | 2003 | Executive Vice President, Chief Financial Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company. Ms. Hart was appointed to her current position in September 2015. Prior to her appointment as Chief Financial Officer, Ms. Hart served as the Bank’s Senior Vice President and Controller since January 2014 and as acting CFO for the Company and the Bank beginning in September 2015. Prior to that, Ms. Hart served as the Bank’s Senior Vice President and Director of Internal Audit starting in January 2010. From 2005 to 2010, Ms. Hart served as Vice President and Senior Auditor and previously served as Assistant Vice President and Staff Auditor from 2003 to 2005. |
Jeff D. Pope | 59 | 1991 | Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Banking Officer of Four Oaks Bank & Trust Company. Mr. Pope has been an Executive Vice President of the Company and Chief Banking Officer of the Bank since January 2009. From 2005 until January 2009, he served as Executive Vice President and Branch Administrator, and from 2000 until 2005, he served as Senior Vice President and Regional Executive. |
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Lisa S. Herring | 40 | 2002 | Executive Vice President, Chief Operating Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company and Chief Risk Officer of the Bank. Ms. Herring was named Chief Operating Officer of the Company and the Bank in December 2015. Ms. Herring has been an Executive Vice President of the Company and Chief Risk Officer of the Bank since July 2009. From 2005 until July 2009, Ms. Herring served as the Bank’s Senior Vice President and General Auditor. From 2002 until 2005, Ms. Herring served as the Bank’s Vice President and General Auditor. |
Warren D. Herring, Jr. | 46 | 2015 | Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Credit Officer of Four Oaks Bank & Trust Company. Mr. Herring joined the Company and the Bank in March 2015, initially serving as Chief Credit Officer on an acting basis until May 2015. Prior to joining the Company and the Bank, he most recently served as Chief Credit Officer and Executive Vice President of Premier Commercial Bank from August 2010 until March 2015. From 2008 until 2010, Mr. Herring served as Senior Credit Administration Manager of CommunityOne Bank and, from 2007 to 2008, he served as Senior Regional Risk Manager of RBC Bank. Prior to his employment with RBC Bank, Mr. Herring held positions at First National Bank and Trust Company and Central Carolina Bank. |
Available Information
We maintain a website at www.fouroaksbank.com where our periodic reports on Form 10-Q and 10-K and our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available under “Investor Relations.” We are registered as a bank holding company with the Federal Reserve System. Additionally, we are a state-chartered member of the Federal Reserve System and the FDIC insures the Bank’s deposits up to applicable limits. Our corporate offices are located at 6114 US 301 South, Four Oaks, North Carolina, 27524. Our common stock is traded on the OTC Market's OTCQX tier (the "OTCQX") under the symbol “FOFN”.
Item 1A. Risk Factors
Risk Related to Our Business
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations.
Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. We are subject to regulations of the FRB, the FDIC, and the CFPB. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Changes to statutes, regulations, or regulatory policies, including interpretation and implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the extent to which legislation will be enacted or the extent we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes or scrutiny could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations, and other institutions.
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We are also subject to the accounting rules and regulations of the Securities and Exchange Commission (the "SEC") and the Financial Accounting Standards Board (the "FASB"). Changes in accounting rules could materially adversely affect our reported financial statements or our results of operations and may also require extraordinary efforts or additional costs to implement. Any of these laws or regulations may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us.
We are subject to examination and scrutiny by a number of regulatory authorities, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations, or financial position pursuant to the terms of formal or informal regulatory orders, including the 2015 Written Agreement with the FRB.
We are subject to examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions, and requirements on us if they identify violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, cease and desist orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings.
In July 2015, the Bank entered into the 2015 Written Agreement with the FRB. The 2015 Written Agreement requires the Bank to take certain actions, including developing and submitting for approval a written plan to assure ongoing board oversight of the Bank's management and operations; a written program for the review of new products, services, or business lines acceptable to the FRB; and an enhanced written program for conducting appropriate levels of customer due diligence by the Bank acceptable to the FRB.
The Bank has made progress in complying with the terms of the 2015 Written Agreement and expects to increase its compliance over the upcoming periods. However, there can be no assurance that the terms and conditions of the 2015 Written Agreement will be fully and completely met or that the impact or effect of such terms and conditions will not have a material adverse effect on our financial condition, results of operations and future prospects. A material failure to comply with the terms of the 2015 Written Agreement could subject the Bank, and subsequently the Company, to additional regulatory actions and further restrictions on our business. The Bank cannot determine whether or when the 2015 Written Agreement will be terminated. Even if the 2015 Written Agreement is terminated, in whole or in part, the Bank or Company could be subject to supervisory enforcement actions that restrict our activities.
Pending or future litigation could adversely affect our financial condition, results of operations and cash flows.
We are from time to time party to various legal actions in the course of our business and an adverse outcome in such litigation could adversely affect our business, financial condition and results of operations. Refer to Part I, Item 3, Legal Proceedings, of this Annual Report on Form 10-K for further information regarding our litigation.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that we can prevent any such failures, interruptions or security breaches or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
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We are exposed to risks in connection with the loans we make, and may not be able to prevent unexpected losses which could adversely impact our results of operations.
A significant source of risk for us arises from the possibility that loan losses will be sustained because borrowers, guarantors, and related parties fail to perform in accordance with the terms of their loans. Our policy dictates that we maintain an allowance for loan losses. The amount of the allowance is based on management’s evaluation of our loan portfolio, the financial condition of the borrowers, current economic conditions, past and expected loan loss experience, and other factors management deems appropriate. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations.
With most of our loans concentrated in the central region of North Carolina, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. In addition to the financial strength and cash flow characteristics of the borrower in each case, the Bank often secures loans with real estate collateral. If the value of real estate in our core market areas were to decline materially, a significant portion of our loan portfolio could become under collateralized, which could have a material adverse effect on us. At December 31, 2015, approximately 92% of the Bank's loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.
Our loan portfolio consists primarily of loans secured by residential and commercial real estate.
We are subject to risk with respect to our residential and commercial real estate loan portfolios, both of which represent a large percentage of our total loan portfolio. As of December 31, 2015, we had $128.4 million or 28% of the portfolio in residential mortgage loans and $295.9 million or 64% in commercial real estate loans, including acquisition, development, and construction loans.
We originate fixed and adjustable rate loans secured by one- to four-family residential real estate. The residential loans in our loan portfolio are sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Residential loans with high combined loan-to-value ratios generally are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which could in turn adversely affect our financial condition and results of operations.
We extend real estate land loans, construction loans, and acquisition and development loans to builders and developers, primarily for the construction/development of properties. We originate these loans on a presold and speculative basis and they include loans for both residential and commercial purposes. At December 31, 2015, our loan portfolio was comprised of $87.1 million of acquisition, development, and construction loans which totaled 19% of total loans and $3.9 million or 46% of our nonperforming assets at December 31, 2015.
In general, construction and land lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor, or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. Construction and land acquisition and development loans often involve the repayment dependent, in part, on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring. In addition, speculative construction loans to residential builders are often associated with homes that are not presold, and thus pose a greater potential risk than construction loans to individuals on their personal residences. At December 31, 2015, $29.4 million or 80% of our residential construction loans were for speculative construction loans.
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We also originate owner and non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, from the business which occupies the property which may be adversely affected by changes in the economy or local market conditions. Commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with other segments in the loan portfolio. As of December 31, 2015, our owner occupied commercial real estate loans totaled $84.1 million or 18% of our total loan portfolio and non-owner occupied commercial real estate loans, excluding acquisition, development, and construction loans, totaled $124.6 million, or 27%.
Our allowance for probable loan losses may be insufficient.
We maintain an allowance for probable loan losses, which is a reserve established through a provision for probable loan losses charged to expense. This allowance represents management’s best estimate of probable losses based on those that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality and trends; present economic, political, and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for probable loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates and assumptions regarding current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the allowance for probable loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for probable loan losses; we will need additional provisions to increase the allowance for probable loan losses. Any increases in the allowance for probable loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes A and D to our consolidated financial statements presented under Item 8 of Part II of this Form 10-K, for further discussion related to our process for determining the appropriate level of the allowance for probable loan losses.
We are subject to interest rate risk.
Like most financial institutions, our most significant market risk exposure is the risk of economic loss resulting from adverse changes in market prices and interest rates. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations.
Our profitability may be impacted by the economic conditions of our principal operating regions.
The majority of our customers are individuals and small to medium-size businesses located in North Carolina’s Johnston, Wake, Duplin, Sampson, Harnett, and Moore counties and surrounding areas. As a result of this geographic concentration, our results may correlate to the economic conditions in these areas. Declines in these markets’ economic conditions may adversely affect the quality of our loan portfolio and the demand for our products and services, and accordingly, our results of operations.
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Inadequate resources to make technological improvements may impact our business.
The banking industry undergoes frequent technological changes with introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement these new products and services or be successful in marketing these products and services to our customers. Additionally, the implementation of changes and maintenance to current systems may cause service interruptions, transaction processing errors and system conversion delays. Failure to successfully keep pace with technological change affecting the banking industry while avoiding interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.
We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. We generally outsource a portion of these modifications and improvements to third parties and they may experience errors or disruptions that could adversely impact us and over which we may have limited control. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into our existing businesses.
We may not be able to realize the remaining benefit of our deferred tax assets.
As of December 31, 2015 and December 31, 2014, we had a deferred tax asset of $20.7 million and $23.4 million, a valuation allowance of $3.8 million and $22.0 million, and a deferred tax liability of $263,000 and $1.4 million, respectively. A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of the total deferred tax asset will not be realized.
During the second quarter of 2015, the Company determined that it is more likely than not that sufficient taxable income will be generated to realize a significant portion of its deferred tax assets, warranting a partial release of the valuation allowance. As a result, the Company recognized a $16.6 million income tax benefit, which positively impacted earnings and increased capital for the Bank and the Company. Future evidence may show that it is more likely than not that the remaining deferred tax assets will be realized, at which point the remaining valuation allowance can be reversed. Alternatively, future evidence may prove that it is more likely than not that a portion of the deferred tax assets will not be realized, in which case a valuation allowance may be reestablished.
We believe that, subject to certain limitations including federal tax laws relating to “ownership changes,” should we continue to maintain profitability and project future profits while remaining well capitalized, then we would be able to reverse some or all of the remaining deferred tax asset valuation allowance. Even if we are able to reverse additional amounts of the deferred tax asset valuation allowance, however, the portion of a deferred tax asset that may be included in Tier 1 Capital for regulatory capital purposes is limited within the regulatory capital rules.
We structured the Rights Offering to avoid an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Following the closing of the Rights Offering, the Board of Directors approved a rights plan designed to preserve the ability to fully utilize our net operating loss carryforwards by deterring any person from acquiring our common stock without approval of the Board of Directors if such acquisition would result in a shareholder owning 4.9% or more of our then outstanding common stock, which rights plan was subsequent ratified by our shareholders. Additionally, our shareholders approved an amendment to our articles of incorporation to include ownership limitations that help preserve the ability to fully utilize our net operating loss carryforwards. Together, these two changes help prevent an ownership change that could substantially reduce or eliminate the significant long-term benefits our net operating loss carryforwards might provide. However, it is important to note that even with the amendment to our articles of incorporation and the adoption of the rights plan, neither measure offers a complete solution and an ownership change could still occur, which would significantly limit the amount of the net operating loss carryforwards that we might otherwise be able to utilize.
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The Consent Order with the Department of Justice could adversely affect us.
On May 20, 2013, the U. S. Department of Justice (the "DOJ") issued a subpoena to the Bank requiring the production of documents in connection with an investigation of consumer fraud related to third party payment processing. In connection with this investigation, the Bank negotiated a civil settlement with the DOJ (the "Consent Order"), which was filed with the United States District Court for the Eastern District of North Carolina (the “District Court”) on January 8, 2014. The Consent Order was filed contemporaneously with the filing of a complaint by the DOJ alleging violation of a variety of laws, including money laundering laws. The Consent Order was approved by the District Court on April 26, 2014. As part of the terms of the Consent Order, the Bank agreed to pay a civil monetary penalty in the amount of $1 million, plus a civil forfeiture in the amount of $200,000 and terminated its relationship with a certain third party payment processor (“TPPP”) and ceased providing bank accounts and banking services to such TPPP’s client originators. The Company has maintained compliance with the terms of the Consent Order since entering into it in March 2014. We expect that we will remain in compliance going forward; however, should we fail to remain in compliance, a material failure to comply with the terms of the Consent Order could subject us to additional enforcement action and further restrictions on our business.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
In early July 2013, the Federal Reserve approved a final rule that implements Basel III’s integrated regulatory capital framework. The Basel III capital rule substantially revises the risk-based capital requirements applicable to bank holding companies as well as depository institutions, including the Company and the Bank, compared to the previous U.S. risk-based capital rules. The Basel III capital rule defines the components of capital and addresses other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III capital rule also addresses risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaces the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee on Banking Supervision, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee on Banking Supervision’s 2004 Basel II capital accords. The Basel III capital rule also implements the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III capital rule became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period). Although the implementation of Basel III, once fully phased in, is not expected to have a material impact on the capital ratios of the Company and the Bank, any future changes to capital requirements may have such an effect.
We may be subject to environmental liability associated with our lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
We may not be able to effectively compete with larger financial institutions for business.
Commercial banking in North Carolina is extremely competitive due in large part to North Carolina’s early adoption of statewide branching. The Bank competes in the North Carolina market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of these competitors have broader geographic markets, higher lending limits, more services, and more media advertising. We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition.
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Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that historically would have been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
We may not be able to attract and retain skilled people and the lack of sufficient talent could adversely impact our operations.
Our success depends in part on our ability to retain key executives and to attract and retain additional qualified management personnel who have experience both in sophisticated banking matters and in operating a small to mid-size bank. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require. Consequently the loss of one or more members of our executive management team may have a material adverse effect on our operations. We expect to compete effectively in this area by offering competitive financial packages that include incentive-based compensation.
Risk Related to Our Common Stock
An investment in our common stock is not an insured deposit, and as with any stock, inherent market risk may cause you to lose some or all of your investment.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
Our common stock is thinly traded.
Our common stock is traded on the OTCQX. There can be no assurance, however, that an active trading market for our common stock will develop or be sustained in the future. Our common stock is thinly traded and has substantially less liquidity than the average trading market for many other publicly traded companies. Thinly traded stocks can be more volatile than stock trading in an active public market. Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to changes in analysts’ recommendations or projections, our announcement of developments related to our business, operations, and stock performance of other companies deemed to be peers, news reports of trends, concerns, irrational exuberance on the part of investors and other issues related to the financial services industry. Over the past several years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations that have not necessarily been related to operating performance. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Therefore, our shareholders may not be able to sell their shares at the volume, prices, or times that they desire.
A single shareholder owns over 47% of the outstanding shares of the Company.
A single shareholder, Kenneth R. Lehman, owns over 47% of the outstanding shares of the Company. In addition, Mr. Lehman currently serves on the Company's Board of Directors. Because of the percentage of our common stock held by Mr. Lehman, he may be able to influence the outcome of any matter submitted to a vote of our shareholders and his interests may not align precisely with the interests of the other holders of our common stock.
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Our ability to pay dividends and interest on our outstanding securities may be limited.
Our ability to pay cash dividends on our common stock may be limited by regulatory restrictions, by the Bank's ability to pay cash dividends to the Company, and by our need to maintain sufficient capital to support our operations. We have not paid any cash dividends on our common stock since we suspended dividends in the fourth quarter of 2010. As a bank holding company, our ability to declare and pay dividends depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. A decision to pay any dividend in the future would be determined based on a number of factors including, but not limited to, capital position and capital adequacy, ongoing operations and profitability, the risk profile of the institution and general market conditions, among other things. Holders of our common stock are entitled to receive dividends only when and if declared by the Board of Directors. No assurance can be given, therefore, that cash dividends on our common stock will be paid in the future.
In addition, our subordinated debentures and subordinated promissory notes are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures (and the related trust preferred securities) and subordinated promissory notes before any dividends can be paid on our common stock and, in the event of bankruptcy, dissolution, or liquidation, the holders of the debentures and promissory notes must be satisfied before any distributions can be made to the holders of common stock. Pursuant to the terms of the indenture governing the subordinated debentures, we may not pay any cash dividends on our common stock until we are current on interest payments on such subordinated debentures.
Item 1B – Unresolved Staff Comments.
Not applicable.
Item 2 - Properties.
The Bank owns its main office, which is located at 6144 US 301 South, Four Oaks, North Carolina. The main office, which was constructed by the Bank in 1985, is a 12,000 square foot facility on 1.64 acres of land. The Bank owns a 5,000 square foot facility renovated in 1992 on 1.15 acres of land located at 5987 US 301 South, Four Oaks, North Carolina, which houses its training center. The Bank also owns a 15,000 square foot facility built in 2000 located at 6114 US 301 South, Four Oaks, North Carolina, which houses its administrative offices, data operations, loan operations, and wide area network central link. In addition, the Bank owns the following:
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Properties Owned | |||||||
Location | Year Built/Acquired | Present Function | Square Feet | ||||
102 East Main Street Clayton, North Carolina | 1986 | Branch Office | 4,900 | ||||
200 East Church Street Benson, North Carolina | 1987 | Branch Office | 2,300 | ||||
128 North Second Street Smithfield, North Carolina | 1991 | Branch Office | 5,500 | ||||
403 South Brightleaf Boulevard Smithfield, North Carolina | 1995 | Limited-Service Facility | 860 | ||||
200 Glen Road Garner, North Carolina | 1996 | Branch Office | 3,500 | ||||
325 North Judd Parkway Northeast Fuquay-Varina, North Carolina | 2002 | Branch Office | 8,900 | ||||
406 East Main Street Wallace, North Carolina | 2006 | Branch Office | 9,300 | ||||
805 N. Arendell Avenue Zebulon, North Carolina | 2007 | Branch Office | 6,100 | ||||
105 Commerce Avenue Southern Pines, North Carolina | 2005 | Loan Production Office | 4,100 | ||||
115 Four Oaks Place Dunn, North Carolina | 2016 | Branch Office | 3,994 |
On March 21, 2013, the Bank renewed the lease on the Holly Springs branch office located at 201 West Center Street, Holly Springs, North Carolina for a five year term. Under the terms of the lease, the Bank pays $3,073 per month for the period beginning April 1, 2015 through March 31, 2016 with an annual rate increase of 3.0%. The Bank’s Harrells office located at 590 Tomahawk Highway, Harrells, North Carolina is under a lease with terms specifying the Bank will pay $600 each month for periods of one year duration until the lease is terminated by one of the parties. In addition, the Bank has a ten year lease which commenced on June 12, 2006, on our former Sanford office located at 830 Spring Lane, Sanford, North Carolina, which was closed in May 2012, however, the facility is still under a lease contract. Under the terms of the lease, the Bank will pay $8,717 each month with an annual rate increase not to exceed 2.5% over a 10 year period. On October 30, 2015, the Bank renewed the lease on the Dunn office located at 604-A Erwin Road, Dunn, North Carolina for a one year term. Under the terms of the lease, the Bank will pay $1,600 each month for the period beginning September 1, 2015 and ending August 31, 2016. At the time of the renewal the Bank was building a permanent branch location and has since moved into the new office located at 115 Four Oaks Place, Dunn, North Carolina. The Bank also has a lease on the building at 1408 Garner Station Boulevard, Raleigh, North Carolina which expires on June 30, 2022. The Bank pays $13,607 each month from June 2015 until May 2016, with a 3.0% increase each consecutive year thereafter, until expiration on June 30, 2022. On September 30, 2014, the Bank entered into a three year lease on its Raleigh loan production office located at 5909 Falls of the Neuse Road, Raleigh, North Carolina. Under the terms of the lease, the Bank will pay $2,000 each month for the period beginning November 1, 2014 and ending October 31, 2017. The Bank has a two year lease which went into effect on May 1, 2015, on its Apex loan production office located at 1091 Investment Boulevard, Apex, North Carolina. Under the terms of the lease, the Bank pays $1,750 each month for the period beginning May 1, 2015 through April 30, 2016 with an annual rate increase of 3.0%. Following is a summary of leased properties.
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Properties Leased | ||
Location | Present Function | |
201 West Center Street Holly Springs, North Carolina | Branch Office | |
590 Tomahawk Highway Harrells, North Carolina | Branch Office | |
830 Spring Lane Sanford, North Carolina | Vacant | |
604-A Erwin Road Dunn, North Carolina | Vacant | |
1408 Garner Station Boulevard Raleigh, North Carolina | Branch Office | |
5909 Falls of Neuse Raleigh, North Carolina | Loan Production Office | |
1091 Investment Boulevard Apex, North Carolina | Loan Production Office |
Management believes each of the properties referenced above are adequately covered by insurance. The net book value for our properties, including land, buildings, and furniture and equipment was $12.3 million at December 31, 2015. Additional information is disclosed in Note E-Bank Premises and Equipment to our consolidated financial statements presented under Item 8 of Part II of this Form 10-K.
