UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 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 |_| Smaller reporting company |X|
(Do not check if a 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, 7,056,963
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of November 6, 2009)
Explanatory Note
Four Oaks Fincorp, Inc. (the "Company") is filing this Amendment No. 1 on Form
10-Q/A ("Amendment No. 1") to amend Part I, Item 1 of its Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2009, previously filed on
November 9, 2009 (the "Original Filing"). Part I, Item 1 of the Original Filing
is being amended to correct the presentation of the following items in the
consolidated statements of income for the three months ended September 30, 2008
caused by a data transmission error: FDIC assessment and other operating expense
as components of total non-interest expenses, total non-interest expenses,
income before income taxes and net income. All references to the aforementioned
items throughout the remainder of the Original Filing are accurate. In addition,
the Company is filing herewith currently dated certifications as Exhibits 31.3,
31.4, 32.3 and 32.4. Solely for this reason, the Company has also amended Part
II, Item 6 of the Original Filing to reflect the filing of these exhibits.
This Amendment No. 1 speaks as of the filing date of the Original Filing and has
not been updated to reflect events occurring subsequent to November 9, 2009.
Accordingly, in conjunction with reading this Amendment No. 1, you should also
read any other filings that the Company has made with the Securities and
Exchange Commission since the date of the Original Filing.
2
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, 2009 December 31,
(Unaudited) 2008*
------------------ ------------
ASSETS (Amounts in thousands)
Cash and due from banks $ 10,267 $ 19,449
Interest-earning deposits 29,651 9,303
Federal funds sold - 123
Investment securities available for sale 130,745 171,991
Loans 719,147 681,500
Allowance for loan losses (16,326) (9,542)
------------------ ------------
Net loans 702,821 671,958
Accrued interest receivable 3,756 4,216
Bank premises and equipment, net 16,902 17,156
FHLB stock 6,771 6,529
Investment in life insurance 10,944 10,566
Goodwill 6,083 6,083
Other assets 14,622 7,409
------------------ ------------
Total assets $ 932,562 $ 924,783
================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 77,335 $ 73,971
Savings and interest-bearing deposits 156,418 184,149
Time deposits, $100,000 and over 291,487 278,535
Other time deposits 195,612 186,039
------------------ ------------
Total deposits 720,852 722,694
Borrowings 112,679 114,314
Subordinated debentures 12,372 12,372
Subordinated promissory notes 12,000 -
Accrued interest payable 2,541 3,282
Other liabilities 4,897 5,471
------------------ ------------
Total liabilities 865,341 858,133
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Shareholders' equity:
Common stock; $1.00 par value, 20,000,000
shares authorized; 7,056,963 and 6,921,909
shares issued and outstanding at September
30, 2009 and December 31, 2008, respectively 7,057 6,922
Additional paid-in capital 31,687 30,862
Retained earnings 26,648 28,456
Accumulated other comprehensive income 1,829 410
------------------ ------------
Total shareholders' equity 67,221 66,650
------------------ ------------
Total liabilities and shareholders'
equity $ 932,562 $ 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2009 2008 2009 2008
--------- --------- --------- ---------
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 10,540 $ 10,417 $ 30,462 $ 31,053
Investment securities:
Taxable 729 1,716 3,019 4,987
Tax-exempt 615 139 2,004 267
Dividends 115 104 314 405
Interest-earning deposits 11 22 20 56
--------- --------- --------- ---------
Total interest and dividend income 12,010 12,398 35,819 36,768
--------- --------- --------- ---------
Interest expense:
Deposits 3,074 4,477 10,526 13,784
Borrowings 1,320 1,164 3,620 3,775
--------- --------- --------- ---------
Total interest expense 4,394 5,641 14,146 17,559
--------- --------- --------- ---------
Net interest income 7,616 6,757 21,673 19,209
Provision for loan losses 4,483 347 10,497 1,589
--------- --------- --------- ---------
Net interest income after provision for
loan losses 3,133 6,410 11,176 17,620
--------- --------- --------- ---------
Non-interest income:
Service charges on deposit accounts 543 598 1,654 1,704
Other service charges, commissions and
fees 374 371 1,124 1,190
