UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2008
Commission File Number 000-22787
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FOUR OAKS FINCORP, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2028446
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524
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(Address of principal executive office, including zip code)
(919) 963-2177
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(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. |X|YES [ ]NO
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 definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer |X|
Non-accelerated filer [ ] (Do not check if a Smaller reporting company [ ]
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): [ ]YES |X|NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, 6,889,795
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of November 3, 2008)
1
TABLE OF CONTENTS Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2008 (Unaudited) and December 31, 2007....... 3
Consolidated Statements of Income (Unaudited)
Three Months and Nine Months Ended September 30, 2008
and 2007................................................... 4
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months and Nine Months Ended September 30, 2008
and 2007................................................... 5
Consolidated Statement of Shareholders' Equity (Unaudited)
Nine Months Ended September 30, 2008....................... 6
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2008 and 2007.............. 7
Notes to Consolidated Financial Statements (Unaudited)..... 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..... 20
Item 4 - Controls and Procedures........................................ 20
Part II. OTHER INFORMATION
Item 1A.- Risk Factors................................................... 20
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.... 21
Item 6 - Exhibits....................................................... 22
2
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
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September 30,
2008 December 31,
(Unaudited) 2007*
--------------- ---------------
ASSETS (Amounts in thousands)
Cash and due from banks $ 13,026 $ 14,394
Interest-earning deposits 26,239 3,881
Federal funds sold 120 -
Investment securities available for sale 138,894 114,301
Loans 661,339 545,270
Allowance for loan losses (8,597) (6,653)
--------------- ---------------
Net loans 652,742 538,617
Accrued interest receivable 3,831 3,564
Bank premises and equipment, net 17,068 12,627
FHLB stock 6,529 5,010
Investment in life insurance 10,435 10,041
Goodwill 6,240 -
Other assets 8,351 5,868
--------------- ---------------
Total assets $ 883,475 $ 708,303
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 77,980 $ 74,687
Money market and NOW accounts 129,015 126,300
Savings 29,057 28,041
Time deposits, $100,000 and over 256,244 172,513
Other time deposits 191,264 136,222
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Total deposits 683,560 537,763
Borrowings 114,450 97,000
Subordinated debentures 12,372 12,372
Accrued interest payable 3,219 4,055
Other liabilities 4,498 2,483
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Total liabilities 818,099 653,673
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Shareholders' equity:
Common stock; $1.00 par value, 20,000,000 shares
authorized; 6,889,795 and 6,165,197 and shares issued and
outstanding at September 30, 2008 and December 31, 2007,
respectively 6,890 6,165
Additional paid-in capital 30,813 21,545
Retained earnings 28,698 26,477
Accumulated other comprehensive income (loss) (1,025) 443
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Total shareholders' equity 65,376 54,630
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Total liabilities and shareholders' equity $ 883,475 $ 708,303
=============== ===============
* Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
3
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 10,417 $ 10,570 $ 31,053 $ 30,175
Investment securities:
Taxable 1,716 1,576 4,987 4,413
Tax-exempt 139 42 267 127
Dividends 104 112 405 281
Interest-earning deposits 22 10 56 36
----------- ----------- ----------- -----------
Total interest and dividend income 12,398 12,310 36,768 35,032
----------- ----------- ----------- -----------
Interest expense:
Deposits 4,477 4,940 13,784 14,167
Borrowings 1,164 1,194 3,775 3,329
----------- ----------- ----------- -----------
Total interest expense 5,641 6,134 17,559 17,496
----------- ----------- ----------- -----------
Net interest income 6,757 6,176 19,209 17,536
Provision for loan losses 347 280 1,589 774
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,410 5,896 17,620 16,762
----------- ----------- ----------- -----------
Non-interest income:
Service charges on deposit accounts 598 513 1,704 1,526
Other service charges, commissions and fees 371 376 1,190 1,136
Gain (loss) on sale of investment securities 93 (15) 389 (44)
Gain on sale of loans - - 47 26
Gain on hedges - 214 97 54
Merchant fees 121 110 369 336
Income from investment in bank-owned life
insurance 131 20 394 1
----------- ----------- ----------- -----------
Total non-interest income 1,314 1,218 4,190 3,035
----------- ----------- ----------- -----------
Non-interest expenses:
Salaries 2,604 2,152 7,511 6,340
Employee benefits 523 379 1,561 1,242
Occupancy expense 282 203 750 584
Equipment expense 396 365 1,174 1,026
Professional and consulting fees 362 212 1,090 938
Other taxes and licenses 140 80 350 212
Merchant processing expense 109 92 320 284
Other operating expense 1,211 823 3,390 2,549
----------- ----------- ----------- -----------
Total non-interest expenses 5,627 4,306 16,146 13,175
----------- ----------- ----------- -----------
Income before income taxes 2,097 2,808 5,664 6,622
Provision for income taxes 672 996 1,778 2,311
