10-Q 1 fofn0930201310q.htm 10-Q FOFN 09.30.2013 10Q



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 September 30, 2013

Commission File Number      000-22787      

FOUR OAKS FINCORP, INC.
(Exact name of registrant as specified in its charter)
 
NORTH CAROLINA
 
56-2028446
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification Number)
 
6114 U.S. 301 SOUTH, FOUR OAKS, NC  27524
(Address of principal executive office, including zip code)
 
(919) 963-2177
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYES   oNO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) xYES   oNO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
Accelerated filer o
Non-accelerated filer    o (Do not check if a smaller reporting company)  
Smaller reporting company x
                                                                                                                                                                                                             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
oYES   xNO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Common Stock,
7,959,515
par value $1.00 per share  
(Number of shares outstanding
(Title of Class)
November 12, 2013

-1-


TABLE OF CONTENTS
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013 (Unaudited) and December 31, 2012
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
 
 
Nine Months Ended September 30, 2013 and 2012
 
 
 
 
 
 
Nine Months Ended September 30, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-2-




Part I. FINANCIAL INFORMATION

Item 1 – FINANCIAL STATEMENTS

FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2013
 
December 31,
 
(Unaudited)
 
2012(*)
 
(amounts in thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
12,059

 
$
18,862

Interest-earning deposits
118,113

 
164,288

Cash and cash equivalents
130,172

 
183,150

CDs held for investment
35,035

 
26,460

Investment securities available for sale, at fair value
8,821

 
73,722

Investment securities held to maturity, at amortized cost
102,173

 
20,329

Total investment securities
110,994

 
94,051

Loans held for sale
214

 
19,297

Loans
495,989

 
497,929

Allowance for loan losses
(12,296
)
 
(16,549
)
Net loans
483,693

 
481,380

Accrued interest receivable
1,570

 
1,869

Bank premises and equipment held for sale, net

 
1,901

Bank premises and equipment, net
12,834

 
13,382

FHLB stock
6,076

 
6,415

Investment in life insurance
14,325

 
14,139

Foreclosed assets
10,443

 
15,136

Other assets
6,208

 
8,318

Total assets
$
811,564

 
$
865,498

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Deposits:
 

 
 

Noninterest-bearing demand
$
214,918

 
$
189,048

Money market, NOW accounts and savings accounts
160,342

 
164,614

Time deposits, $100,000 and over
166,336

 
215,984

Other time deposits
104,784

 
130,210

Total deposits
646,380

 
699,856

Borrowings
112,000

 
112,000

Subordinated debentures
12,372

 
12,372

Subordinated promissory notes
12,000

 
12,000

Accrued interest payable
1,609

 
1,736

Other liabilities
4,954

 
4,858

Total liabilities
789,315

 
842,822

Commitments (Note B)


 


Shareholders’ equity:
 

 
 

Common stock, $1.00 par value, 80,000,000 shares authorized; 7,959,514 shares issued and outstanding at September 30, 2013 and 7,815,315 shares issued and outstanding at December 31, 2012
7,960

 
7,815

Additional paid-in capital
34,262

 
34,192

Accumulated deficit
(19,988
)
 
(20,040
)
Accumulated other comprehensive income
15

 
709

Total shareholders' equity
22,249

 
22,676

Total liabilities and shareholders' equity
$
811,564

 
$
865,498


 (*)  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 OPERATIONS (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(amounts in thousands, except share data)
Interest and dividend income:
 
 
 
 
 
 
 
Loans, including fees
$
6,827

 
$
7,654

 
$
20,608

 
$
23,981

Investment securities:
 

 
 

 
 
 
 
Taxable
443

 
417

 
918

 
1,384

Dividends
78

 
68

 
263

 
223

Interest-earning deposits and Federal funds sold
164

 
163

 
498

 
460

Total interest and dividend income
7,512

 
8,302

 
22,287

 
26,048

Interest expense:
 

 
 

 
 

 
 

Deposits
846

 
1,561

 
2,693

 
5,296

Borrowings
1,025

 
1,029

 
3,041

 
3,056

Subordinated debentures
51

 
57

 
153

 
173

Subordinated promissory notes
257

 
260

 
763

 
776

Total interest expense
2,179

 
2,907

 
6,650

 
9,301

Net interest income
5,333

 
5,395

 
15,637

 
16,747

Provision for loan losses

 
2,089

 
35

 
1,803

Net interest income after provision for loan losses
5,333

 
3,306

 
15,602

 
14,944

Non-interest income:
 

