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 June 30, 2009
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 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 (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). [ ]YES [ ]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 definitions 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 [X]
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange 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, 7,031,325
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of August 3, 2009)
1
TABLE OF CONTENTS Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2009 (Unaudited) and December 31, 2008...................... 3
Consolidated Statements of Income (Loss) (Unaudited)
Three Months and Six Months Ended June 30, 2009 and 2008............. 4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months and Six Months Ended June 30, 2009 and 2008............. 5
Consolidated Statement of Shareholders' Equity (Unaudited)
Six Months Ended June 30, 2009....................................... 6
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2009 and 2008.............................. 7
Notes to Consolidated Financial Statements (Unaudited)............... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.............. 28
Item 4 - Controls and Procedures................................................. 28
Item 4T - Controls and Procedures................................................. 28
Part II. OTHER INFORMATION
Item 1A - Risk Factors............................................................ 28
Item 4 - Submission of Matters to a Vote of Security Holders..................... 29
Item 6 - Exhibits................................................................ 31
2
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
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June 30, 2009 December 31,
(Unaudited) 2008*
----------------- -----------------
ASSETS (Amounts in thousands)
Cash and due from banks $ 11,583 $ 19,449
Interest-earning deposits 18,913 9,303
Federal funds sold - 123
Investment securities available for sale 151,626 171,991
Loans 718,469 681,500
Allowance for loan losses (13,289) (9,542)
----------------- -----------------
Net loans 705,180 671,958
Accrued interest receivable 3,790 4,216
Bank premises and equipment, net 17,052 17,156
FHLB stock 6,771 6,529
Investment in life insurance 10,818 10,566
Goodwill 6,083 6,083
Other assets 11,920 7,409
----------------- -----------------
Total assets $ 943,736 $ 924,783
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 78,217 $ 73,971
Savings and interest-bearing deposits 173,518 184,149
Time deposits, $100,000 and over 277,909 278,535
Other time deposits 208,678 186,039
----------------- -----------------
Total deposits 738,322 722,694
Borrowings 112,679 114,314
Subordinated debentures 12,372 12,372
Subordinated promissory notes 7,800 -
Accrued interest payable 3,060 3,282
Other liabilities 3,474 5,471
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Total liabilities 877,707 858,133
----------------- -----------------
Shareholders' equity:
Common stock; $1.00 par value, 20,000,000 shares
authorized; 7,031,325 and 6,921,909 shares issued
and outstanding at June 30, 2009 and December 31,
2008, respectively 7,031 6,922
Additional paid-in capital 31,531 30,862
Retained earnings 27,476 28,456
Accumulated other comprehensive income (loss) (9) 410
----------------- -----------------
Total shareholders' equity 66,029 66,650
----------------- -----------------
Total liabilities and shareholders' equity $ 943,736 $ 924,783
================= =================
* 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 (LOSS) (UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2009 2008 2009 2008
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(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 10,169 $ 10,250 $ 19,922 $ 20,636
Investment securities:
Taxable 859 1,758 2,289 3,271
Tax-exempt 776 71 1,389 128
Dividends 131 146 199 304
Interest-earning deposits 3 14 9 31
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Total interest and dividend income 11,938 12,239 23,808 24,370
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Interest expense:
Deposits 3,416 4,609 7,452 9,307
Borrowings 1,192 1,343 2,301 2,611
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Total interest expense 4,608 5,952 9,753 11,917
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Net interest income 7,330 6,287 14,055 12,453
Provision for loan losses 4,372 954 6,014 1,242
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Net interest income after provision for loan losses 2,958 5,333 8,042 11,211
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Non-interest income:
Service charges on deposit accounts 561 575 1,111 1,107
Other service charges, commissions and fees 395 439 750 820
Gain on sale of investment securities 695 163 1,386 296
Impairment loss on investment securities (27) - (181) -
Gain on sale of loans 18 41 18 46
Gain on hedges - - - 97
Merchant fees 127 138 232 248
Income from investment in bank-owned life insurance 126 131 252 263
------------- ------------- ------------- -------------
Total non-interest income 1,895 1,487 3,567 2,877
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Non-interest expenses:
Salaries 2,570 2,574 5,097 4,906
Employee benefits 401 521 1,020 1,039
Occupancy expense 271 247 543 469
Equipment expense 434 400 823 779
Professional and consulting fees 706 347 1,260 728
Other taxes and licenses 126 135 212 210
Merchant processing expense 105 120 193 211
Loss on sale of foreclosed assets 63 21 179 71
Other operating expense 1,620 1,189 2,680 2,109
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Total non-interest expenses 6,296 5,554 12,007 10,521
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Income (loss) before income taxes (1,443) 1,266 (398) 3,567
Provision for income taxes (738) 302 (600) 1,106
------------- ------------- ------------- -------------
Net income (loss) $ (705) $ 964 $ 202 $ 2,461
============= ============= ============= =============
Basic net income (loss) per common share $ (0.10) $ 0.15 $ 0.03 $ 0.39
============= ============= ============= =============
Diluted net income (loss) per common share $ (0.10) $ 0.15 $ 0.03 $ 0.39
============= ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2009 2008 2009 2008
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(Amounts in thousands)
Net income (loss) $ (705) $ 964 $ 202 $ 2,461
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Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on
available for sale securities 134 (1,886) 663 (1,262)
Tax effect (45) 713 (247) 462
Reclassification of net gains recognized
in net income (668) (163) (1,359) (296)
Tax effect 258 65 524 118
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Total other comprehensive loss (321) (1,271) (419) (978)
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Comprehensive income (loss) $ (1,026) $ (307) $ (217) $ 1,483
============= ============= ============= =============
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, 2008 6,921,909 $ 6,922 $ 30,862 $ 28,456 $ 410 $ 66,650
Net income - - - 202 - 202