----------- ----------- ----------- -----------
Net income $ 1,425 $ 1,812 $ 3,886 $ 4,311
=========== =========== =========== ===========
Basic net income per common share $ 0.21 $ 0.29 $ 0.60 $ 0.70
=========== =========== =========== ===========
Diluted net income per common share $ 0.21 $ 0.29 $ 0.60 $ 0.70
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
4
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
(Amounts in thousands)
Net income $ 1,425 $ 1,812 $ 3,886 $ 4,311
----------- ----------- ----------- -----------
Other comprehensive income:
Securities available for sale:
Unrealized holding gains (losses) on available
for sale securities (950) 1,586 (2,072) 615
Tax effect 516 (634) 837 (246)
Reclassification of (gains) losses recognized in
net income (93) 15 (389) 44
Tax effect 37 (6) 156 (18)
----------- ----------- ----------- -----------
Net of tax amount (490) 961 (1,468) 395
----------- ----------- ----------- -----------
Cash flow hedging activities:
Unrealized holding gains on cash flow hedging
activities - 70 - 402
Tax effect - (28) - (160)
----------- ----------- ----------- -----------
Net of tax amount - 42 - 242
----------- ----------- ----------- -----------
Total other comprehensive income (loss) (490) 1,003 (1,468) 637
----------- ----------- ----------- -----------
Comprehensive income $ 935 $ 2,815 $ 2,418 $ 4,948
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
5
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Accumulated
Common stock Additional other Total
---------------------------- paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income (loss) equity
------------- ------------- ------------- ------------- ------------- -------------
(Amounts in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2007 6,165,197 $ 6,165 $ 21,545 $ 26,477 $ 443 $ 54,630
Net income - - - 3,886 - 3,886
Other comprehensive income
(loss) - - - - (1,468) (1,468)
Effect of Merger with LongLeaf
Community Bank 609,770 609 7,601 - - 8,210
Issuance of common stock 120,848 122 1,433 - - 1,555
Current income tax benefit - - 102 - - 102
Stock based compensation - - 132 - - 132
Purchases and retirement of
common stock (6,020) (6) - (69) - (75)
Cash dividends of $ .24 per
share YTD - - - (1,596) - (1,596)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE ATSEPTEMBER 30, 2008 6,889,795 $ 6,890 $ 30,813 $ 28,698 $ (1,025) $ 65,376
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
6
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended
September 30,
--------------------------------------
2008 2007
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(Amounts in thousands)
Cash flows from operating activities:
Net income $ 3,886 $ 4,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,589 774
Provision for depreciation and amortization 844 742
Net amortization of bond premiums and discounts 11 31
Stock based compensation 132 170
(Gain) loss on sale of investment securities (389) 44
Gain on sale of loans (47) (26)
Loss on disposition of premises and equipment 4 78
Loss on sale of foreclosed assets 132 11
Income from investment in life insurance (394) (1)
Gain on hedges (97) (54)
Changes in assets and liabilities:
Other assets (112) 449
Interest receivable (25) (808)
Other liabilities 966 300
Interest payable (941) 478
----------------- -----------------
Net cash provided by operating activities 5,559 6,499
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Cash flows from investing activities:
Proceeds from sales and calls of investment securities
available for sale 116,395 28,794
Purchases of investment securities available for sale (138,859) (54,293)
Purchase of FHLB stock (3,802) (1,003)
Redemption of FHLB Stock 2,562 504
Net increase in loans (68,692) (47,248)
Purchase of bank premises and equipment (1,626) (1,914)
Proceeds from sales of foreclosed assets 335 782
Net expenditures on foreclosed assets (61) (13)
Net cash provided by business combination 3,167 -
----------------- -----------------
Net cash used by investing activities (90,581) (74,391)
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Cash flow from financing activities:
Net proceeds from borrowings 14,864 22,545
Net increase in deposit accounts 91,283 47,438
Proceeds from issuance of common stock 1,554 1,352
Excess tax benefits from stock options 102 203
Purchase and retirement of common stock (75) (876)
Cash dividends paid (1,596) (1,289)
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Net cash provided by financing activities 106,132 69,373
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Net cash provided by financing activities 21,110 1,481
Cash and cash equivalents at beginning of period 18,275 17,711
----------------- -----------------
Cash and cash equivalents at end of the period $ 39,385 $ 19,192
================= =================
The accompanying notes are an integral part of the consolidated
financial statements.
7
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial information contained in the accompanying
unaudited consolidated financial statements reflects all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the
financial information as of and for the three and nine-month periods ended
September 30, 2008 and 2007, in conformity with accounting principles generally
accepted in the United States of America. The consolidated financial statements
include the accounts of Four Oaks Fincorp, Inc. (the "Company") and its
wholly-owned subsidiaries, Four Oaks Bank & Trust Company (the "Bank") and Four
Oaks Mortgage Services, LLC, a mortgage origination subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three and Nine-month periods ended September 30, 2008
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2008.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's Annual Report on Form 10-K
for the year ended December 31, 2007. This Quarterly Report should be read in
conjunction with such Annual Report.