 
 

 
 

 
 

Service charges on deposit accounts
458

 
508

 
1,333

 
1,440

Other service charges, commissions and fees
947

 
661

 
2,577

 
1,962

Gains on sale of investment securities available for sale
92

 
349

 
462

 
1,006

Total other-than-temporary impairment loss

 

 

 
(56
)
Portion of loss recognized in other comprehensive income

 

 

 
56

Net impairment loss recognized in earnings

 

 

 

Income from investment in life insurance
49

 
78

 
186

 
246

Other non-interest income
80

 
267

 
858

 
387

Total non-interest income
1,626

 
1,863

 
5,416

 
5,041

Non-interest expenses:
 

 
 

 
 

 
 

Salaries
2,435

 
2,560

 
7,749

 
7,652

Employee benefits
384

 
467

 
1,384

 
1,455

Occupancy expenses
250

 
335

 
903

 
995

Equipment expenses
354

 
340

 
1,059

 
1,108

Professional and consulting fees
903

 
622

 
2,309

 
1,915

FDIC assessments
371

 
527

 
1,290

 
1,645

Foreclosed asset-related costs, net
697

 
870

 
1,637

 
1,963

Collection expenses
234

 
290

 
925

 
1,288

Other
1,252

 
1,319

 
3,710

 
3,720

Total non-interest expenses
6,880

 
7,330

 
20,966

 
21,741

Income (loss) before income taxes
79

 
(2,161
)
 
52

 
(1,756
)
Provision for income taxes

 

 

 
(175
)
Net Income (loss)
$
79

 
$
(2,161
)
 
$
52

 
$
(1,581
)
Basic net income (loss) per common share
$
0.01

 
$
(0.28
)
 
$
0.01

 
$
(0.20
)
Diluted net income (loss) per common share
$
0.01

 
$
(0.28
)
 
$
0.01

 
$
(0.20
)
Weighted Average Shares Outstanding, Basic
7,944,600

 
7,769,887

 
7,897,348

 
7,729,454

Weighted Average Shares Outstanding, Diluted
7,944,600

 
7,769,887

 
7,897,348

 
7,729,454

 
The accompanying notes are an integral part of the consolidated financial statements.

-4-




FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(amounts in thousands)
Net income (loss)
$
79

 
$
(2,161
)
 
$
52

 
$
(1,581
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Securities available for sale:
 

 
 

 
 

 
 

Unrealized gains(losses) on securities available for sale
(154
)
 
709

 
(728
)
 
1,738

Tax benefit(expense)
59

 
(279
)
 
281

 
(681
)
Reclassification of gains recognized in net income
(92
)
 
(349
)
 
(462
)
 
(1,006
)
Tax benefit
35

 
135

 
178

 
388

Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity
50

 

 
60

 

Tax expense
(19
)
 

 
(23
)
 

Portion of other-than-temporary loss recognized in other comprehensive income

 

 

 
(56
)
Tax benefit

 

 

 
22

Total other comprehensive income (loss)
(121
)
 
216

 
(694
)
 
405

 
 
 
 
 
 
 
 
Comprehensive loss
$
(42
)
 
$
(1,945
)
 
$
(642
)
 
$
(1,176
)
 
The accompanying notes are an integral part of the consolidated financial statements.



-5-




 FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
 

 
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated other comprehensive
income
 
Total
shareholders'
equity
 
Shares
 
Amount
 
 
 
 
 
(amounts in thousands, except share data)
BALANCE, DECEMBER 31, 2011
7,663,387

 
$
7,663

 
$
34,048

 
$
(13,071
)
 
$
1,052

 
$
29,692

Net loss

 

 

 
(1,581
)
 

 
(1,581
)
Other comprehensive income

 

 

 

 
405

 
405

Issuance of common stock
122,131

 
123

 
76

 

 

 
199

Stock based compensation

 

 
50

 

 

 
50

BALANCE, SEPTEMBER 30, 2012
7,785,518

 
$
7,786

 
$
34,174

 
$
(14,652
)
 
$
1,457

 
$
28,765



 
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated other comprehensive
income
 
Total
shareholders'
equity
 
Shares
 
Amount
 
 
 
 
 
(amounts in thousands, except share data)
BALANCE, DECEMBER 31, 2012
7,815,385

 
$
7,815

 
$
34,192

 
$
(20,040
)
 
$
709

 
$
22,676

Net income

 

 

 
52

 

 
52

Other comprehensive loss

 

 

 

 
(694
)
 
(694
)
Issuance of common stock
144,129

 
145

 
50

 

 

 
195

Stock based compensation

 

 
20

 

 

 
20

BALANCE, SEPTEMBER 30, 2013
7,959,514

 
$
7,960

 
$
34,262

 
$
(19,988
)
 
$
15

 
$
22,249

 
The accompanying notes are an integral part of the consolidated financial statements.

