UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016
Commission File Number 000-22787
FOUR OAKS FINCORP, INC. |
(Exact name of registrant as specified in its charter) |
NORTH CAROLINA | 56-2028446 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification Number) |
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524 |
(Address of principal executive office, including zip code) |
(919) 963-2177 |
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYES oNO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) xYES oNO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
oYES xNO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, | 33,816,085 |
par value $1.00 per share | (Number of shares outstanding |
(Title of Class) | May 11, 2016) |
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TABLE OF CONTENTS | Page No. | |
March 31, 2016 (Unaudited) and December 31, 2015 | ||
Three Months Ended March 31, 2016 and 2015 | ||
Consolidated Statements of Comprehensive Income (Unaudited) | ||
Three Months Ended March 31, 2016 and 2015 | ||
Three Months Ended March 31, 2016 and 2015 | ||
Three Months Ended March 31, 2016 and 2015 | ||
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Part I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, 2016 | December 31, 2015 | ||||||
(Unaudited) | (*) | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 17,341 | $ | 17,375 | |||
Interest-earning deposits | 25,720 | 9,380 | |||||
Cash and cash equivalents | 43,061 | 26,755 | |||||
Certificates of deposits held for investment | 22,540 | 23,520 | |||||
Investment securities available-for-sale, at fair value | 70,460 | 70,281 | |||||
Investment securities held-to-maturity, at amortized cost | 62,212 | 65,354 | |||||
Total investment securities | 132,672 | 135,635 | |||||
Loans held for sale | 730 | 1,145 | |||||
Loans | 475,843 | 458,313 | |||||
Allowance for loan losses | (9,084 | ) | (9,616 | ) | |||
Net loans | 466,759 | 448,697 | |||||
Accrued interest receivable | 1,557 | 1,594 | |||||
Bank premises and equipment, net | 12,355 | 12,293 | |||||
FHLB stock | 3,596 | 3,288 | |||||
Investment in life insurance | 14,820 | 14,777 | |||||
Foreclosed assets | 2,482 | 1,760 | |||||
Deferred tax assets, net | 15,691 | 16,679 | |||||
Other assets | 5,451 | 5,244 | |||||
TOTAL ASSETS | $ | 721,714 | $ | 691,387 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 136,477 | $ | 132,044 | |||
Money market, NOW accounts and savings accounts | 195,919 | 180,214 | |||||
Time deposits, $250,000 and over | 68,762 | 65,718 | |||||
Other time deposits | 160,220 | 164,358 | |||||
Total deposits | 561,378 | 542,334 | |||||
Borrowings | 70,000 | 60,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 11,500 | 11,500 | |||||
Accrued interest payable | 439 | 437 | |||||
Other liabilities | 3,781 | 4,338 | |||||
TOTAL LIABILITIES | 659,470 | 630,981 | |||||
Commitments and Contingencies (Note F) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 80,000,000 shares authorized; 33,664,216 and 33,595,812 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively | 33,664 | 33,596 | |||||
Additional paid-in capital | 31,631 | 31,666 | |||||
Accumulated deficit | (3,740 | ) | (4,571 | ) | |||
Accumulated other comprehensive income (loss) | 689 | (285 | ) | ||||
Total shareholders' equity | 62,244 | 60,406 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 721,714 | $ | 691,387 |
(*) Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except share data)
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Interest and dividend income: | |||||||
Loans, including fees | $ | 6,089 | $ | 6,364 | |||
Taxable investments | 840 | 845 | |||||
Dividends | 81 | 79 | |||||
Interest-earning deposits | 109 | 176 | |||||
Total interest and dividend income | 7,119 | 7,464 | |||||
Interest expense: | |||||||
Deposits | 601 | 644 | |||||
Borrowings | 378 | 769 | |||||
Subordinated debentures | 59 | 49 | |||||
Subordinated promissory notes | 182 | 252 | |||||
Total interest expense | 1,220 | 1,714 | |||||
Net interest income | 5,899 | 5,750 | |||||
Provision for loan losses | — | — | |||||
Net interest income after provision for loan losses | 5,899 | 5,750 | |||||
Non-interest income: | |||||||
Service charges on deposit accounts | 357 | 415 | |||||
Other service charges, commissions and fees | 751 | 790 | |||||
Gains on sale of investment securities available-for-sale, net | — | 56 | |||||
Income from investment in life insurance | 43 | 50 | |||||
Indemnification from third party payment processor clients | — | 179 | |||||
Other non-interest income | 18 | 40 | |||||
Total non-interest income | 1,169 | 1,530 | |||||
Non-interest expense: | |||||||
Salaries | 2,593 | 2,616 | |||||
Employee benefits | 629 | 556 | |||||
Occupancy expenses | 336 | 329 | |||||
Equipment expenses | 148 | 237 | |||||
Professional and consulting fees | 540 | 766 | |||||
FDIC assessments | 128 | 175 | |||||
Foreclosed asset-related costs, net | 99 | 103 | |||||
Collection expenses | 59 | 135 | |||||
Other operating expenses | 1,242 | 1,385 | |||||
Total non-interest expense | 5,774 | 6,302 | |||||
Income before income taxes | 1,294 | 978 | |||||
Income tax expense | 463 | — | |||||
Net income | $ | 831 | $ | 978 | |||
Basic net income per common share | $ | 0.03 | $ | 0.03 | |||
Diluted net income per common share | $ | 0.03 | $ | 0.03 | |||
Weighted Average Shares Outstanding, Basic | 32,273,475 | 32,034,791 | |||||
Weighted Average Shares Outstanding, Diluted | 32,522,453 | 32,097,274 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Net income | $ | 831 | $ | 978 | |||
Other comprehensive income: | |||||||
Securities available-for-sale: | |||||||
Unrealized holding gains on available-for-sale securities | 1,549 | 627 | |||||
Tax effect | (568 | ) | — | ||||
Reclassification of gains recognized in net income | — | (56 | ) | ||||
Tax effect | — | — | |||||
Amortization of unrealized losses on investment securities transferred from available-for-sale to held-to-maturity | (11 | ) | (16 | ) | |||
Tax effect | 4 | — | |||||
Total other comprehensive income | 974 | 555 | |||||
Comprehensive income | $ | 1,805 | $ | 1,533 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except share data)
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 | 32,032,327 | $ | 32,032 | $ | 32,520 | $ | (24,579 | ) | $ | 756 | $ | 40,729 | ||||||||||
Net income | — | — | — | 978 | — | 978 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 555 | 555 | ||||||||||||||||
Stock based compensation | — | — | 143 | — | — | 143 | ||||||||||||||||
Issuance of common stock | 10,635 | 11 | 6 | — | — | 17 | ||||||||||||||||
Issuance of restricted stock | 1,446,000 | 1,446 | (1,446 | ) | — | — | — | |||||||||||||||
BALANCE, MARCH 31, 2015 | 33,488,962 | $ | 33,489 | $ | 31,223 | $ | (23,601 | ) | $ | 1,311 | $ | 42,422 |