NOTE 2 - NET INCOME PER SHARE
Basic and diluted net income per common share are computed based on the weighted
average number of shares outstanding during each period. Diluted net income per
common share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that would then share in the
net income of the Company.
Basic and diluted net income per common share have been computed based upon net
income as presented in the accompanying consolidated statements of income
divided by the weighted average number of common shares outstanding or assumed
to be outstanding as summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2008 2007 2008 2007
--------------- --------------- --------------- ---------------
Weighted average number of common shares
used in computing basic net income per share 6,875,620 6,180,326 6,440,021 6,165,315
Effect of dilutive stock options 1,102 15,247 5,435 28,647
--------------- --------------- --------------- ---------------
Weighted average number of common shares and
dilutive potential common shares used in
computing diluted net income per share 6,876,722 6,195,573 6,445,456 6,193,962
=============== =============== =============== ===============
As of September 30, 2008 there were 173,468 antidilutive stock options
outstanding. At September 30, 2007, there were no antidilutive stock options
outstanding.
8
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 3 - COMMITMENTS
At September 30, 2008, loan commitments were as follows (in thousands):
Commitments to extend credit $ 122,097
Undisbursed lines of credit 31,942
Letters of credit 3,416
NOTE 4 - FAIR VALUE MEASUREMENT
On January 1, 2008, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework for measuring fair value under accounting principles
generally accepted in the United States, and enhances disclosures about fair
value measurements. The Company elected not to delay the application of SFAS No.
157 to nonfinancial assets and nonfinancial liabilities, as allowed by Financial
Accounting Standards Board ("FASB") Staff Position SFAS 157-2. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value and, therefore, does not expand the use of fair value in
any new circumstances. Fair value is defined as the exchange price that would be
received to sell an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 clarifies that
fair value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data. SFAS No. 157 requires fair value
measurements to be separately disclosed by level within the fair value
hierarchy. Under SFAS No. 157, the Company bases fair values on the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. For assets and
liabilities recorded at fair value, it is the Company's policy to maximize the
use of observable inputs and minimize the use of unobservable inputs when
developing fair value measurements, in accordance with the fair value hierarchy
in SFAS No. 157.
Fair value measurements for assets and liabilities where there exists limited or
no observable market data and, therefore, are based primarily upon estimates,
are often calculated based on the economic and competitive environment, the
characteristics of the asset or liability and other factors. Therefore, the
results cannot be determined with precision and may not be realized in an actual
sale or immediate settlement of the asset or liability. Additionally, there may
be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results of current or future values.
The Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale are recorded at fair value on a recurring basis.
Additionally, from time to time, the Company may be required to record at fair
value other assets on a nonrecurring basis. These nonrecurring fair value
adjustments typically would involve application of lower of cost or market
accounting or write-downs of individual assets.
9
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - FAIR VALUE MEASUREMENT (Continued)
Under SFAS No. 157, the Company groups assets and liabilities at fair value in
three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value.
These levels are:
Level 1 -- Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange.
Level 2 -- Valuations are obtained from readily available pricing sources via
independent providers for market transactions involving similar assets or
liabilities. The Company's principal market for these securities is the
secondary institutional markets and valuations are based on observable market
data in those markets. Level 2 securities include U. S. Government agency
obligations, state and municipal bonds and mortgage-backed securities.
Level 3 -- Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted cash flow
models and similar techniques, and not based on market exchange, dealer, or
broker traded transactions. Level 3 valuations incorporate certain assumptions
and projections in determining the fair value assigned to such assets or
liabilities. Level 3 financial instruments consist of the Company's derivative
financial instruments. The Company obtains pricing for these instruments from
third parties who have experience in valuing these types of securities.
Following is a description of valuation methodologies used for assets and
liabilities recorded at fair value.
Investment Securities Available-for-Sale
- ----------------------------------------
Investment securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
Loans
- -----
The Company does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows. Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. At September 30, 2008, none of the
impaired loans were evaluated based on the fair value of collateral. In
accordance with SFAS No. 157, impaired loans where an allowance is established
based on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the
10
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - FAIR VALUE MEASUREMENT (Continued)
Company would record the impaired loan as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, the Company would record the impaired loan as
nonrecurring Level 3.
Derivative Assets and Liabilities
- ---------------------------------
Derivative instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market prices are
not readily available. For those derivatives, the Company measures fair value
using models that use primarily market observable inputs, such as yield curves
and option volatilities, and include the value associated with counterparty
credit risk. The Company classifies derivatives instruments held or issued for
risk management purposes as Level 2. As of September 30, 2008 the Company held
no derivative instruments.
Foreclosed Assets
- -----------------
Foreclosed assets are adjusted to fair value 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. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the foreclosed asset as nonrecurring Level 3. There were no fair
value adjustments related to foreclosed real estate of $1.7 million at September
30, 2008.