-6-




FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
 
Nine Months Ended
 
September 30,
 
2013
 
2012
 
(amounts in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
52

 
$
(1,581
)
Adjustments to reconcile net income (loss) to net cash provided by operations:
 

 
 

Provision for loan losses
35

 
1,803

Provision for depreciation and amortization
735

 
873

Net amortization of bond premiums and discounts
1,368

 
1,409

Stock based compensation
20

 
50

Gain on sale of investment securities
(462
)
 
(1,006
)
Gain on sale of branches
(586
)
 

Loss on sale of foreclosed assets, net
1

 
237

Valuation adjustment on foreclosed assets
1,207

 
1,726

Earnings on bank-owned life insurance
(186
)
 
(246
)
Proceeds from sale of mortgage loans held for sale
21,993

 

Originations of mortgage loans held for sale
(21,136
)
 

Gain on sale of mortgage loans held for sale
(473
)
 

Changes in assets and liabilities:
 
 
 
Other assets
2,174

 
1,720

Accrued interest receivable
299

 
120

Other liabilities
96

 
1,441

Accrued interest payable
(127
)
 
262

Net cash provided by operating activities
5,010

 
6,808

Cash flows from investing activities:
 

 
 

Proceeds from sales and calls of investment securities available for sale
20,874

 
37,937

Proceeds from paydowns of investment securities available for sale
5,610

 
9,314

Proceeds from paydowns of investment securities held to maturity
8,604

 
3,454

Purchases of investment securities available for sale
(29,253
)
 
(36,273
)
Purchases of investment securities held to maturity
(24,660
)
 
(5,319
)
Net cash from sale of branches
(39,622
)
 

Purchases of CDs held for investment
(8,575
)
 

Redemption of FHLB stock
339

 
138

Net (increase) decrease in loans outstanding
(666
)
 
47,346

Purchases of bank premises and equipment
(161
)
 
(336
)
Proceeds from sales of foreclosed assets
5,429

 
4,043

Net recoveries (expenditures) on foreclosed assets
13

 
(13
)
Net cash (used in) provided by investing activities
(62,068
)
 
60,291

Cash flows from financing activities:
 

 
 

Net (decrease) increase in deposit accounts
3,885

 
(10,245
)
Proceeds from issuance of common stock
195

 
199

Net cash (used in) provided by financing activities
4,080

 
(10,046
)
Net (decrease) increase in cash and cash equivalents
(52,978
)
 
57,053

Cash and cash equivalents at beginning of period
183,150

 
164,966

Cash and cash equivalents at end of period
$
130,172

 
$
222,019

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid on deposits and borrowings
$
(6,777
)
 
$
(9,039
)
Supplemental disclosure for sale of branches:
 
 
 
     Proceeds from sale of fixed assets
$
1,875

 
$

     Proceeds from sale of loans
$
15,060

 
$

  Assumption of customer deposits
$
(57,361
)
 
$

    Gain on sale of branches
$
586

 
$

    Proceeds from sale of other assets
$
225

 
$

Supplemental disclosures of noncash investing and financing activities:
 

 
 

Unrealized (losses) gains on investment securities available for sale, net of taxes
$
(694
)
 
$
405

Transfers of loans to foreclosed assets
$
1,957

 
$
8,481

Loans transferred from held for sale to held for investment
$
3,639

 
$

Transferred from AFS to HTM securities
$
76,487

 
$

 
The accompanying notes are an integral part of the consolidated financial statements.


-7-


FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
 
 
 
NOTE A - ORGANIZATION AND GOING CONCERN CONSIDERATIONS

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 months ended September 30, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America.  The consolidated financial statements include the accounts and transactions of Four Oaks Fincorp, Inc., a bank holding company incorporated under the laws of the State of North Carolina (the “Company”), and its wholly-owned subsidiary, Four Oaks Bank & Trust Company (the “Bank”).  Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.