Item 3 - Legal Proceedings
In October 2013, multiple putative class action lawsuits were filed in United States district courts across the country against a number of different banks based on the banks' alleged role in "payday lending". Four of these lawsuits, filed in the Northern District of Georgia, the Middle District of North Carolina, the District of Maryland, and the Southern District of Florida, named the Bank as one of the defendants. The lawsuits allege that, by processing Automatic Clearing House transactions indirectly on behalf of "payday" lenders, the Bank is illegally participating in an enterprise to collect unlawful debts and is therefore liable to plaintiffs for damages under the federal Racketeer Influenced and Corrupt Organizations Act. The lawsuits also allege a variety of state law claims. The Bank moved to dismiss each of these lawsuits. The Georgia action was voluntarily dismissed by the plaintiffs and the District of Maryland granted the motion and dismissed the case, which the parties subsequently settled while on appeal to the United States Court of Appeals for the Fourth Circuit. The lawsuit in the Southern District of Florida has been stayed pending arbitration of the plaintiff's claims against the Bank’s co-defendants. The Middle District of North Carolina granted the motion in part and denied it in part; the case against the Bank has been stayed pending resolution of motions to compel arbitration filed by the Bank's co-defendants.
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 4 - Mine Safety Disclosures
Not Applicable.
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PART II
Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the OTCQX under the symbol “FOFN.” Prior to February 2, 2015, our common stock traded on the OTC Bulletin Board under the same symbol. The range of high and low bid prices of our common stock for each quarter during the two most recent fiscal years, as published by the OTC Bulletin Board and OTCQX, is as follows (prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions):
Fiscal Year Ended December 31, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First quarter | $ | 1.72 | $ | 1.40 | $ | 2.20 | $ | 1.56 | ||||||||
Second quarter | $ | 1.67 | $ | 1.42 | $ | 3.00 | $ | 1.27 | ||||||||
Third quarter | $ | 1.88 | $ | 1.52 | $ | 1.85 | $ | 1.11 | ||||||||
Fourth quarter | $ | 1.83 | $ | 1.60 | $ | 1.63 | $ | 1.43 |
As of March 25, 2016, the approximate number of holders of record of our common stock was 2,300. We have no other issued class of equity securities. The Bank’s ability to declare a dividend to us and the Company’s ability to pay dividends are subject to the restrictions of the NCBCA. North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. No dividends were paid to us by the Bank during 2014 or 2015. A decision to pay any dividend in the future would be determined based on a number of factors including (but not limited to) capital position and capital adequacy, ongoing operations and profitability, the risk profile of the institution, and general market conditions, among other things.
Except as previously disclosed, we did not sell any securities in 2015 that were not registered under the Securities Act. The following table summarizes stock repurchase activity for the fourth quarter of 2015:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |||||||||
October 1, 2015 to October 31, 2015 | — | — | — | — | |||||||||
November 1, 2015 to November 30, 2015 | — | — | — | — | |||||||||
December 1, 2015 to December 31, 2015 | 14,538 | $ | 1.75 | — | — | ||||||||
Total | 14,538 | $ | 1.75 | — | — |
(1) Represents shares repurchased to satisfy tax withholding obligations that arose on the vesting of shares of restricted stock.
Item 6 - Selected Financial Data
Not applicable.
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Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information about the major components of our results of operations and financial condition, liquidity and capital resources and should be read in conjunction with our audited consolidated financial statements and notes thereto which are contained in this report.
Description of Business
As a community-focused commercial bank, our primary business consists of providing a full range of banking services to our customers with an emphasis on quality personal service. Our core products consist of loans secured by real estate, commercial and consumer loans, as well as various deposit products to meet our customers’ needs. Our primary source of income is generated from net interest margin, the difference between interest income received on our loans and securities and interest expense paid on deposits and borrowings. Our income is also affected by our ability to price our products competitively and maximize the interest rate spread between the interest yield on loans and securities and the interest rate paid on deposits and borrowings. Our products also generate other income through product related fees and commissions. We incur operating expenses consisting primarily of salaries and benefits, occupancy and equipment and other professional and miscellaneous expenses. Refer to Item 1. Business, of this Annual Report on Form 10-K for a more detailed description of the business.
Comparison of Financial Condition at December 31, 2015 and 2014
Overview
Total assets were $691.4 million at December 31, 2015 compared to $820.8 million at December 31, 2014, a decline of $129.4 million as we exited the Automated Clearing House ("ACH") TPPP business line. Cash and cash equivalents were $50.3 million at December 31, 2015 compared to $186.3 million at December 31, 2014, a decrease of $136.0 million of which $134.4 million was due to the above-mentioned business line exit. The investment portfolio decreased $10.2 million or 7.0% while loans increased $6.1 million or 1.3%. Deposits decreased $118.9 million for the year 2015 which included a reduction of $134.4 million from the ACH TPPP business line exit offset by $15.6 million in deposit growth. Long term borrowings decreased $30 million or 33.3% as the Company was able to pay off $40 million in expensive long-term debt during the fourth quarter. Equity increased $19.7 million or 48.3% ending the year at $60.4 million. This increase resulted from net income due to improved operating performance, as well as the reversal of the $16.6 million valuation allowance against the Company's deferred tax assets recognized during the second quarter of 2015.
For the first time in six years, we experienced growth in our loan portfolio year over year as total loans increased $6.1 million or 1.3%. New loan production was solid in 2015 but payoffs, paydowns and maturities continued to have an impact on overall portfolio growth levels. Additionally, the Company completed the previously disclosed Asset Resolution Plan during 2015 which resulted in a reduction of approximately $14 million in loans outstanding. In addition to loan growth, we saw improvements in both credit quality and regulatory capital ratios. As of December 31, 2015, nonperforming assets had declined $5.5 million or 39.5% when compared to December 31, 2014. The Company’s ratio of nonperforming assets to regulatory Tier 1 capital plus the allowance has also improved during the year falling from 23% at December 31, 2014, to 12% at December 31, 2015.
Prior to 2010, for 73 consecutive years, we paid dividends (prior to 1997 when we reorganized into a holding company, it was our wholly-owned subsidiary, Four Oaks Bank & Trust Company, which paid dividends). We suspended dividends in the fourth quarter of 2010 due to losses for the year and continue to monitor our ability to pay dividends based on our risk profile, capital levels, and expected earnings.
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The following table indicates the ratios for return on average assets and average equity, dividend payout, and average equity to average assets in addition to earnings (loss) per common share and book value per common share for the years ended December 31, 2015, 2014, and 2013:
As of and for the Year Ended December 31, | |||||||||||
Performance Ratios: | 2015 | 2014 | 2013 | ||||||||
Return on average assets | 2.70 | % | (0.50 | )% | (0.04 | )% | |||||
Return on average equity | 38.60 | % | (13.09 | )% | (1.53 | )% | |||||
Dividend payout ratio | 0.00 | % | 0.00 | % | 0.00 | % | |||||
Average equity to average assets | 7.00 | % | 3.85 | % | 2.78 | % | |||||
Earnings (Loss) per Common Share: | |||||||||||
Basic earnings (loss) per common share | $ | 0.62 | $ | (0.24 | ) | $ | (0.04 | ) | |||
Diluted earnings (loss) per common share | $ | 0.62 | $ | (0.24 | ) | $ | (0.04 | ) | |||
Book Value per Common Share: | |||||||||||
Book value per common share | $ | 1.80 | $ | 1.27 | $ | 2.71 |
Investment Portfolio
Our investment portfolio as of December 31, 2015 consists of primarily residential mortgage-backed securities ("MBSs"). The MBSs consist of fixed-rate mortgage securities underwritten and guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC) with the U.S. Department of the Treasury. In addition to economic and market conditions, our overall management strategy for our investment portfolio is determined by, among other factors, loan demand, deposit mix, liquidity and collateral needs, our interest rate risk position and the overall structure of our balance sheet.
Available for sale securities are reported at fair value and consist of taxable municipal securities, MBSs, other debt securities, and equity securities not classified as trading securities or as held-to-maturity securities. As of December 31, 2015, our available-for-sale investment portfolio consisted of $31.7 million in FNMAs and FHLMC MBSs, $24.6 million of taxable municipal securities, $13.5 million in GNMA MBSs, $500,000 of debt securities, and $11,000 in equity shares.
During 2013, the Bank transferred the available-for-sale investment portfolio to held-to-maturity securities and these are carried at book value. As of December 31, 2015, we owned $59.2 million in GNMA MBSs, $3.5 million in taxable municipal securities, and $2.6 million in FNMA MBSs that are accounted for as held-to-maturity. The classification of securities purchased since this date has generally been in available-for-sale and is determined at the date of purchase.
During 2015, total investments decreased $10.2 million or 7.0%. Cash received from sales and paydowns totaled $29.8 million of which $21.7 million were deployed to purchase new securities and the remainder was used to fund loans and paydown long term borrowings.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in permanent write-downs of the individual securities to their fair value. If we do not intend to sell the security prior to recovery and it is more likely than not we will not be required to sell the impaired security prior to recovery, the credit loss portion of the impairment is recognized in earnings and the remaining impairment is recognized in other comprehensive income. Otherwise, the full impairment loss is recognized in earnings. At December 31, 2015, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the twelve months ended December 31, 2015.
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The valuations of investment securities, available-for-sale, at December 31, 2015, 2014 and 2013 were as follows (amounts in thousands):
Available for Sale | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
Amortized cost | Estimated fair value | Amortized cost | Estimated fair value | Amortized cost | Estimated fair value | ||||||||||||||||||
Taxable Municipals | $ | 24,789 | $ | 24,567 | $ | 16,412 | $ | 17,078 | $ | 6,176 | $ | 5,933 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 13,512 | 13,530 | 16,204 | 16,264 | 25,773 | 25,477 | |||||||||||||||||
FNMA & FHLMC | 32,024 | 31,673 | 30,992 | 30,858 | — | — | |||||||||||||||||
Trust preferred securities | — | — | — | — | 1,175 | 1,025 | |||||||||||||||||
Other debt securities | 500 | 500 | — | — | — | — | |||||||||||||||||
Equity securities | 11 | 11 | 11 | 11 | 98 | 131 | |||||||||||||||||
Total securities | $ | 70,836 | $ | 70,281 | $ | 63,619 | $ | 64,211 | $ | 33,222 | $ | 32,566 | |||||||||||
Pledged securities | $ | 14,290 | $ | 20,618 | $ | 6,176 |
The valuations of investment securities, held-to-maturity, at December 31, 2015, 2014 and 2013 were as follows (amounts in thousands):
Held to Maturity | |||||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||||
Amortized cost | Estimated fair value | Amortized cost | Estimated fair value | Amortized cost | Estimated fair value | ||||||||||||||||||
Taxable Municipals | $ | 3,531 | $ | 3,512 | $ | 3,584 | $ | 3,556 | $ | 3,635 | $ | 3,481 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 59,185 | 59,464 | 74,482 | 75,125 | 89,892 | 87,883 | |||||||||||||||||
FNMA | 2,638 | 2,657 | 3,517 | 3,561 | 4,486 | 4,467 | |||||||||||||||||
Total securities | $ | 65,354 | $ | 65,633 | $ | 81,583 | $ | 82,242 | $ | 98,013 | $ | 95,831 | |||||||||||
Pledged securities | $ | 47,031 | $ | 81,225 | $ | 86,591 |
The following table sets forth the carrying value of our available-for-sale investment portfolio at December 31, 2015 by expected maturities (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.
Available for Sale | |||||||||||||||||||
Carrying Value | |||||||||||||||||||
Within 1 year | After 1 year through 5 years | After 5 years through 10 years | After 10 years | Total | |||||||||||||||
Taxable Municipals | $ | — | $ | — | $ | — | $ | 24,567 | $ | 24,567 | |||||||||
Mortgage-backed securities | |||||||||||||||||||
GNMA | — | — | — | 13,530 | 13,530 | ||||||||||||||
FNMA & FHLMC | — | — | — | 31,673 | 31,673 | ||||||||||||||
Other debt securities | — | — | 500 | — | 500 | ||||||||||||||
Equity securities | — | — | — | 11 | 11 | ||||||||||||||
Total securities | $ | — | $ | — | $ | 500 | $ | 69,781 | $ | 70,281 |
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The following table sets forth the carrying value of our held-to-maturity investment portfolio at December 31, 2015 by expected maturities (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.
Held to Maturity | |||||||||||||||||||
Carrying Value | |||||||||||||||||||
Within 1 year | After 1 year through 5 years | After 5 years through 10 years | After 10 years | Total | |||||||||||||||
Taxable Municipals | $ | 100 | $ | 2,367 | $ | 1,064 | $ | — | $ | 3,531 | |||||||||
Mortgage-backed securities | |||||||||||||||||||
GNMA | — | — | 5,291 | 53,894 | 59,185 | ||||||||||||||
FNMA | — | — | 2,638 | — | 2,638 | ||||||||||||||
Total securities | $ | 100 | $ | 2,367 | $ | 8,993 | $ | 53,894 | $ | 65,354 |
The following table sets forth the weighted average yield (computed on a tax equivalent basis) by maturity of our available-for-sale investment portfolio at December 31, 2015 amortized cost:
Available-for-Sale | ||||||||||||||
Weighted Average Yields | ||||||||||||||
Within 1 year | After 1 year through 5 years | After 5 years through 10 years | After 10 years | Total | ||||||||||
Taxable Municipals | — | % | — | % | — | % | 4.03 | % | 4.03 | % | ||||
Mortgage-backed securities | ||||||||||||||
GNMA | — | % | — | % | — | % | 2.55 | % | 2.55 | % | ||||
FNMA & FHLMC | — | % | — | % | — | % | 2.03 | % | 2.03 | % | ||||
Other debt securities | — | % | — | % | 6.50 | % | — | % | 6.50 | % | ||||
Total weighted average yields | — | % | — | % | 6.50 | % | 2.84 | % | 2.86 | % |
The following table sets forth the weighted average yield (computed on a tax equivalent basis) by maturity of our held-to-maturity investment portfolio at December 31, 2015 amortized cost:
Held to Maturity | ||||||||||||||
Weighted Average Yields | ||||||||||||||
Within 1 year | After 1 year through 5 years | After 5 years through 10 years | After 10 years | Total | ||||||||||
Taxable Municipals | 2.02 | % | 3.19 | % | 3.85 | % | — | % | 3.35 | % | ||||
Mortgage-backed securities | ||||||||||||||
GNMA | — | % | — | % | 2.63 | % | 2.07 | % | 2.12 | % | ||||
FNMA | — | % | — | % | 1.64 | % | — | % | 1.64 | % | ||||
Total weighted average yields | 2.02 | % | 3.19 | % | 2.49 | % | 2.07 | % | 2.16 | % |
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Loan Portfolio
We have a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in our markets. This policy relates to loan administration, documentation, underwriting, approval, and reporting requirements for various types of loans. The policy is designed to comply with all applicable federal and state regulatory requirements and establishes minimum standards for the extension of credit. The lending policy also establishes pre-determined lending authorities for loan officers commensurate with their abilities and experience. In addition, the policy outlines authorities for approval of credit requests at various lending amounts. This includes the Executive Loan Committee, comprised of the Chief Executive Officer, the Chief Credit Officer, and three non-management directors, and the Board of Directors that reviews the largest requests and requests that fall under Regulation O. Approval authorities are under regular review and are subject to adjustment. Loan requests outside of standard policy or guidelines may be made on a case by case basis when justified, documented, and approved by the appropriate authority.
Underwriting criteria for all types of loans are prescribed within the lending policy. The following is a description of each loan type and related criteria.
Commercial Real Estate
Commercial real estate, including acquisition and development, and real estate construction makes up the largest segment of our loan portfolio. This segment is closely monitored at the management and Board level. Our Board of Directors receives reports on a quarterly basis detailing trends. Underwriting criteria and procedures for commercial real estate loans generally include:
• | Procurement of federal income tax returns and financial statements, preferably for the past three years if available, and related supplemental information deemed relevant. |
• | Rent rolls, tenant listings, and other similar documents are requested as needed. |
• | Detailed financial and credit analysis related to cash flow, collateral, the borrower’s capital and character, and the operational environment is performed and presented to the appropriate officer or committee for approval. |
• | Cash flows from the project financed and aggregate cash flows of the principals and their entities generally should produce a minimum debt service coverage ratio of 1.25:1. |
• | Cash or collateral equity injection by the applicant, ranging from 15% to 35% based on regulatory loan to value ratio limits, in order to meet minimum federal guidelines for each loan category. |
• | Past experience of the investor in commercial real estate. |
• | Past experience of the customer with the Bank. |
• | Tangible net worth analysis of the borrower and any guarantors. |
• | General and local commercial real estate conditions are monitored and considered in the decision-making process. |
• | Alternative uses of the security are considered in the event of default. |
• | Credit enhancements are utilized when necessary and desirable, such as the use of guarantors and take out commitments. |
• | Non-construction real estate loans typically have a 15 to 20 year amortization with a five or seven year balloon payment. If appropriate, a loan may be set up as an interest only single payment if the identified repayment source coincides with the maturity. |
• | Commercial construction projects generally require that an engineer or architect review the applicant’s cost figures for accuracy. In addition, all draw requests must be approved by either the engineer or architect for accuracy before payment is made. |
• | On-site progress inspections are completed to protect the Bank. |
• | Requests for residential construction loans are closely monitored at the contractor level and subdivision level for concentrations. A request is generally denied if either the predetermined builder’s concentration or Bank’s concentration limit has been attained. |
• | Real estate construction loans are made for terms not to exceed 12 to 18 months for residential construction and 18 to 24 months for commercial construction. |
• | Collateral is investigated using current valuations and is supplemented by the loan officer’s knowledge of the local market. Outside appraisals are completed by appraisers on the Bank’s approved list. The appraisals on loans greater than $250,000 are reviewed by an outside source that certifies it is compliant with Uniform Standards of Professional Appraisal Practice. |
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Residential Real Estate
Residential real estate makes up the second largest segment of our loan portfolio and outstanding balances have generally been very stable. Terms may range up to 15 years with amortizations of up to 30 years. Underwriting criteria and procedures for residential real estate mortgage loans generally include:
• | Monthly debt payments of the borrower to gross monthly income should not exceed 45% with stable employment of two years. |
• | Loan to value ratio limits of up to 90% of the appraised value |
• | A credit investigation, which includes an Equifax credit report with a Beacon score of at least 620. |
• | Verification of income by various methods. |
• | Appropriate insurance to protect the Bank, typically in the amount of the loan. |
• | Flood certifications are procured. |
• | Collateral is investigated using current valuations and is supplemented by the loan officer’s knowledge of the local market. Outside appraisals are completed by appraisers on the Bank’s approved list. The appraisals on loans greater than $250,000 are reviewed by an outside source that certifies it is compliant with Uniform Standards of Professional Appraisal Practice. |
Financial
Financial loans are secured by stocks, bonds, and mutual funds. Underwriting procedures and criteria for financial loans generally include:
• | Stock loans should be structured to coincide with the identified source of repayment. |
• | The maximum loan to value ratio for stock listed for sale on the NYSE, AMEX, or NASDAQ is 85% of its market value. |
• | Generally, stock loans should not exceed 60 months. |
Agricultural
Crop production lending presents many risks to the lender because of weather uncertainty and fluctuations in commodity prices. Underwriting procedures and criteria for agricultural loans generally include:
• | The farmer should have the financial capacity to withstand at least one bad crop year. |
• | The farmer must possess sufficient equity in equipment or farmland for the Bank to term, within acceptable collateral margins (ranging from 50% to 80%) and cash flow debt service coverage requirements (generally 1.25:1), any line outstanding after the sale of crops. |
• | Farmers should meet certain qualitative criteria with respect to the farmer’s knowledge and experience. |
• | For new customers, documentation on where the farmer previously banked and the circumstances underlying the new loan request. |
Commercial Inventory and Accounts Receivable
Underwriting procedures and loan to value ratios for commercial inventory loans and accounts receivable loans generally include:
• | Up to 80% of eligible accounts receivable. |
• | Up to 80% of the individually assigned accounts receivable. The customer assigns individual invoices, sometimes with shipping documents attached. These may be stamped or marked to show that they have been assigned to the Bank. The customer brings payments to the Bank for processing against individual invoices. |
• | 50% or less of the cost or market on materials and qualified finished goods, depending on their quality and stability. |
• | 0% on work-in-progress. |
Installment Loans
These loans are predominantly direct loans to established customers of the Bank and primarily include the financing of automobiles, boats, and other consumer goods. The character, capacity, collateral, and conditions are evaluated using policy limitations. Installment loans are typically made for terms that do not exceed 60 months with any exceptions being documented. Installment loan underwriting criteria and procedures for such financing generally include:
• | Financial statements are generally required on all consumer loans secured by a primary residence, all unsecured loans of $10,000 or more, and all secured transactions of $50,000 or more. |
• | Income verification is generally required on all consumer loans. |
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• | Past experience of the customer with the Bank. |
• | A debt to income ratio that does not exceed 45%. |
• | Stable employment record of two years. |
• | Stable residency record of two years. |
• | A Beacon score of at least 620. |
• | Terms to match the usefulness or life of the security. |
• | If unsecured, the total unsecured loans of the applicant should not exceed 15% of adjusted net worth or 20% of the applicant’s gross annual income. |
Interest Only Loans
Interest only loans are generally limited to construction lending, properties recently completed and undergoing occupancy stabilization period, and revolving lines of credit. Any other loans made as interest only should have a reason and proper approval.