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2015 | 33,595,812 | $ | 33,596 | $ | 31,666 | $ | (4,571 | ) | $ | (285 | ) | $ | 60,406 | |||||||||
Net income | — | — | — | 831 | — | 831 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 974 | 974 | ||||||||||||||||
Stock based compensation | — | — | 77 | — | — | 77 | ||||||||||||||||
Issuance of common stock | 18,392 | 18 | 8 | — | — | 26 | ||||||||||||||||
Current income tax benefit | — | — | 1 | — | — | 1 | ||||||||||||||||
Issuance of restricted stock | 130,000 | 130 | (130 | ) | — | — | — | |||||||||||||||
Forfeiture of restricted stock | (42,500 | ) | (43 | ) | 43 | — | — | — | ||||||||||||||
Stock withheld for payment of taxes | (37,488 | ) | (37 | ) | (34 | ) | — | — | (71 | ) | ||||||||||||
BALANCE, MARCH 31, 2016 | 33,664,216 | $ | 33,664 | $ | 31,631 | $ | (3,740 | ) | $ | 689 | $ | 62,244 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 831 | $ | 978 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Deferred income tax expense | 424 | — | |||||
Provision for depreciation and amortization | 162 | 176 | |||||
Net amortization of bond premiums and discounts | 216 | 263 | |||||
Stock based compensation | 77 | 143 | |||||
Gain on sale of investment securities | — | (56 | ) | ||||
Gain on sale of foreclosed assets, net | (5 | ) | (16 | ) | |||
Valuation adjustment on foreclosed assets | 12 | 116 | |||||
Earnings on investment in bank-owned life insurance | (43 | ) | (50 | ) | |||
Gain on sale of mortgage loans held for sale | (100 | ) | (111 | ) | |||
Originations of mortgage loans held for sale | (4,141 | ) | (5,879 | ) | |||
Proceeds from sale of loans held for sale | 4,656 | 5,364 | |||||
Changes in assets and liabilities: | |||||||
Other assets | (207 | ) | 821 | ||||
Accrued interest receivable | 37 | 80 | |||||
Other liabilities | (557 | ) | 597 | ||||
Accrued interest payable | 2 | 23 | |||||
Net cash provided by operating activities | 1,364 | 2,449 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sales and calls of investment securities available-for-sale | — | 2,609 | |||||
Proceeds from maturities and calls of investment securities held-to-maturity | 100 | — | |||||
Proceeds from paydowns of investment securities available-for-sale | 1,280 | 1,157 | |||||
Proceeds from paydowns of investment securities held-to-maturity | 2,905 | 3,409 | |||||
Purchases of investment securities available-for-sale | — | (2,538 | ) | ||||
Redemption of certificates of deposits held for investment | 980 | 99 | |||||
(Purchase) redemption of FHLB stock | (308 | ) | 224 | ||||
Net increase in loans outstanding | (18,925 | ) | (6,595 | ) | |||
Purchases of bank premises and equipment | (224 | ) | (68 | ) | |||
Proceeds from sales of foreclosed assets | 134 | 1,036 | |||||
Net cash used in investing activities | (14,058 | ) | (667 | ) | |||
Cash flows from financing activities: | |||||||
Net proceeds from borrowings | 10,000 | — | |||||
Net increase (decrease) in deposit accounts | 19,044 | (57,674 | ) | ||||
Proceeds from issuance of common stock | 26 | 17 | |||||
Excess tax benefits from stock options | 1 | — | |||||
Shares withheld for payment of taxes | (71 | ) | — | ||||
Net cash provided by (used in) financing activities | 29,000 | (57,657 | ) | ||||
Change in cash and cash equivalents | 16,306 | (55,875 | ) | ||||
Cash and cash equivalents at beginning of period | 26,755 | 158,527 | |||||
Cash and cash equivalents at end of period | $ | 43,061 | $ | 102,652 |
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Supplemental disclosures of cash flow information: | |||||||
Interest paid on deposits and borrowings | $ | 1,218 | $ | 1,691 | |||
Supplemental disclosures of noncash investing and financing activities: | |||||||
Unrealized gains on investment securities available-for-sale | $ | 1,549 | $ | 571 | |||
Amortization of net losses on investment securities transferred to held-to-maturity | (11 | ) | (16 | ) | |||
Transfer of loans to foreclosed assets | 863 | 619 | |||||
Loans transferred from held for sale to held for investment | — | 105 | |||||
Loans transferred from held for investment to held for sale | — | 113 | |||||
Available for sale securities purchased, not yet settled | — | 1,805 |
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The organization and business of Four Oaks Fincorp, Inc., a bank holding company incorporated under the laws of the State of North Carolina (the “Company”), accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. This Quarterly Report should be read in conjunction with such Annual Report.
The accompanying unaudited consolidated financial statements are prepared in accordance with instructions for Form 10-Q and the applicable rules and regulations of the Securities and Exchange Commission. In management’s opinion, the financial information contained in the accompanying unaudited consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts and transactions of the Company, and its wholly-owned subsidiary, Four Oaks Bank & Trust Company (the “Bank”). Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.
Certain amounts previously presented in the Company's Consolidated Financial Statements for the prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior periods' Statements of Operations, Comprehensive Income, or Shareholders' Equity as previously reported.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update amends several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual and interim 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 February 2016, the FASB issued 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 January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting treatment related to classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Upon adoption, investments in equity securities, except those accounted for under the equity method or that result in the consolidation of the investee, will be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost minus impairment, plus or minus changes from observable price changes in an orderly transaction. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of certain provisions is permitted. The Company does not believe the adoption of this ASU will have a material impact on the Company's 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. We adopted ASU No. 2015-03 and there was no impact to the Company’s consolidated financial statements.
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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 continues to evaluate the impact of adopting the new standard on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
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NOTE B - NET INCOME PER SHARE
Basic net income per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options.