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, 2012. This Quarterly Report should be read in conjunction with such Annual Report.

Certain amounts previously presented in our Consolidated Financial Statements for the prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior periods' Statements of Operations, Comprehensive Income (Loss), or Shareholders' Equity as previously reported.
 
Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Improving loan trends and a decrease in the specific reserve on individual impaired loans resulted in a small provision for loan losses for the nine months ended September 30, 2013. The year-to-date net charge offs at September 30, 2013 decreased from the amount reported in the prior year to date period. Nonperforming assets continue to be elevated, although balances are less for nonperforming assets at September 30, 2013 as compared to December 31, 2012. Initiatives by the Special Assets Department are expected to continue to resolve nonperforming loans by either returning them to performing status or removing them from the Company's books. Management expects some additional losses to result from this team's efforts as the process for moving these assets continues. Management still believes that its current operations and its cash availability are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business. While management does not anticipate further significant deterioration in the Bank's loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that the Company and the Bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
 
Net income for the nine months ended September 30, 2013 was $52,000 compared to a net loss of $1,581,000 for the same period of 2012. In comparing the nine months ended September 30, 2013 and 2012, there was a decrease in the provision for loan losses of $1,768,000. An improvement in net charge-offs and a decrease in loan balances requiring reserves led to a loan loss provision in the amount of $35,000 for the nine months ended September 30, 2013 compared to a provision for loan losses of $1,803,000 for the same period in 2012. Net charge offs for the first nine months of 2013 were $4.3 million and $6.0 million for the comparable period in 2012. The historically low level of provision is attributed to improvements in problem loans and in the credit oversight processes, as well as fewer loans outstanding. For more detail on the changes to the Allowance for Loan and Lease Losses and provision, refer to Note E Loans and "Managements' Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this report.

At September 30, 2013 the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.57%, 6.32%, and 3.68%, respectively, compared to 10.17%, 5.93% and 3.33%, respectively, at December 31, 2012. At September 30, 2013, the Bank’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.84%, 9.58% and 5.58%, respectively, compared to 10.20%, 8.93%, and 5.01%, respectively, at December 31, 2012.


-8-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

The Company and the Bank entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”) that imposes certain restrictions on the Company and the Bank, as described in Notes I, Subordinated Notes and J, Regulatory Restrictions. A material failure to comply with the Written Agreement’s terms could subject the Company to additional regulatory actions and further restrictions on its business, which may have a material adverse effect on the Company’s future results of operations and financial condition.

In order for the Company and the Bank to remain well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets.  On July 19, 2013, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock of the Company from 20,000,000 to 80,000,000. This amendment was approved by the Company's shareholders on June 3, 2013. Management continues to evaluate various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is actively managing its balance sheet to preserve capital and to improve capital ratios and actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital.
 
Cash and cash equivalents at September 30, 2013 were approximately $130.2 million. Based on our liquidity analysis, management anticipates that the Company will be able to meet its future obligations as they become due. If unanticipated market factors emerge, or if the Company is not successful in its efforts to comply with the requirements set forth in the Written Agreement, the FRB and/or the NCCOB may take further enforcement or other actions.  These actions might include greater restrictions on the Company’s operations, a revocation of its charter and the placement of the Bank into receivership if the situation materially deteriorates. At this time the Company is in partial compliance with the provisions of the Written Agreement.

NOTE B - COMMITMENTS AND CONTIGENCIES

The following table presents loan commitments at September 30, 2013.
 
 
September 30, 2013
 
(amounts in thousands)
Commitments to extend credit
$
37,891

Undisbursed lines of credit
18,326

Financial stand-by letters of credit
343

Performance stand-by letters of credit
1,809

Legally binding commitments 
58,369

 
 

Unused credit card lines
13,696

 
 

Total 
$
72,065


On May 20, 2013, the U.S. Department of Justice (the “DOJ”) issued a subpoena to the Bank requiring the production of documents in connection with an investigation of consumer fraud related to third party payment processing. The Bank has responded to the subpoena and continues to cooperate with the government’s investigation.  No proceedings related to this investigation have been instituted against the Bank.  Were the DOJ to bring any such proceedings, such proceedings would likely be civil in nature, seeking injunctive relief and monetary relief under the Financial Institutions Reform, Recovery and Enforcement Act.