Below is a table that presents information about certain assets and liabilities
measured at fair value on a recurring basis:
Fair Value Measurements at
September 30, 2008, Using
-------------------------------------------------------
Total Carrying Quoted Prices Significant
Amount in The Assets in Active Other Significant
Consolidated Measured at Fair Markets for Observable Unobservable
Balance Sheet Value Identical Assets Inputs Inputs
Description 9/30/2008 9/30/2008 (Level 1) (Level 2) (Level 3)
- ----------- ----------------- ----------------- ----------------- ----------------- -----------------
Available-for-sale
securities $ 138,894 $ 138,894 $ 3,380 $ 135,514 $ -
NOTE 5 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 allows entities to
measure financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected must be reported in
earnings at each subsequent reporting date. The fair value option can be applied
instrument by instrument, however the election is irrevocable. The Company's
adoption of SFAS No. 159 on January 1, 2008 had no financial statement impact
because the Company did not elect the fair value option for any of its financial
assets or liabilities.
11
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 5 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations," ("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for recognition and measurement of
assets, liabilities and any noncontrolling interest acquired due to a business
combination. SFAS No. 141(R) expands the definitions of a business and a
business combination, resulting in an increased number of transactions or other
events that will qualify as business combinations. Under SFAS No. 141(R) the
entity that acquires the business (the "acquirer") will record 100 percent of
all assets and liabilities of the acquired business, including goodwill,
generally at their fair values. As such, an acquirer will not be permitted to
recognize the allowance for loan losses of the acquiree. SFAS No. 141(R)
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual. In most business combinations, goodwill will be recognized to the
extent that the consideration transferred plus the fair value of any
noncontrolling interests in the acquiree at the acquisition date exceeds the
fair values of the identifiable net assets acquired. Under SFAS No. 141(R),
acquisition-related transaction and restructuring costs will be expensed as
incurred rather than treated as part of the cost of the acquisition and included
in the amount recorded for assets acquired. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. Accordingly, for acquisitions
completed after December 31, 2008, the Company will apply the provisions of SFAS
No. 141(R).
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133."
SFAS No. 161 applies to all derivative instruments and related hedged items
accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 161 requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, results of
operations and cash flows. To meet those objectives, SFAS No. 161 requires (1)
qualitative disclosures about objectives for using derivatives by primary
underlying risk exposure (e.g., interest rate, credit or foreign exchange rate)
and by purpose or strategy (fair value hedge, cash flow hedge, net investment
hedge, and non-hedges), (2) information about the volume of derivative activity
in a flexible format that the preparer believes is the most relevant and
practicable, (3) tabular disclosures about balance sheet location and gross fair
value amounts of derivative instruments, income statement and other
comprehensive income location of gain and loss amounts on derivative instruments
by type of contract, and (4) disclosures about credit-risk related contingent
features in derivative agreements. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Accordingly, the Company will adopt the provisions of SFAS No. 161 in
the first quarter of 2009. The Company does not expect the adoption of the
provisions of SFAS No. 161 to have a material effect on its financial condition
and results of operations.
Other accounting standards that have been issued or proposed 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.
12
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 6 - MERGER WITH LONGLEAF COMMUNITY BANK
On April 17, 2008, the Company completed the merger with LongLeaf Community Bank
("LongLeaf"), headquartered in Rockingham, North Carolina. Under the terms of
the merger agreement, each share of LongLeaf Community Bank common stock was
converted into the right to receive either (i) $16.50 in cash, without interest,
(ii) 1.0 share of the Company's common stock multiplied by an exchange ratio of
1.1542825 or (iii) 0.60 shares of the Company's common stock multiplied by an
exchange ratio of 1.1542825 plus an amount equal to $6.60 in cash. As a result
of the acquisition, the Company paid $4.9 million in cash and has issued 609,770
additional shares of common stock. The acquisition was accounted for using the
purchase method of accounting, with the operating results of LongLeaf Community
Bank subsequent to April 17, 2008 included in the Company's financial
statements.
An unaudited summary of the total purchase price of the transaction is as
follows:
(In thousands)
Fair value of common stock issued $ 7,554
Fair value of common stock options issued 656
Cash paid for shares 4,265
Transaction costs paid in cash 606
--------------
Total purchase price $ 13,081
==============
An unaudited summary of the fair value of the assets acquired and liabilities
assumed is as follows:
(In thousands)
Cash and due from banks $ 1,690
Interest-earning deposits 1,763
Federal funds sold 4,585
Investment securities available for sale 4,212
Loans, net 47,248
Accrued interest receivable 242
FHLB stock 279
Bank premises and equipment 3,678
Deferred tax assets, net 886
Core deposit intangible 470
Goodwill 6,240
Other assets 139
Deposits (54,514)
FHLB Advances (2,586)
Accrued interest payable (105)
Other liabilities (1,146)
--------------
Net assets acquired $ 13,081
==============
13
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7 - RECENT DEVELOPMENTS WITH THE U.S. TREASURY
The U.S. Treasury has announced that it will make funds available to certain
banks under the Troubled Asset Relief Program's Capital Purchase Program (the
"Program"). The Emergency Economic Stabilization Act of 2008 authorized the
Treasury to establish the Program under which certain United States financial
institutions may sell senior preferred stock and issue warrants to purchase an
institution's common stock to the Treasury in exchange for a capital infusion.