Other comprehensive loss - - - - (419) (419)
Issuance of common stock 109,416 109 630 - - 739
Stock based compensation - - 39 - - 39
Cash dividends of $ .165 per share - - - (1,182) - (1,182)
---------- ---------- ------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2009 7,031,325 $ 7,031 $ 31,531 $ 27,476 $ (9) $ 66,029
========== ========== ============= ============= ============= =============
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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Six Months Ended
June 30,
-------------------------------------
2009 2008
----------------- -----------------
(Amounts in thousands)
Cash flows from operating activities:
Net income $ 202 $ 2,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,014 1,242
Provision for depreciation and amortization 555 314
Net amortization of bond premiums and discounts 45 6
Stock based compensation 39 90
Gain on sale of investment securities (1,386) (296)
Gain on sale of loans (18) (46)
Loss on disposition of premises and equipment - 4
Loss on sale of foreclosed assets 173 65
Income from investment in life insurance (252) (263)
Gain on hedges - (97)
Loss on impairment of investment securities 181 -
Changes in assets and liabilities:
Other assets (1,230) (436)
Interest receivable 426 (92)
Other liabilities (1,997) 2,623
Interest payable (222) (699)
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Net cash provided by operating activities 2,530 4,876
----------------- -----------------
Cash flows from investing activities:
Proceeds from sales and calls of investment securities
available for sale 138,547 77,848
Purchases of investment securities available for sale (117,718) (105,225)
Purchase of FHLB stock (243) (2,452)
Redemption of FHLB Stock - 1,212
Net increase in loans (43,113) (47,318)
Purchase of bank premises and equipment (476) (979)
Proceeds from sales of foreclosed assets 744 36
Net expenditures on foreclosed assets - (32)
Net cash provided by business combination - 3,167
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Net cash used by investing activities (22,259) (73,743)
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Cash flow from financing activities:
Net (repayments of) proceeds from borrowings (1,635) 26,914
Net increase in deposit accounts 15,628 54,944
Proceeds from issuance of common stock 739 1,265
Excess tax benefits from stock options - 102
Issuance of subordinated promissory notes 7,800 -
Cash dividends paid (1,182) (1,047)
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Net cash provided by financing activities 21,350 82,178
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Net increase in cash and cash equivalents 1,621 13,311
Cash and cash equivalents at beginning of period 28,875 18,275
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Cash and cash equivalents at end of the period $ 30,496 $ 31,586
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
7
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
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 six month periods ended June
30, 2009 and 2008, in conformity with accounting principles generally accepted
in the United States of America ("GAAP"). 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 six month periods ended June 30, 2009 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2009.
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, 2008. This Quarterly Report should be read in
conjunction with such Annual Report.
Certain prior year amounts have been reclassified in the consolidated financial
statements to conform with the current year presentation. The reclassifications
had no effect on previously reported net income or shareholders' equity.
Subsequent events have been evaluated through August 7, 2009, which is the date
of financial statement issuance.
NOTE 2 - NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per common share are computed based on the
weighted average number of shares outstanding during each period. Diluted net
income (loss) 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 (loss) per common share have been computed based
upon net income (loss) 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:
8
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 2 - NET INCOME (LOSS) PER SHARE (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Weighted average number of common shares
used in computing basic net income (loss) per share 6,998,994 6,248,016 6,965,927 6,220,661
Effect of dilutive stock options - 15,585 - 16,595
------------ ------------ ------------ ------------
Weighted average number of common shares and
dilutive potential common shares used in
computing diluted net income (loss) per share 6,998,994 6,263,601 6,965,927 6,237,256
============ ============ ============ ============
As of June 30, 2009 there were 311,403 antidilutive stock options outstanding.
At June 30, 2008, there were 137,328 antidilutive stock options outstanding.
NOTE 3 - COMMITMENTS
At June 30, 2009, loan commitments were as follows (in thousands):
Commitments to extend credit $ 46,218
Undisbursed lines of credit 68,465
Letters of credit 3,468
NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of securities available for sale as of June 30, 2009 and December 31,
2008 are as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- ---------------- ---------------- ----------------
(Amounts in thousands)
June 30, 2009
U.S. government and agency securities $ - $ - $ - $ -
State and municipal securities 72,441 353 1,020 71,774
Mortgage-backed securities 74,320 1,423 97 75,646
Other 4,893 - 687 4,206
---------------- ---------------- ---------------- ----------------
$ 151,654 $ 1,776 $ 1,804 $ 151,626
================ ================ ================ ================
9
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 4 - INVESTMENT SECURITIES (Continued)
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- ---------------- ---------------- ----------------
(Amounts in thousands)
December 31, 2008
U.S. government and agency securities $ 65,590 $ 161 $ 3 $ 65,748
State and municipal securities 46,852 301 178 46,975
Mortgage-backed securities 53,899 1,171 57 55,013
Other 4,982 - 727 4,255
---------------- ---------------- ---------------- ----------------
$ 171,323 $ 1,633 $ 965 $ 171,991
================ ================ ================ ================
The following table shows 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
June 30, 2009 and December 31, 2008. As of June 30, 2009, the unrealized losses
relate to six mortgage-backed securities, 105 municipal securities and 12 other
securities. Four of the 12 other securities had continuous unrealized losses for
more than 12 months. The unrealized losses relate to debt securities that have
incurred fair value reductions due to higher market interest rates since the
securities were purchased.
The unrealized losses are not likely to reverse unless and until market interest
rates decline to the levels that existed when the securities were purchased.
Since none of the unrealized losses relate to the marketability of the
securities or the issuer's ability to honor redemption obligations, none of the
securities are deemed to be other than temporarily impaired.