Bank policy generally prohibits underwriting negative amortization loans or hybrid loans.
The following loan table describes our loan portfolio composition by segment based on the loan classifications discussed in Note D - Loans and Allowance for Loan Losses to the financial statements for December 31, 2015, 2014, 2013, 2012, and 2011 (amounts in thousands):
Loan Portfolio Classification | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Loans receivable: | |||||||||||||||||||
Commercial and industrial | $ | 23,163 | $ | 24,286 | $ | 25,858 | $ | 28,377 | $ | 39,329 | |||||||||
Commercial construction and land development | 50,510 | 53,642 | 66,253 | 90,899 | 113,762 | ||||||||||||||
Commercial real estate | 208,737 | 200,510 | 214,159 | 181,194 | 214,740 | ||||||||||||||
Residential construction | 36,618 | 28,130 | 28,697 | 20,445 | 26,707 | ||||||||||||||
Residential mortgage | 128,442 | 135,022 | 147,300 | 165,009 | 192,972 | ||||||||||||||
Consumer | 6,638 | 7,248 | 6,750 | 7,399 | 9,359 | ||||||||||||||
Consumer credit cards | 2,240 | 2,276 | 2,339 | 2,265 | 2,092 | ||||||||||||||
Business credit cards | 1,168 | 1,251 | 1,124 | 1,186 | 1,016 | ||||||||||||||
Other | 1,257 | 499 | 738 | 1,278 | 2,330 | ||||||||||||||
458,773 | 452,864 | 493,218 | 498,052 | 602,307 | |||||||||||||||
Net deferred loan fees | (460 | ) | (608 | ) | (506 | ) | (123 | ) | (75 | ) | |||||||||
Net loans before allowance | 458,313 | 452,256 | 492,712 | 497,929 | 602,232 | ||||||||||||||
Allowance for loan losses | (9,616 | ) | (9,377 | ) | (11,590 | ) | (16,549 | ) | (21,141 | ) | |||||||||
Total net loans | $ | 448,697 | $ | 442,879 | $ | 481,122 | $ | 481,380 | $ | 581,091 | |||||||||
Loans held for sale | $ | 1,145 | $ | 2,882 | $ | — | $ | 19,297 | $ | — | |||||||||
Commitments and contingencies: | |||||||||||||||||||
Commitments to make loans | $ | 139,577 | $ | 100,843 | $ | 66,341 | $ | 71,924 | $ | 78,683 | |||||||||
Standby letters of credit | $ | 671 | $ | 1,441 | $ | 991 | $ | 2,838 | $ | 1,940 |
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The maturities and carrying amounts of loans, excluding credit cards, as of December 31, 2015 are summarized as follows (amounts in thousands):
Loan Maturities | |||||||||||||||||||||||||||||||
Commercial & Industrial | Commercial Construction & Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Total | ||||||||||||||||||||||||
Due within one year: | |||||||||||||||||||||||||||||||
Fixed rate | $ | 3,111 | $ | 7,328 | $ | 6,445 | $ | 1,112 | $ | 3,589 | $ | 3,387 | $ | 723 | $ | 25,695 | |||||||||||||||
Variable rate | 10,507 | 15,646 | 20,309 | 35,038 | 9,023 | — | 232 | 90,755 | |||||||||||||||||||||||
Due after one year through five years: | |||||||||||||||||||||||||||||||
Fixed rate | 5,873 | 19,864 | 104,215 | 207 | 42,196 | 3,159 | 73 | 175,587 | |||||||||||||||||||||||
Variable rate | 719 | 6,095 | 22,861 | 261 | 17,116 | 6 | 229 | 47,287 | |||||||||||||||||||||||
Due after five years: | |||||||||||||||||||||||||||||||
Fixed rate | 2,288 | 1,148 | 48,605 | — | 17,635 | 86 | — | 69,762 | |||||||||||||||||||||||
Variable rate | 665 | 429 | 6,302 | — | 38,883 | — | — | 46,279 | |||||||||||||||||||||||
Total | $ | 23,163 | $ | 50,510 | $ | 208,737 | $ | 36,618 | $ | 128,442 | $ | 6,638 | $ | 1,257 | $ | 455,365 |
As of December 31, 2015, the Company had approximately $165.2 million of variable rate loans with interest rate floors in effect (i.e. the floor rate exceeded the variable rate). Interest rates on these loans will not adjust until the underlying index plus any rate adjuster increases above the floor rate.
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. Nonperforming loans are loans that have been placed into nonaccrual status when doubts arise regarding the full collectibility of principal or interest and we are therefore uncertain that the borrower can satisfy the contractual terms of the loan agreement. In addition our policy is to place a loan on nonaccrual status at the point when the loan becomes past due 90 days unless there is sufficient documentation to establish that the loan is well secured and in the process of collection. These nonaccrual loans may be returned to accrual status when the factors which initially indicated the doubtful collectibility of the loans have ceased to exist. Foreclosed assets consists typically of real estate assets acquired either through foreclosure proceedings or deed in lieu of foreclosure. Foreclosed assets are recorded at an estimated fair value less costs to sell the property, or the recorded investment in the loan at the time of foreclosure, whichever is less. These assets are periodically evaluated and any decreases in the property's fair value result in corresponding write downs of the asset's carrying value.
As of December 31, 2015, nonperforming assets declined $5.5 million or 39.5% when compared to December 31, 2014. The Company’s ratio of nonperforming assets to regulatory Tier 1 capital plus the allowance has improved during the year. At December 31, 2015 this ratio was 12% compared to 23% at December 31, 2014. This reduction is the result of continued efforts to resolve nonperforming assets while minimizing losses as we completed the Asset Resolution Plan.
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The following table describes our nonperforming asset portfolio composition by category based on the loan classifications discussed in Note D - Loans and Allowance for Loan Losses to the financial statements for December 31, 2015, 2014, 2013, 2012, and 2011 (amounts in thousands):
Nonperforming Assets | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Nonaccrual loans: | |||||||||||||||||||
Commercial and industrial | $ | 119 | $ | — | $ | 651 | $ | 664 | $ | 779 | |||||||||
Commercial construction and land development | 1,626 | 5,533 | 9,536 | 15,941 | 29,538 | ||||||||||||||
Commercial real estate | 2,929 | 983 | 6,391 | 9,091 | 14,830 | ||||||||||||||
Residential construction | 721 | — | 695 | 833 | 1,469 | ||||||||||||||
Residential mortgage | 1,203 | 1,271 | 9,943 | 9,408 | 13,466 | ||||||||||||||
Consumer | — | 472 | 11 | 33 | 59 | ||||||||||||||
Total nonaccrual loans | $ | 6,598 | $ | 8,259 | $ | 27,227 | $ | 35,970 | $ | 60,141 | |||||||||
Past due 90 days or more and still accruing: | |||||||||||||||||||
Consumer credit cards | $ | 29 | $ | 14 | $ | 23 | $ | 32 | $ | 60 | |||||||||
Business credit cards | 36 | 3 | — | — | — | ||||||||||||||
Total past due 90 days and still accruing | $ | 65 | $ | 17 | $ | 23 | $ | 32 | $ | 60 | |||||||||
Foreclosed assets: | |||||||||||||||||||
Commercial and industrial | $ | 3 | $ | 44 | $ | 44 | $ | 71 | $ | — | |||||||||
Commercial construction and land development | 1,493 | 2,613 | 6,364 | 8,363 | 6,863 | ||||||||||||||
Commercial real estate | 82 | 485 | 1,077 | 2,420 | 2,183 | ||||||||||||||
Residential construction | 69 | — | 42 | 602 | 837 | ||||||||||||||
Residential mortgage | 113 | 640 | 975 | 3,680 | 2,276 | ||||||||||||||
Total foreclosed assets | $ | 1,760 | $ | 3,782 | $ | 8,502 | $ | 15,136 | $ | 12,159 | |||||||||
Nonperforming loans held for sale | $ | — | $ | 1,865 | $ | — | $ | — | $ | — | |||||||||
Total nonperforming assets | $ | 8,423 | $ | 13,923 | $ | 35,752 | $ | 51,138 | $ | 72,360 | |||||||||
Nonperforming loans to gross loans | 1.44 | % | 1.83 | % | 5.53 | % | 7.22 | % | 9.99 | % | |||||||||
Nonperforming assets to total assets | 1.22 | % | 1.70 | % | 4.35 | % | 5.91 | % | 7.89 | % | |||||||||
Allowance coverage of nonperforming loans | 144.32 | % | 113.30 | % | 42.53 | % | 45.97 | % | 35.12 | % |
Foreclosed Assets
As of December 31, 2015, there were 35 foreclosed properties valued at $1.8 million compared with 128 foreclosed properties valued at $3.8 million as of December 31, 2014. The amount of loans transferred into foreclosed assets decreased from $2.3 million for the year ending December 31, 2014 to $1.2 million for the year ending December 31, 2015. Sales of foreclosed assets decreased to $3.0 million in 2015 compared to $5.4 million in 2014 as the number and value of properties in the portfolio continues to decline. The continued decline in foreclosed assets resulted primarily from sales of foreclosed properties and reductions in the number of properties added to foreclosed assets.
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Nonaccrual and TDR Loans
Interest income is calculated by the relevant interest method based upon the daily outstanding balance of the loan. The recognition of interest income ceases however when it becomes probable that full collectibility of all interest due under the contractual terms of the loan agreement may not occur. As a result, loans may either be placed in nonaccrual status and/or restructured to allow for a payment stream which may appropriately accommodate a borrower's diminished repayment capacity. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. Such restructured loans are typically initially placed into nonaccrual status and may later be returned to accrual status depending upon a demonstrated ability by the borrower to meet the repayment terms of the restructured loan. Payments received on nonaccrual loans are applied first to principal and thereafter interest only after all principal has been collected. We accrue interest on restructured loans at the restructured rates when we anticipate that no loss of original principal will occur.
Nonaccrual loans as a percentage of gross loans decreased to 1.44% as of December 31, 2015 compared to 1.83% as of December 31, 2014. At December 31, 2015, there were 42 nonaccrual loans totaling $6.6 million compared to 87 loans totaling $10.1 million at December 31, 2014. The gross interest income that would have been recorded for loans accounted for on a nonaccrual basis at December 31, 2015 and 2014 was approximately $153,000 and $373,000, respectively. These amounts represent interest income that would have been recorded if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period.
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 December 31, 2015, all of these loans had been sold or transferred back to held for investment.
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 December 31, 2015, there were 8 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 December 31, 2015, the recorded investment in performing TDRs and their related allowance for loan losses totaled $2.3 million and $328,000, respectively compared to $4.8 million and $524,000 as of December 31, 2014. Outstanding nonperforming TDRs totaled $1.1 million with $139,000 in specific reserves as of December 31, 2015 compared to $3.8 million in outstanding nonperforming TDRs with no related allowance for loan losses as of December 31, 2014. The amount of interest recognized for performing and nonperforming TDRs during the twelve months of 2015 was approximately $156,000 and $7,000, respectively.
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The following table describes performing and nonperforming TDRs for December 31, 2015, 2014, 2013, 2012, and 2011 (amounts in thousands):
Performing TDRs: | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | 37 | $ | 349 | $ | 360 | |||||||||
Commercial construction and land development | 1,059 | 1,336 | 227 | 3,484 | 1,631 | ||||||||||||||
Commercial real estate | 1,028 | 2,469 | 4,447 | 5,522 | 4,910 | ||||||||||||||
Residential construction | — | — | — | — | 165 | ||||||||||||||
Residential mortgage | 226 | 950 | 2,319 | 3,945 | 3,728 | ||||||||||||||
Consumer | — | 4 | — | — | 15 | ||||||||||||||
Total performing TDRs | $ | 2,313 | $ | 4,759 | $ | 7,030 | $ | 13,300 | $ | 10,809 |
Nonperforming TDRs: | 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | 301 | $ | 87 | $ | 315 | |||||||||
Commercial construction and land development | 557 | 2,776 | 6,699 | 10,659 | 18,357 | ||||||||||||||
Commercial real estate | 574 | 552 | 4,204 | 4,437 | 7,395 | ||||||||||||||
Residential construction | — | — | — | — | 345 | ||||||||||||||
Residential mortgage | — | 54 | 3,055 | 3,113 | 7,470 | ||||||||||||||
Consumer | — | 467 | 1 | — | 8 | ||||||||||||||
Total nonperforming TDRs | $ | 1,131 | $ | 3,849 | $ | 14,260 | $ | 18,296 | $ | 33,890 |
Allowance for Loan Losses and Summary of Loan Loss Experience
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed. Management evaluates the adequacy of our allowance for loan losses on 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. Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
Management has developed a model for evaluating the adequacy of the allowance for loan losses. The model uses the Company’s internal grading system to quantify the risk of each loan. The grade is initially assigned by the lending officer and/or the credit administration function. The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. Additionally, regulatory agencies review the adequacy of the risk grades assigned as well as the risk grade process and may require changes based on judgments that differ from those of management that could impact the allowance for loan losses.
The grading system is comprised of seven risk categories for active loans. Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan. Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan. Grade 6 loans are considered sub-standard and are generally impaired, however, certain of these loans continue to accrue interest, and are not TDRs and are not considered impaired. Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Grade 8 loans are considered uncollectable and identified as a confirmed loss. Loans can also be classified as non-accrual, TDR, or otherwise impaired, all of which are considered impaired and evaluated for specific reserve under FASB Accounting Standard Codification ("ASC") 310-10 regardless of the risk grade assigned.
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Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of two 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 or upon the fair market value of the underlying assets securing the loan. If the fair market value of collateral method is selected for use, an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal. Each loan is then analyzed to determine the net value of collateral or cash flows and an estimate of potential loss. The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal. If collection is deemed to be collateral dependent then the deficiency is generally charged off. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value. Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and charge-offs. Groups of small dollar impaired loans with similar risk characteristics may be evaluated for impairment collectively.
Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450. The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels and is adjusted for the loan's risk grade. The qualitative factors address loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations. Together these two components comprise the ASC 450, or general reserve.
During 2015, the Company enhanced its allowance for loan and lease losses ("ALLL") methodology by increasing the look back period used to calculate historical loss rates for the quantitative ASC 450 reserve. In prior periods, the Company calculated historical loss rates from the most recent three years on a rolling quarter basis but this was increased to the most recent five years on a rolling quarter basis in the fourth quarter of 2015. This change was made in an effort to provide a more precise estimate of potential losses and to provide for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from 0% for a risk grade 1 to 300% for a risk grade 6 that is unimpaired. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of 50% to 100% added to that particular risk grade. Lastly, categories that have had historically high charge-offs also have an additional reserve factor between 25% to 100% added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.
The allowance for loan losses at December 31, 2015 was $9.6 million, which represents 2.1% of total loans outstanding compared to $9.4 million or 2.1% as of December 31, 2014. For the year ended December 31, 2015, net loan recoveries were $239,000 compared with $10.2 million in net chargeoffs for the prior year period as the Asset Resolution Plan was implemented. Non-accrual loans were $6.6 million and $8.3 million at December 31, 2015 and 2014, respectively. The 30-89 day past due numbers are down to $1.2 million as of December 31, 2015 compared to $1.4 million as of December 31, 2014, a 13.3% decrease.
The ASC 450 reserve as of December 31, 2014 was 2.1% compared to 2.2% as of December 31, 2015 due to the net recovery position for the allowance for loan losses during the year ended December 31, 2015. As of December 31, 2015, the Company had $6.6 million in loans in the coastal North Carolina region which are collateralized by properties that have seen significant declines in value, compared to $7.7 million as of December 31, 2014. Those loans in this category that are evaluated as part of the ASC 450 general reserve are being reserved at an average of 35.4% as of December 31, 2015.
Impaired loans evaluated for specific reserve as of December 31, 2015 were $8.6 million compared to $13.0 million for the year ended December 31, 2014, a decline of $4.4 million or 33.5%. The ASC 310 reserve was $1.3 million as of December 31, 2015 compared to $663,000 as of December 31, 2014.
The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.
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The following table summarizes the Bank’s loan loss experience for the years ending December 31, 2015, 2014, 2013, 2012, and 2011 (amounts in thousands, except ratios):
Allowance for Loan Losses | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Balance at beginning of period | $ | 9,377 | $ | 11,590 | $ | 16,549 | $ | 21,141 | $ | 22,100 | |||||||||
Charge-offs: | |||||||||||||||||||
Commercial and industrial | 74 | 492 | 411 | 703 | 2,181 | ||||||||||||||
Commercial construction and land development | 196 | 3,106 | 3,759 | 7,929 | 7,735 | ||||||||||||||
Commercial real estate | 578 | 3,315 | 2,220 | 3,691 | 1,802 | ||||||||||||||
Residential construction | 41 | 171 | 138 | 103 | 588 | ||||||||||||||
Residential mortgage | 713 | 4,847 | 1,559 | 1,801 | 2,126 | ||||||||||||||
Consumer | 210 | 183 | 271 | 516 | 477 | ||||||||||||||
Other | 69 | — | — | — | — | ||||||||||||||
Total charge-offs | 1,881 | 12,114 | 8,358 | 14,743 | 14,909 | ||||||||||||||
Recoveries: | |||||||||||||||||||
Commercial and industrial | 234 | 208 | 514 | 622 | 419 | ||||||||||||||
Commercial construction and land development | 1,176 | 397 | 587 | 1,176 | 404 | ||||||||||||||
Commercial real estate | 393 | 334 | 1,506 | 366 | 485 | ||||||||||||||
Residential construction | — | — | — | — | 291 | ||||||||||||||
Residential mortgage | 201 | 866 | 599 | 458 | 771 | ||||||||||||||
Consumer | 113 | 120 | 154 | 148 | 140 | ||||||||||||||
Other | 3 | 23 | 4 | — | — | ||||||||||||||
Total recoveries | 2,120 | 1,948 | 3,364 | 2,770 | 2,510 | ||||||||||||||
Net recoveries (charge-offs) | 239 | (10,166 | ) | (4,994 | ) | (11,973 | ) | (12,399 | ) | ||||||||||
Provision for loan losses | — | 7,953 | 35 | 7,381 | 11,440 | ||||||||||||||
Balance at end of year | $ | 9,616 | $ | 9,377 | $ | 11,590 | $ | 16,549 | $ | 21,141 | |||||||||
Ratio of net charge-offs during the year to average gross loans outstanding during the year | — | % | 2.14 | % | 1.01 | % | 2.21 | % | 1.90 | % |
In 2015, net recoveries totaled $239,000 compared to net chargeoffs of $10.2 million for 2014, a net decrease of $10.4 million primarily due to the Asset Resolution Plan that was executed in 2014 and resulted in elevated charge-offs. Total nonperforming loans were reduced 20.1% from $8.3 million as of December 31, 2014 to $6.6 million as of December 31, 2015.
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The following table summarizes the Bank’s allocation of allowance for loan losses at December 31, 2015, 2014, 2013, 2012, and 2011 (amounts in thousands, except ratios).
Allowance for Loan Losses by Loan Classification | ||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||
Amount | % (1) | Amount | % (1) | Amount | % (1) | Amount | % (1) | Amount | % (1) | |||||||||||||||||||||||||
Commercial and industrial | $ | 221 | 5 | % | $ | 119 | 6 | % | $ | 487 | 6 | % | $ | 1,185 | 6 | % | $ | 2,730 | 7 | % | ||||||||||||||
Commercial construction and land development | 5,470 | 11 | % | 5,105 | 12 | % | 5,037 | 13 | % | 7,251 | 18 | % | 8,799 | 19 | % | |||||||||||||||||||
Commercial real estate | 2,268 | 46 | % | 2,382 | 44 | % | 2,981 | 43 | % | 2,961 | 37 | % | 3,800 | 36 | % | |||||||||||||||||||
Residential construction | 305 | 8 | % | 436 | 6 | % | 713 | 6 | % | 423 | 4 | % | 740 | 4 | % | |||||||||||||||||||
Residential mortgage | 1,191 | 28 | % | 1,206 | 30 | % | 2,146 | 30 | % | 4,471 | 33 | % | 4,630 | 32 | % | |||||||||||||||||||
Consumer | 113 | 2 | % | 89 | 2 | % | 188 | 2 | % | 188 | 2 | % | 413 | 2 | % | |||||||||||||||||||
Other | 48 | — | % | 40 | — | % | 38 | — | % | 70 | — | % | 29 | — | % | |||||||||||||||||||
Total | $ | 9,616 | 100 | % | $ | 9,377 | 100 | % | $ | 11,590 | 100 | % | $ | 16,549 | 100 | % | $ | 21,141 | 100 | % |
(1) Represents total of all outstanding loans in each category as a percentage of total loans outstanding.
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Deposits
Deposits are the primary source of funds for our portfolio loans, loan pipeline and investments. Our deposit strategy is to obtain deposit funds from within our market areas through relationship banking. The majority of our deposits are from individuals and entities located in our primary markets of Johnston and Wake counties. We are positioned to obtain wholesale deposits, including brokered deposits, from various sources in order to supplement our liquidity if needed. As of December 31, 2015, total deposits were approximately $542.3 million, down from $661.2 million at December 31, 2014, due primarily to a decrease in non-interest demand accounts as we exited the ACH TPPP business line.