Under the Program, eligible institutions can generally apply to issue preferred
stock to the Treasury in aggregate amounts between 1% and 3% of the
institution's risk-weighted assets, along with warrants covering shares of
common stock. On November 5, 2008, the Company's board of directors (the
"Board") authorized and approved the Company's participation in the Program, and
the Company intends to file its application shortly with the Treasury to
participate in the Program. In order to participate in the Program, the Board
also authorized the Company to sell up to 20,000 shares of senior preferred
stock ("Senior Preferred") to the Treasury for $1,000 per share, subject to the
pre-approval by the Company's shareholders to amend the Company's Articles of
Incorporation to authorize preferred stock.
At this point, however, there is no binding agreement or commitment with respect
to the Company's participation in the Program. The Company and the Treasury must
still negotiate the terms and conditions of the Company's participation in the
Program, which means that closing of the transaction is not guaranteed. Although
the Company has no reason to believe that the Company will not be able to
participate in the Program, no assurances can be given that the Company will be
able to participate in the Program, and the approximate number of shares of
preferred stock that the Company may issue pursuant to the Program or the
approximate amount of consideration the Company will receive as compensation
from the Treasury for any such shares that may be issued by the Company under
the Program cannot be determined at this time.
14
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 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.
Impact of Recent Developments on the Banking Industry
The banking industry, including the Company, is operating in a challenging and
volatile economic environment. The effects of the downturn in the housing market
have adversely impacted credit markets, consumer confidence and the broader
economy. Along with other financial institutions, the Company's stock price has
suffered as a result. Management cannot predict when these market difficulties
will subside. While the current economic downturn and the difficulties it
presents for the Company and others in the banking industry are unprecedented,
management believes that the business is cyclical and must be viewed and
measured over time. The Company's primary focus at this time is to manage the
business safely during the economic downturn and be poised to take advantage of
any market opportunities that may arise.
Because of the current economic situation, U.S. and foreign governments have
acted in attempts to stabilize the financial system. For example, the U.S.
government has adopted the Emergency Economic Stabilization Act, which, among
other things, authorized the U.S. Treasury to establish the Troubled Asset
Relief Program's Capital Purchase Program under which certain United States
financial institutions may sell senior preferred stock and issue warrants to
purchase an institution's common stock to the Treasury in exchange for a capital
infusion. See "Liquidity and Capital Resources" below for a more detailed
discussion of the Company's potential participation in this program. It is not
clear at this time what impact these measures will have on the Company or the
financial markets as a whole. Management will continue to monitor the effects of
these programs as they related to the Company and its financial operations.
Comparison of Financial Condition at
September 30, 2008 and December 31, 2007
The Company's total assets grew from $708.3 million at December 31, 2007 to
$883.5 million at September 30, 2008, an increase of $175.2 million or 24.7%.
The Company's liquid assets, consisting of cash and cash equivalents and
investment securities available for sale, increased $45.7 million during the
nine months ended September 30, 2008 compared to liquid assets as of December
31, 2007, primarily from increases in investment securities of $24.6 million and
cash in correspondent banks of $22.4 million. Additional funds available from
deposit growth provided the Company with an opportunity to increase investment
securities available for sale during the first nine months of 2008. Gross loans
increased by $116.1 million or 21.3% from $545.3 million at December 31, 2007 to
$661.3 million at September 30, 2008. The acquisition of LongLeaf Community Bank
("LongLeaf") on April 17, 2008 contributed $47.2 million of the total loan
growth, with the majority of the remaining growth due to growth in loans secured
by real estate during the third quarter. The Company's loan portfolio continued
to reflect a trend towards growth in commercial real estate lending and
construction loans. Deposits grew $145.8 million or 27.1% from $537.8 million at
December 31, 2007 to $683.6 million at September 30, 2008. Deposits from the
Company's local market continued to be its primary funding source, increasing by
$65.8 million in the first nine months of 2008 compared to deposits from the
local market as of December 31, 2007, while wholesale deposits increased by
$80.0 million for the same period. The LongLeaf acquisition accounted for $54.5
million of the total deposit growth over the first nine months of 2008, with the
remaining due primarily to growth in the Company's time deposit accounts.
15
Total shareholders' equity increased approximately $10.7 million from $54.6
million at December 31, 2007 to $65.4 million at September 30, 2008. This
increase in shareholders' equity resulted principally from shares of common
stock valued at $7.6 million issued and stock options valued at $656,000 in
connection with the merger with LongLeaf, income from operations of $3.9
million, net proceeds from the issuance of common stock from stock option
exercises and employee stock purchases of $753,000, dividend reinvestment in the
amount of $904,000, and stock compensation expense of $132,000. Offsetting these
increases were dividends paid to the Company's shareholders of $1.6 million and
other comprehensive losses of $1.5 million during the first nine months of 2008.