June 30, 2009
----------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
------------ ------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Securities available for sale
U.S. government and
agency securities $ - $ - $ - $ - $ - $ -
State and municipal securities 47,153 1,020 - - 47,153 1,020
Mortgage-backed securities 10,096 97 - - 10,096 97
Other 82 52 1,025 635 1,107 687
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 57,331 $ 1,169 $ 1,025 $ 635 $ 58,356 $ 1,804
============ ============ ============ ============ ============ ============
10
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 4 - INVESTMENT SECURITIES (Continued)
December 31, 2008
----------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
------------ ------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Securities available for sale:
U.S. government and
agency securities $ 3,992 $ 3 $ - $ - $ 3,992 $ 3
State and municipal securities 14,097 178 - - 14,097 178
Mortgage-backed securities 4,253 57 - - 4,253 57
Other 96 47 930 680 1,025 727
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 22,438 $ 285 $ 930 $ 680 $ 23,367 $ 965
============ ============ ============ ============ ============ ============
The amortized cost and fair value of available for sale securities at June 30,
2009 by contractual maturities are shown below. 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.
Amortized
Cost Fair Value
--------------- ---------------
(Amounts in thousands)
Due within one year $ 280 $ 283
Due after one year through five years 517 529
Due after five years through ten years 3,550 3,548
Due after ten years 147,306 147,267
--------------- ---------------
$ 151,654 $ 151,626
=============== ===============
Securities with a carrying value of approximately $104.8 million and $120.9
million at June 30, 2009 and December 31, 2008, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
Sales and calls of securities available for sale during the periods ending June
30, 2009, and June 30, 2008 generated gross realized gains of $1.4 million and
$301,000, respectively and gross realized losses of $41,000 and $5,000,
respectively. During the six months ended June 30, 2009, the Company recognized
$27,000 of impairment loss on common equity marketable securities and $154,000
of impairment loss on a nonmarketable equity investment. There was no impairment
loss recognized on investments for the six months ended June 30, 2008.
11
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 4 - INVESTMENT SECURITIES (Continued)
At June 30, 2009, the balance of Federal Home Loan Bank ("FHLB") of Atlanta
stock held by the Company is $6.8 million. On March 25, 2009 and May 8, 2009,
FHLB announced that it would not pay a dividend for the fourth quarter of 2008
or first quarter of 2009, respectively, reflecting a conservative financial
management approach in light of continued volatility in the financial markets.
On February 27, 2009, FHLB announced that it would increase the Subclass B1
membership stock requirement cap from $25 million to $26 million and approve
excess activity-based stock repurchases on a quarterly review cycle instead of
daily in order to facilitate capital management. Management believes that its
investment in FHLB stock was not other-than-temporarily impaired as of June 30,
2009 or December 31, 2008. However, there can be no assurance that the impact of
recent or future legislation on the Federal Home Loan Banks will not also cause
a decrease in the value of the FHLB stock held by the Company.
NOTE 5 - LOANS
An analysis of the allowance for loan losses is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
(In thousands)
Balance at beginning of period $ 10,450 $ 6,800 $ 9,542 $ 6,653
Provision charged to operations 4,372 954 6,014 1,242
Charge-offs (1,556) (814) (2,344) (978)
Recoveries 23 46 77 69
------------ ------------ ------------ ------------
Net (charge-offs) recoveries (1,533) (768) (2,267) (909)
Allowance recorded related to loans
acquired in acquisition of LongLeaf
Community Bank - 1,398 - 1,398
Balance at end of period $ 13,289 $ 8,384 $ 13,289 $ 8,384
============ ============ ============ ============
NOTE 6 - SUBORDINATED PROMISSORY NOTES
The Company sold $7.8 million aggregate principal amount of subordinated
promissory notes to certain accredited investors during the three months ended
June 30, 2009. These notes are due in ten years, beginning May 15, 2019, and the
Company is obligated to pay interest at an annualized rate of 8.5% payable in
quarterly installments beginning on the third month anniversary of the date of
issuance. The Company may prepay the notes at any time after the fifth
anniversary of the date of issuance, subject to compliance with applicable law.
Subsequent to June 30, 2009, and as of the date of these financial statements,
the Company has sold an additional $2.3 million in subordinated promissory notes
with the same terms and conditions as described above. The Company may elect to
sell additional notes upon the same terms and conditions in one or more
subsequent closings on or prior to August 13, 2009, provided that the aggregate
principal amount of all notes issued in all closings does not exceed $12
million. The Company may extend the August 13, 2009 deadline if all $12 million
has not been sold by that date.
12
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 7 - FAIR VALUE MEASUREMENT
On January 1, 2008 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157") and SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 157
defines fair value, establishes a framework for measuring fair value under GAAP
and expands disclosures about fair value measurements. SFAS No. 157 applies
whenever other accounting pronouncements require or permit assets or liabilities
to be measured at fair value. Accordingly, SFAS No. 157 does not expand the use
of fair value in any new circumstances. SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value. As of
June 30, 2009, the Company had not elected to measure any financial assets or
liabilities using the fair value option under SFAS No. 159. Therefore the
adoption of SFAS No. 159 had no effect on the Company's financial condition or
results of operations.
The Company records securities available for sale and derivative assets or
liabilities at fair value on a recurring basis. Fair value is a market-based
measurement and is defined as the price that would be received to sell an asset,
or paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. The transaction to sell the asset or
transfer the liability is a hypothetical transaction at the measurement date,
considered from the perspective of a market participant that holds the assets or
owes the liability. In general, the transaction price will equal the exit price
and, therefore, represent the fair value of the asset or liability at initial
recognition. In determining whether a transaction price represents the fair
value of the asset or liability at initial recognition, each reporting entity is
required to consider factors specific to the transaction and the asset or
liability, the principal or most advantageous market for the asset or liability,
and market participants with whom the entity would transact in the market.
SFAS No. 157 establishes a fair value hierarchy to prioritize the inputs of
valuation techniques used to measure fair value. The inputs are evaluated and an
overall level for the fair value measurement is determined. This overall level
is an indication of how market-observable the fair value measurement is and
defines the level of disclosure. SFAS No. 157 clarifies fair value in terms of
the price in an orderly transaction between market participants to sell an asset
or transfer a liability in the principal (or most advantageous) market for the
asset or liability at the measurement date (an exit price). In order to
determine the fair value or the exit price, entities must determine the unit of
account, highest and best use, principal market, and market participants. These
determinations allow the reporting entity to define the inputs for fair value
and level of hierarchy.