Noninterest-bearing demand deposits and interest-bearing transaction accounts, which include savings, money market and interest checking, decreased $115.2 million of which $134.4 million was due to account closures from the ACH TPPP business line exit offset by core deposit growth of $19.2 million. Time deposits declined $3.7 million as we continue to grow lower-costing transaction deposits and limit the number of volatile non-relationship time deposit customers.
Wholesale deposits, including time deposits placed in the Certificate of Deposit Account Registry Service, ("CDARS"), and various brokered deposit programs increased $15.6 million, or 60.1%, from $25.9 million as of December 31, 2014, to $41.5 million at December 31, 2015 as we ensure adequate liquidity to pay down higher cost long term borrowings. The CDARS program provides full FDIC insurance on deposit balances greater than posted FDIC limits by exchanging larger depository relationships with other CDARS members. CDARS is offered as a service to our customers who either require or desire full FDIC insurance coverage of their deposits.
Time certificates in amounts of $100,000 or more outstanding at December 31, 2015, 2014, 2013, 2012, and 2011, by maturity were as follows (amounts in thousands):
Time Certificates of $100,000 or More by Maturity | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Three months or less | $ | 23,651 | $ | 21,597 | $ | 17,131 | $ | 37,937 | $ | 37,829 | |||||||||
Over three months through six months | 39,708 | 25,319 | 22,952 | 33,520 | 33,808 | ||||||||||||||
Over six months through twelve months | 31,324 | 32,021 | 44,566 | 48,734 | 74,976 | ||||||||||||||
Over twelve months through three years | 42,819 | 51,515 | 70,509 | 68,973 | 144,493 | ||||||||||||||
Over three years | 13,508 | 12,884 | 7,245 | 26,820 | 26,524 | ||||||||||||||
Total | $ | 151,010 | $ | 143,336 | $ | 162,403 | $ | 215,984 | $ | 317,630 |
Borrowings
The Bank borrows funds principally from the Federal Home Loan Bank of Atlanta (the "FHLB"). During 2015, the Bank entered into a $10 million short term advance and extinguished $40.0 million in advances as we worked to reposition the balance sheet for future growth and reduce interest expense on high-cost borrowings.
Information regarding borrowings at December 31, 2015, 2014, and 2013, are as follows (amounts in thousands, except rates):
FHLB Advances | |||||||||||
2015 | 2014 | 2013 | |||||||||
Balance outstanding at December 31 | $ | 60,000 | $ | 90,000 | $ | 112,000 | |||||
Weighted average rate at December 31 | 2.38 | % | 3.42 | % | 3.58 | % | |||||
Maximum borrowings during the year | $ | 90,000 | $ | 112,000 | $ | 112,000 | |||||
Average amounts outstanding during year | $ | 88,773 | $ | 110,416 | $ | 112,000 | |||||
Weighted average rate during year | 3.39 | % | 3.57 | % | 3.58 | % |
The Company has $11.5 million of subordinated promissory notes, see Note I- Subordinated Promissory Notes and $12.4 million in subordinated debentures, see Note H - Trust Preferred Securities.
The Bank may purchase federal funds through secured federal funds lines of credit with various banks. These lines are intended for short-term borrowings and are payable on demand and bear interest based upon the daily federal funds rate. For 2015, 2014, and 2013, the Bank purchased no federal funds except in conjunction with semi-annual testing of the borrowing lines available. At December 31, 2015 and December 31, 2014, the Bank had no federal funds borrowings outstanding under these lines.
39
Results of Operations for the Years Ended December 31, 2015 and 2014
Overview
For the twelve months ended December 31, 2015, the Company had net income of $20.0 million or $0.62 basic and diluted net income per share compared to a net loss of $4.2 million or $0.24 basic and diluted net loss per share for the same period in 2014. The year-over-year $24.2 million increase in net income resulted primarily from an income tax benefit of $16.5 million due to the partial reversal of the valuation allowance against deferred tax assets, as well as improved operations. The net income increase was further attributable to an $8.0 million decrease in provision for loan loss expenses year over year as we completed the Asset Resolution Plan which began in 2014.
Net interest income before the provision for loan losses totaled $22.6 million for the twelve months ended December 31, 2015 as compared to $20.7 million for the same period in 2014. Net interest margin for the twelve months ended December 31, 2015 was 3.3% compared to 2.6% for the same period in 2014. The increased net interest income stems primarily from increased investment income, declining interest expense on deposits, and lower expense on long-term borrowings that resulted from balance sheet strategies executed by the Company during 2014 and 2015.
Non-interest income was $9.6 million for the twelve months ended December 31, 2015, compared to $11.1 million for the same period in 2014. This decrease was primarily driven by declines in ACH TPPP indemnification income as the Company's exit from this business line is complete, offset by increased gains from the sale of problem loans identified during the previously disclosed Asset Resolution Plan.
Non-interest expense totaled $28.6 million for the twelve months ended December 31, 2015 compared to $28.1 million for the same period in 2014. Salaries and benefit related expenses were a primary driver of the change with an increase of $3.2 million for the twelve month period. This increase includes one time compensation costs related to restructuring the organization along with increased investment in our associates through the implementation a performance based compensation plan and the adoption of annual discretionary bonuses. The Company continued to restructure the balance sheet during 2015 and extinguished $40.0 million of long-term debt with a total expense of $2.1 million for the twelve months ended December 31, 2015 as compared to $22.0 million in extinguishments with a total expense of $1.5 million for the same period in 2014. An additional driver of the increase was technology related expenses incurred as the Company upgraded its technology platform to provide better products and services for customers while decreasing technology related risks. These increases were offset by declines in other areas as we began to benefit from improved asset quality and reductions in our risk profile.
Net Interest Income
The primary component of earnings for the Bank is net interest income, which is the difference between interest income, principally from loan and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.
Net interest income increased by $1.9 million, to $22.6 million in 2015 from $20.7 million in 2014. Net yield increased 70 basis points to 3.3% in 2015 from and a net yield of 2.6% in the previous year. The increase in net interest income was due to a $561,000 increase in income from investments as excess cash was deployed, offset slightly by a decrease in interest income on loans which declined as we continued to see interest rate pressures in the market driven by competition for new loan business. The decline in interest expense was driven primarily by reductions in high cost long term borrowings that were paid down during 2014 and 2015. Interest expense on these borrowings declined $938,000 and the average rate dropped by 17 basis points. We additionally saw reductions in interest expense on deposits as we continue to replace higher cost deposits with noninterest bearing demand deposits. The Company refinanced its subordinated promissory notes during late 2015 from 8.50% to 6.25% which will provide benefit in future periods, but this had little effect on interest cost for the year ending 2015.
40
On average, our interest-earning assets declined $105.2 million during 2015 from 2014, however the rate earned on these assets increased 64 basis points. The primary driver for the decline in interest-earning assets was our strategic exit from the ACH TPPP business line which included a $117.4 million reduction in interest earning deposits in banks which carried a relatively low yield. Average loans also declined $15.6 million during 2015 however this was offset by a $29.3 million increase in average investments. Interest bearing liabilities declined $30.8 million as we continued to replace certificates of deposits with non-interest bearing demand deposits and restructure the balance sheet by eliminating unnecessary high cost borrowings. In addition to the total reduction in interest bearing liabilities, the rate paid on these liabilities declined 17 basis points driven primarily by reductions in high cost long term borrowings paid down during 2014 and 2015.
We set interest rates on deposits and loans at competitive rates. Interest rate spreads have increased from 2.2% in 2014 to 3.0% for 2015. The interest rate spread is the difference between the interest rates earned on average loans and investments, and the interest rates paid on average interest-bearing deposits and borrowings.
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The following schedule presents average balance sheet information for the years 2015, 2014, and 2013, along with related interest earned and average yields for interest-earning assets and the interest paid and average rates for interest-bearing liabilities (amounts in thousands, except for average rates). Nonaccrual notes are included in loan amounts.
Average Daily Balances, Interest Income/Expense, Average Yield/Rate For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Loans | $ | 458,679 | $ | 25,208 | 5.50 | % | $ | 474,327 | $ | 25,331 | 5.34 | % | $ | 494,378 | $ | 26,619 | 5.38 | % | ||||||||||||||
Investment securities - taxable | 142,305 | 3,299 | 2.32 | % | 112,989 | 2,401 | 2.12 | % | 104,676 | 1,419 | 1.36 | % | ||||||||||||||||||||
Other investments and FHLB stock | 4,628 | 331 | 7.15 | % | 6,106 | 326 | 5.34 | % | 7,306 | 322 | 4.41 | % | ||||||||||||||||||||
Interest earning deposits in banks | 81,787 | 528 | 0.65 | % | 199,140 | 747 | 0.38 | % | 173,750 | 686 | 0.39 | % | ||||||||||||||||||||
Total interest-earning assets | 687,399 | 29,366 | 4.27 | % | 792,562 | 28,805 | 3.63 | % | 780,110 | 29,046 | 3.72 | % | ||||||||||||||||||||
Other assets | 53,056 | 39,346 | 40,384 | |||||||||||||||||||||||||||||
Total assets | $ | 740,455 | $ | 831,908 | $ | 820,494 | ||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||
NOW and money market deposits | $ | 139,985 | $ | 316 | 0.23 | % | $ | 128,345 | $ | 286 | 0.22 | % | $ | 129,522 | $ | 309 | 0.24 | % | ||||||||||||||
Savings deposits | 38,194 | 57 | 0.15 | % | 34,856 | 51 | 0.15 | % | 33,004 | 47 | 0.14 | % | ||||||||||||||||||||
Time deposits, $100,000 and over | 140,227 | 1,430 | 1.02 | % | 152,399 | 1,686 | 1.11 | % | 181,965 | 2,154 | 1.18 | % | ||||||||||||||||||||
Other time deposits | 83,064 | 643 | 0.77 | % | 95,039 | 849 | 0.89 | % | 110,046 | 972 | 0.88 | % | ||||||||||||||||||||
Borrowed funds | 88,776 | 3,059 | 3.45 | % | 110,419 | 3,997 | 3.62 | % | 112,001 | 4,065 | 3.63 | % | ||||||||||||||||||||
Subordinated debentures and promissory notes | 24,371 | 1,273 | 5.22 | % | 24,372 | 1,219 | 5.00 | % | 24,372 | 1,224 | 5.02 | % | ||||||||||||||||||||
Total interest-bearing liabilities | 514,617 | 6,778 | 1.32 | % | 545,430 | 8,088 | 1.48 | % | 590,910 | 8,771 | 1.48 | % | ||||||||||||||||||||
Noninterest-bearing deposits | 169,289 | 249,266 | 201,371 | |||||||||||||||||||||||||||||
Other liabilities | 4,719 | 5,222 | 5,393 | |||||||||||||||||||||||||||||
Stockholders' equity | 51,830 | 31,990 | 22,820 | |||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 740,455 | $ | 831,908 | $ | 820,494 | ||||||||||||||||||||||||||
Net interest income and interest rate spread | $ | 22,588 | 2.95 | % | $ | 20,717 | 2.15 | % | $ | 20,275 | 2.24 | % | ||||||||||||||||||||
Net yield on average interest-earning assets | 3.29 | % | 2.61 | % | 2.60 | % | ||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 133.57 | % | 145.31 | % | 132.02 | % |
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The following table shows changes in interest income and expense by category and rate/volume variances for the years ended December 31, 2015, 2014 and 2013. The changes due to rate and volume were allocated on their absolute values (amounts in thousands, except for average rates):
Year Ended December 31, 2015 vs. 2014 | Year Ended December 31, 2014 vs. 2013 | ||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income: | |||||||||||||||||||||||
Loans | $ | (848 | ) | $ | 725 | $ | (123 | ) | $ | (1,075 | ) | $ | (213 | ) | $ | (1,288 | ) | ||||||
Investment securities - taxable | 651 | 247 | 898 | 145 | 837 | 982 | |||||||||||||||||
Other investments | (92 | ) | 97 | 5 | (58 | ) | 62 | 4 | |||||||||||||||
Interest earning deposits in banks | (599 | ) | 380 | (219 | ) | 98 | (37 | ) | 61 | ||||||||||||||
Total interest income | (888 | ) | 1,449 | 561 | (890 | ) | 649 | (241 | ) | ||||||||||||||
Interest expense: | |||||||||||||||||||||||
Deposits | |||||||||||||||||||||||
NOW and money market deposits | 26 | 4 | 30 | (3 | ) | (20 | ) | (23 | ) | ||||||||||||||
Savings deposits | 5 | 1 | 6 | 3 | 1 | 4 | |||||||||||||||||
Time deposits over $100,000 | (129 | ) | (127 | ) | (256 | ) | (339 | ) | (129 | ) | (468 | ) | |||||||||||
Other time deposits | (100 | ) | (106 | ) | (206 | ) | (133 | ) | 10 | (123 | ) | ||||||||||||
Borrowed funds | (764 | ) | (174 | ) | (938 | ) | (57 | ) | (11 | ) | (68 | ) | |||||||||||
Subordinated Debentures | — | 54 | 54 | — | (5 | ) | (5 | ) | |||||||||||||||
Total interest expense | (962 | ) | (348 | ) | (1,310 | ) | (529 | ) | (154 | ) | (683 | ) | |||||||||||
Net interest income increase (decrease) | $ | 74 | $ | 1,797 | $ | 1,871 | $ | (361 | ) | $ | 803 | $ | 442 |
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.
The allowance for loan losses at December 31, 2015 was $9.6 million, which represents 2.1% of total loans outstanding compared to $9.4 million or 2.1% as of December 31, 2014. During the year ended December 31, 2015, no provision for the allowance for loan losses was recognized in earnings due to continued improvement in asset quality and the Company's net recovery position at year end, as compared to $8.0 million for the twelve months ended December 31, 2014 as a result of the Asset Resolution Plan executed during the third quarter of 2014. Management believes that at December 31, 2015, the allowance for loan losses was adequate to absorb probable losses inherent in the loan portfolio. Management remains focused on finishing the resolution process and putting legacy loan issues behind the organization. See additional discussion under the section entitled "Asset Quality".
Non-interest Income
Non-interest income for the twelve months ended December 31, 2015 was $9.6 million, as compared to $11.1 million for the same period in 2014, a decrease of $1.5 million. The principal drivers for this decline are related to non-recurring items that appeared in both years but at varying levels. ACH indemnification income for 2015 totaled $445,000 compared to $3.9 million in 2014, a decline of $3.4 million as we completed the exit from this business line. Offsetting this decline was an increase in gains on the sale of problem loans. We reported total gains for 2015 of $3.2 million compared to $1.2 million for the year ended December 31, 2014 as we completed disposal of loans identified in the Asset Resolution Plan. Non-interest income generated from our core banking activities totaled $5.6 million for 2015 compared to $5.5 million in 2014 as we saw increased production and total revenue in our mortgage and wealth management business lines, partially offset by declines in overdraft revenue.
43
Non-interest Expense
Non-interest expense for the year ended December 31, 2015 was $28.6 million, as compared to $28.1 million for the year ended December 31, 2014, an increase of $551,000. The main reason for the increase in total non-interest expenses was a $2.9 million increase in compensation expense. Of this total expense $1.2 million was related to one time costs associated with changes in the executive management team. We additionally implemented a new performance based compensation plan and introduced annual discretionary bonuses which accounted for $1.3 million of the compensation increase as we continue to invest in our associates and ensure we retain key employees. Other operating expenses were elevated by $986,000 primarily due to technology related expenses incurred as the Company upgraded its technology platform to provide better products and services for customers while decreasing technology related risks. The Company continued to restructure the balance sheet during 2015 and extinguished $40 million of long-term debt with a total expense of $2.1 million for the twelve months ended December 31, 2015 as compared to $22.0 million in extinguishments with a total expense of $1.5 million for the same period in 2014.
These increases were offset by declines in other areas as we began to benefit from improved asset quality and reductions in our risk profile. Collections and foreclosure related expenses declined $1.8 million as we incurred fewer costs related to disposition efforts and saw limited write downs on foreclosed assets. FDIC insurance premiums declined $1.1 million and professional and consulting fees declined $919,000.
Income Taxes
The Company reported a $16.5 million income tax benefit for the twelve months ended December 31, 2015 compared to no income tax expense or benefit for the twelve months ended December 31, 2014 as the Company determined in the second quarter of 2015, it is more likely than not that it will generate sufficient taxable income to utilize a significant portion of its deferred tax assets. As a result of this change in judgment about the ability to utilize its deferred tax assets in future years, the Company released a portion of the valuation allowance against its deferred tax assets resulting in an income tax benefit that positively impacted earnings and increased capital for the Company and Bank. This conclusion, and partial release of the valuation allowance, was based upon a number of factors including continued improvement in quarterly earnings, forecasted future profitability, improved asset quality, and the execution of the Asset Resolution Plan. Management will continue to evaluate the ability to utilize the remaining portion of the deferred tax assets as more objective information on growth and profitability becomes available. Future evidence may show that it is more likely than not that the remaining deferred tax assets will be utilized at which point the remaining valuation allowance can be reversed. Alternatively, future evidence may prove that it is more likely that not that a portion of the deferred tax assets will not be utilized in which case a valuation allowance may be reestablished.
Off-Balance Sheet Arrangements
As part of its normal course of business to meet the financing needs of its customers, the Bank is at times a party to financial instruments with off-balance sheet credit risk. Such instruments include commitments to extend credit and standby letters of credit. At December 31, 2015, the Bank’s outstanding commitments to extend credit consisted of undisbursed lines of credit, other commitments to extend, undisbursed portion of construction loans and stand-by letters of credit of $140.2 million. See Note L - Commitments and Contingencies in the accompanying notes to the consolidated financial statements for additional detail regarding the Bank's off-balance sheet risk exposure.
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. During the twelve months ended 2015, the Company's primary use of its excess liquidity was due to the strategic exit of the ACH TPPP line of business. These deposits declined $134.4 million during the twelve month period from $134.9 million at December 31, 2014 compared to $429,000 at December 31, 2015. Management actively managed the changes in these deposits to maintain adequate liquidity during the transition.
44
At December 31, 2015, our outstanding commitments to extend credit consisted of loan commitments of $29.4 million, undisbursed lines of credit of $94.2 million, unused credit card lines of $16.0 million, financial stand-by letters of credit of $438,000 and performance stand-by letters of credit of $233,000. We believe that our combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand, and deposit maturities and withdrawals in the near term.
At December 31, 2014, our outstanding commitments to extend credit consisted of loan commitments of $14.2 million, undisbursed lines of credit of $73.9 million, unused credit card lines of $12.8 million, financial stand-by letters of credit of $238,000 and performance stand-by letters of credit of $1.2 million.
Certificates of deposits represented 42.4% of our total deposits at December 31, 2015, an increase from 35.4% at December 31, 2014. Brokered and out-of-market certificates of deposit totaled $41.5 million at year-end 2015 and $25.9 million at year-end 2014, which comprised 7.7% and 3.9% of total deposits, respectively. Certificates of deposit of $100,000 or more, inclusive of brokered and out-of-market certificates, represented 27.8% of our total deposits at December 31, 2015 and 21.7% at December 31, 2014. Large certificates of deposits are generally considered rate sensitive. While we will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention.
On August 15, 2014, the Company closed the Rights Offering and Standby Offering with Kenneth R. Lehman, a private investor, who later became a member of our Board of Directors. 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 $60.4 million or 8.74% of total assets at December 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 $37.0 million that remain unused at December 31, 2015. As of December 31, 2015, the Company has the credit capacity to borrow up to $138.3 million from the FHLB with $60.0 million outstanding as of December 31, 2015.
The Company had total risk based capital of 16.0%, Tier 1 risk based capital of 12.4%, and a Tier 1 leverage ratio of 8.8% at December 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 15.6%, Tier 1 risk based capital of 14.4%, and a Tier 1 leverage ratio of 10.2% at December 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 11.3% and 14.4%, respectively, at December 31, 2015. At December 31, 2015, both the Company and the Bank were well capitalized. The Company has reviewed the new regulatory guidance under Basel III for capital and believes that it will continue to be well capitalized under the new requirements.
The Company sold $11.5 million aggregate principal amount of subordinated promissory notes to certain accredited investors in December 2015. These notes are due on November 30, 2025 and the Company is obligated to pay interest at an annualized rate of 6.25% payable in quarterly installments commencing on March 1, 2016. The Company may prepay the notes at any time after November 30, 2020, subject to compliance with applicable law. The proceeds were used to refinance the Company's outstanding subordinated promissory notes issued in 2009.
Prior to July 30, 2015, the Company was prohibited by the 2011 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 were also prohibited from declaring or paying dividends without prior approval of the supervisory authorities. On July 30, 2015, the 2011 Written Agreement was terminated and therefore these provisions are no longer in force which allowed the Company to pay the interest on its subordinated promissory notes and TPS for the fourth quarter of 2015 without obtaining prior approval. 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. A decision to pay any dividend in the future would be determined based on a number of factors including capital position and capital adequacy, ongoing operations and profitability, the risk profile of the institution and general market conditions, among other things.
45
Impact of Inflation and Changing Prices
The primary effect of inflation on our operations is reflected in increases in the price of goods and services resulting in higher operating expenses. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans, and deposits.