At September 30, 2008, both the Company and the Bank were considered to be well
capitalized as such term is defined in applicable federal regulations.
Results of Operations for the Three Months Ended
September 30, 2008 and 2007
Net Income. Net income for the three months ended September 30, 2008 was $1.4
million, or $.21 basic net income per share, as compared with net income of $1.8
million, or $.29 basic net income per share, for the three months ended
September 30, 2007, a decrease of $387,000, or $.08 basic net income per share.
Net income declined primarily due to lower margins and increased operating costs
related to the Company's recent expansion.
Net Interest Income. Like most financial institutions, the primary component of
earnings for the Bank is net interest income. Net interest income is the
difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result from changes in volume,
spread and margin. For this purpose, volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities, spread refers to
the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities and margin refers to net interest
income divided by average interest-earning assets. Margin is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities, as well as by levels of non-interest-bearing liabilities and
capital.
Net interest income for the three months ended September 30, 2008 was $6.8
million, an increase of $581,000 compared to the three months ended September
30, 2007, which was primarily due to increases in the loan and investment
securities portfolios. Average interest-earning assets increased $169.9 million
for the quarter and average liabilities increased $168.3 million for the same
period. Margins decreased as yields on assets fell faster than the cost of
liabilities resulting in a decrease in the Company's net interest margin by 50
basis points from 3.89% during the three months ended September 30, 2007 to
3.39% during the three months ended September 30, 2008.
Provision for Loan Losses. The provision for loan losses was $347,000 and
$280,000 the three months ended September 30, 2008 and 2007, respectively, an
increase of $67,000. Net charge-offs of $126,000 were recorded for the three
months ended September 30, 2008 compared to net charge offs of $25,000 during
the three months ended September 30, 2007. Non-accrual loans increased from $4.1
million to $11.9 million during the quarter ended September 30, 2008. Of this
increase, $7.0 million relating to a single borrower whose loans were placed in
non-accrual status on the last day of the quarter. The balance of the increase
in non-accrual loans relates to loans acquired in the merger of LongLeaf. We
have evaluated these loans in determining our allowance for loan losses as of
September 30, 2008, and have determined that our exposure to loss on these loans
is largely mitigated by the values of the underlying collateral. At September
30, 2008, impaired loans, which includes non-accrual loans, total $15.2 million.
Of these loans, $11.1 million have specific loss allowances that aggregate $2.1
million. Management believes that the allowance is adequate to absorb probable
losses inherent in the loan portfolio.
16
Non-Interest Income. Non-interest income increased $96,000 for the three months
ended September 30, 2008 to $1.3 million as compared to $1.2 million for the
same period in 2007. The increase is primarily due to increases in income from
bank-owned life insurance of $111,000, realized gains on the sale of investment
securities of $108,000 and an increase in service charge income of $84,000.
Non-Interest Expense. Non-interest expense increased $1.3 million to $5.6
million for the three months ended September 30, 2008 compared to $4.3 million
for the three months ended September 30, 2007. This increase was due in part to
increases in salaries and employee benefits of $596,000, which resulted from
normal salary adjustments, rising benefits costs, additional staffing and the
merger with LongLeaf. For the three months ended September 30, 2008, net
occupancy and equipment expenses increased $110,000, other taxes and licenses
increased $60,000 and other operating expenses increased $388,000. The primary
increases in other non-interest expense for the three months ended September 30,
2008 included an increase in the FDIC insurance premium of $107,000, printing
and office supplies of $25,000, advertising expense of $34,000, ATM operating
fees of $29,000 and store value card expenses of $34,000. There were no other
significant increases in any of the remaining non-interest expenses.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 32.0% and 35.5% for the three
months ended September 30, 2008 and 2007, respectively. The decrease resulted
because non-taxable income from investment securities and bank-owned life
insurance comprised a larger portion of income before taxes in the current
quarter.
Results of Operations for the Nine Months Ended
September 30, 2008 and 2007
Net Income. Net income for the nine months ended September 30, 2008 was $3.9
million, or $.60 basic net income per share, as compared with net income of $4.3
million or $.70 basic net income per share for the nine months ended September
30, 2007, a decrease of $425,000 or $.10 per share. Net income declined
primarily due to lower margins and increased operating costs related to the
Company's recent expansion and increased provision for loan losses.
Net Interest Income. Net interest income was $19.2 million and $17.5 million for
the nine month periods ended September 30, 2008 and September 30, 2007,
respectively. Interest and dividend income was $36.8 million and $35.0 million
for the nine months ended September 30, 2008 and 2007, respectively. This
increase in interest and dividend income was offset by an increase in interest
expense on deposits and borrowings of $63,000 to $17.6 million for the nine
months ended September 30, 2008 from $17.5 million for the nine months ended
September 30, 2007. This increase in interest expense was primarily due to
average deposit growth of $103.9 million and an average increase in borrowings
of $37.5 million during the nine months ended September 30, 2008. Margins
decreased as the yields on assets fell faster than the cost of liabilities,
resulting in a decrease in the Company's net interest margin by 45 basis points
from 3.86% in the first nine months of 2007 to 3.41% in the first nine months of
2008.