Outlined below is the application of the fair value hierarchy established by
SFAS No. 157 to the Company's financial assets that are carried at fair value.
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.
Level 2 - Inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full
term of the financial instrument. As of June 30, 2009 and December 31, 2008, the
types of financial assets and liabilities the Company carried at fair value
hierarchy Level 2 included securities available for sale and derivatives. There
were no derivative assets or liabilities at June 30, 2009 or December 31, 2008.
13
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 7 - FAIR VALUE MEASUREMENT (Continued)
Level 3 - Inputs to the valuation methodology are unobservable and significant
to the fair value measurement. Unobservable inputs are supported by little or no
market activity or by the Company's own assumptions. As of June 30, 2009 and
December 31, 2008, the Company did not carry any financial assets or
liabilities, measured on a recurring basis, at fair value hierarchy Level 3, but
the Company did value certain financial assets, measured on a non-recurring
basis, at fair value hierarchy Level 3.
Fair Value Measured on a Recurring Basis. The Company measures certain assets at
fair value on a recurring basis, as described below.
Investment Securities Available for Sale
Investment securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
The Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs.
Below is a table that presents information about assets measured at fair value
on a recurring basis at June 30, 2009 and December 31, 2008:
Fair Value Measurements at
June 30, 2009 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 6/30/2009 6/30/2009 (Level 1) (Level 2) (Level 3)
- ----------- ---------------- ---------------- ---------------- ---------------- ----------------
Federal Agency Securities - - - - -
Tax Exempt Securites 71,774 71,774 - 71,774 -
Mortgage-backed Securities 75,646 75,646 - 75,646 -
Other Investments 4,206 4,206 4,206 - -
---------------- ---------------- ---------------- ---------------- ----------------
Total Available for sale
Securities $ 151,626 $ 151,626 $ 4,206 $ 147,420 -
14
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 7 - FAIR VALUE MEASUREMENT (Continued)
Fair Value Measurements at
December 31, 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 12/31/2008 12/31/2008 (Level 1) (Level 2) (Level 3)
- ----------- ---------------- ---------------- ---------------- ---------------- ----------------
Federal Agency Securities 65,747 65,747 - 65,747 -
Tax Exempt Securites 46,975 46,975 - 46,976 -
Mortgage-backed Securities 55,013 55,013 - 55,013 -
Other Investments 4,256 4,256 4,256 - -
---------------- ---------------- ---------------- ---------------- ----------------
Total Available for sale
Securities $ 171,991 $ 171,991 $ 4,256 $ 167,735 $ -
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 subjected to nonrecurring fair value adjustments as Level 2.
There were no loans held for sale and no fair value adjustments related to loans
held for sale as of or for the periods ended June 30, 2009 or December 31, 2008.
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, an amendment of FASB
Statements No. 5 and 15." 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 June 30, 2009, substantially all of the total impaired loans
were evaluated based on the fair value of the collateral. In accordance with
SFAS No. 157, impaired loans with an allowance established based on the fair
value of collateral require classification in the fair value hierarchy. When the
fair value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan as nonrecurring Level 2.
When a current appraised value is not available or management determines the
fair value of the collateral is further impaired below the appraised value and
there is no observable market price, the Company records the impaired loan as
15
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 7 - FAIR VALUE MEASUREMENT (Continued)
nonrecurring Level 3. Impaired loans totaled $25.6 million and $20.8 million at
June 30, 2009 and December 31, 2008, respectively. Of such loans, $23.5 million
and $17.0 million had specific loss allowances aggregating $5.8 million and $2.9
million at June 30, 2009 and December 31, 2008, respectively. Of those specific
allowances, all were determined using Level 3 inputs.
Goodwill and Other Intangible Assets
Goodwill and identified intangible assets are subject to impairment testing.
When appropriate, a projected cash flow valuation method is used in the
completion of impairment testing. This valuation method requires a significant
degree of management judgment. In the event the projected undiscounted net
operating cash flows are less than the carrying value, the asset is recorded at
fair value as determined by the valuation model. As such, the Company classifies
goodwill and other intangible assets subjected to nonrecurring fair value
adjustments as Level 3. At June 30, 2009 and December 31, 2008, there were no
fair value adjustments related to goodwill of $6.1 million and other intangible
assets of $419,000 and $449,000, respectively.
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. At June 30, 2009 and December 31,
2008, the Company recorded foreclosed real estate of $4.2 million and $1.2
million, respectively. All foreclosed asset values were determined using Level 3
inputs.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As discussed in Note 9, the Company has adopted the provisions set forth in
Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 107-1
and Accounting Principles Board ("APB") 28-1, "Interim Disclosures about Fair
Value of Financial Instruments" ("FSP FAS 107-1"), which amends SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"),
requiring a company to disclose on an interim and annual basis the fair value of
its financial instruments, whether or not recognized in the balance sheet, where
it is practical to estimate that value. Quoted market prices, if available, are
utilized as an estimate of the fair value of financial instruments. Because no
quoted market prices exist for a significant part of the Company's financial
instruments, the fair value of such instruments has been derived based on
management's assumptions with respect to future economic conditions, the amount
and timing of future cash flows and estimated discount rates. Different
assumptions could significantly affect these estimates. Accordingly, the net
realizable value could be materially different from the estimates presented
below. In addition, the estimates are only indicative of individual financial
instruments' values and should not be considered an indication of the fair value
of the Company taken as a whole. The following methods and assumptions were used
to estimate the fair value of each class of financial instrument.