Recent Accounting Pronouncements
See Note A - Organization and Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements presented under Item 8 of Part II of this Form 10-K, for a discussion of recent accounting pronouncements and management's assessment of the potential impact on our consolidated financial statements.
Critical Accounting Estimates and Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting estimates and policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe that the allowance for loan losses, other than temporary impairment of investments available-for-sale, valuation of foreclosed assets, and income taxes, represent particularly sensitive accounting estimates.
See Note A - Organization and Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements presented under Item 8 of Part II of this Form 10-K, and other statements set forth elsewhere in this report, for a comprehensive view of significant accounting estimates and policies.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
46
Item 8 - Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Four Oaks Fincorp, Inc.
We have audited the accompanying consolidated balance sheets of Four Oaks Fincorp, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2015. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Four Oaks Fincorp, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Cherry Bekaert LLP
Raleigh, North Carolina
March 28, 2016
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Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
As of December 31, 2015 and December 31, 2014
(Amounts in thousands, except per share data)
2015 | 2014 | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 17,375 | $ | 15,519 | |||
Interest-earning deposits | 9,380 | 143,008 | |||||
Cash and cash equivalents | 26,755 | 158,527 | |||||
Certificates of deposits held for investment | 23,520 | 27,784 | |||||
Investment securities available-for-sale, at fair value | 70,281 | 64,211 | |||||
Investment securities held-to-maturity, at amortized cost | 65,354 | 81,583 | |||||
Total investment securities | 135,635 | 145,794 | |||||
Loans held for sale | 1,145 | 2,882 | |||||
Loans | 458,313 | 452,256 | |||||
Allowance for loan losses | (9,616 | ) | (9,377 | ) | |||
Net loans | 448,697 | 442,879 | |||||
Accrued interest receivable | 1,594 | 1,627 | |||||
Bank premises and equipment, net | 12,293 | 11,895 | |||||
FHLB stock | 3,288 | 4,788 | |||||
Investment in life insurance | 14,777 | 14,590 | |||||
Foreclosed assets | 1,760 | 3,782 | |||||
Deferred tax assets, net | 16,679 | — | |||||
Other assets | 5,244 | 6,248 | |||||
TOTAL ASSETS | $ | 691,387 | $ | 820,796 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 132,044 | $ | 251,723 | |||
Money market, NOW accounts and savings accounts | 180,214 | 175,731 | |||||
Time deposits, $100,000 and over | 151,010 | 143,336 | |||||
Other time deposits | 79,066 | 90,395 | |||||
Total deposits | 542,334 | 661,185 | |||||
Borrowings | 60,000 | 90,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 11,500 | 12,000 | |||||
Accrued interest payable | 437 | 1,704 | |||||
Other liabilities | 4,338 | 2,806 | |||||
TOTAL LIABILITIES | 630,981 | 780,067 | |||||
Commitments and Contingencies (Note L) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 80,000,000 shares authorized; 33,595,812 and 32,032,327 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | 33,596 | 32,032 | |||||
Additional paid-in capital | 31,666 | 32,520 | |||||
Accumulated deficit | (4,571 | ) | (24,579 | ) | |||
Accumulated other comprehensive (loss) income | (285 | ) | 756 | ||||
Total shareholders' equity | 60,406 | 40,729 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 691,387 | $ | 820,796 |
See notes to consolidated financial statements.
48
Four Oaks Fincorp, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2015 and 2014
(Amounts in thousands, except per share data)
2015 | 2014 | |||||||
Interest and dividend income: | ||||||||
Loans, including fees | $ | 25,208 | $ | 25,331 | ||||
Taxable investments | 3,299 | 2,401 | ||||||
Dividends | 331 | 326 | ||||||
Interest-earning deposits | 528 | 747 | ||||||
Total interest and dividend income | 29,366 | 28,805 | ||||||
Interest expense: | ||||||||
Deposits | 2,446 | 2,872 | ||||||
Borrowings | 3,059 | 3,997 | ||||||
Subordinated debentures | 250 | 199 | ||||||
Subordinated promissory notes | 1,023 | 1,020 | ||||||
Total interest expense | 6,778 | 8,088 | ||||||
Net interest income | 22,588 | 20,717 | ||||||
Provision for loan losses | — | 7,954 | ||||||
Net interest income after provision for loan losses | 22,588 | 12,763 | ||||||
Non-interest income: | ||||||||
Service charges on deposit accounts | 1,566 | 1,672 | ||||||
Other service charges, commissions and fees | 3,664 | 3,442 | ||||||
Gains on sale of investment securities available-for-sale, net | 265 | 265 | ||||||
Gains on sale of loans held for sale | 3,205 | 1,150 | ||||||
Recovery of impairment loss and gain on redemption of equity securities | — | — | 298 | |||||
Income from investment in life insurance | 187 | 210 | ||||||
Indemnification from third party payment processor clients | 445 | — | 3,872 | |||||
Other non-interest income | 225 | 205 | ||||||
Total non-interest income | 9,557 | 11,114 | ||||||
Non-interest expense: | ||||||||
Salaries | 12,190 | 9,306 | ||||||
Employee benefits | 2,072 | 1,748 | ||||||
Occupancy expenses | 1,342 | 1,311 | ||||||
Equipment expenses | 707 | 1,134 | ||||||
Professional and consulting fees | 2,500 | 3,419 | ||||||
FDIC assessments | 736 | 1,835 | ||||||
Foreclosed asset-related costs, net | 393 | 1,931 | ||||||
Collection expenses | 337 | 630 | ||||||
Prepayment of FHLB borrowings | 2,089 | 1,487 | ||||||
Other operating expenses | 6,251 | 5,265 | ||||||
Total non-interest expense | 28,617 | 28,066 | ||||||
Income (loss) before income taxes | 3,528 | (4,189 | ) | |||||
Income tax benefit | (16,480 | ) | — | |||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) | |||
Basic net income (loss) per common share | $ | 0.62 | $ | (0.24 | ) | |||
Diluted net income (loss) per common share | $ | 0.62 | $ | (0.24 | ) |
See notes to consolidated financial statements.
49
Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2015 and 2014
(Amounts in thousands)
2015 | 2014 | ||||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) | ||
Other comprehensive (loss) income: | |||||||
Securities available-for-sale: | |||||||
Unrealized holding (losses) gains on available-for-sale securities | (882 | ) | 1,348 | ||||
Tax effect | 203 | — | |||||
Reclassification of gains recognized in net income | (265 | ) | (265 | ) | |||
Tax effect | — | — | |||||
Amortization of unrealized losses on investment securities transferred from available-for-sale to held-to-maturity | (59 | ) | (93 | ) | |||
Tax effect | (38 | ) | — | ||||
Total other comprehensive (loss) income | (1,041 | ) | �� | 990 | |||
Comprehensive income (loss) | $ | 18,967 | $ | (3,199 | ) |
See notes to consolidated financial statements.
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Four Oaks Fincorp, Inc.
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2015 and 2014
(Amounts in thousands, except share data)
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2013 | 7,977,657 | $ | 7,978 | $ | 34,269 | $ | (20,390 | ) | $ | (234 | ) | $ | 21,623 | |||||||||
Net loss | — | — | — | (4,189 | ) | — | (4,189 | ) | ||||||||||||||
Other comprehensive income | — | — | — | — | 990 | 990 | ||||||||||||||||
Issuance of common stock | 24,054,670 | 24,054 | (1,812 | ) | — | — | 22,242 | |||||||||||||||
Stock based compensation | — | — | 63 | — | — | 63 | ||||||||||||||||
BALANCE, DECEMBER 31, 2014 | 32,032,327 | $ | 32,032 | $ | 32,520 | $ | (24,579 | ) | $ | 756 | $ | 40,729 | ||||||||||
Net income | — | — | — | 20,008 | — | 20,008 | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (1,041 | ) | (1,041 | ) | ||||||||||||||
Issuance of common stock | 117,023 | 117 | 53 | — | — | 170 | ||||||||||||||||
Stock based compensation | — | — | 565 | — | — | 565 | ||||||||||||||||
Issuance of restricted stock | 1,521,000 | 1,521 | (1,521 | ) | — | — | — | |||||||||||||||
Forfeiture of restricted stock | (60,000 | ) | (60 | ) | 60 | — | — | — | ||||||||||||||
Stock withheld for payment of taxes | (14,538 | ) | (14 | ) | (11 | ) | — | — | (25 | ) | ||||||||||||
BALANCE, DECEMBER 31, 2015 | 33,595,812 | $ | 33,596 | $ | 31,666 | $ | (4,571 | ) | $ | (285 | ) | $ | 60,406 |
See notes to consolidated financial statements.
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Four Oaks Fincorp, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015 and 2014
(Amounts in thousands)
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Provision for loan losses | — | 7,954 | ||||||
Deferred income tax benefit | (16,514 | ) | — | |||||
Provision for depreciation and amortization | 684 | 646 | ||||||
Net amortization of bond premiums and discounts | 1,153 | 1,167 | ||||||
Stock based compensation | 565 | 63 | ||||||
Gain on sale of investment securities | (265 | ) | (265 | ) | ||||
Loss on disposition of bank premises and equipment | 48 | — | ||||||
Gain on sale of foreclosed assets, net | (73 | ) | (193 | ) | ||||
Valuation adjustment on foreclosed assets | 344 | 1,772 | ||||||
Earnings on investment in bank-owned life insurance | (187 | ) | (210 | ) | ||||
Gain on sale of mortgage loans held for sale | (644 | ) | (571 | ) | ||||
Gain on sale of problem loans held for sale | (3,205 | ) | (1,150 | ) | ||||
Originations of mortgage loans held for sale | (29,060 | ) | (24,440 | ) | ||||
Proceeds from sale of loans held for sale | 37,003 | 33,418 | ||||||
Recovery of impairment loss on redemption of securities | — | (298 | ) | |||||
Changes in assets and liabilities: | ||||||||
Other assets | 1,004 | (153 | ) | |||||
Accrued interest receivable | 33 | (51 | ) | |||||
Other liabilities | 1,532 | (1,483 | ) | |||||
Accrued interest payable | (1,267 | ) | 62 | |||||
Net cash provided by operating activities | 11,159 | 12,079 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from sales and calls of investment securities available-for-sale | 8,324 | 22,737 | ||||||
Proceeds from paydowns of investment securities available-for-sale | 6,008 | 1,065 | ||||||
Proceeds from paydowns of investment securities held-to-maturity | 15,430 | 15,323 | ||||||
Purchases of investment securities available-for-sale | (21,697 | ) | (53,787 | ) | ||||
Redemption of certificates of deposits held for investment | 4,264 | 4,066 | ||||||
Redemption of FHLB stock | 1,500 | 1,288 | ||||||
Net (increase) decrease in loans outstanding | (9,414 | ) | 17,863 | |||||
(Purchase) disposal of bank premises and equipment | (1,130 | ) | 29 | |||||
Proceeds from sales of foreclosed assets | 2,990 | 5,428 | ||||||
Net cash provided by investing activities | 6,275 | 14,012 | ||||||
Cash flows from financing activities: | ||||||||
Net repayments from borrowings | (30,000 | ) | (22,000 | ) | ||||
Net (decrease) increase in deposit accounts | (118,851 | ) | 3,565 | |||||
Proceeds from issuance of common stock | 170 | 22,242 | ||||||
Net repayments of subordinated promissory notes | (500 | ) | — | |||||
Shares withheld for payment of taxes | (25 | ) | — | |||||
Net cash (used in) provided by financing activities | (149,206 | ) | 3,807 | |||||
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Change in cash and cash equivalents | (131,772 | ) | 29,898 | |||||
Cash and cash equivalents at beginning of period | 158,527 | 128,629 | ||||||
Cash and cash equivalents at end of period | $ | 26,755 | $ | 158,527 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid on deposits and borrowings | $ | 8,045 | $ | 8,026 | ||||
Income taxes paid | — | 110 | ||||||
Supplemental disclosures of noncash investing and financing activities: | ||||||||
Unrealized (losses) gains on investment securities available-for-sale | $ | (1,147 | ) | $ | 1,248 | |||
Loans transferred from held for investment to held for sale | 2,618 | 13,193 | ||||||
Transfer of loans to foreclosed assets | 1,239 | 2,287 | ||||||
Loans transferred from held for sale to held for investment | 261 | — | 3,054 | |||||
Amortization of net losses on investment securities transferred to held-to-maturity | (59 | ) | (93 | ) |
See notes to consolidated financial statements.
53
Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2015 and 2014
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Four Oaks Fincorp, Inc. (the "Company") was incorporated under the laws of the State of North Carolina on February 5, 1997. The Company’s primary function is to serve as the holding company for its owned subsidiaries, Four Oaks Bank & Trust Company, Inc. (the "Bank") and Four Oaks Mortgage Services, L.L.C (inactive). The Bank operates sixteen offices in eastern and central North Carolina, and its primary source of revenue is derived from loans to customers and from its securities portfolio. The loan portfolio is comprised mainly of real estate, commercial, and consumer loans. These loans are primarily collateralized by residential and commercial properties, commercial equipment, and personal property.
Basis of Presentation
The consolidated financial statements include the accounts and transactions of the Company, a bank holding company incorporated under the laws of the State of North Carolina, and its wholly-owned subsidiaries, the Bank, and Four Oaks Mortgage Services, L.L.C., which has been inactive since September 30, 2012. All significant intercompany transactions have been eliminated. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note H - Trust Preferred Securities). The Trust is not included in the consolidated financial statements of the Company.
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 period's Statements of Operations, Comprehensive Income (Loss), or Shareholders' Equity as previously reported.
Use of Estimates
Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of impaired loans, fair value of foreclosed assets, other than temporary impairment of investment securities available-for-sale and held-to-maturity, and the valuation allowance against deferred tax assets.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks, and interest-earning deposits.
Federal regulations require institutions to set aside specified amounts of cash as reserves against transactions and time deposits. As of December 31, 2015, the daily average gross reserve requirement was $0 due to the amount of cash on the balance sheet.
Investment Securities
Investment securities are classified into three categories:
(1) Held-to-Maturity - Debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at amortized cost.
(2) Trading - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
54
(3) Available-for-Sale - Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of income taxes, as other comprehensive income, a separate component of shareholders' equity. Gains and losses on sales of securities, computed based on specific identification of adjusted cost of each security, are included in income at the time of the sale. Premiums and discounts are amortized into interest income using a method that approximates the interest method over the period to maturity.
Transfers of securities into held-to-maturity from available-for-sale are made at fair value as of the transfer date. The unrealized gain or loss as of the transfer date is retained in accumulated other comprehensive income and in the carrying value of the held-to-maturity securities. The unrealized gain or loss is then amortized over the remaining life of the securities.
Each investment security in a loss position is evaluated for other-than-temporary impairment on at least a quarterly basis. The review includes an analysis of the facts and circumstances of each individual investment such as: (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.
Regardless of these factors, if we have developed a plan to sell the security or it is likely that we will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.
Loans Held for Sale
As part of the asset resolution plan (the "Asset Resolution Plan") executed during 2014, the Company transferred loans held for investment to loans held for sale in anticipation of near term loan sales. The Asset Resolution Plan was completed in the fourth quarter of 2015 and all loans not sold were transferred from loans held for sale to loans held for investment. Other loans held for sale generally represent single-family, residential first mortgage loans on a pre-sold basis originated by our mortgage division. Commitments to sell the residential first mortgage loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting standards of the investor that purchases the loan. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Loans held for sale are measured at the lower of cost or fair value on an aggregated basis within the consolidated balance sheet under the caption “loans held for sale”.
Rate Lock Commitments
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). As required by Accounting Standard Codification ("ASC") ASC 815, Derivatives and Hedging, rate lock commitments related to the origination of mortgage loans held for sale and the corresponding forward loan sale commitments are considered to be derivatives. The commitments are generally for periods of 60 days and are at market rates.
In order to mitigate the risk from interest rate fluctuations, the Company enters into forward loan sale commitments on a “best efforts” basis while the loan is in the pipeline. Interest rate lock commitments and forward sales commitments are not material to the financial statements for any period presented.
Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on all loan classifications is calculated by using the simple interest method on daily balances of the principal amount outstanding.
Loan origination fees are deferred, as well as certain direct loan origination costs. Such costs and fees are recognized as an adjustment to yield over the contractual lives of the related loans utilizing the interest method.
55
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect 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. Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of the following 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 or by determining the fair market value of the underlying collateral securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or charge-off, and is incorporated into the Bank's allowance for loan and lease losses ("ALLL"). Groups of small dollar impaired loans with similar risk characteristics are evaluated for impairment collectively.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual when doubts arise regarding the full collectibility of principal or interest and we are therefore uncertain that the borrower can satisfy the contractual terms of the loan agreement. In addition our policy is to place a loan on nonaccrual status at the point when the loan becomes past due 90 days unless there is sufficient documentation to establish that the loan is well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged-off, the loan is generally classified as nonaccrual.
While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Allowance for Loan Losses
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed. Management evaluates the adequacy of our allowance for loan losses on 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. Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
Management has developed a model for evaluating the adequacy of the allowance for loan losses. The model uses the Company’s internal grading system to quantify the risk of each loan. The grade is initially assigned by the lending officer and/or the credit administration function. The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The grading system is comprised of seven risk categories for active loans. Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan. Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan. Grade 6 loans are considered substandard and are generally impaired. Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Grade 8 loans are considered uncollectable and identified as a confirmed loss. Loans can also be classified as non-accrual, troubled debt restructuring ("TDR"), or otherwise impaired, all of which are considered impaired.
56
Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of the following 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 or by determining the fair market value of the underlying collateral securing the loan. If the fair market value of collateral method is selected for use, an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal. Groups of small dollar impaired loans with similar risk characteristics are evaluated for impairment collectively. Other impaired loans are then analyzed individually to determine the net value of collateral or cash flows and an estimate of potential loss. The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal. If collection is deemed to be collateral dependent then the deficiency is generally charged off. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value. Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and charge-offs. Groups of small dollar impaired loans with similar risk characteristics may be evaluated for impairment collectively.
Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450. The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels and is adjusted for the loan's risk grade. The qualitative factors address loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations. Together these two components comprise the ASC 450, or general reserve.
During 2015, the Company enhanced its ALLL methodology by increasing the look back period used to calculate historical loss rates for the quantitative ASC 450 reserve. In prior periods, the Company calculated historical loss rates from the most recent three years on a rolling quarter basis but this was increased to the most recent five years on a rolling quarter basis. This change was made in an effort to provide a more precise estimate of potential losses and to provide for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from 0% for a risk grade 1 and 300% for a risk grade 6 that is unimpaired. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of 50% to 100% added to that particular risk grade. Categories that have had historically high charge-offs also have an additional reserve factor between 25% to 100% added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.
The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles. However, upon examination by various regulatory agencies, adjustments to the allowance may be required. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.
Bank Premises and Equipment
Land is carried at cost. Buildings, furniture, and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets. Useful lives range from 5 to 10 years for furniture and equipment and 40 years for buildings. Expenditures for repairs and maintenance are charged to expense as incurred.
Stock in Federal Home Loan Bank of Atlanta
The Company owned Federal Home Loan Bank of Atlanta (“FHLB”) stock that it accounts for under the cost method. Based on the continued payment of dividends and that redemption of this stock has historically been at par, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of December 31, 2015 or December 31, 2014. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the FHLB stock held by the Company.
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Foreclosed Assets
Assets acquired as a result of foreclosure are valued at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations of the property are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of debt are treated as credit losses. Routine holding costs, subsequent declines in value, and gains or losses on disposition are included in other income and expense.
Income Taxes
Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “other assets” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be fully realized.
Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset.
From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.
Stock Compensation Plans
The Company accounts for stock based awards granted to employees using the fair value method. The cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). The cost of employee services received in exchange for an award is based on the grant-date fair value of the award. Excess tax benefits are reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which will require lessees to be recorded as an asset on the balance sheet for the right to use the leased asset and a liability for the corresponding lease obligation for leases with terms of more than 12 months. The accounting treatment for lessors will remain relatively unchanged. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In April 2015, the FASB issued 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.
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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.
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 August 12, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. Based on ASU 2015-14, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). 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.
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From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
NOTE B - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options.
Basic and diluted net income (loss) per common share have been computed based upon net income (loss) as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below (amounts in thousands, except share data):
Twelve Months Ended | ||||||||
December 31, | ||||||||
2015 | 2014 | |||||||
Net income (loss) available to common shareholders | $ | 20,008 | $ | (4,189 | ) | |||
Weighted average number of common shares - basic | 32,103,671 | 17,484,541 | ||||||
Effect of dilutive stock options | 15,776 | — | ||||||
Effect of dilutive restricted stock awards | 128,276 | — | ||||||
Weighted average number of common shares - dilutive | 32,247,723 | 17,484,541 | ||||||
Basic earnings (loss) per common share | $ | 0.62 | $ | (0.24 | ) | |||
Diluted earnings (loss) per common share | $ | 0.62 | $ | (0.24 | ) | |||
Anti-dilutive awards | 147,655 | 227,407 |
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 diluted weighted average shares of common stock increased 14.8 million for the year ended December 31, 2015 to 32.2 million as compared to 17.5 million at December 31, 2014.