Basic and diluted net income per common share have been computed based upon net income as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below (amounts in thousands, except share data):
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Net income available to common shareholders | $ | 831 | $ | 978 | |||
Weighted average number of common shares - basic | 32,273,475 | 32,034,791 | |||||
Effect of dilutive stock options | 35,025 | 15,869 | |||||
Effect of dilutive restricted stock awards | 213,953 | 46,614 | |||||
Weighted average number of common shares - dilutive | 32,522,453 | 32,097,274 | |||||
Basic earnings per common share | $ | 0.03 | $ | 0.03 | |||
Diluted earnings per common share | $ | 0.03 | $ | 0.03 | |||
Anti-dilutive awards | 12,305 | 176,857 |
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NOTE C – INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale and securities held-to-maturity as of March 31, 2016 and December 31, 2015 are as follows (amounts in thousands):
March 31, 2016 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 24,781 | $ | 665 | $ | 26 | $ | 25,420 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 13,343 | 207 | 5 | 13,545 | |||||||||||
FNMA & FHLMC | 30,831 | 169 | 16 | 30,984 | |||||||||||
Other debt securities | 500 | — | — | 500 | |||||||||||
Equity securities | 11 | — | — | 11 | |||||||||||
Total | $ | 69,466 | $ | 1,041 | $ | 47 | $ | 70,460 |
March 31, 2016 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,418 | $ | 48 | $ | — | $ | 3,466 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 56,351 | 1,068 | 16 | 57,403 | |||||||||||
FNMA | 2,443 | 56 | — | 2,499 | |||||||||||
Total | $ | 62,212 | $ | 1,172 | $ | 16 | $ | 63,368 |
December 31, 2015 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 24,789 | $ | 225 | $ | 447 | $ | 24,567 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 13,512 | 68 | 50 | 13,530 | |||||||||||
FNMA & FHLMC | 32,024 | — | 351 | 31,673 | |||||||||||
Other debt securities | 500 | — | — | 500 | |||||||||||
Equity securities | 11 | — | — | 11 | |||||||||||
Total | $ | 70,836 | $ | 293 | $ | 848 | $ | 70,281 |
December 31, 2015 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,531 | $ | 1 | $ | 20 | $ | 3,512 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 59,185 | 509 | 230 | 59,464 | |||||||||||
FNMA | 2,638 | 19 | — | 2,657 | |||||||||||
Total | $ | 65,354 | $ | 529 | $ | 250 | $ | 65,633 |
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The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Available-for-Sale: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 5 | $ | 4,384 | $ | 11 | 1 | $ | 779 | $ | 15 | $ | 5,163 | $ | 26 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 1 | 4,624 | 5 | — | — | — | 4,624 | 5 | |||||||||||||||||||||
FNMA & FHLMC | 3 | 3,438 | 16 | — | — | — | 3,438 | 16 | |||||||||||||||||||||
Total temporarily impaired securities | 9 | $ | 12,446 | $ | 32 | 1 | $ | 779 | $ | 15 | $ | 13,225 | $ | 47 |
March 31, 2016 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Held-to-Maturity: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 1 | $ | 1,000 | $ | 1 | 1 | $ | 3,292 | $ | 15 | $ | 4,292 | $ | 16 | |||||||||||||||
Total temporarily impaired securities | 1 | $ | 1,000 | $ | 1 | 1 | $ | 3,292 | $ | 15 | $ | 4,292 | $ | 16 |
December 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Available-for-Sale: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 20 | $ | 16,888 | $ | 447 | — | $ | — | $ | — | $ | 16,888 | $ | 447 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 3 | 10,010 | 50 | — | — | — | 10,010 | 50 | |||||||||||||||||||||
FNMA & FHLMC | 11 | 31,673 | 351 | — | — | — | 31,673 | 351 | |||||||||||||||||||||
Total temporarily impaired securities | 34 | $ | 58,571 | $ | 848 | — | $ | — | $ | — | $ | 58,571 | $ | 848 |
December 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Held-to-Maturity: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 9 | $ | 3,325 | $ | 20 | — | $ | — | $ | — | $ | 3,325 | $ | 20 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 14 | 20,784 | 116 | 3 | 5,130 | 114 | 25,914 | 230 | |||||||||||||||||||||
Total temporarily impaired securities | 23 | $ | 24,109 | $ | 136 | 3 | $ | 5,130 | $ | 114 | $ | 29,239 | $ | 250 |
-13-
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If it is determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
The unrealized gains and losses on securities at March 31, 2016 resulted from changing market interest rates compared to the yields available at the time the underlying securities were purchased. As of March 31, 2016, there were 3 of 54 Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS"), 3 of 14 Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") MBS, and 6 of 38 taxable municipal securities that contained net unrealized losses. Management identified no impairment related to credit quality. For debt securities in an unrealized loss position, the Company does not intend to sell and it is not likely that the Company will be required to sell these securities before the anticipated recovery of the amortized cost basis. As a result, no other than temporary impairment losses were recognized during the three months ended March 31, 2016.
The amortized cost and fair value of available-for-sale and held-to-maturity securities at March 31, 2016 by expected maturities are shown on the following table (amounts in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2016 | |||||||
Securities Available-for-Sale: | Amortized Cost | Fair Value | |||||
Taxable municipal securities: | |||||||
Due after ten years | $ | 24,781 | $ | 25,420 | |||
Total taxable municipal securities | 24,781 | 25,420 | |||||
Mortgage-backed securities - GNMA/FNMA & FHLMC: | |||||||
Due after ten years | 44,174 | 44,529 | |||||
Total mortgage-backed securities - GNMA/FNMA & FHLMC | 44,174 | 44,529 | |||||
Other debt securities: | |||||||
Due after five years through ten years | 500 | 500 | |||||
Total other debt securities | 500 | 500 | |||||
Other securities: | |||||||
Equity securities | 11 | 11 | |||||
Total other securities | 11 | 11 | |||||
Total available-for-sale securities | $ | 69,466 | $ | 70,460 | |||
Securities Held-to-Maturity: | |||||||
Taxable municipal securities: | |||||||
Due within one year | $ | 157 | $ | 158 | |||
Due after one year through five years | 2,200 | 2,225 | |||||
Due after five years through ten years | 1,061 | 1,083 | |||||
Total taxable municipal securities | 3,418 | 3,466 | |||||
Mortgage-backed securities - GNMA/FNMA: | |||||||
Due after five years through ten years | 7,443 | 7,664 | |||||
Due after ten years | 51,351 | 52,238 | |||||
Total mortgage-backed securities - GNMA/FNMA | 58,794 | 59,902 | |||||
Total held-to-maturity securities | $ | 62,212 | $ | 63,368 |
-14-
Securities with a carrying value of approximately $70.2 million and $61.1 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Sales and calls of securities available-for-sale for the three months ended March 31, 2015 of $2.6 million generated net realized gains of $56,000, and no gross realized losses. There were no sales of securities available-for-sale for the three months ended March 31, 2016.
-15-
NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis. Each class of loans is subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Loans are primarily made in the Company's market area in North Carolina, principally Johnston, Wake, Harnett, Duplin, Sampson, and Moore counties. There have been no significant changes to the loan class definitions outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The classification of loan segments as of March 31, 2016 and December 31, 2015 are summarized as follows (amounts in thousands):
March 31, 2016 | December 31, 2015 | ||||||
Commercial and industrial | $ | 24,578 | $ | 23,163 | |||
Commercial construction and land development | 50,970 | 50,510 | |||||
Commercial real estate | 218,594 | 208,737 | |||||
Residential construction | 40,342 | 36,618 | |||||
Residential mortgage | 131,338 | 128,442 | |||||
Consumer | 6,380 | 6,638 | |||||
Consumer credit cards | 1,994 | 2,240 | |||||
Business credit cards | 1,402 | 1,168 | |||||
Other | 987 | 1,257 | |||||
Gross loans | 476,585 | 458,773 | |||||
Less: | |||||||
Net deferred loan fees | (742 | ) | (460 | ) | |||
Net loans before allowance | 475,843 | 458,313 | |||||
Allowance for loan losses | (9,084 | ) | (9,616 | ) | |||
Total net loans | $ | 466,759 | $ | 448,697 | |||
Loans held for sale | $ | 730 | $ | 1,145 |
-16-
Allowance for Loan Losses and Recorded Investment in Loans
The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on at least a quarterly basis, which includes a review of loans both specifically and collectively evaluated for impairment.
The following tables are an analysis of the allowance for loan losses by loan segment as of and for the three months ended March 31, 2016 and 2015 and as of and for the twelve months ended December 31, 2015 (amounts in thousands).