Provision for Loan Losses. The Company's provision for loan losses was $1.6
million and $774,000 for the nine months ended September 30, 2008 and 2007,
respectively, an increase of $815,000. This increase was primarily due to loan
growth and the results of a declining real estate market. Net charge-offs of
$1.0 million were recorded during the first nine months of 2008, compared to
$155,000 for the first nine months of 2007. Non-accrual loans increased from
$1.2 million to $11.9 million during the nine months ended September 30, 2008.
Of this increase, $7.0 million relating to a single borrower was placed in
non-accrual status on the last day of the quarter. The balance of the increase
in non-accrual loans relates to a combination of loans acquired in the merger of
LongLeaf and the downturn in the economy. We have evaluated these loans in
determining our allowance for loan losses as of September 30, 2008, and have
determined that our exposure to loss on these loans is largely mitigated by the
values of the underlying collateral. At September 30, 2008, impaired loans,
which includes non-accrual loans, total $15.2 million. Of these loans, $11.1
million have specific loss allowances that aggregate $2.1 million. Management
believes that the allowance is adequate to absorb probable losses inherent in
the loan portfolio.
17
Non-Interest Income. Non-interest income increased $1.2 million to $4.2 million
for the nine months ended September 30, 2008 compared to $3.0 million for the
nine month period ended September 30, 2007. This increase is primarily due to
positive market valuations resulting in an increase of $433,000 in the sale of
investment securities, a $71,000 increase in the interest rate swaps and a
$393,000 increase in the cash surrender value of the bank owned life insurance,
and an increase in service charges for deposit accounts of $178,000 due to the
growth in deposit accounts. There were no other significant changes in any of
the categories of income that comprise the Company's total non-interest income.
Non-Interest Expense. Non-interest expense increased $3.0 million to $16.1
million for the nine months ended September 30, 2008 compared to $13.2 million
for the nine months ended September 30, 2007. The increase was due in part to an
increase in salaries and employee benefits of $1.5 million, which resulted from
normal salary adjustments, rising benefit costs, additional staffing, due to the
merger with LongLeaf and rising insurance costs. In addition, net occupancy and
equipment expenses increased $314,000, other taxes and licenses increased
$138,000, professional and consulting fees increased $152,000, and other
operating expenses increased $841,000. The primary increases in other
non-interest expense for the first nine months of 2008 included ATM operating
fees of $58,000, advertising expense of $129,000, printing and office supply
expenses of $77,000, meals and entertainment expenses of $47,000, and an
increase in the FDIC insurance premium of $178,000, data processing fees of
$39,000 and loss on the sale of reposed assets of $106,000. There were no other
significant increases in any of the remaining non-interest expenses which grew
due to the Company's overall asset growth.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 31.4% and 34.9% for the nine
months ended September 30, 2008 and 2007, respectively. The decrease resulted
because non-taxable income from investment securities and bank-owned life
insurance comprised a larger portion of income before taxes in the current year.
Liquidity and Capital Resources
The Company's liquidity position is primarily dependent upon the Bank's need to
respond to loan demand, the short-term demand for funds caused by withdrawals
from deposit accounts (other than time deposits) and the liquidity of its
assets. The Bank's primary liquidity sources include cash and amounts due from
other banks, federal funds sold, and U.S. Government Agency and other marketable
investment securities. The Bank also has the ability to borrow funds from the
Federal Reserve Bank and the Federal Home Loan Bank of Atlanta and to purchase
federal funds from other financial institutions. Management believes that the
Bank's liquidity sources are adequate to meet its operating needs and the
operating needs of the Bank for the next eighteen months. Total shareholders'
equity was $65.4 million or 7.4% of total assets at September 30, 2008 and $54.6
million or 7.7% of total assets at December 31, 2007.
18
The United States Treasury has announced that it will make funds available to
certain banks under the Troubled Asset Relief Program's Capital Purchase Program
(the "Program"). The Emergency Economic Stabilization Act of 2008 authorized the
Treasury to establish the Program under which certain United States financial
institutions may sell senior preferred stock and issue warrants to purchase an
institution's common stock to the Treasury in exchange for a capital infusion.
Under the Program, eligible institutions can generally apply to issue preferred
stock to the Treasury in aggregate amounts between 1% and 3% of the
institution's risk-weighted assets. On November 5, 2008, the Company's board of
directors (the "Board") authorized and approved the Company's participation in
the Program, and the Company plans to file its application with the Treasury
shortly to participate in the Program. In order to participate in the Program,
the Board also authorized the Company to sell up to 20,000 shares of senior
preferred stock ("Senior Preferred") to the Treasury for $1,000 per share,
subject to the pre-approval by the Company's shareholders to amend the Company's
Articles of Incorporation to authorize preferred stock.