16
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
Investment Securities Available for Sale
Fair values of investment securities available for sale are based on quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans
Fair values have been estimated by type of loan: residential real estate loans,
consumer loans, and commercial and other loans. For variable-rate loans that
reprice frequently and with no significant credit risk, fair values are based on
carrying values. The fair values of fixed rate loans are estimated by
discounting the future cash flows using the current rates at which loans with
similar terms would be made to borrowers with similar credit ratings and for the
same remaining maturities, adjusted for current liquidity and market conditions.
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.
Investment in Life Insurance
The carrying value of life insurance approximates fair value because this
investment is carried at cash surrender value, as determined by the insurer.
Deposits
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at year-end. Fair value of time deposits is
estimated by discounting the future cash flows using the current rate offered
for similar deposits with the same maturities.
Borrowings and Subordinated Debentures
The fair values of borrowings and subordinated debentures are based on
discounting expected cash flows at the interest rate for debt with the same or
similar remaining maturities and collection requirements.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate fair value.
Derivative Financial Instruments
Fair values for interest rate swap agreements are based upon the estimated
amounts required to settle the contracts.
17
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents information for financial assets and liabilities as
of June 30, 2009 and December 31, 2008:
June 30, 2009 December 31, 2008
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------- ---------------- ---------------- ----------------
Financial assets:
Cash and cash equivalents $ 30,496 $ 30,496 $ 28,875 $ 28,875
Securities available for sale 151,626 151,626 171,991 171,991
Loans, net 705,180 700,600 671,958 666,558
FHLB stock 6,771 6,771 6,529 6,529
Investment in life insurance 10,818 10,818 10,566 10,566
Accrued interest receivable 3,790 3,790 4,216 4,216
Financial liabilities:
Deposits $ 738,322 $ 728,762 $ 722,693 $ 715,581
Subordinated debentures 12,372 12,372 12,372 11,773
Subordinated promissory notes 7,800 7,801 - -
Borrowings 112,679 132,825 114,314 117,042
Accrued interest payable 3,060 3,060 3,282 3,282
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"), which replaces SFAS No. 141, "Business
Combinations." 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 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).
18
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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"). 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. 133"). 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. The adoption of SFAS No. 161 on
January 1, 2009 did not have a material effect on the Company's financial
condition and results of operations.
In October 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active." The FSP clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP was effective upon issuance, including
prior periods for which financial statements had not been issued. The adoption
of this FSP did not have a material impact on the Company's consolidated
financial condition or results of operations.
In April 2009, the FASB issued three related FSPs to (1) clarify the application
of SFAS No. 157 to fair value measurements in the current economic environment,
(2) modify the recognition of other-than-temporary impairments of debt
securities, and (3) require companies to disclose the fair values of financial
instruments in interim periods. The final FSPs are effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009, if all three FSPs or both the fair value
measurements and other-than-temporary impairment FSPs are adopted
simultaneously. The Company has adopted these FSPs effective for the quarterly
period ending June 30, 2009. None of the FSPs had a significant impact on
financial condition or results of operations, but each is described in more
detail below.
FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly," provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased and also provides guidance on
identifying circumstances that indicate a transaction is not orderly. The FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique used, the objective of a fair value measurement remains the same. Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale), between market participants at the measurement date under
current market conditions.
19
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments," amends the other-than-temporary impairment
guidance in GAAP for debt securities to make the guidance more operational and
to improve the presentation and disclosure of other-than-temporary impairments
on debt and equity securities in the financial statements. The FSP does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities.
FSP FAS 107-1 amends SFAS No. 107 to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. The FSP also amends APB Opinion No.
28, "Interim Financial Reporting," to require those disclosures in summarized
information in interim reporting periods.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," ("SFAS No.
165"), which sets forth the circumstances under which an entity should recognize
events occurring after the balance sheet date and the disclosures that should be
made. Also, this statement requires disclosure of the date through which the
entity has evaluated subsequent events (for public companies, and other
companies that expect to widely distribute their financial statements, this date
is the date of financial statement issuance, and for nonpublic companies, the
date the financial statements are available to be issued). The statement was
effective and adopted for the period ended June 30, 2009.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140" ("SFAS No. 166"). SFAS
No. 166 makes several significant amendments to SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 140"), including the removal of the concept of a qualifying
special-purpose entity from SFAS No. 140. SFAS No. 166 also clarifies that a
transferor must evaluate whether it has maintained effective control of a
financial asset by considering its continuing direct or indirect involvement
with the transferred financial asset. The provisions of SFAS No. 166 are
effective for financial asset transfers occurring after December 31, 2009.
Management is currently evaluating the effect that the provisions of SFAS No.
166 may have on the Company's consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)" ("SFAS No. 167"). SFAS No. 167 requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a variable
interest entity ("VIE") for consolidation purposes. The primary beneficiary of a
VIE is the enterprise that has: (1) the power to direct the activities of the
VIE that most significantly impact the VIE's economic performance, and (2) the
obligation to absorb losses of the VIE that could potentially be significant to
the VIE or the right to receive benefits of the VIE that could potentially be
significant to the VIE. The provisions of SFAS No. 167 are effective for the
Company on January 1, 2010. Management is currently evaluating the effect that
the provisions of SFAS No. 167 may have on the Company's consolidated financial
statements.
20
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162" ("SFAS No. 168"). SFAS No. 168
established the FASB Accounting Standards Codification (the "Codification") to
become the single source of authoritative GAAP recognized by the FASB to be
applied by nongovernmental entities, with the exception of guidance issued by
the U.S. Securities and Exchange Commission (the "SEC") and its staff. All
guidance contained in the Codification carries an equal level of authority. The
provisions of SFAS No. 168 are effective for interim and annual periods ending
after September 15, 2009. Management is currently evaluating the effect that the
provisions of SFAS No. 168 may have on the Company's consolidated financial
statements.
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.