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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 as of December 31, 2015 and 2014 are as follows (amounts in thousands):
Securities Available-for-Sale | |||||||||||||||||||||||||||||||
At December 31 | |||||||||||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
Taxable municipal securities | $ | 24,789 | $ | 225 | $ | 447 | $ | 24,567 | $ | 16,412 | $ | 686 | $ | 20 | $ | 17,078 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||||
GNMA | 13,512 | 68 | 50 | 13,530 | 16,204 | 163 | 103 | 16,264 | |||||||||||||||||||||||
FNMA & FHLMC | 32,024 | — | 351 | 31,673 | 30,992 | — | 134 | 30,858 | |||||||||||||||||||||||
Other debt securities | 500 | — | — | 500 | — | — | — | — | |||||||||||||||||||||||
Equity securities | 11 | — | — | 11 | 11 | — | — | 11 | |||||||||||||||||||||||
Total | $ | 70,836 | $ | 293 | $ | 848 | $ | 70,281 | $ | 63,619 | $ | 849 | $ | 257 | $ | 64,211 |
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities held-to-maturity as of December 31, 2015 and 2014 are as follows (amounts in thousands):
Securities Held-to-Maturity | |||||||||||||||||||||||||||||||
At December 31 | |||||||||||||||||||||||||||||||
2015 | 2014 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
Taxable municipal securities | $ | 3,531 | $ | 1 | $ | 20 | $ | 3,512 | $ | 3,584 | $ | — | $ | 28 | $ | 3,556 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||||
GNMA | 59,185 | 509 | 230 | 59,464 | 74,482 | 887 | 244 | 75,125 | |||||||||||||||||||||||
FNMA | 2,638 | 19 | — | 2,657 | 3,517 | 44 | — | 3,561 | |||||||||||||||||||||||
Total | $ | 65,354 | $ | 529 | $ | 250 | $ | 65,633 | $ | 81,583 | $ | 931 | $ | 272 | $ | 82,242 |
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 December 31, 2015 resulted from changing market interest rates compared to the yields available at the time the underlying securities were purchased. Twenty of fifty-four Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS"), eleven of fourteen Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") MBS, and twenty-nine of thirty-nine taxable municipal securities contained net unrealized losses at December 31, 2015. Management identified no impairment related to credit quality. At December 31, 2015, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the twelve months ended December 31, 2015.
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The following tables reflect the gross unrealized losses and fair values of securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented. (amounts in thousands):
Securities Available-for-Sale | |||||||||||||||||||||||
12/31/2015 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Taxable municipal securities | $ | 16,888 | $ | 447 | $ | — | $ | — | $ | 16,888 | $ | 447 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 10,010 | 50 | — | — | 10,010 | 50 | |||||||||||||||||
FNMA & FHLMC | 31,673 | 351 | — | — | 31,673 | 351 | |||||||||||||||||
Total temporarily impaired securities | $ | 58,571 | $ | 848 | $ | — | $ | — | $ | 58,571 | $ | 848 |
Securities Available-for-Sale | |||||||||||||||||||||||
12/31/2014 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Taxable municipal securities | $ | 2,580 | $ | 20 | $ | — | $ | — | $ | 2,580 | $ | 20 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 7,425 | 103 | — | — | 7,425 | 103 | |||||||||||||||||
FNMA & FHLMC | 30,858 | 134 | — | — | 30,858 | 134 | |||||||||||||||||
Total temporarily impaired securities | $ | 40,863 | $ | 257 | $ | — | $ | — | $ | 40,863 | $ | 257 |
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The following tables reflect the gross unrealized losses and fair values of securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented. (amounts in thousands):
Securities Held-to-Maturity | |||||||||||||||||||||||
12/31/2015 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Taxable municipal securities | $ | 3,325 | $ | 20 | $ | — | $ | — | $ | 3,325 | $ | 20 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 20,784 | 116 | 5,130 | 114 | 25,914 | 230 | |||||||||||||||||
Total temporarily impaired securities | $ | 24,109 | $ | 136 | $ | 5,130 | $ | 114 | $ | 29,239 | $ | 250 |
Securities Held-to-Maturity | |||||||||||||||||||||||
12/31/2014 | |||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Taxable municipal securities | $ | — | $ | — | $ | 3,556 | $ | 28 | $ | 3,556 | $ | 28 | |||||||||||
Mortgage-backed securities | |||||||||||||||||||||||
GNMA | 7,594 | 41 | 12,240 | 203 | 19,834 | 244 | |||||||||||||||||
Total temporarily impaired securities | $ | 7,594 | $ | 41 | $ | 15,796 | $ | 231 | $ | 23,390 | $ | 272 |
The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (amounts in thousands):
2015 | 2014 | ||||||
Balance of credit losses on debt securities at the beginning of the period | $ | — | $ | 75 | |||
Income received on other-than-temporary impaired debt securities | — | (75 | ) | ||||
Balance of credit losses on debt securities at the end of the period | $ | — | $ | — |
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The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2015 by expected maturities are shown below (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.
Available-for-Sale | |||||||||||||||||||||||||||||||
Taxable municipal securities | Mortgage-backed securities - GNMA | Mortgage-backed securities - FNMA & FHLMC | Other Debt Securities | ||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||
Due within one year | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Due after one year through five years | — | — | — | — | — | — | — | — | |||||||||||||||||||||||
Due after five years through ten years | — | — | — | — | — | — | 500 | 500 | |||||||||||||||||||||||
Due after ten years | 24,789 | 24,567 | 13,512 | 13,530 | 32,024 | 31,673 | — | — | |||||||||||||||||||||||
Total Munis, GNMA, FNMA & FHLMC and Other Debt securities | $ | 24,789 | $ | 24,567 | $ | 13,512 | $ | 13,530 | $ | 32,024 | $ | 31,673 | $ | 500 | $ | 500 | |||||||||||||||
Securities without a specific maturity: | |||||||||||||||||||||||||||||||
Equity securities | 11 | 11 | |||||||||||||||||||||||||||||
Total other securities | $ | 11 | $ | 11 | |||||||||||||||||||||||||||
Held-to-Maturity | |||||||||||||||||||||||||||||||
Taxable municipal securities | Mortgage-backed securities - GNMA | Mortgage-backed securities - FNMA | |||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||||
Due within one year | $ | 100 | $ | 100 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Due after one year through five years | 2,367 | 2,351 | — | — | — | — | |||||||||||||||||||||||||
Due after five years through ten years | 1,064 | 1,061 | 5,291 | 5,425 | 2,638 | 2,657 | |||||||||||||||||||||||||
Due after ten years | — | — | 53,894 | 54,039 | — | — | |||||||||||||||||||||||||
Total Munis, GNMA, and FNMA securities | $ | 3,531 | $ | 3,512 | $ | 59,185 | $ | 59,464 | $ | 2,638 | $ | 2,657 |
Securities with a carrying value of approximately $61.1 million and $101.8 million at December 31, 2015 and 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 during 2015 and 2014 of $8.3 million and $22.7 million generated gross realized gains of $264,771 and $265,087, respectively, and no gross realized losses for 2015 and 2014.
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NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
The classification of loan segments as of December 31, 2015 and 2014 are summarized as follows (amounts in thousands):
2015 | 2014 | ||||||
Commercial and industrial | $ | 23,163 | $ | 24,286 | |||
Commercial construction and land development | 50,510 | 53,642 | |||||
Commercial real estate | 208,737 | 200,510 | |||||
Residential construction | 36,618 | 28,130 | |||||
Residential mortgage | 128,442 | 135,022 | |||||
Consumer | 6,638 | 7,248 | |||||
Other | 1,257 | 499 | |||||
Consumer credit cards | 2,240 | 2,276 | |||||
Business credit cards | 1,168 | 1,251 | |||||
458,773 | 452,864 | ||||||
Net deferred loan fees | (460 | ) | (608 | ) | |||
Allowance for loan losses | (9,616 | ) | (9,377 | ) | |||
Total net loans | $ | 448,697 | $ | 442,879 | |||
Loans held for sale | $ | 1,145 | $ | 2,882 |
Nonperforming assets
Nonperforming assets at December 31, 2015 and 2014 consist of the following (amounts in thousands):
2015 | 2014 | ||||||
Loans past due ninety days or more and still accruing | $ | 65 | $ | 17 | |||
Nonaccrual loans | 6,598 | 8,259 | |||||
Loans held for sale - nonperforming | — | 1,865 | |||||
Foreclosed assets | 1,760 | 3,782 | |||||
Total | $ | 8,423 | $ | 13,923 |
Related Party Loans
The Company had loan and deposit relationships with directors, executive officers, and associates of these parties as of December 31, 2015 and 2014. The following is a reconciliation of these loans (amounts in thousands):
2015 | 2014 | ||||||
Beginning balance | $ | 8,777 | $ | 9,840 | |||
New loans | 1,689 | 1,539 | |||||
Principal repayments | (1,716 | ) | (2,602 | ) | |||
Ending balance | $ | 8,750 | $ | 8,777 |
As a matter of policy, these loans and credit lines are approved by the Company’s Board of Directors and are made with interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectibility.
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Credit Risk
We use an internal grading system to assign the degree of inherent risk on each individual loan and monitor trends in portfolio quality. The grade is initially assigned by the lending officer or credit administration and reviewed by the loan administration function throughout the life of the loan. The credit grades have been defined as follows:
• | Grade 1 - Superior / Lowest Risk |
Loans that are virtually risk-free and are well-collateralized by cash or cash-equivalent instruments held by the Bank. They are loans secured by properly margined liquid collateral such as certificates of deposit, government securities, cash value of life insurance, stock actively traded on one of the major stock exchanges, etc. The repayment program is well-defined and achievable, and repayment sources are numerous. Repayment is definite and being handled as agreed. No material documentation deficiencies or exceptions exist.
• | Grade 2 - Strong |
Loans secured by readily marketable collateral, properly margined and with a definite repayment program in effect. These loans are within guidelines to borrowers with liquid financial statements and sound financial condition. A liquid financial statement is generally a financial statement with substantial liquid assets, particularly relative to the debts. These loans have excellent, multiple sources of repayment, with no significant identifiable risk of collection. The repayment source is well-defined by proven income, cash flow, trade asset turn, etc. Documented sources of repayment exceed required minimum Bank guidelines, and can be supplemented with verifiable cash flow from other sources. Such loans conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).
• | Grade 3 - Solid / Standard |
These loans have adequate sources of repayment, with little identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:
◦ | Conformity in most respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (limited exceptions of any kind). All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted. |
◦ | Documented sources of repayment that meet required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. |
◦ | Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. |
◦ | Secured loans repaying as agreed where collateral value and marketability are sufficient and do not materially affect risk. |
◦ | Fully collectible, unsecured loans repaying as agreed and backed by sound personal or business financial statements with reachable assets that can be readily liquidated. |
• | Grade 4 - Acceptable |
These are acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics:
◦ | Exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions are greater for this risk grade, the exceptions may be properly mitigated by other documented factors that offset any additional risks. |
◦ | Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. |
◦ | Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor. |
◦ | Secured loans repaying as agreed where collateral value or marketability are questionable but do not materially affect risk of repayment/collection. |
◦ | Includes loans to borrowers with an established borrowing history with the Bank, with no Bank delinquencies and no delinquencies with other creditors, but with little or no identifiable cash flow to support the borrower's unblemished repayment history. |
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• | Grade 5 - Special Mention or Watch List |
A Special Mention loan (OAEM) has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Special Mention or Watch List loans may include the following characteristics:
◦ | Loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors. |
◦ | Loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. |
◦ | Borrowers that are experiencing adverse operating trends or an ill-proportioned balance sheet. |
◦ | Loans being repaid as agreed that require close following because of complexity, information or underwriting deficiencies, emerging signs of weakness or non-standard terms. |
◦ | Potential weaknesses exist, generally the result of deviations from prudent lending practices, such as over advances on collateral or unproven and inadequate primary repayment sources. |
◦ | Loans where adverse economic conditions have developed subsequent to the loan origination that may not jeopardize liquidation of the debt, but do substantially increase the level of risk, may also warrant this rating. |
• | Grades 6-8 - Substandard (Grade 6), Doubtful (Grade 7) and Loss (Grade 8) |
A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Loans are not typically made if graded Substandard or worse at inception without management's approval.
The following tables illustrate the credit risk profile by creditworthiness class as of December 31, 2015 and 2014 (amounts in thousands):
December 31, 2015 | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate - Other | Residential - Construction | Residential - Mortgage | Consumer - Other | Other - Loans | Total | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,942 | $ | — | $ | — | $ | — | $ | — | $ | 1,773 | $ | — | $ | 3,715 | |||||||||||||||
2 - Strong | 971 | 749 | 2,280 | — | 15,187 | 386 | 7 | 19,580 | |||||||||||||||||||||||
3 - Standard | 10,530 | 11,262 | 94,357 | 4,296 | 56,493 | 1,250 | 469 | 178,657 | |||||||||||||||||||||||
4 - Acceptable | 9,297 | 33,832 | 103,740 | 31,431 | 50,226 | 3,170 | 757 | 232,453 | |||||||||||||||||||||||
5 - Special Mention | 304 | 2,486 | 4,444 | 170 | 5,231 | 59 | — | 12,694 | |||||||||||||||||||||||
6 - Substandard or worse (1) | 119 | 2,181 | 3,916 | 721 | 1,305 | — | 24 | 8,266 | |||||||||||||||||||||||
$ | 23,163 | $ | 50,510 | $ | 208,737 | $ | 36,618 | $ | 128,442 | $ | 6,638 | $ | 1,257 | $ | 455,365 |
(1) The above table does not include business and consumer credit cards.
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December 31, 2014 | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate - Other | Residential - Construction | Residential - Mortgage | Consumer - Other | Other - Loans | Total | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 2,099 | $ | — | $ | — | $ | — | $ | — | $ | 1,638 | $ | — | $ | 3,737 | |||||||||||||||
2 - Strong | 606 | 630 | 2,206 | — | 14,794 | 314 | 11 | 18,561 | |||||||||||||||||||||||
3 - Standard | 9,506 | 10,625 | 81,761 | 1,893 | 53,007 | 3,556 | 225 | 160,573 | |||||||||||||||||||||||
4 - Acceptable | 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 - Substandard or worse (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 |
(1) The above table does not include business and consumer credit cards and loans held for sale. As of December 31, 2014, there were $2.5 million in risk grade 6 loans classified as held for sale.
The following table illustrates the credit card portfolio exposure as of December 31, 2015 and 2014 (amounts in thousands):
December 31, 2015 | December 31, 2014 | ||||||||||||||
Consumer - Credit Card | Business - Credit Card | Consumer - Credit Card | Business - Credit Card | ||||||||||||
Performing | $ | 2,211 | $ | 1,133 | $ | 2,263 | $ | 1,248 | |||||||
Nonperforming | 29 | 35 | 13 | 3 | |||||||||||
$ | 2,240 | $ | 1,168 | $ | 2,276 | $ | 1,251 |
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Nonaccruals and Past Due Loans
The following tables illustrate the age analysis of past due loans by loan class as of December 31, 2015 and 2014 (amounts in thousands):
December 31, 2015 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | 56 | $ | 119 | $ | — | $ | 175 | $ | 22,988 | $ | 23,163 | |||||||||||
Commercial construction & land development | 211 | 1,626 | — | 1,837 | 48,673 | 50,510 | |||||||||||||||||
Commercial real estate | — | 2,929 | — | 2,929 | 205,808 | 208,737 | |||||||||||||||||
Residential construction | 133 | 721 | — | 854 | 35,764 | 36,618 | |||||||||||||||||
Residential mortgage | 499 | 1,203 | — | 1,702 | 126,740 | 128,442 | |||||||||||||||||
Consumer | 71 | — | — | 71 | 6,567 | 6,638 | |||||||||||||||||
Consumer credit cards | 95 | — | 29 | 124 | 2,116 | 2,240 | |||||||||||||||||
Business credit cards | 107 | — | 36 | 143 | 1,025 | 1,168 | |||||||||||||||||
Other loans | — | — | — | — | 1,257 | 1,257 | |||||||||||||||||
Total | $ | 1,172 | $ | 6,598 | $ | 65 | $ | 7,835 | $ | 450,938 | $ | 458,773 |
December 31, 2014 | |||||||||||||||||||||||
30-89 Days Past Due | 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.
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 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 ALLL.
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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 loans does not include deferred fees or accrued interest and management deems this amount to be immaterial.
The following tables illustrate the impaired loans by loan class as of December 31, 2015 and 2014 (amounts in thousands):
December 31, 2015 | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 67 | $ | 67 | $ | — | $ | 63 | $ | 3 | |||||||||
Commercial construction & land development | 737 | 1,706 | — | 1,031 | 19 | ||||||||||||||
Commercial real estate | 2,258 | 2,614 | — | 2,020 | 50 | ||||||||||||||
Residential construction | 721 | 722 | — | 408 | 8 | ||||||||||||||
Residential mortgage | 1,305 | 1,312 | — | 1,191 | 51 | ||||||||||||||
Subtotal: | $ | 5,088 | $ | 6,421 | $ | — | $ | 4,713 | $ | 131 | |||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 52 | $ | 63 | $ | 7 | $ | 58 | $ | 4 | |||||||||
Commercial construction & land development | 1,948 | 3,020 | 1,006 | 2,086 | 122 | ||||||||||||||
Commercial real estate | 1,699 | 1,699 | 228 | 1,713 | 79 | ||||||||||||||
Residential mortgage | 139 | 217 | 20 | 183 | 8 | ||||||||||||||
Subtotal: | $ | 3,838 | $ | 4,999 | $ | 1,261 | $ | 4,040 | $ | 213 | |||||||||
Totals: | |||||||||||||||||||
Commercial | $ | 6,761 | $ | 9,169 | $ | 1,241 | $ | 6,971 | $ | 277 | |||||||||
Residential | 2,165 | 2,251 | 20 | 1,782 | 67 | ||||||||||||||
Grand Total | $ | 8,926 | $ | 11,420 | $ | 1,261 | $ | 8,753 | $ | 344 |
At December 31, 2015, the recorded investment in loans considered impaired totaled $8.9 million. Of the total investment in loans considered impaired, $3.8 million were found to show specific impairment for which a $1.3 million valuation allowance was recorded; the remaining $5.1 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance.
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December 31, 2014 | |||||||||||||||||||
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.
At December 31, 2014, the recorded investment in loans considered impaired totaled $13.4 million. Of the total investment in loans considered impaired, $2.0 million were found to show specific impairment for which a $663,000 valuation allowance was recorded; the remaining $11.4 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance.
Troubled Debt Restructurings
Loans are classified as a 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. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.
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. All loans identified by the Bank's internal loan grading system to pose a heightened level of risk at or prior to renewal or modification are additionally reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine whether a concession has been granted. If the Bank determines that both conditions have been met, the loan will be classified as a TDR. If the Bank determines that both conditions have not been met, the loan is not classified as a TDR, but would typically then be monitored for any additional deterioration. Documentation to support this determination of TDR classification is maintained within the credit file.
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For the year ended December 31, 2015, there were no loans modified as TDRs compared to three loans totaling $104,000 which were deemed TDRs for the year ended December 31, 2014. The following table presents a breakdown of TDRs by loan class and the type of concession made to the borrower as of December 31, 2014 (amounts in thousands, except number of loans):
For the Year Ended | |||||||||
December 31, 2014 | |||||||||
Number of loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||
Extended payment terms: | |||||||||
Consumer | 1 | $ | 4 | $ | 4 | ||||
Subtotal | 1 | $ | 4 | $ | 4 | ||||
Forgiveness of principal: | |||||||||
Commercial construction and land development | 2 | $ | 100 | $ | 43 | ||||
Subtotal | 2 | $ | 100 | $ | 43 | ||||
Total | 3 | $ | 104 | $ | 47 |
There were no loans modified as TDRs and for which there was a payment default during the year ended December 31, 2015.
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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.
Following is an analysis of the allowance for loan losses by loan segment as of and for the years ended December 31, 2015 and 2014 (amounts in thousands):
December 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 | (58 | ) | (615 | ) | 71 | (90 | ) | 497 | 121 | 74 | — | ||||||||||||||||||||
Loans charged-off | (74 | ) | (196 | ) | (578 | ) | (41 | ) | (713 | ) | (210 | ) | (69 | ) | (1,881 | ) | |||||||||||||||
Recoveries | 234 | 1,176 | 393 | — | 201 | 113 | 3 | 2,120 | |||||||||||||||||||||||
Net (charge-offs) recoveries | 160 | 980 | (185 | ) | (41 | ) | (512 | ) | (97 | ) | (66 | ) | 239 | ||||||||||||||||||
Balance, end of period | $ | 221 | $ | 5,470 | $ | 2,268 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 9,616 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2 | $ | 989 | $ | 228 | $ | — | $ | — | $ | — | $ | — | $ | 1,219 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 219 | $ | 4,481 | $ | 2,040 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 8,397 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 24,331 | $ | 50,510 | $ | 208,737 | $ | 36,618 | $ | 128,442 | $ | 8,878 | $ | 1,257 | $ | 458,773 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 84 | $ | 2,564 | $ | 3,957 | $ | 721 | $ | 1,305 | $ | — | $ | — | $ | 8,631 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 24,247 | $ | 47,946 | $ | 204,780 | $ | 35,897 | $ | 127,137 | $ | 8,878 | $ | 1,257 | $ | 450,142 |
(1) At December 31, 2015, there were $295,000 in impaired loans collectively evaluated for impairment with $42,000 in reserves established.