At this point, however, there is no binding agreement or commitment with respect
to the Company's participation in the Program. The Company and the Treasury must
still negotiate the terms and conditions of the Company's participation in the
Program, which means that closing of the transaction is not guaranteed. Although
the Company has no reason to believe that the Company will not be able to
ultimately participate in the Program, no assurances can be given that the
Company will be able to ultimately participate in the Program, the approximate
number of shares of preferred stock that the Company may issue pursuant to the
Program or the approximate amount of consideration the Company will receive as
compensation from Treasury for any such shares that may be issued by the Company
under the Program.
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, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
statements represent the Company's judgment concerning the future and are
subject to risks and uncertainties that could cause its actual operating results
and financial position to differ materially. Such forward-looking statements can
be identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof, or
other variations thereof, or comparable terminology.
The Company cautions that any such forward-looking statements are further
qualified by important factors that could cause its actual operating results to
differ materially from those anticipated 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, the failure of
assumptions underlying the establishment of the allowance for loan losses, the
low trading volume of the Company's common stock, other considerations described
in connection with specific forward-looking statements and other cautionary
elements specified in the Company's periodic filings with the Securities and
Exchange Commission (the "Commission"), including without limitation, its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form
8-K.
19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has not been any material change in information or in
the overall analysis of financial instruments considered market risk sensitive,
as measured by the factors of contractual maturities, average interest rates and
the difference between estimated fair values and book values, since the analysis
prepared and presented in conjunction with its Annual Report on Form 10-K for
the fiscal year ended December 31, 2007.
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 Commission's
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 are
effective, in that they provide reasonable assurances that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods required by the Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the period covered by this Quarterly Report that the
Company believes have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1A - RISK FACTORS
Other than as set forth below, there have been no material changes in the
Company's risk factors from those disclosed in its Annual Report on Form 10-K
for the year ended December 31, 2007.
U.S. and International Credit Markets and Economic Conditions Could Affect the
Company's Liquidity and Financial Condition
As described in Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Recent Developments on
the Banking Industry," global market and economic conditions continue to be
disruptive and volatile and the disruption has particularly had a negative
impact on the financial sector. The possible duration and severity of this
adverse economic cycle is unknown. Although the Company remains well-capitalized
and has not suffered any liquidity issues as a result of these recent events,
the cost and availability of funds may be adversely affected by illiquid credit
markets. Continued turbulence in U.S. and international markets and economies
may adversely affect the Company's liquidity, financial condition and
profitability.
20
While the U.S. and foreign governments have instituted programs to address
economic stabilization, the efficacy of these programs in stabilizing the
economy and the banking system at large are uncertain. Details as to the
Company's ultimate participation in the U.S. Treasury's Troubled Asset Relief
Program and its subsequent impact on the Company also remain uncertain. Although
the final terms of the program have not been decided, the U.S. Treasury's
program could reduce investment returns to participating banks' shareholders by
restricting dividends to common shareholders, diluting existing shareholders
interests and restricting capital management practices.
In addition, federal and state governments could pass additional legislation
responsive to current credit conditions. The Company could experience higher
credit losses because of legislation or regulatory action that reduces the
amounts borrowers are contractually required to pay under existing loan
contracts or that limits its ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases made by or on
behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Exchange Act) of the Company's common stock during the
three months ended September 30, 2008:
Total Number of Maximum Number of
Shares Purchased of Shares That
Total Number as Part of Publicly May Yet Be
of Shares Average Price Announced Purchased Under
Period Purchased (1) Paid per Share Program the Program (1)
- --------------------------------------------------------------------------------------------------------
July 1, 2008 to
July 31, 2008 - - - 350,969
- --------------------------------------------------------------------------------------------------------
August 1, 2008 to
August 31, 2008 - - - 350,969
- --------------------------------------------------------------------------------------------------------
September 1, 2008 to
September 30, 2008 6,020 12.49 6,020 344,949
- --------------------------------------------------------------------------------------------------------
Total 6,020 12.49 6,020 344,949
1) The Company is authorized to repurchase shares of its common stock
through a program first approved by its board of directors in 2001.
The program currently approved by the Company's board of directors
extends through December 31, 2008 and allows the Company to repurchase
up to an aggregate of 500,000 shares, with the limit aggregated from
2001 through December 31, 2008. The Company repurchased 6,020 shares
of stock under the program during the three months ended September 30,
2008. As of September 30, 2008, of the 500,000 authorized shares of
its common stock designated for repurchase, an aggregate of 155,051
shares have already been repurchased and 344,949 shares remained
authorized for repurchase under the program.
21
ITEM 6 EXHIBITS
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Four Oaks Fincorp, Inc. Third Amended and Restated Dividend
Reinvestment and Stock Purchase Plan
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-4(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
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: November 7, 2008 By: /s/ Ayden R. Lee, Jr.
-----------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: November 7, 2008 By: /s/ Nancy S. Wise
-----------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
23
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Four Oaks Fincorp, Inc. Third Amended and Restated Dividend
Reinvestment and Stock Purchase Plan
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-4(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