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2016 | |||||||||||||||||||||||||||||||
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 | $ | 221 | $ | 5,470 | $ | 2,268 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 9,616 | |||||||||||||||
Provision for loan losses | 28 | (441 | ) | 545 | (34 | ) | (99 | ) | (3 | ) | 4 | — | |||||||||||||||||||
Loans charged-off | (24 | ) | — | (565 | ) | — | — | (41 | ) | — | (630 | ) | |||||||||||||||||||
Recoveries | 27 | 11 | 2 | 21 | 10 | 26 | 1 | 98 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 3 | 11 | (563 | ) | 21 | 10 | (15 | ) | 1 | (532 | ) | ||||||||||||||||||||
Balance, end of period | $ | 252 | $ | 5,040 | $ | 2,250 | $ | 292 | $ | 1,102 | $ | 95 | $ | 53 | $ | 9,084 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2 | $ | 649 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 651 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 250 | $ | 4,391 | $ | 2,250 | $ | 292 | $ | 1,102 | $ | 95 | $ | 53 | $ | 8,433 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 25,980 | $ | 50,970 | $ | 218,594 | $ | 40,342 | $ | 131,338 | $ | 8,374 | $ | 987 | $ | 476,585 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 78 | $ | 1,421 | $ | 1,775 | $ | 261 | $ | 1,262 | $ | — | $ | — | $ | 4,797 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 25,902 | $ | 49,549 | $ | 216,819 | $ | 40,081 | $ | 130,076 | $ | 8,374 | $ | 987 | $ | 471,788 |
(1) At March 31, 2016, there were $302,000 in impaired loans collectively evaluated for impairment with $43,000 in reserves established.
-17-
Three Months Ended | |||||||||||||||||||||||||||||||
March 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 119 | $ | 5,105 | $ | 2,382 | $ | 436 | $ | 1,206 | $ | 89 | $ | 40 | $ | 9,377 | |||||||||||||||
Provision for loan losses | 14 | (322 | ) | 108 | (24 | ) | 214 | 15 | (5 | ) | — | ||||||||||||||||||||
Loans charged-off | (9 | ) | — | (4 | ) | — | (148 | ) | (54 | ) | — | (215 | ) | ||||||||||||||||||
Recoveries | 46 | 319 | 184 | — | 46 | 32 | 1 | 628 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 37 | 319 | 180 | — | (102 | ) | (22 | ) | 1 | 413 | |||||||||||||||||||||
Balance, end of period | $ | 170 | $ | 5,102 | $ | 2,670 | $ | 412 | $ | 1,318 | $ | 82 | $ | 36 | $ | 9,790 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 508 | $ | 125 | $ | — | $ | — | $ | 3 | $ | — | $ | 636 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 170 | $ | 4,594 | $ | 2,545 | $ | 412 | $ | 1,318 | $ | 79 | $ | 36 | $ | 9,154 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 27,432 | $ | 53,345 | $ | 208,342 | $ | 28,912 | $ | 132,212 | $ | 8,787 | $ | 281 | $ | 459,311 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 6,123 | $ | 4,103 | $ | — | $ | 2,125 | $ | 3 | $ | — | $ | 12,354 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 27,432 | $ | 47,222 | $ | 204,239 | $ | 28,912 | $ | 130,087 | $ | 8,784 | $ | 281 | $ | 446,957 |
(1) At March 31, 2015, there were $210,000 impaired loans collectively evaluated for impairment with $31,000 in reserves established.
Twelve Months Ended | |||||||||||||||||||||||||||||||
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 recoveries (charge-offs) | 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.
-18-
Credit Risk
The Company uses an internal grading system to assign the degree of inherent risk on each individual loan and monitors 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. There have been no significant changes in credit grade definitions as outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The following tables are an analysis of the creditworthiness by loan class and credit card portfolio exposure as of March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,899 | $ | 56 | $ | — | $ | — | $ | — | $ | 1,701 | $ | — | $ | 3,656 | |||||||||||||||
2 - Strong | 1,029 | 864 | 2,778 | 245 | 15,082 | 480 | 6 | 20,484 | |||||||||||||||||||||||
3 - Standard | 10,595 | 10,621 | 91,544 | 5,462 | 53,170 | 1,145 | 454 | 172,991 | |||||||||||||||||||||||
4 - Acceptable | 10,646 | 35,830 | 114,161 | 34,374 | 56,464 | 2,989 | 505 | 254,969 | |||||||||||||||||||||||
5 - Special Mention | 296 | 2,131 | 7,659 | — | 5,321 | 65 | — | 15,472 | |||||||||||||||||||||||
6-8 - Substandard | 113 | 1,468 | 2,452 | 261 | 1,301 | — | 22 | 5,617 | |||||||||||||||||||||||
$ | 24,578 | $ | 50,970 | $ | 218,594 | $ | 40,342 | $ | 131,338 | $ | 6,380 | $ | 987 | $ | 473,189 |
Consumer - Credit Card | Business- Credit Card | ||||||
Performing | $ | 1,975 | $ | 1,369 | |||
Nonperforming | 19 | 33 | |||||
Total | $ | 1,994 | $ | 1,402 | |||
Total Loans | $ | 476,585 |
December 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,942 | $ | — | $ | — | $ | — | $ | — | $ | 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 | |||||||||||||||||||||||
6-8 - Substandard | 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 |
Consumer- Credit Card | Business- Credit Card | ||||||
Performing | $ | 2,211 | $ | 1,133 | |||
Non Performing | 29 | 35 | |||||
Total | $ | 2,240 | $ | 1,168 | |||
Total Loans | $ | 458,773 |
-19-
Asset Quality
The following tables are an age analysis of past due loans, including those on nonaccrual by loan class, as of March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | — | $ | 113 | $ | — | $ | 113 | $ | 24,465 | $ | 24,578 | |||||||||||
Commercial construction & land development | 202 | 1,467 | — | 1,669 | 49,301 | 50,970 | |||||||||||||||||
Commercial real estate | 1 | 1,475 | — | 1,476 | 217,118 | 218,594 | |||||||||||||||||
Residential construction | — | 261 | — | 261 | 40,081 | 40,342 | |||||||||||||||||
Residential mortgage | 87 | 1,246 | — | 1,333 | 130,005 | 131,338 | |||||||||||||||||
Consumer | 39 | — | — | 39 | 6,341 | 6,380 | |||||||||||||||||
Consumer credit cards | 61 | — | 19 | 80 | 1,914 | 1,994 | |||||||||||||||||
Business credit cards | 79 | — | 33 | 112 | 1,290 | 1,402 | |||||||||||||||||
Other loans | 22 | — | — | 22 | 965 | 987 | |||||||||||||||||
Total | $ | 491 | $ | 4,562 | $ | 52 | $ | 5,105 | $ | 471,480 | $ | 476,585 |
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 |
Nonperforming assets
Nonperforming assets at March 31, 2016 and December 31, 2015 consist of the following (amounts in thousands):
March 31, 2016 | December 31, 2015 | ||||||
Loans past due ninety days or more and still accruing | $ | 52 | $ | 65 | |||
Nonaccrual loans | 4,562 | 6,598 | |||||
Foreclosed assets | 2,482 | 1,760 | |||||
Total nonperforming assets | $ | 7,096 | $ | 8,423 |
-20-
Impaired Loans
The following tables illustrate the impaired loans by loan class as of March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 61 | $ | 61 | $ | — | $ | 61 | $ | — | |||||||||
Commercial construction & land development | 686 | 1,504 | — | 693 | — | ||||||||||||||
Commercial real estate | 1,775 | 2,153 | — | 1,787 | 6 | ||||||||||||||
Residential construction | 261 | 262 | — | 249 | — | ||||||||||||||
Residential mortgage | 1,261 | 1,289 | — | 1,277 | 3 | ||||||||||||||
Subtotal: | 4,044 | 5,269 | — | 4,067 | 9 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | 52 | 63 | 7 | 52 | — | ||||||||||||||
Commercial construction & land development | 782 | 1,161 | 655 | 785 | — | ||||||||||||||
Residential mortgage | 221 | 299 | 32 | 222 | 2 | ||||||||||||||
Subtotal: | 1,055 | 1,523 | 694 | 1,059 | 2 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 3,356 | 4,942 | 662 | 3,378 | 6 | ||||||||||||||
Residential | 1,743 | 1,850 | 32 | 1,748 | 5 | ||||||||||||||
Grand Total | $ | 5,099 | $ | 6,792 | $ | 694 | $ | 5,126 | $ | 11 |
-21-
December 31, 2015 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
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 |
-22-
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. 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.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered and the loan is considered performing. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. 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.