NOTE 10 - RECENT DEVELOPMENTS WITH THE U.S. TREASURY
The United States Treasury ("the 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. In November 2008, the
Company's board of directors (the "Board") authorized and approved the Company's
participation in the Program, and the Company filed its application with the
Treasury in November 2008 to participate in the Program. In order to participate
in the Program, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation to authorize preferred stock and the Board
authorized the Company to sell up to 20,000 shares of senior preferred stock to
the Treasury for $1,000 per share.
As of the filing date of this report, the Company has not heard from the
Treasury on the final status of its application to participate in the Program.
Accordingly, 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, 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.
21
FOUR OAKS FINCORP, INC.
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Notes to Consolidated Financial Statements
NOTE 11 - PROPOSED MERGER WITH NUESTRO BANCO
On April 29, 2009, the Company and the Bank entered into a definitive agreement
(the "Agreement") with Nuestro Banco ("Nuestro") pursuant to which Nuestro will
merge with and into the Bank. Under the terms of the Agreement, the Company has
agreed to acquire all outstanding shares of Nuestro's capital stock in exchange
for approximately 357,099 shares of the Company's common stock. At the effective
time of the merger, each share of Nuestro common stock will be cancelled in
exchange for the right to receive 1.0 share of Company common stock multiplied
by an exchange ratio of 0.2697 on and subject to the terms and conditions
contained in the Agreement. The Company will also assume each option to purchase
Nuestro capital stock that is outstanding and unexercised immediately prior to
the effective time of the merger. Subject to each holder of a warrant to
purchase Nuestro capital stock providing a written termination of his or her
warrant prior to the effective time of the merger, each issued and outstanding
warrant to purchase Nuestro capital stock will be cancelled in exchange for the
right to receive a warrant to purchase that number of shares of the Company's
common stock equal to the number of Nuestro shares underlying the cancelled
warrant immediately prior to the effective time of the merger multiplied by an
exchange ratio of 0.2697. The proposed transaction with Nuestro is subject to
customary closing conditions, including shareholder approval by Nuestro
shareholders, which occurred on June 23, 2009. The Company is currently awaiting
approval of the merger by the Board of Governors of the Federal Reserve System.
22
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.
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 ("the 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 relate to the Company and its financial
operations.
The Federal Deposit Insurance Corporation ("FDIC"), which imposes insurance
assessments on the Company's wholly-owned subsidiary, Four Oaks Bank & Trust
Company (the "Bank"), recently voted to amend the restoration of the Deposit
Insurance Fund. The FDIC's Board of Governors imposed a special assessment on
insured institutions of 5 basis points; implemented changes to the risk- based
assessment system, and increased regular premium rates for 2009, which banks
must pay on top of the special assessment. The 5 basis point special assessment
on the industry will be as assessed on the Bank's assets less Tier 1 capital as
of June 30, 2009, payable September 30, 2009. As a result of the special
assessment and increased regular assessments the Company projects at this time
it will experience an increase in FDIC assessment by approximately $1.2 million
from 2008 to 2009. The 5 basis point special assessment represents $445,000 of
this increase. The FDIC further is expected to impose an additional special
assessment in 2009 of up to 5 basis points.
Comparison of Financial Condition at
June 30, 2009 and December 31, 2008
The Company's total assets grew from $924.8 million at December 31, 2008 to
$943.7 million at June 30, 2009, an increase of $18.9 million, or 2.0%. The
Company's liquid assets, consisting of cash and cash equivalents and investment
securities available for sale, decreased $18.8 million during the six months
ended June 30, 2009 compared to liquid assets as of December 31, 2008, primarily
from decreases in investment securities of $20.4 million. Gross loans increased
by $37.0 million or 5.4% from $681.5 million at December 31, 2008 to $718.5
million at June 30, 2009. The Company's loan portfolio increase is due mainly to
growth in the residential sector. Deposits grew $15.6 million or 2.2% from
$722.7 million at December 31, 2008 to $738.3 million at June 30, 2009. Deposits
from the Company's local market continued to be its primary funding source,
accounting for 72.8% of overall deposits, while wholesale deposits increased by
$29.0 million or 16.9% for the same period.
23
Total shareholders' equity decreased approximately $621,000 from $66.7 million
at December 31, 2008 to $66.0 million at June 30, 2009. The decreases resulted
primarily from dividends paid to the Company's shareholders of $1.2 million and
other comprehensive losses of $419,000 during the first six months of 2009.
Offsetting this decrease is our net income of $202,000, issuance of shares of
common stock valued at $739,000 and stock compensation expense of $39,000. At
June 30, 2009, 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
June 30, 2009 and 2008
Net Income (Loss). Net loss for the three months ended June 30, 2009 was
$705,000, or $.10 basic net loss per share, as compared with net income of
$964,000, or $.15 basic net income per share, for the three months ended June
30, 2008, a decrease of $1.7 million or $.25 basic net loss per share. Net
income declined primarily due to an increase of $3.4 million in the provision
for loan losses due to the deterioration of the local economy and the special
assessment from the FDIC of $445,000.
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 June 30, 2009 was $7.3 million,
an increase of $1.0 million compared to the three months ended June 30, 2008,
which was primarily due to a decrease in the cost of deposits. Average
interest-earning assets increased $144.7 million for the quarter and average
interest-bearing liabilities increased $140.6 million for the same period.
Margins decreased only slightly, primarily due to the cost of liabilities
continuing to decrease as yields on assets stabilized resulting in a decrease in
the Company's net interest margin by 10 basis points from 3.38% during the three
months ended June 30, 2008 to 3.28% during the three months ended June 30, 2009.