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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.
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NOTE E - BANK PREMISES AND EQUIPMENT
Company premises and equipment at December 31, 2015 and 2014 are as follows (amounts in thousands):
2015 | 2014 | ||||||
Land | $ | 4,394 | $ | 4,394 | |||
Buildings and leasehold improvements | 11,312 | 11,189 | |||||
Furniture and equipment | 5,182 | 11,411 | |||||
Construction in process | 1,467 | 562 | |||||
22,355 | 27,556 | ||||||
Less accumulated depreciation | (10,062 | ) | (15,661 | ) | |||
$ | 12,293 | $ | 11,895 |
Depreciation expense was $684,000 and $833,000 for the years ended December 31, 2015 and 2014, respectively.
NOTE F - DEPOSITS
At December 31, 2015, the scheduled maturities of time deposits are as follows (amounts in thousands):
Less than $100,000 | $100,000 or more | Total | |||||||||
2016 | $ | 44,628 | $ | 94,570 | $ | 139,198 | |||||
2017 | 22,174 | 32,320 | 54,494 | ||||||||
2018 | 7,518 | 10,612 | 18,130 | ||||||||
2019 | 1,790 | 4,347 | 6,137 | ||||||||
2020 | 2,803 | 7,338 | 10,141 | ||||||||
2021 and beyond | 153 | 1,823 | 1,976 | ||||||||
Total time deposits | $ | 79,066 | $ | 151,010 | $ | 230,076 |
NOTE G - BORROWINGS
At December 31, 2015 and 2014, borrowed funds included the following FHLB advances (amounts in thousands):
Maturity | Interest Rate | 2015 | 2014 | |||||||||
June 5, 2017 | 4.35% | Fixed | $ | — | $ | 10,000 | ||||||
July 3, 2017 | 4.36% | Fixed | — | 13,000 | ||||||||
July 31, 2017 | 4.35% | Fixed | — | 5,000 | ||||||||
August 14, 2017 | 4.08% | Fixed | — | 5,000 | ||||||||
August 14, 2017 | 3.94% | Fixed | 5,000 | 5,000 | ||||||||
October 4, 2017 | 3.95% | Fixed | — | 7,000 | ||||||||
February 5, 2018 | 2.06% | Fixed | 10,000 | 10,000 | ||||||||
June 5, 2018 | 2.25% | Fixed | 5,000 | 5,000 | ||||||||
June 5, 2018 | 2.55% | Fixed | 5,000 | 5,000 | ||||||||
June 5, 2018 | 3.03% | Fixed | 5,000 | 5,000 | ||||||||
September 10, 2018 | 3.14% | Fixed | 10,000 | 10,000 | ||||||||
September 18, 2018 | 2.71% | Fixed | 10,000 | 10,000 | ||||||||
February 22, 2016 | 0.48% | Fixed | 10,000 | — | ||||||||
$ | 60,000 | $ | 90,000 |
FHLB advances are secured by a floating lien covering the Company’s loan portfolio of qualifying residential (1-4 units) first mortgage loans. At December 31, 2015, the Company has available lines of credit totaling $138.3 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at December 31, 2015 and 2014 were 2.38% and 3.42%, respectively.
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In addition to the above advances, the Company has lines of credit of $37.0 million from various financial institutions to purchase federal funds on a short-term basis. The Company has no federal funds purchases outstanding as of December 31, 2015.
NOTE H - TRUST PREFERRED SECURITIES
On March 30, 2006, $12.4 million of trust preferred securities (the “Trust Preferred Securities”) were placed through the Trust. The Trust has invested the net proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company and recorded in borrowings on the accompanying consolidated balance sheets. The Trust Preferred Securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus 1.35%. The dividends paid to holders of the Trust Preferred Securities, which will be recorded as interest expense, are deductible for income tax purposes. The Trust Preferred Securities are redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15, September 15, December 15, or March 15. Redemption is mandatory by June 15, 2036.
The Company has fully and unconditionally guaranteed the Trust Preferred Securities through the combined operation of the Debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The Trust Preferred Securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.
We have the right to defer payment of interest on the Debentures at any time and from time to time for a period not exceeding five years, provided that no deferral period extends beyond the stated maturities of the Debentures. Such deferral of interest payments by the Company will result in a deferral of distribution payments on the related Trust Preferred Securities. Whenever we defer the payment of interest on the Debentures, the Company will be precluded from the payment of cash dividends to shareholders. In January 2011, the Company elected to defer the regularly scheduled interest payments on the Debentures related to our outstanding Trust Preferred Securities as the Company was prohibited by the 2011 Written Agreement, as defined and described in Note K - Regulatory Restrictions of these Notes to Consolidated Financial Statements, from paying interest without prior approval of the supervisory authorities. On July 30, 2015, the 2011 Written Agreement was terminated and these restrictions were eliminated allowing the Company to pay the deferred interest on its Debentures. The Company is now current with interest payments on the Debentures.
NOTE I – SUBORDINATED PROMISSORY NOTES
In late 2015, the Company sold $11.5 million aggregate principal amount of subordinated promissory notes. These notes are due on November 30, 2025 and the Company is obligated to pay interest at an annualized rate of 6.25% payable in quarterly installments commencing on March 1, 2016. The Company may prepay the notes at any time after November 30, 2020, subject to compliance with applicable law. The proceeds of the offering were used to refinance the Company's outstanding subordinated promissory notes issued in 2009.
NOTE J - INCOME TAXES
Allocation of income tax expense between current and deferred portions is as follows (amounts in thousands):
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
Current tax expense (benefit): | |||||||
Federal | $ | 34 | $ | — | |||
State | — | — | |||||
34 | — | ||||||
Deferred tax expense (benefit): | |||||||
Federal | (15,184 | ) | — | ||||
State | (1,330 | ) | — | ||||
(16,514 | ) | — | |||||
Income tax benefit | $ | (16,480 | ) | $ | — |
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The reconciliation of expected income tax at the statutory federal rate of 34% with income tax expense is as follows (amounts in thousands):
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
Expense computed at statutory rate of 34% | $ | 1,200 | $ | (1,424 | ) | ||
Effect of state income taxes, net of federal benefit | (790 | ) | 39 | ||||
Tax exempt income | (19 | ) | (22 | ) | |||
Bank owned life insurance income | (64 | ) | (71 | ) | |||
Valuation allowance | (16,819 | ) | 1,421 | ||||
Other, net | 12 | 57 | |||||
$ | (16,480 | ) | $ | — |
Deferred income taxes consist of the following (amounts in thousands):
Years Ended December 31, | |||||||
2015 | 2014 | ||||||
Deferred tax assets: | |||||||
Allowance for loan losses | $ | 3,523 | $ | 3,454 | |||
Restricted stock and stock options | 240 | 384 | |||||
OTTI | 188 | 345 | |||||
Net deferred loan fees | 169 | 206 | |||||
Net operating loss | 14,901 | 16,187 | |||||
FMV adjustment on purchased assets | — | 89 | |||||
SERP accrual | 186 | 178 | |||||
Other | 1,335 | 2,545 | |||||
Unrealized loss on securities | 165 | — | |||||
Total deferred tax assets | 20,707 | 23,388 | |||||
Less valuation allowance | (3,765 | ) | (22,013 | ) | |||
Net deferred tax assets | 16,942 | 1,375 | |||||
Deferred tax liabilities: | |||||||
Property and equipment | $ | 133 | $ | 809 | |||
Prepaid expense | 80 | 255 | |||||
Unrealized gain on securities | — | 282 | |||||
Other | 50 | 29 | |||||
Total deferred tax liabilities | 263 | 1,375 | |||||
Net deferred tax asset (liability) | $ | 16,679 | $ | — |
When tax returns are filed, it is highly likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. For the years ended December 31, 2015 and 2014, there were no uncertain tax positions taken by the Company. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Fiscal years ending December 31, 2009 and thereafter are subject to IRS examination.
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For the twelve months ended December 31, 2015, the Company recorded a discrete income tax benefit of $16.5 million. This compares to no income tax benefit or expense for the same period in 2014. The year-over-year variance is due to the Company’s release of the valuation allowance against its deferred tax assets in the second quarter of 2015 offset by an income tax expense in the third quarter of 2015 as a result of changes to the North Carolina tax rate and its impact on future deferred tax benefits.
As of December 31, 2015, the Company had net operating losses available for carryforward of $39.4 million that will expire, if unused, from 2028 through 2034.
Under the accounting principles generally accepted in the United States ("GAAP"), companies are required to assess whether a valuation allowance should be established against their deferred tax assets based on consideration of all available positive and negative evidence using a “more likely than not” standard. During the analysis for the twelve months ended December 31, 2010 and continuing through March 31, 2015, the Company had concluded that it was not more-likely-than-not that the Company would be able to utilize its deferred tax assets and, accordingly, had established a full valuation allowance against the value of the deferred tax assets. This conclusion was based on negative credit quality trends, increasing provision for loan losses, cumulative loss position, and uncertainty regarding the amount of future taxable income that the Company could forecast.
As part of the ongoing evaluation of positive and negative factors, the Company determined in the second quarter of 2015, it is more likely than not that it will generate sufficient taxable income to utilize a significant portion of its deferred tax assets. As a result of this change in judgment about the ability to utilize its deferred tax assets in future years, the Company released $16.6 million of the valuation allowance against its deferred tax assets resulting in an income tax benefit. This conclusion, and partial release of the valuation allowance, was based upon a number of factors including continued improvement in quarterly earnings, forecasted future profitability, improved asset quality and the execution of the Asset Resolution Plan.
The Company will continue to evaluate its ability to utilize the remaining $3.8 million in net deferred tax assets as more objective information on growth and profitability becomes available. Future evidence may show that it is more likely than not that the remaining deferred tax assets will be utilized at which point the remaining valuation allowance can be reversed. Alternatively, future evidence may prove that it is more likely than not that a portion of the deferred tax assets will not be utilized in which case a valuation allowance may be reestablished.
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NOTE K - 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. Although not currently limited by regulatory authorities, there were no dividends paid to the Company by the Bank during 2015.
In early July 2013, the Federal Reserve approved a final rule that implemented Basel III’s integrated regulatory capital framework. This rule substantially revised risk-based capital requirements including defining the components of capital, modifying the risk weights applied to assets, and addressing other issues affecting the calculation of banking institution's regulatory capital ratios. The Based III rule became effective for the Company and the Bank on January 1, 2015. The minimum capital level requirements applicable to the Company and Bank under the Basel III rules are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%.
At December 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 and at (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 December 31, 2015: | ||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 77,620 | 15.6 | % | $ | 39,750 | 8.0 | % | $ | 49,688 | 10.0 | % | ||||||||
Tier I Capital (to Risk Weighted Assets) | 71,367 | 14.4 | % | 29,813 | 6.0 | % | 39,750 | 8.0 | % | |||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 71,367 | 14.4 | % | 22,360 | 4.5 | % | 32,297 | 6.5 | % | |||||||||||
Tier I Capital (to Average Assets) | 71,367 | 10.2 | % | 28,015 | 4.0 | % | 35,019 | 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 | % |
At December 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 16.0%, 12.4%, 11.3%, and 8.8%, 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 "2011 Written Agreement") with the Federal Reserve Bank of Richmond (the "FRB") and the North Carolina Office of the Commissioner of Banks (the "NCCOB"). Working closely with its regulatory partners, the Company demonstrated substantial business and risk management progress and was deemed in compliance with the 2011 Written Agreement. The Company's 2014 capital raise, continued asset quality improvements, and implementation of the Asset Resolution Plan were critical to the Bank's ability to demonstrate the required compliance. As a result, on July 30, 2015, the 2011 Written Agreement was terminated by the FRB and the NCCOB. In connection with the termination of the 2011 Written Agreement, the Bank entered into a new Written Agreement on July 30, 2015 (the “2015 Written Agreement”) with only the FRB, which is unrelated to the Bank’s financial condition. Under the terms of the 2015 Written Agreement, the Bank submitted the following plans for approval:
•a written plan to assure ongoing board oversight of the Bank's management and operations;
•a written program for the review of new products, services, or business lines; and
• | an enhanced written program for conducting appropriate levels of customer due diligence by the Bank. |
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In addition, the Bank has agreed that it will:
• | within ten days of approval by the FRB, adopt the approved programs specified in the second and third bullets, above; and |
• | within 30 days after the end of each calendar quarter following the date of the 2015 Written Agreement, submit to FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2015 Written Agreement and the results thereof. |
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the commitment letter or contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Undisbursed lines of credit are commitments for possible future extensions of credit to customers on existing loans. These lines of credit generally contain a specified maturity date, but could also exclude an expiration date such as is the case for our overdraft protection lines. Similar to commitments, undisbursed lines of credit may not be drawn upon to the total extent to which the Bank is committed and do not necessarily represent future cash requirements.
Stand-by letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within four years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
At December 31, 2015 and 2014, financial instruments whose contract amounts represent credit risk were (amounts in thousands):
2015 | 2014 | ||||||
Commitments to extend credit | $ | 29,354 | $ | 14,182 | |||
Undisbursed lines of credit | 94,241 | 73,888 | |||||
Financial stand-by letters of credit | 438 | 238 | |||||
Performance stand-by letters of credit | 233 | 1,203 | |||||
Legally binding commitments | 124,266 | 89,511 | |||||
Unused credit card lines | 15,982 | 12,773 | |||||
Total | $ | 140,248 | $ | 102,284 |
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Litigation Proceedings
In October 2013, multiple putative class action lawsuits were filed in United States district courts across the country against a number of different banks based on the banks' alleged role in "payday lending". Four of these lawsuits, filed in the Northern District of Georgia, the Middle District of North Carolina, the District of Maryland, and the Southern District of Florida, named the Bank as one of the defendants. The lawsuits allege that, by processing Automatic Clearing House transactions indirectly on behalf of "payday" lenders, the Bank is illegally participating in an enterprise to collect unlawful debts and is therefore liable to plaintiffs for damages under the federal Racketeer Influenced and Corrupt Organizations Act. The lawsuits also allege a variety of state law claims. The Bank moved to dismiss each of these lawsuits. The Georgia action was voluntarily dismissed by the plaintiffs and the District of Maryland granted the motion and dismissed the case, which the parties subsequently settled while on appeal to the United States Court of Appeals for the Fourth Circuit. The lawsuit in the Southern District of Florida has been stayed pending arbitration of the plaintiff's claims against the Bank’s co-defendants. The Middle District of North Carolina granted the motion in part and denied it in part; the case against the Bank has been stayed pending resolution of motions to compel arbitration filed by the Bank's co-defendants.
Additionally, the Company and the Bank are parties to certain other legal actions in the ordinary course of their business. The Company believes these actions are routine in nature and incidental to the operation of their 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, the Company's assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, the Company's business, financial condition, results of operations, cash flows and prospects could be adversely affected.
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NOTE M – FAIR VALUE MEASUREMENTS
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 December 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 the Government National Mortgage Association (“GNMA”), with additional mortgage-backed securities issued by the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation ("FHLMC"). As of December 31, 2015, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities. Securities classified as Level 3 include other debt securities in less liquid markets and with no quoted market price.
The following table presents information about assets measured at fair value on a recurring basis at December 31, 2015 and 2014 (amounts in thousands):
Available-for-Sale Securities: | Fair Value Measurements at December 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 | ||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||
Taxable municipal securities | $ | 24,567 | $ | 24,567 | $ | — | $ | 24,567 | $ | — | ||||||||||
Mortgage-backed securities: | ||||||||||||||||||||
GNMA | 13,530 | 13,530 | — | 13,530 | — | |||||||||||||||
FNMA & FHLMC | 31,673 | 31,673 | — | 31,673 | — | |||||||||||||||
Other debt securities | 500 | 500 | — | — | 500 | |||||||||||||||
Equity securities | 11 | 11 | — | 11 | — | |||||||||||||||
Total available-for-sale securities | $ | 70,281 | $ | 70,281 | $ | — | $ | 69,781 | $ | 500 |
Available-for-Sale Securities: | 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 | ||||||||||||||||
(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 | $ | — |
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The table below presents reconciliation for the years ended December 31, 2015 and 2014 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands). During the year ended December 31, 2015, no securities were transferred from Level 3 to Level 2.
Available-for-Sale Securities | |||||||
2015 | 2014 | ||||||
Beginning Balance | $ | — | $ | 1,025 | |||
Total realized and unrealized gains or (losses): | |||||||
Included in earnings | — | 250 | |||||
Included in other comprehensive income | — | 150 | |||||
Purchases, issuances and settlements | 500 | (1,425 | ) | ||||
Ending Balance | $ | 500 | $ | — |
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.
At December 31, 2015, the Company had $1.1 million in loans held for sale which were made up entirely of residential mortgage loans held for sale in the secondary market. At December 31, 2014, the Company had $2.9 million in loans held for sale which included $335,000 in residential mortgage loans held for sale in the secondary market and $2.5 million in other loans for sale that were transferred from loans held for investment during 2014. These loans were transferred to held for sale and are being carried at fair value in anticipation of near term loan sales resulting from the Asset Resolution Plan.
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.
As of December 31, 2015, the Bank identified $3.5 million in impaired loans that were carried at fair value which included $3.8 million in loans that required a specific valuation allowance of $1.3 million and an additional $1.0 million in loans without a specific valuation allowance that have previously been written down to fair value. As of December 31, 2014, the Bank identified $9.9 million in impaired loans that were carried at fair value which included $1.6 million in loans that required a specific valuation allowance of $524,000 and an additional $8.8 million in loans without a specific valuation allowance that have previously been written down to fair value.
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. At December 31, 2015, there were $344,000 of fair value adjustments required after transfer related to foreclosed real estate of $1.8 million compared to $1.8 million and $3.8 million, respectively, at December 31, 2014.
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Assets measured at fair value on a non-recurring basis are included in the table below at December 31, 2015 and 2014 (amounts in thousands):
Fair Value Measurements at December 31, 2015, Using | ||||||||||||||||||||
Description | Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
Loans held for sale | $ | 1,145 | $ | 1,145 | $ | — | $ | 1,145 | $ | — | ||||||||||
Impaired loans | $ | 3,540 | $ | 3,540 | $ | — | $ | — | $ | 3,540 | ||||||||||
Foreclosed assets | $ | 1,760 | $ | 1,760 | $ | — | $ | — | $ | 1,760 |
Fair Value Measurements at December 31, 2014, Using | ||||||||||||||||||||
Description | Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (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 December 31, 2015 (amounts in thousands, except percentages):
Total Carrying Amount at December 31, 2015 | Valuation Methodology | Range of Inputs | |||||
Recurring measurements: | Probability of default | 10-20% | |||||
Other debt securities | $ | 500 | Loss given default | 100% | |||
Nonrecurring measurements: | |||||||
Impaired loans | $ | 3,540 | Collateral discounts | 9 - 50% | |||
Foreclosed assets | $ | 1,760 | Discounted appraisals | 10 - 30% |
Collateral discounts to determine fair value on impaired loans varies widely and result from the consideration of the following factors: the age of the most recent appraisal, 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% - 40% |
Commercial real estate | 9% - 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.
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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.
Certificates of Deposit
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 mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans 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.
Premises and Equipment, Held for Sale
The carrying amount of premises and equipment held for sale 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.
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The following table presents information for financial assets and liabilities as of December 31, 2015 and 2014 (amounts in thousands):
December 31, 2015 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 26,755 | $ | 26,755 | $ | 26,755 | $ | — | $ | — | |||||||
Certificates of deposit | 23,520 | 23,520 | — | 23,520 | — | ||||||||||||
Securities available-for-sale | 70,281 | 70,281 | — | 69,781 | 500 | ||||||||||||
Securities held-to-maturity | 65,354 | 65,633 | — | 65,633 | — | ||||||||||||
Loans held for sale | 1,145 | 1,145 | — | 1,145 | — | ||||||||||||
Loans, net | 448,697 | 423,285 | — | — | 423,285 | ||||||||||||
FHLB stock | 3,288 | 3,288 | — | 3,288 | — | ||||||||||||
Accrued interest receivable | 1,594 | 1,594 | — | 1,594 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 542,334 | $ | 541,818 | $ | — | $ | 541,818 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 23,872 | 23,872 | — | — | 23,872 | ||||||||||||
Borrowings | 60,000 | 61,709 | — | 61,709 | — | ||||||||||||
Accrued interest payable | 437 | 437 | — | 437 | — |
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 | — |
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NOTE N - STOCK OPTION PLAN
The Company has a non-qualified stock option plan for certain key employees under which it is authorized to issue options for up to 1,542,773 shares of common stock. Options are granted at the discretion of the Company’s Board of Directors at an exercise price approximating market value, as determined by a committee of Board members. All options granted subsequent to a 1997 amendment will be 100% vested after either one or two years from the grant date and will expire after such a period as is determined by the Board at the time of grant. Options granted in 2014 have a two year vesting provision. There were no options granted during 2015.