The following table provides a summary of loans modified as TDRs at March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | — | $ | 404 | $ | 404 | $ | — | ||||||||
Commercial real estate | 300 | 551 | 851 | — | ||||||||||||
Residential mortgage | 223 | — | 223 | — | ||||||||||||
Total modifications | $ | 523 | $ | 955 | $ | 1,478 | $ | — |
December 31, 2015 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | 1,059 | $ | 557 | $ | 1,616 | $ | 447 | ||||||||
Commercial real estate | 1,028 | 574 | 1,602 | 20 | ||||||||||||
Residential mortgage | 226 | — | 226 | — | ||||||||||||
Total modifications | $ | 2,313 | $ | 1,131 | $ | 3,444 | $ | 467 |
There were no new TDRs made to borrowers for the three months ended March 31, 2016 and there were no TDR loans modified during the previous twelve months that had a payment default for the three months ended March 31, 2016.
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NOTE E – BORROWINGS
At March 31, 2016 and December 31, 2015, borrowed funds included the following FHLB advances (amounts in thousands):
Maturity | Interest Rate | March 31, 2016 | December 31, 2015 | |||||||||
February 22, 2016 | 0.48% | Fixed | $ | — | $ | 10,000 | ||||||
May 12, 2016 | 0.59% | Fixed | 10,000 | — | ||||||||
August 9, 2017 | 0.73% | Fixed | 10,000 | — | ||||||||
August 14, 2017 | 3.94% | Fixed | 5,000 | 5,000 | ||||||||
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 | ||||||||
$ | 70,000 | $ | 60,000 |
FHLB advances are secured by a floating lien covering the Company's loan portfolio of qualifying mortgage loans. At March 31, 2016, the Company had available lines of credit totaling $144.0 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at March 31, 2016 and December 31, 2015 were 2.16% and 2.38%, respectively.
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 March 31, 2016.
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NOTE F - COMMITMENTS AND CONTINGENCIES
Commitments
The following table presents loan commitments at March 31, 2016 (amounts in thousands).
March 31, 2016 | |||
Commitments to extend credit | $ | 21,258 | |
Undisbursed lines of credit | 95,176 | ||
Financial stand-by letters of credit | 439 | ||
Performance stand-by letters of credit | 199 | ||
Legally binding commitments | 117,072 | ||
Unused credit card lines | 16,225 | ||
Total | $ | 133,297 |
Pledged Assets
Certain assets are pledged to secure municipal deposits, borrowings, and borrowing capacity, subject to certain limits, at the Federal Home Loan Bank (the "FHLB") and the Federal Reserve Bank of Richmond (the "FRB"), as well as for other purposes as required or permitted by law. FHLB borrowings are secured by securities and a floating lien covering the Company's loan portfolio of qualifying residential (1-4 units) first mortgage and commercial real estate loans. The following table provides the total market value of pledged assets by asset type at March 31, 2016 (amounts in thousands).
March 31, 2016 | |||
Securities | $ | 70,156 | |
Loans | 32,631 |
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. As previously reported, 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. Of the two remaining lawsuits, there are no updates to the lawsuits in the Southern District of Florida, which, as previously reported, 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 had been stayed pending resolution of motions to compel arbitration filed by the Bank's co-defendants, and the Court has not yet determined whether the case against the Bank will proceed pending appeal by those co-defendants.
Additionally, the Company is party to certain legal actions in the ordinary course of its business. The Company believes these actions are routine in nature and incidental to the operation of its business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on its business, financial condition, results of operations, cash flows or prospects. If, however, the Company's assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, its business, financial condition, results of operations, cash flows and prospects could be adversely affected.
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NOTE G – FAIR VALUE MEASUREMENT
Fair Value Measured on a Recurring Basis.
The Company measures certain assets at fair value on a recurring basis, as described below.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities have historically included equity securities traded on an active exchange, such as the New York Stock Exchange. As of March 31, 2016, there were no Level 1 securities. Level 2 securities include taxable municipalities, mortgage-backed securities issued by government sponsored entities, and certain equity securities. The Company’s mortgage-backed securities were primarily issued by GNMA, FNMA, and FHLMC. As of March 31, 2016, 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 March 31, 2016 and December 31, 2015 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
March 31, 2016, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
Available-for-Sale Securities: | 3/31/2016 | 3/31/2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 25,420 | $ | 25,420 | $ | — | $ | 25,420 | $ | — | |||||||||
Mortgage-backed securities: | |||||||||||||||||||
GNMA | 13,545 | 13,545 | — | 13,545 | — | ||||||||||||||
FNMA & FHLMC | 30,984 | 30,984 | — | 30,984 | — | ||||||||||||||
Other debt securities | 500 | 500 | — | — | 500 | ||||||||||||||
Equity securities | 11 | 11 | — | 11 | — | ||||||||||||||
Total available-for-sale securities | $ | 70,460 | $ | 70,460 | $ | — | $ | 69,960 | $ | 500 |
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 | |||||||||||||||
Available-for-Sale Securities: | 12/31/2015 | 12/31/2015 | (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 |
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The following table presents the reconciliation for the three months ended March 31, 2016 and 2015 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands).
Three Months Ended | |||||||
March 31, | |||||||
Securities Available-for-Sale: | 2016 | 2015 | |||||
Beginning Balance | $ | 500 | $ | — | |||
Total realized and unrealized gains or (losses): | |||||||
Included in earnings | — | — | |||||
Included in other comprehensive income | — | — | |||||
Purchases, issuances and settlements | — | — | |||||
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.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, when a loan is considered impaired, it is evaluated for impairment and written down to its estimated fair value or an allowance for loan losses is established. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When there is no observable market prices, an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.
Foreclosed Assets
Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3.
Assets measured at fair value on a non-recurring basis are included in the tables below at March 31, 2016 and December 31, 2015 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
March 31, 2016, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
3/31/2016 | 3/31/2016 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Loans held for sale | $ | 730 | $ | 730 | $ | — | $ | 730 | $ | — | |||||||||
Impaired loans | 1,616 | 1,616 | — | — | 1,616 | ||||||||||||||
Foreclosed assets | 2,482 | 2,482 | — | — | 2,482 |
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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 | |||||||||||||||
12/31/2015 | 12/31/2015 | (Level 1) | (Level 2) | (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 |
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 recurring and nonrecurring basis at March 31, 2016 (amounts in thousands, except percentages).