Provision for Loan Losses. The provision for loan losses was $4.4 million and
$954,000 for the three months ended June 30, 2009 and 2008, respectively, an
increase of $3.4 million. Net charge-offs of $1.5 million were recorded for the
three months ended June 30, 2009 compared to net charge offs of $768,000 during
the three months ended June 30, 2008. Non-accrual loans increased from $7.1
million to $25.6 million during the quarter ended June 30, 2009. Of this
increase, $15.3 million relates to new home construction contractors, $5.0
million relates to residential mortgages and $4.0 million in business
construction loans. The Company has evaluated these loans in determining its
allowance for loan losses as of June 30, 2009, and has determined that its
exposure to loss on these loans is largely mitigated by the values of the
underlying collateral. At June 30, 2009, impaired loans, which include
non-accrual loans, totaled $25.6 million. Of these loans, $23.5 million have
specific loss allowances that aggregate $5.8 million. Loan growth, increased
levels of past due loans and nonperforming assets, and further deterioration of
our local economy led us to increase our allowance for loan losses to 1.85% of
gross loans at June 30, 2009 as compared to 1.31% as of June 30, 2008.
Management believes that the allowance is adequate to absorb probable losses
inherent in the loan portfolio.
24
Non-Interest Income. Non-interest income increased $408,000 for the three months
ended June 30, 2009 to $1.9 million as compared to $1.5 million for the same
period in 2008. The increase is primarily due to realized gains on the sale of
investment securities of $695,000.
Non-Interest Expense. Non-interest expense increased $742,000 to $6.3 million
for the three months ended June 30, 2009 compared to $5.6 million for the three
months ended June 30, 2008. This increase was due in part to increases in
professional and legal expenses of $291,000, relating to expansion and capital
enhancement initiatives. The additional increase occurred in other operating
expenses, which increased $431,000. The primary increases in non-interest
expense for the three months ended June 30, 2009 included increases in
foreclosure expense of $80,000 and an increase in the FDIC insurance premium of
$487,000. Offsetting these were decreases in printing and office supplies of
$47,000 and meals, travel and entertainment of $17,000. 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 51.1% and 23.9% for the three
months ended June 30, 2009 and 2008, respectively. The increase resulted because
non-taxable income from investment securities comprised a larger portion of
income before taxes in the prior quarter.
Results of Operations for the Six Months Ended
June 30, 2009 and 2008
Net Income. Net income for the six months ended June 30, 2009 was $202,000, or
$.03 basic net income per share as compared to $2.5 million, or $.39 basic net
income per share for the six months ended June 30, 2008, a decrease of $2.3
million or $.36 per share. Net income declined primarily due to the increased
provision for loan losses due to the deterioration of the local economy, and the
special assessment for FDIC premiums of $445,000.
Net Interest Income. Net interest income was $14.1 million and $12.5 million for
the six month periods ended June 30, 2009 and June 30, 2008, respectively.
Interest and dividend income was $23.8 million and $24.4 million for the six
months ended June 30, 2009 and 2008, respectively. The decrease in interest and
dividend income was offset by a decrease in interest expense on deposits and
borrowings of $2.2 million to $9.8 million for the six months ended June 30,
2009 from $11.9 million for the six months ended June 30, 2008. This decrease in
interest expense was primarily due to deposits repricing lower even though
average deposits grew $154.1 million during the six months ended June 30, 2009.
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 25
basis points from 3.44% in the first half of 2008 to 3.19% in the first half of
2009.
Provision for Loan Losses. The Company's provision for loan losses was $6.0
million and $1.2 million for the six months ended June 30, 2009 and 2008,
respectively, an increase of $4.8 million. Net charge-offs of $2.3 million were
recorded during the first six months of 2009, compared to $909,000 for the first
six months of 2008. Non-performing assets aggregated $31.7 million at June 30,
2009, increasing $24.6 million from the $7.1 million at June 30, 2008, while the
allowance for loan losses, expressed as a percentage of gross loans, was 1.85%
at June 30, 2009 and 1.31% at June 30, 2008. This $24.6 million increase was
primarily due to increases in non-accrual loans, of this $15.3 million relates
to new home construction contractors, $5.0 million relates to residential
mortgages and $4.0 million relates to business construction loans. Loan growth,
increased levels of past due loans and nonperforming assets, and further
deterioration of our local economy led us to increase our allowance for loan
losses to 1.85% of gross loans at June 30, 2009 as compared to 1.31% as of June
30, 2008. Management believes that the allowance is adequate to absorb probable
losses inherent in the loan portfolio.
25
Non-Interest Income. Non-interest income increased $691,000 to $3.6 million for
the six months ended June 30, 2009 compared to $2.9 million for the six month
period ended June 30, 2008. This increase is primarily due to an increase of
$1.1 million in the sale of investment securities. Offsetting the increase were
decreases in other service charges, commissions and fee income of $70,000 and
impairment losses of $181,000. 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 $1.5 million to $12.0
million for the six months ended June 30, 2009 compared to $10.5 million for the
six months ended June 30, 2008. The increase was due in part to net occupancy
and equipment expenses increases of $118,000, increases in professional and
legal fees of $532,000 relating to expansion and capital enhancement
initiatives, costs related to foreclosed assets of $108,000 and other operating
expenses of $571,000. The primary increase in other non-interest expense for the
first six months of 2009 includes an increase in the FDIC insurance premium of
$611,000. 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 -150.8% and 31.0% for the six
months ended June 30, 2009 and 2008, respectively. The percentage decreased for
the current six month period because tax exempt interest and nontaxable income
from bank-owned life insurance represented a much larger component of income
before income taxes.
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. Beginning on May 15, 2009, the
Company began offering subordinated promissory notes to accredited investors.
These notes are due in ten years, and the Company is obligated to pay interest
at an annualized rate of 8.5% payable in quarterly installments commencing on
the third month anniversary of the date of issuance. The Company may prepay the
notes at any time after the fifth anniversary of the date of issuance, subject
to compliance with applicable law. As of June 30, 2009 and August 7, 2009 the
Company has sold $7.8 million and $10.1 million aggregate principal amount of
subordinated promissory notes, respectively. The Company may elect to sell
additional notes upon the same terms and conditions in subsequent closings on or
prior to August 13, 2009, unless extended, provided that the aggregate principal
amount of all notes issued in all closings does not exceed $12 million.
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 $66.0 million or 7.0% of total assets at
June 30, 2009 and $66.7 million or 7.2% of total assets at December 31, 2008.