In October 2013, multiple putative class action lawsuits were filed in United States district courts across the country against a number of different banks based on the banks’ alleged role in “payday lending.”  Four of these lawsuits, pending in the Northern District of Georgia, the Middle District of North Carolina, the District of Maryland, and the Southern District of Florida, name the Bank as one of the defendants.  The lawsuits allege that, by processing Automatic Clearing House transactions indirectly on behalf of “payday” lenders, the Bank is illegally participating in an enterprise to collect unlawful debts and is therefore liable to plaintiffs for damages under the federal Racketeer Influenced and Corrupt Organizations Act.  The lawsuits also allege a variety of state law claims.  The Bank has not yet responded to any of the complaints filed in these actions.


-9-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

NOTE C - NET INCOME PER SHARE
 
Basic net income (loss) per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options.

Basic and diluted net income (loss) per common share have been computed based upon net income (loss) as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Weighted average number of common shares used in computing basic net income (loss) per common share
7,944,600

 
7,769,887

 
7,897,348

 
7,729,454

Effect of dilutive stock options

 

 

 

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income (loss) per common share
7,944,600

 
7,769,887

 
7,897,348

 
7,729,454

 
For the three and nine month periods ended September 30, 2013 and 2012 all stock options were considered anti-dilutive either as a result of net losses incurred or the average market price for the shares during each period was less than the assumed proceeds that would be received by the Company upon exercise of the options.

For the periods ended September 30, 2013 and 2012, there were 303,980 and 277,289 anti-dilutive stock options outstanding, respectively, which represented all of the options outstanding for both periods.




-10-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

NOTE D– INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available for sale and securities held to maturity as of September 30, 2013 and December 31, 2012 are as follows:
 
 
September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Available for Sale:
(amounts in thousands)
Taxable municipal securities
$
3,971

 
$

 
$
148

 
$
3,823

Mortgage-backed securities
 
 
 
 
 
 
 
GNMA
3,860

 

 
15

 
3,845

Trust preferred securities
1,175

 

 
150

 
1,025

Equity securities
98

 
30

 

 
128

Total
$
9,104

 
$
30

 
$
313

 
$
8,821


 
September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Held to Maturity:
(amounts in thousands)
Taxable municipal securities
$
3,648

 
$
142

 
$

 
$
3,790

Mortgage-backed securities
 
 
 
 
 
 
 
GNMA
93,787

 
474

 
1,508

 
92,753

FNMA
4,738

 
15

 

 
4,753

Total
$
102,173

 
$
631

 
$
1,508

 
$
101,296


 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Available for Sale:
(amounts in thousands)
Taxable municipal securities
$
5,459

 
$
454

 
$

 
$
5,913

Mortgage-backed securities
 
 
 
 
 
 
 
GNMA
60,056

 
704

 
17

 
60,743

FNMA
5,872

 
10

 
2

 
5,880

Trust preferred securities
1,175

 

 
169

 
1,006

Equity securities
170

 
11

 
1

 
180

Total
$
72,732

 
$
1,179

 
$
189

 
$
73,722

 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities Held to Maturity:
(amounts in thousands)
Mortgage-backed securities - GNMA
$
20,329

 
$
339

 
$

 
$
20,668

Total
$
20,329

 
$
339

 
$

 
$
20,668



-11-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

During the second quarter of 2013, the Company transferred $76.5 million of available-for-sale state and municipal debt and mortgage-backed securities to the held-to-maturity category, reflecting the company's intent to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The related $.4 million of unrealized holding gains that were included in the transfer is retained in accumulated other comprehensive income and in the carrying value of the held-to-maturity securities. This amount will be amortized as an adjustment to interest income over the remaining life of the securities. This will offset the impact of amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.    

The following tables show gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012. At December 31, 2012 there were no unrealized losses in the held to maturity category.
 