Total Carrying Amount at March 31, 2016 | Valuation Methodology | Range of Inputs | |||||
Recurring measurements: | |||||||
Other debt securities | $ | 500 | Probability of default | 0% | |||
Loss given default | 100% | ||||||
Nonrecurring measurements: | |||||||
Impaired loans | $ | 1,616 | Collateral discounts | 9 - 50% | |||
Foreclosed assets | $ | 2,482 | 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.
Certificate of Deposits
These investments are valued at carrying amounts for fair value purposes.
Securities Available-for-Sale and Securities Held-to-Maturity
Fair values of investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held For Sale
The fair value of 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.
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 March 31, 2016 and December 31, 2015 (amounts in thousands).
March 31, 2016 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 43,061 | $ | 43,061 | $ | 43,061 | $ | — | $ | — | |||||||
Certificates of deposit | 22,540 | 22,540 | — | 22,540 | — | ||||||||||||
Securities available-for-sale | 70,460 | 70,460 | — | 69,960 | 500 | ||||||||||||
Securities held-to-maturity | 62,212 | 63,368 | — | 63,368 | — | ||||||||||||
Loans held for sale | 730 | 730 | — | 730 | — | ||||||||||||
Loans, net | 466,759 | 440,375 | — | — | 440,375 | ||||||||||||
FHLB stock | 3,596 | 3,596 | — | 3,596 | — | ||||||||||||
Accrued interest receivable | 1,557 | 1,557 | — | 1,557 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 561,378 | $ | 560,874 | $ | — | $ | 560,874 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 23,872 | 23,872 | — | — | 23,872 | ||||||||||||
Borrowings | 70,000 | 71,914 | — | 71,914 | — | ||||||||||||
Accrued interest payable | 439 | 439 | — | 439 | — |
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 | — |
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NOTE H - REGULATORY RESTRICTIONS
North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the Bank. Although not currently limited by regulatory authorities, there were no dividends paid to the Company by the Bank during the three months ended March 31, 2016.
Current federal regulations require that the Company and the Bank maintain a minimum ratio of total capital to risk weighted assets of 8.0%, with at least 6.0% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Company and the Bank must maintain a common equity Tier 1 capital ratio of 4.5% and a leverage ratio of 4.0%. For the Bank to be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. There is no such category for well capitalized at the Company level. At March 31, 2016, the Bank was classified as well capitalized for regulatory capital purposes.
Capital ratios for the Bank and the Company are presented in the table below.
Actual Ratio | Minimum For Capital Adequacy Purposes | Minimum to be Well Capitalized under Prompt Corrective Action Provisions | |||||||||
3/31/2016 | 12/31/2015 | Ratio | Ratio | ||||||||
Bank | |||||||||||
Total Capital (to Risk Weighted Assets) | 15.5 | % | 15.6 | % | 8.0 | % | 10.0 | % | |||
Tier I Capital (to Risk Weighted Assets) | 14.2 | % | 14.4 | % | 6.0 | % | 8.0 | % | |||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 14.2 | % | 14.4 | % | 4.5 | % | 6.5 | % | |||
Tier I Capital (to Average Assets) | 10.5 | % | 10.2 | % | 4.0 | % | 5.0 | % | |||
Company | |||||||||||
Total Capital (to Risk Weighted Assets) | 15.8 | % | 16.0 | % | 8.0 | % | N/A | ||||
Tier I Capital (to Risk Weighted Assets) | 12.3 | % | 12.4 | % | 6.0 | % | N/A | ||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 10.7 | % | 11.3 | % | 4.5 | % | N/A | ||||
Tier I Capital (to Average Assets) | 9.1 | % | 8.8 | % | 4.0 | % | N/A |
In July 2015, the Bank entered into a Written Agreement (the "2015 Written Agreement") with the FRB replacing the Written Agreement the Company and the Bank entered into with the FRB and the North Carolina Office of the Commissioner of Banks in 2011. Under the terms of the 2015 Written Agreement, the Bank submitted and implemented the following plans:
•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 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.
-31-
NOTE I - RESTRICTED STOCK
A summary of the activity of the Company's restricted stock awards for the three months ended March 31, 2016 is presented below:
Restricted Stock | Weighted Average Grant-Date Fair Value | |||||
Unvested at December 31, 2015: | 1,363,175 | �� | $ | 1.64 | ||
Granted | 130,000 | 1.89 | ||||
Vested | (149,325 | ) | 1.53 | |||
Forfeited | (42,500 | ) | 1.71 | |||
Unvested at March 31, 2016: | 1,301,350 | $ | 1.68 |
The Company measures the fair value of restricted shares based on the price of the Company's common stock on the grant date, and compensation expense is recorded over the vesting period. The related compensation expense recognized for restricted stock awards for the three months ended March 31, 2016 and 2015 was $75,000 and $135,000, respectively. At March 31, 2016, the Company estimates there was $2.0 million of total unrecognized compensation cost related to unvested restricted stock granted under the plan. That cost is expected to be recognized over the next three years. The grant-date fair value of restricted stock grants vested during the three months ended March 31, 2016 was $1.53.
-32-
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the financial condition and results of operations of Four Oaks Fincorp, Inc. (the “Company”) and its subsidiaries and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report. Unless the context otherwise indicates, references in this report to "we," "us" and "our" refer to the Company and its subsidiaries.
Regulatory Update
In July 2015, the Bank entered into a Written Agreement (the "2015 Written Agreement") with the Federal Reserve Bank of Richmond (the "FRB") replacing the Written Agreement the Company and the Bank entered into with the FRB and the North Carolina Office of the Commissioner of Banks in 2011. Under the terms of the 2015 Written Agreement, the Bank submitted and implemented the following plans:
•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 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 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.
Comparison of Financial Condition at March 31, 2016 and December 31, 2015
The Company’s total assets increased $30.3 million or 4.4% during the three month period ending March 31, 2016, from $691.4 million at December 31, 2015 to $721.7 million at March 31, 2016 primarily due to increased cash and solid loan growth. Cash, cash equivalents, and investments were $201.9 million at March 31, 2016 compared to $189.2 million at December 31, 2015, an increase of $12.7 million or 6.7%. Strong loan demand resulted in growth of $17.5 million or 3.8% as outstanding gross loans grew to $475.8 million at March 31, 2016 compared to $458.3 million at December 31, 2015.
Total liabilities were $659.5 million at March 31, 2016, an increase of $28.5 million or 4.5%, from $631.0 million at December 31, 2015. Deposit growth continues to exceed expectations and total deposits increased $19.1 million or 3.5% during the three month period ended March 31, 2016, from $542.3 million at December 31, 2015, to $561.4 million at March 31, 2016. Long-term borrowings were $70.0 million at March 31, 2016 compared to $60.0 million at December 31, 2015, an increase of $10.0 million or 16.7%. Total shareholders’ equity increased $1.8 million or 3.0%, from $60.4 million at December 31, 2015, to $62.2 million at March 31, 2016. This increase resulted primarily from net income generated during the first quarter, as well as increases in accumulated other comprehensive income on the available for sale securities portfolio.