Additionally, we have available lines of credit from various correspondent banks
to purchase federal funds on a short-term basis of approximately $33.0 million.
As of June 30, 2009, the Bank has the credit capacity to borrow up to $188.7
million, from the Federal Home Loan Bank of Atlanta ("FHLB"), with $112.7
million outstanding as of that date. At December 31, 2008 we had FHLB borrowings
outstanding of $114.3 million.
The 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. In November 2008, the Company's board of
directors (the "Board") authorized and approved the Company's participation in
the Program, and the Company filed its application with the Treasury in November
2008 to participate in the Program. In order to participate in the Program, the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation to authorize preferred stock and the Board authorized the Company
to sell up to 20,000 shares of senior preferred stock to the Treasury for $1,000
per share.
26
As of the filing date of this report, the Company has not heard from the
Treasury on the final status of its application to participate in the Program.
Accordingly, 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, 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.
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.
27
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, 2008.
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.
Item 4T - Controls and Procedures
Not applicable.
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, 2008.
Our Proposed Transaction with Nuestro Banco is Subject to Uncertainties.
Our proposed transaction with Nuestro is subject to customary closing
conditions, including shareholder approval by Nuestro shareholders, which
occurred on June 23, 2009. If any of the conditions to closing are not satisfied
or waived, the proposed transaction would not be completed. In addition, the
merger agreement relating to the proposed transaction can be terminated prior to
completion of the transaction under certain circumstances, including where
Nuestro receives an acquisition proposal from a third party that its board
believes is more favorable to its shareholders than the proposed transaction
(after following specific procedures described in our merger agreement with
Nuestro). If the merger agreement is terminated, the proposed transaction would
not be completed, and, in certain circumstances, Nuestro could be required to
pay us a termination fee of $175,000. If the merger is not completed, the value
of our common stock could decline. We are currently targeting to close the
proposed transaction, assuming the satisfaction or waiver of all conditions,
including approval of the merger by the Board of Governors of the Federal
Reserve System, in the third quarter of 2009. The closing of the proposed
transaction could be delayed beyond the third quarter of 2009 due to many
factors, including factors beyond the control of either party.
28
We May Not Be Able To Successfully Integrate Bank Mergers and Acquisitions,
Including the Merger of Nuestro into the Bank.
Our proposed merger of the bank with Nuestro involves the combination of two
banks that previously have operated independently. Difficulties may arise in the
integration of the business and operations of any banks that we acquire and, as
a result, we may not be able to achieve the cost savings and synergies that we
expect will result from such transactions. Achieving cost savings is dependent
on consolidating certain operational and functional areas, eliminating
duplicative positions, and terminating certain agreements for outside services.
Additional operational savings are dependent upon the integration of the
acquired or merged entity's businesses with ours, the conversion of core
operating systems, data systems, and products and the standardization of
business practices. Complications or difficulties in the conversion of the core
operating systems, data systems, and products may result in the loss of
customers, damage to our reputation within the financial services industry,
operational problems, one-time costs currently not anticipated or reduced cost
savings resulting from such mergers or acquisitions. Annual cost savings in each
such transaction may be materially less than anticipated if the merger or
acquisition is delayed unexpectedly, the integration of operations is delayed
beyond what is anticipated or the conversion to a single data system is not
accomplished on a timely basis. Difficulty in integrating an acquired company
may cause us not to realize expected revenue increases, cost savings, increases
in geographic or product presence, and/or other projected benefits from the
acquisition. The integration could result in higher than expected deposit
attrition, loss of key employees, disruption of our businesses or the businesses
of the acquired company, or otherwise adversely affect our ability to maintain
relationships with customers and employees or achieve the anticipated benefits
of the acquisition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 2009, the Company held its Annual Meeting of Shareholders. Of
6,965,358 shares entitled to vote at the meeting, 5,415,927 shares voted. The
following proposals were submitted to the shareholders and voted on at the
meeting:
Proposal 1: To elect eight nominees to the Company's Board of Directors to serve
until the 2010 Annual Meeting of Shareholders or until their successors are
elected and qualified. The votes were cast as follows:
29
For Withheld
------------- -------------
Ayden R. Lee, Jr. 5,196,396 219,531
Percy Y. Lee 5,172,020 243,907
Warren L. Grimes 5,171,014 244,913
William J. Edwards 5,174,378 241,549
Dr. R. Max Raynor 5,213,476 202,451
John W. Bullard 5,169,695 246,232
Paula Canaday Bowman 5,173,229 242,698
Michael A. Weeks 5,154,887 261,040
Proposal 2: To vote on a shareholder proposal to stop awarding stock options.
The votes were cast as follows:
For Against Abstain Broker Non-Vote
---------------- ---------------- ---------------- ----------------
941,285 3,305,754 54,286 1,114,602
30
ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. Description
- ----------- -----------
2.1 Merger Agreement, dated April 29, 2009, by and among Four
Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and
Nuestro Banco (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K filed with the
Commission on May 1, 2009)
2.2 List of Schedules Omitted from Merger Agreement included as
Exhibit 2.1 above (incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed with the
Commission on May 1, 2009)
4.1 Agreement to furnish instruments and agreements defining
rights of holders of long-term debt
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
31
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: August 7, 2009 By: /s/ Ayden R. Lee, Jr.
-------------------------------------
Ayden R. Lee, Jr.
Chairman, President and
Chief Executive Officer
Date: August 7, 2009 By: /s/ Nancy S. Wise
------------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
32
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
2.1 Merger Agreement, dated April 29, 2009, by and among Four
Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and
Nuestro Banco (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K filed with the
Commission on May 1, 2009)
2.2 List of Schedules Omitted from Merger Agreement included as
Exhibit 2.1 above (incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K filed with the
Commission on May 1, 2009)
4.1 Agreement to furnish instruments and agreements defining
rights of holders of long-term debt
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