Gain on sale of investment securities 680 93 2,066 389
Impairment loss on investment
securities (314) - (341) -
Impairment loss on non-marketable
investments - - (154) -
Gain on sale of loans 37 - 54 47
Gain on hedges - - - 97
Merchant fees 117 121 349 369
Income from investment in bank-owned
life insurance 126 131 378 394
--------- --------- --------- ---------
Total non-interest income 1,563 1,314 5,130 4,190
Non-interest expenses:
Salaries 2,533 2,604 7,630 7,511
Employee benefits 461 523 1,481 1,561
Occupancy expense 272 282 815 750
Equipment expense 403 396 1,226 1,174
Professional and consulting fees 464 362 1,724 1,090
FDIC assessment 587 121 1,307 221
Other taxes and licenses 113 140 325 350
Merchant processing expense 97 109 290 320
Loss on sale of foreclosed assets 16 70 195 140
Other operating expense 933 1,020 2,895 3,029
--------- --------- --------- ---------
Total non-interest expenses 5,879 5,627 17,887 16,146
--------- --------- --------- ---------
Income (loss) before income taxes (1,183) 2,097 (1,581) 5,664
Provision for income taxes (636) 672 (1,236) 1,778
--------- --------- --------- ---------
Net income (loss) $ (547) $ 1,425 $ (345) $ 3,886
========= ========= ========= =========
Basic net income (loss) per common share $ (0.08) $ 0.21 $ (0.05) $ 0.60
========= ========= ========= =========
Diluted net income (loss) per common
share $ (0.08) $ 0.21 $ (0.05) $ 0.60
========= ========= ========= =========
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,
------------------ ------------------
2009 2008 2009 2008
--------- -------- -------- ---------
(Amounts in thousands)
Net income (loss) $ (547) $ 1,425 $ (345) $ 3,886
--------- -------- -------- ---------
Other comprehensive income:
Securities available for sale:
Unrealized holding gains (losses) on
available for sale securities 3,283 (950) 3,478 (2,072)
Tax effect (1,220) 516 (999) 837
Reclassification of net gains recognized
in net income (loss) (680) (93) (2,066) (389)
Tax effect 262 37 796 156
Reclassification of impairment loss
recognized in net income (loss) 314 - 341 -
Tax effect (121) - (131) -
--------- -------- -------- ---------
Total other comprehensive income 1,838 (490) 1,419 (1,468)
--------- -------- -------- ---------
Comprehensive income $ 1,291 $ 935 $ 1,074 $ 2,418
========= ======== ======== =========
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 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 loss - - - (345) - (345)
Other comprehensive income - - - - 1,419 1,419
Issuance of common stock 135,054 135 770 - - 905
Stock based compensation - - 55 - - 55
Cash dividends of $ .21 per
share - - - (1,463) - (1,463)
----------- -------- --------- --------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2009 7,056,963 $ 7,057 $ 31,687 $ 26,648 $ 1,829 $ 67,221
=========== ======== ========= ========= ============= =============
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,
---------------------
2009 2008
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(Amounts in thousands)
Cash flows from operating activities:
Net income $ (345) $ 3,886
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 10,497 1,589
Provision for depreciation and amortization 835 844
Net amortization of bond premiums and discounts 193 11
Stock based compensation 55 132
Gain on sale of investment securities (2,066) (389)
Gain on sale of loans (54) (47)
Loss on disposition of premises and equipment - 4
Loss on sale of foreclosed assets 185 132
Income from investment in life insurance (378) (394)
Gain on hedges - (97)
Impairment loss on investment securities available for
sale 341 -
Impairment loss on non-marketable investments 154 -
Changes in assets and liabilities:
Other assets (1,256) (112)
Interest receivable 460 (25)
Other liabilities (574) 966
Interest payable (741) (941)
---------- ----------
Net cash provided by operating activities 7,306 5,559
---------- ----------
Cash flows from investing activities:
Proceeds from sales and calls of investment securities
available for sale 187,982 116,395
Purchases of investment securities available for sale (143,605) (138,859)
Purchase of FHLB stock (242) (3,802)
Redemption of FHLB Stock - 2,562
Net increase in loans (49,233) (68,692)
Purchase of bank premises and equipment (619) (1,626)
Proceeds from sales of foreclosed assets 1,494 335
Net expenditures on foreclosed assets (5) (61)
Net cash provided by business combination - 3,167
---------- ----------
Net cash used by investing activities (4,228) (90,581)
---------- ----------
Cash flow from financing activities:
Net (repayments of) proceeds from borrowings (1,635) 14,864
Net increase (decrease) in deposit accounts (1,842) 91,283
Proceeds from issuance of common stock 905 1,554
Excess tax benefits from stock options - 102
Purchase and retirement of common stock - (75)
Issuance of subordinated promissory notes 12,000 -
Cash dividends paid (1,463) (1,596)
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Net cash provided by financing activities 7,965 106,132
---------- ----------
Net increase in cash and cash equivalents 11,043 21,110
Cash and cash equivalents at beginning of period 28,875 18,275
---------- ----------
Cash and cash equivalents at end of the period $ 39,918 $ 39,385
========== ==========
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, 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 nine month periods ended
September 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 November 9, 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.
Notes to Consolidated Financial Statements
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NOTE 2 - NET INCOME (LOSS) PER SHARE (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2009 2008 2009 2008
----------- ----------- ----------- -----------
Weighted average number of common shares
used in computing basic net income (loss)
per share 7,037,174 6,875,620 6,989,937 6,440,021
Effect of dilutive stock options - 1,102 - 5,435
----------- ----------- ----------- -----------
Weighted average number of common shares and
dilutive potential common shares used in
computing diluted net income (loss) per share 7,037,174 6,876,722 6,989,937 6,445,456
=========== =========== =========== ===========
As of September 30, 2009 there were 311,403 antidilutive stock options
outstanding. At September 30, 2008, there were 173,468 antidilutive stock
options outstanding.
NOTE 3 - COMMITMENTS
At September 30, 2009, loan commitments were as follows (in thousands):
Commitments to extend credit $ 40,925
Undisbursed lines of credit 66,333
Letters of credit 2,904
NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of securities available for sale as of September 30, 2009 and December
31, 2008 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Amounts in thousands)
September 30, 2009
State and municipal securities $ 49,354 $ 1,659 $ 1 $ 51,012
Agency mortgage-backed securities 73,749 1,649 46 75,352
Equity securities 4,606 - 226 4,380
---------- ---------- ---------- ----------
$ 127,709 $ 3,309 $ 273 $ 130,745
========== ========== ========== ==========
9
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - INVESTMENT SECURITIES (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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
Agency mortgage-backed securities 53,899 1,171 57 55,013
Equity securities 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
September 30, 2009 and December 31, 2008. As of September 30, 2009, the
unrealized losses relate to three mortgage-backed securities, one municipal
security, and 12 other securities. Ten 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 and equity securities that
have declined in market value 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.
September 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:
State and municipal
securities $ 391 $ 1 $ - $ - $ 391 $ 1
Agency mortgage-backed
securities 5,587 46 - - 5,587 46
Equity securities 77 20 1,211 206 1,288 226
-------- ---------- -------- ---------- -------- ----------
Total temporarily impaired
securities $ 6,055 $ 67 $ 1,211 $ 206 $ 7,266 $ 273
======== ========== ======== ========== ======== ==========
10
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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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
Agency mortgage-backed
securities 4,253 57 - - 4,253 57
Equity securities 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 September
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 Fair
Cost Value
---------- ----------
(Amounts in thousands)
Due within one year $ 297 $ 283
Due after one year through five years 527 531
Due after five years through ten years 4,366 4,486
Due after ten years 117,913 121,065
---------- ----------
Total debt securities 123,103 126,365
Equity securities 4,606 4,380
---------- ----------
$ 127,709 $ 130,745
========== ==========
Securities with a carrying value of approximately $93.5 million and $120.9
million at September 30, 2009 and December 31, 2008, respectively, were pledged
to secure public deposits and for other purposes required or permitted by law.