Results of Operations for the Three Months Ended March 31, 2016 and 2015
Net Income. Net income for the three months ended March 31, 2016 was $831,000, or $0.03 net income per basic and diluted share, as compared to net income of $978,000, or $0.03 net income per basic and diluted share, for the three months ended March 31, 2015, a decrease of $147,000. During the first quarter of 2016, the Company began recording income tax expense for the first time since the establishment of the valuation allowance on the Company's deferred tax assets in 2010. For the quarter ended March 31, 2016, the Company reported a provision for income taxes totaling $463,000 compared to no income tax provision for this same quarter in 2015. Pre-tax net income for the three months ended March 31, 2016 was $1.3 million compared to $978,000 for the same period in 2015, an increase of $316,000.
Net Interest Income. Net interest income is the difference between interest income, principally from loan and investment securities, and interest expense, largely on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread, and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.
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Net interest income increased to $5.9 million for the three months ended March 31, 2016, as compared to $5.7 million for the same period in 2015. Interest income totaled $7.1 million for the three months ended March 31, 2016 compared to $7.5 million for the same period in 2015, a decline of $345,000. During the three month period ended March 31, 2015, the Company recorded approximately $350,000 in previously deferred interest from problem loan payouts while there was minimal income of this type for the three months ended March 31, 2016. Offsetting the reduction in interest income, interest expense for the period ended March 31, 2016 improved approximately $500,000 as a result of the balance sheet strategies executed in 2015 which entailed reducing high cost Federal Home Loan Bank ("FHLB") borrowings and refinancing the Company's subordinated debt. Interest expense totaled $1.2 million for the three months ended March 31, 2016 compared to $1.7 million for the same period in 2015. Net interest margin improved 64 basis points to 3.69% for the quarter ended March 31, 2016, as compared to 3.05% for the same period ended March 31, 2015.
Provision for Loan Losses. The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management’s consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. During the three months ended March 31, 2016 and March 31, 2015, no provision for the allowance for loan losses was recognized in earnings.
Non-Interest Income. Non-interest income decreased $361,000 to $1.2 million for the quarter ended March 31, 2016, as compared to $1.5 million for the quarter ended March 31, 2015. Of the decline, $179,000 related to the absence of Automatic Clearing House ("ACH") third party payment processors indemnification income as the Company completed the exit from this line of business in 2015. Additionally contributing to the decline were reductions in service charges on deposit accounts and other service charges, commissions, and fees.
Non-Interest Expense. Non-interest expense decreased $528,000 to $5.8 million for the quarter ended March 31, 2016, as compared to $6.3 million for the quarter ended March 31, 2015. Professional and consulting fees declined $226,000 due to reductions in legal fees, audit expenses, and other professional fees. Also contributing to the decline was a reduction in other operating expenses of $143,000 when compared to first quarter of 2015. During the first quarter of 2015, the Company completed an upgrade of its technology platform and the absence of these expenses in the first quarter 2016 is the primary contributor to the decline in other operating expenses.
Income Taxes. As noted above, the Company began recording income tax expense during the first quarter 2016 and reported a provision for income taxes totaling $463,000 compared to no income tax provision for this same quarter in 2015.
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Asset Quality
Asset quality continued to improve during the quarter ended March 31, 2016. The Company completed its asset resolution plan in 2015 and management believes problem assets have now reached manageable levels in which resolution can occur in the normal course of business. Classified assets as of March 31, 2016, which include loans risk graded substandard or lower and foreclosed assets, totaled $8.2 million compared to $10.1 million at December 31, 2015, a decline of $1.9 million. Classified to capital totaled 10.0% as of March 31, 2016 compared to 12.5% at year end 2015.
Nonperforming Assets
Nonperforming assets are comprised of nonperforming loans, accruing loans which are past due 90 days or more, repossessed assets, and other real estate owned ("foreclosed assets"). During the first quarter ended March 31, 2016, nonperforming assets declined $1.3 million or 15.8% as compared to December 31, 2015.
The following table describes our nonperforming asset portfolio by loan class as of March 31, 2016 and December 31, 2015 (amounts in thousands, except ratios).
March 31, 2016 | December 31, 2015 | ||||||
Nonaccrual loans: | |||||||
Commercial and industrial | $ | 113 | $ | 119 | |||
Commercial construction and land development | 1,467 | 1,626 | |||||
Commercial real estate | 1,475 | 2,929 | |||||
Residential construction | 261 | 721 | |||||
Residential mortgage | 1,246 | 1,203 | |||||
Total nonaccrual loans | 4,562 | 6,598 | |||||
Past due 90 days or more and still accruing: | |||||||
Consumer credit cards | 19 | 29 | |||||
Business credit cards | 33 | 36 | |||||
Total past due 90 days and still accruing | 52 | 65 | |||||
Foreclosed assets: | |||||||
Commercial and industrial | 3 | 3 | |||||
Commercial construction and land development | 1,425 | 1,493 | |||||
Commercial real estate | 945 | 82 | |||||
Residential construction | — | 69 | |||||
Residential mortgage | 109 | 113 | |||||
Total foreclosed assets | 2,482 | 1,760 | |||||
Total nonperforming assets | $ | 7,096 | $ | 8,423 | |||
Nonperforming loans to gross loans | 1.0 | % | 1.4 | % | |||
Nonperforming assets to total assets | 1.0 | % | 1.2 | % | |||
Allowance coverage of nonperforming loans | 196.9 | % | 144.3 | % |
Nonaccrual Loans
Loans are moved to nonaccrual status and recognition of interest income ceases when it is probable that full collectibility of principal and interest in accordance with the terms of the loan agreement may not occur. Nonaccrual loans as a percentage of gross loans decreased to 1.0% as of March 31, 2016 compared to 1.4% as of December 31, 2015. At March 31, 2016, there were 38 nonaccrual loans totaling $4.6 million compared to 42 loans totaling $6.6 million at December 31, 2015. The amount of interest income for the three months ended March 31, 2016 that would have been reported on loans in nonaccrual status as of March 31, 2016 totaled $66,000.
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Foreclosed Assets
At March 31, 2016, there were 34 foreclosed properties valued at a total of $2.5 million compared to 35 foreclosed properties valued at $1.8 million as of December 31, 2015. The primary driver of the increase in value of foreclosed properties for the first quarter 2016 was due to the addition of one property in the amount of $863,000.
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. 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.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered and the loan is considered performing. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. 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.
As of March 31, 2016, there were three restructured loans in accrual status compared to eight as of December 31, 2015. Regardless of whether any individual TDR is performing, all TDRs are considered to be impaired and are evaluated as such in the allowance for loan losses calculation. As of March 31, 2016, the recorded investment in performing TDRs and their related allowance for loan losses totaled $523,000 and $0, respectively. Outstanding nonperforming TDRs totaled $955,000 with $0 in specific reserves as of March 31, 2016. The amount of interest recognized for performing and nonperforming TDRs during the first three months of 2016 were approximately $9,183 and $0, respectively.
The following table presents performing and nonperforming TDRs at March 31, 2016 and December 31, 2015 (amounts in thousands).
Performing TDRs: | March 31, 2016 | December 31, 2015 | |||||
Commercial construction and land development | $ | — | $ | 1,059 | |||
Commercial real estate | 300 | 1,028 | |||||
Residential mortgage | 223 | 226 | |||||
Total performing TDRs | $ | 523 | $ | 2,313 |
Nonperforming TDRs: | March 31, 2016 | December 31, 2015 | |||||
Commercial construction and land development | $ | 404 | $ | 557 | |||
Commercial real estate | 551 | 574 | |||||
Total nonperforming TDRs | $ | 955 | $ | 1,131 |
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Allowance for Loan Losses and Summary of Loss Experience
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, 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.