A summary of option activity under the Plan for the year ended December 31, 2015, is presented below:
Shares | Option Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||
Outstanding at January 1, 2015 | 278,582 | $ | 4.86 | |||||||||
Issued | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | 18,525 | 1.99 | ||||||||||
Expired | 66,327 | 7.20 | ||||||||||
Balance at December 31, 2015 | 193,730 | $ | 4.33 | 1.76 | $ | 32,328 | ||||||
Exercisable at December 31, 2015 | 144,199 | $ | 5.23 | 1.28 | $ | 29,853 |
The weighted average exercise price of all exercisable options at December 31, 2015 is $5.23. There were 214,845 shares reserved for future issuance under the Company’s stock option plan at December 31, 2015.
A summary of the status of the Company's non-vested options as of December 31, 2015 and changes during the year then ended is presented below:
Shares | Weighted average grant date fair value | |||||
Non-vested - December 31, 2014 | 104,556 | $ | 0.86 | |||
Granted | — | — | ||||
Vested | 46,075 | 0.69 | ||||
Forfeited/Expired | 8,950 | 0.83 | ||||
Non-vested - December 31, 2015 | 49,531 | $ | 1.03 |
As of December 31, 2015 and 2014, there was $25,388 and $42,016 of unrecognized compensation cost related to non-vested options, respectively.
Additional information concerning the Company’s stock options at December 31, 2015 is as follows:
Exercise Price | Number Outstanding | Contractual Life (Years) | Number Exercisable | |||||
1.15-1.69 | 46,075 | 2.19 | 46,075 | |||||
1.70 - 2.99 | 93,650 | 2.21 | 44,148 | |||||
3.00 - 40.78 | 41,700 | 0.16 | 41,671 | |||||
40.79 | 12,305 | 2.07 | 12,305 | |||||
193,730 | 1.76 | 144,199 |
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2015 and 2014:
2015 | 2014 | |||||
Dividend yield | — | 0 | % | |||
Expected volatility | — | 73.30 | % | |||
Risk free interest rate | — | 1.57 | % | |||
Expected life | — | 5 years |
The weighted average fair value of options granted during 2014 was $1.03 There were no options granted during 2015.
NOTE O - RESTRICTED STOCK
In January 2015, the Board of the Company approved and adopted the Four Oaks Fincorp, Inc. 2015 Restricted Stock Plan (the “Plan”). During 2015, the Company awarded 1,521,000 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 ended 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 which ended December 31, 2015 were (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 is determined based on straight-line interpolation. We achieved our targeted performance level for the one-year Performance Period ending December 31, 2015, and therefore 15% of the shares of restricted stock have now vested. If the performance goals had not been met, 15% of the awards would have been forfeited.
The performance measures and related goals for the three-year period ending December 31, 2018 are based on cumulative earnings per share and were set by the compensation committee of the Board (the "Committee"), in its sole discretion as administrator of the Plan, in the fourth quarter of 2015. Earnings per share must be achieved at the 60% threshold performance level in order for 50% of the remaining awards to vest and at the 100% target performance level in order for 100% of the awards to vest. Where achievement against earnings per share falls between these performance levels, the number of shares vest also falls within these levels. Achievement of 70%, 80%, and 90% of target earnings per share results in vesting of 60%, 75%, and 87.5% respectively. Additionally, if 110% or more of the target performance level is obtained, 100% of the awards will vest and an additional 10% of the applicable restricted stock grant amount will be awarded to each recipient in fully-vested shares.
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 December 31, 2015:
Restricted Stock | Weighted Average Grant-Date Fair Value | |||||
Balance as of December 31, 2014: | — | $ | — | |||
Granted | 1,521,000 | 1.53 | ||||
Vested | (97,825 | ) | 1.52 | |||
Forfeited | (60,000 | ) | 1.52 | |||
Balance as of December 31, 2015: | 1,363,175 | $ | 1.64 |
The Company recognized $540,000 in compensation expense related to restricted stock awards for the twelve months ended December 31, 2015 and the Company estimates there was $1.8 million in unrecognized compensation expense for restricted stock granted.
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NOTE P - OTHER EMPLOYEE BENEFITS
Supplemental Retirement
In 1998, the Bank adopted a Supplemental Executive Retirement Plan (“SERP”) for its then president. The Company has purchased life insurance policies in order to provide future funding of benefit payments. SERP benefits accrued and vested during the period of employment and will be paid in annual benefit payments over the officer’s remaining life commencing with the officer’s retirement on December 31, 2015. The liability accrued under the SERP plan amounts to $507,000 and $477,000 at December 31, 2015 and 2014, respectively. Due to a change in the valuation of expected benefit payments, the expense attributable to the SERP amounted to $30,000 and $0 for 2015 and 2014, respectively.
Employment Agreements
The Company has entered into employment agreements with certain of its executive officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Company’s Board of Directors, except for cause, without triggering the officers’ rights to receive certain vested rights, including severance compensation. In addition, the Company has entered into additional severance compensation arrangements with certain of its executive officers and key employees to provide them with increased severance pay benefits in the event of a termination of employment following a change in control of the Company, as outlined in the agreements; the acquirer will be bound to the terms of the contracts.
Defined Contribution Plan
The Company sponsors a contributory profit-sharing plan in effect for substantially all employees. Participants may make voluntary contributions resulting in salary deferrals in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The plan provides for employee contributions up to $17,500 of the participant's annual salary and an employer contribution of 50% matching of the first 6% of pre-tax salary contributed by each participant. For the year ended December 31, 2014, the plan provided for employee contributions of up to $17,500 of the participants annual salary and an employer contribution of 25% matching of the first 6% of pre-tax salary contributed. Expenses related to these plans for the years ended December 31, 2015 and 2014 were $189,000 and $76,000, respectively. Contributions under the plan are made at the discretion of the Company’s Board of Directors.
Employee Stock Purchase and Bonus Plan
The Employee Stock Purchase and Bonus Plan (the “Purchase Plan”) is a voluntary plan that enables full-time employees of the Company and its subsidiaries to purchase shares of the Company’s common stock. The Purchase Plan is administered by a committee of the Board of Directors, which has broad discretionary authority to administer the Purchase Plan. The Company’s Board of Directors may amend or terminate the Purchase Plan at any time. The Purchase Plan is not intended to be qualified as an employee stock purchase plan under Section 423 of the Code.
Once a year, participants in the Purchase Plan purchase the Company’s common stock at fair market value. Participants are permitted to purchase shares under the Purchase Plan up to five percent (5%) of their compensation, with a maximum purchase amount of $1,000 per year. The Company matches, in cash, fifty percent (50%) of the amount of each participant’s purchase, up to $500. After withholding for income and employment taxes, participants use the balance of the Company’s matching grant to purchase shares of the Company’s common stock.
As of December 31, 2015, 39,000 shares of the Company’s common stock had been reserved for future issuance under the Purchase Plan, and 480,000 total shares had been purchased to date. During the year ended December 31, 2015, 79,000 shares were purchased under the Purchase Plan.
Sick Leave Plan
The Company allows employees to accrue up to 60 days of sick leave that can be carried forward from one year to the next. Employees with 10 consecutive years of service who retire after age 55 are paid for unused sick leave up to a maximum of 60 days. As of December 31, 2015 and 2014, the Company maintained an accrued liability for future obligations in the amount of $587,000 and $562,000, respectively. Future obligations under the plan are assessed on an annual basis. Deferred compensation expenses under the plan totaled $68,000 and $82,000 for 2015 and 2014, respectively. Cash benefits paid to retiring employees totaled $43,000 and $40,000 for 2015 and 2014, respectively.
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NOTE Q - LEASES
The Company has entered into non-cancelable operating leases for seven facilities. Future minimum lease payments under the leases for future years are as follows (amounts in thousands):
Leases | |||
2016 | $ | 329 | |
2017 | 240 | ||
2018 | 185 | ||
2019 | 178 | ||
2020 | 183 | ||
2021 and beyond | 266 | ||
$ | 1,381 |
Total rental expense under operating leases for the years ended December 31, 2015 and 2014 amounted to $373,000 and $327,000, respectively.
NOTE R - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Four Oaks Fincorp, Inc. at December 31, 2015 and 2014, and for the years ended December 31, 2015 and 2014 is presented below (amounts in thousands):
Condensed Balance Sheets | 2015 | 2014 | |||||
Assets: | |||||||
Cash and cash equivalents | $ | 1,362 | $ | 3,958 | |||
Equity investment in subsidiaries | 81,638 | 61,937 | |||||
Investment securities available-for-sale | 11 | 11 | |||||
Other assets | 1,128 | 131 | |||||
Total assets | $ | 84,139 | $ | 66,037 | |||
Liabilities and Shareholders’ Equity: | |||||||
Other liabilities | $ | 26 | $ | 936 | |||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 11,500 | 12,000 | |||||
Shareholders' equity | 60,241 | 40,729 | |||||
Total liabilities and shareholders’ equity | $ | 84,139 | $ | 66,037 |
For the Years Ended December 31, | |||||||
Condensed Statements of Operations | 2015 | 2014 | |||||
Equity in undistributed income (loss) of subsidiaries | $ | 20,367 | $ | (3,128 | ) | ||
Interest income | 27 | 5 | |||||
Gain on sale of investments, available-for-sale | — | 109 | |||||
Recovery of impairment loss on investment securities available-for-sale | — | 189 | |||||
Other income | 11 | 20 | |||||
Other expenses | (1,408 | ) | (1,384 | ) | |||
Income (loss) before income taxes | 18,997 | (4,189 | ) | ||||
Applicable income tax benefit | (1,011 | ) | — | ||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) |
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Condensed Statements of Cash Flows | 2015 | 2014 | |||||
Operating activities: | |||||||
Net income (loss) | $ | 20,008 | $ | (4,189 | ) | ||
Equity in undistributed loss of subsidiaries | (20,367 | ) | 3,128 | ||||
Gain on sale of investments | — | (298 | ) | ||||
(Increase) decrease in other assets | (972 | ) | 16 | ||||
(Decrease) increase in other liabilities | (910 | ) | 199 | ||||
Net cash used in operating activities | (2,241 | ) | (1,144 | ) | |||
Investing activities: | |||||||
Investment in subsidiaries | — | (19,157 | ) | ||||
Sales and maturities of securities | — | 1,560 | |||||
Net cash used in investing activities | — | (17,597 | ) | ||||
Financing activities: | |||||||
Proceeds from issuance of common stock | 170 | 22,243 | |||||
Repayment of subordinated promissory notes | (500 | ) | — | ||||
Shares withheld for payment of taxes | (25 | ) | — | ||||
Net cash (used in) provided by financing activities | (355 | ) | 22,243 | ||||
Net (decrease) increase in cash and cash equivalents | (2,596 | ) | 3,502 | ||||
Cash and cash equivalents, beginning of year | 3,958 | 456 | |||||
Cash and cash equivalents, end of year | $ | 1,362 | $ | 3,958 |
Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A - Controls and Procedures.
Disclosure 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 Annual 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 Annual 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 SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the SEC's rules and forms.
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Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting, based on the framework in Internal Control - Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting as of December 31, 2015.
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 fourth quarter of 2015 that the Company believes have materially affected or are likely to materially affect, its internal control over financial reporting.
Item 9B - Other Information.
On March 23, 2016, the Board of Directors adopted an amendment, effective as of that same date, to the Company's Amended and Restated Employee Stock Purchase and Bonus Plan, as amended (the "Plan"), to increase the number of shares of the Company's common stock available for issuance under the Plan. The number of shares of the Company's common stock reserved for issuance under the Plan was increased to 150,000 shares, from 518,554 shares to 668,554 shares.
PART III
The information called for in Items 10 through 14 is incorporated by reference from the definitive proxy statement for the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after the end of the Company's fiscal year.
Item 10 - Directors, Executive Officers and Corporate Governance.
Item 11 - Executive Compensation.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Item 13 - Certain Relationships and Related Transactions, and Director Independence.
Item 14 - Principal Accounting Fees and Services.
Item 15 – Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of Part II of this Annual Report on Form 10-K.
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TABLE OF CONTENTS | |
Form 10-K Page | |
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit No. | Description of Exhibit | |
3.1 | Articles of Incorporation of Four Oaks Fincorp, Inc. including Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2014) | |
3.2 | Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997) | |
4.1 | Specimen of Certificate for Four Oaks Fincorp, Inc. Common Stock (incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997) | |
4.2 | Tax Asset Protection Plan, dated as of August 18, 2014, between Four Oaks Fincorp, Inc. and Registrar and Transfer Company, as Rights Agent, including the form of Rights Certificate, Summary of Rights and Articles of Amendment to Articles of Incorporation as Exhibits A, B and C, respectively (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on October 19, 2014) | |
4.3 | Agreement to furnish instruments and agreements defining rights of holders of long-term debt | |
10.1 | Amended and Restated Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement) | |
10.2 | Amendment No. 1, effective September 1, 2009 to Amended and Restated Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.3 | Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.4 | Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.5 | Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement) | |
10.6 | Amendment No. 1, effective September 1, 2009 to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.2 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement) |
93
10.7 | Amendment No. 2, effective March 25, 2013, to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 28, 2013) (management contract or compensatory plan, contract or arrangement) | |
10.8 | Amendment No. 3, effective March 23, 2016, to Amended and Restated Employee Stock Purchase and Bonus Plan (management contract or compensatory plan, contract or arrangement) | |
10.9 | 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) (management contract or compensatory plan, contract or arrangement) | |
10.10 | 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 (management contract or compensatory plan, contract or arrangement) | |
10.11 | 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) (management contract or compensatory plan, contract or arrangement) | |
10.12 | Summary of Non-Employee Director Compensation (management contract or compensatory plan, contract or arrangement) | |
10.13 | Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-175771) filed with the SEC on July 25, 2011) | |
10.14 | Amended and Restated Declaration of Trust of Four Oaks Statutory Trust I, dated as of March 30, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) | |
10.15 | Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March 30, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) | |
10.16 | Indenture, dated as of March 30, 2006 by and between Four Oaks Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating to Junior Subordinated Debt Securities due June 15, 2036 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) | |
10.17 | Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.18 | 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 Current Report on Form 8-K filed with the Commission on April 2, 2015) (management contract or compensatory plan, contract or arrangement) | |
10.19 | Amended and Restated Executive Employment Agreement with David H. Rupp (management contract or compensatory plan, contract or arrangement) | |
10.20 | Amended and Restated Executive Employment Agreement with Jeff D. Pope (management contract or compensatory plan, contract or arrangement) | |
10.21 | Amended and Restated Executive Employment Agreement with Lisa S. Herring, as amended by Amendment No. 1 (management contract or compensatory plan, contract or arrangement) | |
10.22 | Executive Employment Agreement with Deanna W. Hart (management contract or compensatory plan, contract or arrangement) | |
10.23 | Amended and Restated Executive Employment Agreement with Warren D. Herring, Jr. (management contract or compensatory plan, contract or arrangement) | |
10.24 | Amended and Restated Executive Employment Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.25 | Severance and General Release Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015) (management contract or compensatory plan, contract or arrangement) | |
10.26 | Consulting Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014) (management contract or compensatory plan, contract or arrangement) | |
10.27 | Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.28 | Written Agreement, effective May 24, 2011, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011) |
94
10.29 | Written Agreement, effective July 30, 2015, by and among Four Oaks Bank & Trust Company and the Federal Reserve Bank of Richmond (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on August 4, 2015) | |
10.30 | Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank (incorporated by reference to Exhibit 10.b to First Bancorp's (File No. 000-15572) Quarterly Report on Form 10-Q for the period ended September 30, 2012) | |
10.31 | Securities Purchase Agreement, dated as of March 24, 2014, between Four Oaks Fincorp, Inc. and Kenneth R. Lehman (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 26, 2014) | |
10.32 | Form of Registration Rights Agreement with Kenneth R. Lehman (included as part of Exhibit 10.33) | |
21 | Subsidiaries of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010) | |
23 | Consent of Cherry Bekaert LLP | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following materials from Four Oaks Fincorp, Inc.'s Annual Report on Form 10-K for the year ended December 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 (Loss); (iv) Consolidated Statements 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 Section 13 or 15(d) 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: | March 28, 2016 | By: | /s/ David H. Rupp | |
David H. Rupp President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated
Date: | March 28, 2016 | /s/ David H. Rupp | |
David H. Rupp President and Chief Executive Officer |
Date: | March 28, 2016 | /s/ Deanna W. Hart | |
Deanna W. Hart Executive Vice President and Chief Financial Officer and Principal Accounting Officer |
Date: | March 28, 2016 | /s/ Ayden R. Lee, Jr. | |
Ayden R. Lee, Jr. Chairman and Director |
Date: | March 28, 2016 | /s/ Paula Canaday Bowman | |
Paula Canaday Bowman Director |
Date: | March 28, 2016 | /s/ Warren L. Grimes | |
Warren L. Grimes Director |
Date: | March 28, 2016 | /s/ Kenneth R. Lehman | |
Kenneth R. Lehman Director |
Date: | March 28, 2016 | /s/ Robert G. Rabon | |
Robert G. Rabon Director |
Date: | March 28, 2016 | /s/ Dr. R. Max Raynor, Jr. | |
Dr. R. Max Raynor, Jr. Director |
Date: | March 28, 2016 | /s/ Michael A. Weeks | |
Michael A. Weeks Director |
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EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
3.1 | Articles of Incorporation of Four Oaks Fincorp, Inc. including Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2014) | |
3.2 | Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997) | |
4.1 | Specimen of Certificate for Four Oaks Fincorp, Inc. Common Stock (incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997) | |
4.2 | Tax Asset Protection Plan, dated as of August 18, 2014, between Four Oaks Fincorp, Inc. and Registrar and Transfer Company, as Rights Agent, including the form of Rights Certificate, Summary of Rights and Articles of Amendment to Articles of Incorporation as Exhibits A, B and C, respectively (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on October 19, 2014) | |
4.3 | Agreement to furnish instruments and agreements defining rights of holders of long-term debt | |
10.1 | Amended and Restated Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement) | |
10.2 | Amendment No. 1, effective September 1, 2009 to Amended and Restated Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.3 | Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.4 | Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.5 | Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement) | |
10.6 | Amendment No. 1, effective September 1, 2009 to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.2 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement) | |
10.7 | Amendment No. 2, effective March 25, 2013, to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 28, 2013) (management contract or compensatory plan, contract or arrangement) | |
10.8 | Amendment No. 3, effective March 23, 2016, to Amended and Restated Employee Stock Purchase and Bonus Plan (management contract or compensatory plan, contract or arrangement) | |
10.9 | 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) (management contract or compensatory plan, contract or arrangement) | |
10.10 | 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 (management contract or compensatory plan, contract or arrangement) | |
10.11 | 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) (management contract or compensatory plan, contract or arrangement) | |
10.12 | Summary of Non-Employee Director Compensation (management contract or compensatory plan, contract or arrangement) | |
10.13 | Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-175771) filed with the SEC on July 25, 2011) | |
10.14 | Amended and Restated Declaration of Trust of Four Oaks Statutory Trust I, dated as of March 30, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) |
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10.15 | Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March 30, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) | |
10.16 | Indenture, dated as of March 30, 2006 by and between Four Oaks Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating to Junior Subordinated Debt Securities due June 15, 2036 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006) | |
10.17 | Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.18 | 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 Current Report on Form 8-K filed with the Commission on April 2, 2015) (management contract or compensatory plan, contract or arrangement) | |
10.19 | Amended and Restated Executive Employment Agreement with David H. Rupp (management contract or compensatory plan, contract or arrangement) | |
10.20 | Amended and Restated Executive Employment Agreement with Jeff D. Pope (management contract or compensatory plan, contract or arrangement) | |
10.21 | Amended and Restated Executive Employment Agreement with Lisa S. Herring, as amended by Amendment No. 1 (management contract or compensatory plan, contract or arrangement) | |
10.22 | Executive Employment Agreement with Deanna W. Hart (management contract or compensatory plan, contract or arrangement) | |
10.23 | Amended and Restated Executive Employment Agreement with Warren D. Herring, Jr. (management contract or compensatory plan, contract or arrangement) | |
10.24 | Amended and Restated Executive Employment Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.25 | Severance and General Release Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015) (management contract or compensatory plan, contract or arrangement) | |
10.26 | Consulting Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 2014) (management contract or compensatory plan, contract or arrangement) | |
10.27 | Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement) | |
10.28 | Written Agreement, effective May 24, 2011, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011) | |
10.29 | Written Agreement, effective July 30, 2015, by and among Four Oaks Bank & Trust Company and the Federal Reserve Bank of Richmond (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on August 4, 2015) | |
10.30 | Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank (incorporated by reference to Exhibit 10.b to First Bancorp's (File No. 000-15572) Quarterly Report on Form 10-Q for the period ended September 30, 2012) | |
10.31 | Securities Purchase Agreement, dated as of March 24, 2014, between Four Oaks Fincorp, Inc. and Kenneth R. Lehman (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 26, 2014) | |
10.32 | Form of Registration Rights Agreement with Kenneth R. Lehman (included as part of Exhibit 10.33) | |
21 | Subsidiaries of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2010) | |
23 | Consent of Cherry Bekaert LLP | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following materials from Four Oaks Fincorp, Inc.'s Annual Report on Form 10-K for the year ended December 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 (Loss); (iv) Consolidated Statements of Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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