Proceeds from sales and calls of investment securities available for sale
amounted to $188.0 million and $116.4 million, for the nine months ended
September 30, 2009 and September 30, 2008, respectively. These transactions
generated gross realized gains of $2.1 million and $490,000, for the nine months
ending September 30, 2009, and September 30, 2008, respectively, and also
generated gross realized losses of $10,000 and $100,000 for these same periods,
respectively. During the nine months ended September 30, 2009, the Company
recognized $341,000 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 nine months ended September
30, 2008.
11
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - INVESTMENT SECURITIES (Continued)
At September 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. Dividend payments were
reinstated on October 31, 2009 when FHLB announced a dividend for the third
quarter of 2009 of .41 percent. Management believes that its investment in FHLB
stock was not other-than-temporarily impaired as of September 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
The following is a summary of the loan portfolio at the periods represented:
September 30, December 31,
2009 2008
------------- ------------
(Amounts in thousands)
Commercial (secured by real estate) $ 273,393 $ 236,537
Commercial construction 11,236 17,115
Commercial and industrial 55,693 51,663
------------- ------------
Total commercial 340,322 305,315
Agricultural loans 21,458 18,743
Residential construction 58,805 88,296
Residential lot loans 79,846 83,782
Residential mortgage 192,936 159,730
Loans to individuals 14,507 15,494
Other loans 11,679 10,329
------------- ------------
Subtotal 719,553 681,689
Less: Net deferred loan fees (406) (189)
------------- ------------
Total Loans $ 719,147 $ 681,500
============= ============
12
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 5 - LOANS (Continued)
An analysis of the allowance for loan losses is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2009 2008 2009 2008
-------- -------- -------- --------
(In thousands)
Balance at beginning of period $ 13,289 $ 8,384 $ 9,542 $ 6,653
Provision charged to operations 4,483 339 10,497 1,581
Charge-offs (1,566) (165) (3,910) (1,143)
Recoveries 120 39 197 108
-------- -------- -------- --------
Net (charge-offs) recoveries (1,446) (126) (3,713) (1,035)
Allowance recorded related to loans
acquired in acquisition of LongLeaf
Community Bank - - - 1,398
-------- -------- -------- --------
Balance at end of period $ 16,326 $ 8,597 $ 16,326 $ 8,597
======== ======== ======== ========
The Company identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. At September 30, 2009, the recorded investment in loans considered
impaired totaled $32.6 million. Of such loans, $29.3 million had valuation
allowances aggregating $8.8 million. At December 31, 2008, the recorded
investment in loans considered impaired totaled $20.8 million, of which $17.0
million of loans had corresponding valuation allowances of $2.9 million.
NOTE 6 - SUBORDINATED PROMISSORY NOTES
The Company sold $4.2 million aggregate principal amount of subordinated
promissory notes to certain accredited investors during the three months ended
September 30, 2009 and $12.0 million for the nine months ended September 30,
2009. These notes are due ten years after the date of issuance, beginning May
15, 2019, and the Company is obligated to pay interest at an annualized rate of
8.5% payable in quarterly installments beginning on the third month anniversary
of the date of issuance. The Company may prepay the notes at any time after the
fifth anniversary of the date of issuance, subject to compliance with applicable
law.
13
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7- FAIR VALUE MEASUREMENT
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.
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
(ASC 820, "Fair Value Measurements and Disclosures") 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. ASC 820 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 ASC
820 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 September 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 September 30, 2009 or December
31, 2008.
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 September 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.