The following table summarizes the Company's loan loss experience by class for the three months ended March 31, 2016 and 2015 (amounts in thousands, except ratios).
Three Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
Balance at beginning of period | $ | 9,616 | $ | 9,377 | |||
Charge-offs: | |||||||
Commercial and industrial | 24 | 9 | |||||
Commercial real estate | 565 | 4 | |||||
Residential mortgage | — | 148 | |||||
Consumer | 41 | 54 | |||||
Total charge-offs | 630 | 215 | |||||
Recoveries: | |||||||
Commercial and industrial | 27 | 46 | |||||
Commercial construction and land development | 11 | 319 | |||||
Commercial real estate | 2 | 184 | |||||
Residential construction | 21 | — | |||||
Residential mortgage | 10 | 46 | |||||
Consumer | 26 | 32 | |||||
Other | 1 | 1 | |||||
Total recoveries | 98 | 628 | |||||
Net (charge-offs) recoveries | (532 | ) | 413 | ||||
Provision for loan losses | — | — | |||||
Balance at end of period | $ | 9,084 | $ | 9,790 | |||
Ratio of net charge-offs to average gross loans | 0.11 | % | — | % |
The allowance for loan losses at March 31, 2016 was $9.1 million, which represents 1.9% of total loans held for investment compared to $9.8 million or 2.1% as of March 31, 2015. The decrease in amount and percentage of total loans is due to the net charge-offs for the quarter and loan growth of $17.5 million for the first quarter of 2016. For the three months ended March 31, 2016, charge-offs outpaced recoveries resulting in a net loan charge-off of $532,000 compared with net recoveries of $413,000 for the prior year period.
The allowance for loan losses on individually reviewed impaired loans totaled $651,000 as of March 31, 2016, compared to $1.2 million as of December 31, 2015, a 47% decrease. The primary driver of the decline is the absence of one relationship that was refinanced with additional collateral and removed from impaired status. The allowance for loan losses on the loans reviewed collectively remained constant at $8.4 million at March 31, 2016 and December 31, 2015.
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Because of the nature of the Company’s primary markets and business, a significant portion of the loan portfolio is secured by commercial real estate, including residential and commercial acquisition, development, and construction properties. As of March 31, 2016, approximately 93% of the loan portfolio had real estate as a primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. Real estate values in many markets have improved. The Company continues to thoroughly review and monitor its commercial real estate concentration and the associated allowance and sets limits by sector and region based on this internal review.
The following table summarizes the Company’s allowance for loan losses by category and percent of loans within each category at March 31, 2016, and December 31, 2015 (amounts in thousands, except ratios).
March 31, 2016 | December 31, 2015 | ||||||||||||
Amount | % of loans in each category | Amount | % of loans in each category | ||||||||||
Commercial and industrial | $ | 252 | 5 | % | $ | 221 | 5 | % | |||||
Commercial construction and land development | 5,040 | 11 | % | 5,470 | 11 | % | |||||||
Commercial real estate | 2,250 | 46 | % | 2,268 | 46 | % | |||||||
Residential construction | 292 | 8 | % | 305 | 8 | % | |||||||
Residential mortgage | 1,102 | 28 | % | 1,191 | 28 | % | |||||||
Consumer | 95 | 2 | % | 113 | 2 | % | |||||||
Other | 53 | — | % | 48 | — | % | |||||||
Total | $ | 9,084 | 100 | % | $ | 9,616 | 100 | % |
Liquidity and Capital Resources
Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources. The term "liquidity" refers to our ability to generate adequate amounts of cash to meet our needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures our liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents (net of federal requirements to maintain reserves against deposit liabilities), investment securities eligible for pledging to secure borrowings, investments available-for-sale, loan repayments, loan sales, deposits and borrowings from the FHLB secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines. During the first three months of 2016, the Company's primary use of its excess liquidity was to fund growth in the loan portfolio.
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.
Management believes that the Company’s liquidity sources are adequate to meet its operating needs for at least the next 12 months. Total shareholders’ equity was $62.2 million at March 31, 2016 and $60.4 million at December 31, 2015. 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 March 31, 2016. As of March 31, 2016, the Company has the credit capacity to borrow up to $144.0 million from the FHLB with $70.0 million outstanding.
The Bank had total risk based capital of 15.5%, Tier 1 risk based capital of 14.2%, a leverage ratio of 10.5%, and common equity Tier 1 capital of 14.2% at March 31, 2016, as compared to 15.6%, 14.4%, 10.2%, and 14.4%, respectively, at December 31, 2015. The Company had total risk based capital of 15.8%, Tier 1 risk based capital of 12.3%, a leverage ratio of 9.1%, and common equity Tier 1 capital of 10.7% at March 31, 2016, as compared to 16.0%, 12.4%, 8.8%, and 11.3%, respectively, at December 31, 2015.
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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 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.
Forward-Looking Information
Information set forth in this Quarterly Report on Form 10-Q, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology, such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereof or comparable terminology.
We caution that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including, without limitation, 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 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 Part II, Item 1A. Risk Factors, and other considerations described in connection with specific forward-looking statements and other cautionary elements specified in the Company's periodic filings with the Commission, including without limitation, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
Any forward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date hereof and we undertake no duty to update them if our view changes later, except as required by law. These forward-looking statements should not be relied upon as representing our view as of any date subsequent to the date hereof.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the SEC's rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that the Company believes have materially affected or are likely to materially affect, its internal control over financial reporting.
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Part II. OTHER INFORMATION
ITEM 1 – 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 ACH 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. As previously reported, 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. Of the two remaining lawsuits, there are no updates to the lawsuit in the Southern District of Florida, which, as previously reported, 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 had been stayed pending resolution of motions to compel arbitration filed by the Bank's co-defendants, and the Court has not yet determined whether the case against the Bank will proceed pending appeal by those 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 1A - RISK FACTORS
There have been no material changes in the Company’s risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
There were no unregistered securities sold during the first quarter of fiscal 2016.
Stock Repurchases
The following table summarizes stock repurchase activity for the first quarter of 2016:
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 | |||||
January 1, 2016 to January 31, 2016 | 37,488 | $ | 1.90 | — | — | ||||
February 1, 2016 to February 29, 2016 | — | — | — | — | |||||
March 1, 2016 to March 31, 2016 | — | — | — | — | |||||
Total | 37,488 | $ | 1.90 | — | — |
(1) Represents shares repurchased to satisfy tax withholding obligations that arose on the vesting of shares of restricted stock.
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ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. | Description |
10.1 | Severance and General Release Agreement with W. Leon Hiatt, III. |
10.2 | Amendment No. 3, effective March 23, 2016, to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015) |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC. | |||
Date: | May 12, 2016 | By: | /s/ David H. Rupp |
David H. Rupp | |||
President and | |||
Chief Executive Officer | |||
Date: | May 12, 2016 | By: | /s/ Deanna W. Hart |
Deanna W. Hart | |||
Executive Vice President and | |||
Chief Financial Officer and | |||
Principal Accounting Officer |
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Exhibit Index
Exhibit No. | Description |
10.1 | Severance and General Release Agreement with W. Leon Hiatt, III. |
10.2 | Amendment No. 3, effective March 23, 2016, to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015) |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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