14
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7- FAIR VALUE MEASUREMENT (Continued)
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 September 30, 2009 and December 31, 2008:
Fair Value Measurements at
September 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 9/30/2009 9/30/2009 (Level 1) (Level 2) (Level 3)
- ----------- ---------------- ---------------- ---------------- ---------------- ----------------
Tax exempt securites 41,036 41,036 - 41,036 -
Taxable municipal securities 9,976 9,976 - 9,461 515
Agency mortgage-backed securities 75,353 75,353 - 75,353 -
Equity securities 4,380 4,380 4,380 - -
---------------- ---------------- ---------------- ---------------- ----------------
Total available for sale
securities $ 130,745 $ 130,745 $ 4,380 $ 125,850 $ 515
15
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7- FAIR VALUE MEASUREMENT (Continued)
Fair Value Measurements at
September 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 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 - 46,975 -
Agency mortgage-backed securities 55,013 55,013 - 55,013 -
Equity securities 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 September 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, (ASC 310,
"Receivables"), an amendment of FASB Statements No. 5 and 15 (ASC 450,
"Contingencies")." 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, 2009, substantially all of the total impaired loans were
evaluated based on the fair value of the collateral. In accordance with ASC 820,
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,
16
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7- FAIR VALUE MEASUREMENT (Continued)
the Company records the impaired loan as nonrecurring Level 3. Impaired loans
totaled $32.6 million and $20.8 million at September 30, 2009 and December 31,
2008, respectively. Of such loans, $29.3 million and $17.0 million had specific
loss allowances aggregating $8.8 million and $2.9 million at September 30, 2009
and December 31, 2008, respectively. In determination of these specific
allowances, the collateral is valued 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 September 30, 2009 and December 31, 2008, there were
no fair value adjustments related to goodwill of $6.1 million and other
intangible assets of $403,000 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 September 30, 2009 and December 31,
2008, the Company recorded foreclosed real estate of $7.4 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" (ASC 825, "Financial Instruments"), 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.
17
FOUR OAKS FINCORP, INC.
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 period-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.
18
FOUR OAKS FINCORP, INC.
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 September 30, 2009 and December 31, 2008:
September 30, 2009 December 31, 2008
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents $ 39,918 $ 39,918 $ 28,875 $ 28,875
Securities available for sale 130,745 130,745 171,991 171,991
Loans, net 702,821 700,499 671,958 666,558
FHLB stock 6,771 6,771 6,529 6,529
Investment in life insurance 10,944 10,944 10,566 10,566
Accrued interest receivable 3,756 3,756 4,216 4,216
Financial liabilities:
Deposits $ 720,852 $ 711,157 $ 722,693 $ 715,581
Subordinated debentures/promissory notes 24,372 24,369 12,372 11,773
Borrowings 112,679 130,835 114,314 117,042
Accrued interest payable 2,541 2,541 3,282 3,282
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (ASC 805, "Business Combinations"), which replaces SFAS No. 141,
"Business Combinations." ASC 805 establishes principles and requirements for
recognition and measurement of assets, liabilities and any noncontrolling
interest acquired due to a business combination. ASC 805 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
ASC 805 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. ASC 805 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 ASC 805, 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. ASC 805 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 ASC 805.
19
FOUR OAKS FINCORP, INC.
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, and an amendment of FASB Statement No. 133"
(ASC 815-10-65-1, "Transition and Effective Date Related to FASB Statement No.
161") "ASC 815". ASC 815 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"). ASC 815 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, ASC
815 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. ASC 815 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The adoption of ASC 815 on January 1, 2009 did not have a material
effect on the Company's financial condition and results of operations.
In April 2009, the FASB issued three related FSPs to (1) clarify the application
of ASC 820 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,"(ASC 820-10-65-4, "Transition Related to FASB Staff
Position FAS 157-4") provides additional guidance for estimating fair value in
accordance with ASC 820 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.
FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-
Temporary Impairments," (ASC 320-10-65-1, "Transition Related to FSP FAS 115-2
and FAS 124-2") 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.
20
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
FSP FAS 107-1 amends SFAS No. 107 (ASC 825-10-65-1, "Transition Related to FSP
FAS 107-1 and APB 28-1") 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," (ASC 825-10-65-1) to require those disclosures in
summarized information in interim reporting periods.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," (ASC 855,
"Subsequent Events"), 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" (ASC 860, ""Transfers
and Servicing"). ASC 860 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. ASC 860 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 ASC 860 are effective
for financial asset transfers occurring after December 31, 2009. Management is
currently evaluating the effect that the provisions of ASC 860 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. The adoption is not expected to have a material
effect on the Company's financial condition and results of operations.
In June 2009, FASB issued SFAS No.168, "FASB Accounting Standards Codification
TM and the Hierarchy of Generally Accepted Accounting Principles--a replacement
of FASB Statement No. 162" (ASC 105, "Generally Accepted Accounting
Principles"), which states that the FASB Accounting Standards Codification-TM
(the "Codification") will become the source of authoritative GAAP recognized by
the FASB to be applied by nongovernmental entities. On the effective date of ASC
105, the Codification superseded all then-existing non-Securities and Exchange
Commission ("SEC") accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Codification is effective for these third quarter financial statements and the
principal impact is limited to disclosures as all future references to
authoritative literature will be referenced in accordance with the Codification.
21
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In August 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05,
"Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at
Fair Value". This ASU provides amendments for fair value measurements of
liabilities. It provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more techniques.
ASU 2009-05 also clarifies that when estimating a fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. ASU 2009-05 is effective for the first reporting
period (including interim periods) beginning after issuance or fourth quarter
2009. The Company is assessing the impact of ASU 2009-05 on its financial
condition, results of operations, and disclosures.
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.
22
FOUR OAKS FINCORP, INC.
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.
On October 26, 2009, the Company and the Bank entered into an amendment (the
"First Amendment") to the agreement with Nuestro. The First Amendment amends
Section 9.1(c) of the Agreement in order to extend the date upon which the
Company and the Bank or Nuestro may terminate the Agreement from October 31,
2009 to November 30, 2009. This extension of the termination date is intended to
allow the parties additional time to receive the consent of the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), which is a
required condition to closing the transaction. The Company has provided the
Federal Reserve with additional information that it requested regarding the
transaction and is awaiting its decision regarding the transaction or further
information requests.
23
Part II. OTHER INFORMATION
ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. Description
- ----------- -----------
10.1 Amendment No. 1, effective September 1, 2009, to Amended and
Restated Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the Company's Amendment No. 1
to Current Report on Form 8-K/A filed with the Commission on
September 29, 2009)
10.2 Amendment No. 1, effective September 1, 2009, to Amended and
Restated Employee Stock Purchase and Bonus Plan
(incorporated by reference to Exhibit 10.2 to the Company's
Amendment No. 1 to Current Report on Form 8-K/A filed with
the Commission on September 29, 2009)
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 (previously
filed as Exhibit 31.1 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 9, 2009)
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 (previously
filed as Exhibit 31.2 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 9, 2009)
31.3 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
31.4 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 (previously filed as Exhibit 32.1
to the Company's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2009)
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 (previously filed as Exhibit 32.2
to the Company's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2009)
32.3 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
32.4 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
24
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 24, 2009 By: /s/ Ayden R. Lee, Jr.
------------------------------------
Ayden R. Lee, Jr.
Chairman, President and
Chief Executive Officer
Date: November 24, 2009 By: /s/ Nancy S. Wise
------------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
25
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Amendment No. 1, effective September 1, 2009, to Amended and
Restated Non-qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the Company's Amendment No. 1
to Current Report on Form 8-K/A filed with the Commission on
September 29, 2009)
10.2 Amendment No. 1, effective September 1, 2009, to Amended and
Restated Employee Stock Purchase and Bonus Plan
(incorporated by reference to Exhibit 10.2 to the Company's
Amendment No. 1 to Current Report on Form 8-K/A filed with
the Commission on September 29, 2009)
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 (previously
filed as Exhibit 31.1 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 9, 2009)
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 (previously
filed as Exhibit 31.2 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on November 9, 2009)
31.3 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
31.4 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 (previously filed as Exhibit 32.1
to the Company's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2009)
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 (previously filed as Exhibit 32.2
to the Company's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2009)
32.3 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
32.4 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