 
September 30, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
(amounts in thousands)
Securities Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal securities
$
3,823

 
$
148

 


 


 
$
3,823

 
$
148

Mortgage-backed securities - GNMA
$
3,845

 
$
15

 
$

 
$

 
$
3,845

 
$
15

Total temporarily impaired securities
$
7,668

 
$
163

 
$

 
$

 
$
7,668

 
$
163

 
 
 
 
 
 
 
 
 
 
 
 
Other than temporary impairment
 
 
 
 
 
 
 
 
 
 
 
Trust preferred securities
$

 
$

 
$
1,025

 
$
150

 
$
1,025

 
$
150

Total other than temporarily impaired securities
$

 
$

 
$
1,025

 
$
150

 
$
1,025

 
$
150


 
September 30, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
(amounts in thousands)
Securities Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
GNMA
$
55,208

 
$
1,508

 
$

 
$

 
$
55,208

 
$
1,508

FNMA

 

 

 

 

 

Total temporarily impaired securities
$
55,208

 
$
1,508

 
$

 
$

 
$
55,208

 
$
1,508




-12-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

 
December 31, 2012
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
(amounts in thousands)
Securities Available for Sale:
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities


 


 


 


 


 


GNMA
$
5,132

 
$
17

 
$

 
$

 
$
5,132

 
$
17

FNMA
1,998

 
2

 

 

 
1,998

 
2

Equity securities

 

 
2

 
1

 
2

 
1

Total temporarily impaired securities
$
7,130

 
$
19

 
$
2

 
$
1

 
$
7,132

 
$
20

 
 
 
 
 
 
 
 
 
 
 
 
Other than temporary impairment
 
 
 
 
 
 
 
 
 
 
 
Trust preferred securities
$

 
$

 
$
1,006

 
$
169

 
$
1,006

 
$
169

Total other than temporarily impaired securities
$

 
$

 
$
1,006

 
$
169

 
$
1,006

 
$
169



Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
 
At September 30, 2013, the unrealized losses relate to 26 mortgage backed securities, 4 taxable municipal securities and two trust preferred securities. Only the two trust preferred securities were in a continuous unrealized loss position for more than twelve months. At December 31, 2011 management determined that one of the trust preferred securities was other than temporarily impaired in the amount of $75,000. Management continues to monitor the creditworthiness of the issuers of the trust preferred securities and has determined that based on the their current financial condition the unrealized losses as of September 30, 2013 are not credit related and will therefore be recognized in other comprehensive income. The gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by the Government National Mortgage Association. The unrealized losses were primarily attributable to changes in interest rates and not due to the credit quality of the investment securities. The Company does not intend to sell, and it is not more likely than not that the Company will be required to sell, these debt securities before the anticipated recovery of the amortized cost basis and; therefore, does not consider them to be other-than-temporarily impaired at September 30, 2013.


-13-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

The amortized cost and fair value of available for sale and held to maturity securities at September 30, 2013 by contractual maturities are shown on the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Available for Sale
 
Amortized
Cost
 
Fair 
Value
 
(amounts in thousands)
Taxable municipal securities:
 
 
 
Due after one year through five years
$

 
$

Due after five years through ten years

 

Due after ten years
3,971

 
3,823

Total taxable municipal securities
3,971

 
3,823

 
 
 
 
Mortgage-backed securities - GNMA/FNMA:
 
 
 
Due within one year

 

Due after one year through five years

 

Due after five years through ten years

 

Due after ten years
3,860

 
3,845

Total mortgage-backed securities - GNMA/FNMA
3,860

 
3,845

 
 
 
 
Other securities:
 
 
 
Trust preferred securities
1,175

 
1,025

Equity securities
98

 
128

Total other securities
1,273

 
1,153

 
 
 
 
Total available for sale securities
$
9,104

 
$
8,821

 
 
 
 
 
Held to Maturity
 
Amortized
Cost
 
Fair 
Value
 
(amounts in thousands)
Taxable municipal securities:
 
 
 
Due within one year

 

Due after one year through five years
528

 
536

Due after five years through ten years
3,120

 
3,254

Due after ten years

 

Total taxable municipal securities
3,648

 
3,790

 
 
 
 
Mortgage-backed securities - GNMA/FNMA:
 
 
 
Due within one year
1,248

 
1,264

Due after one year through five years
64,388

 
64,421

Due after five years through ten years
31,684

 
30,618

Due after ten years
1,205

 
1,203

Total mortgage-backed securities - GNMA/FNMA
98,525

 
97,506

 
 
 
 
Total held to maturity securities
$
102,173

 
$
101,296

 
Securities with a carrying value of approximately $90.7 million and $93.2 million at September 30, 2013 and December 31, 2012, 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 for the nine months ended September 30, 2013 and 2012 were $20.9 million and $37.9 million, respectively. For the nine months ended September 30, 2013 and 2012 we recognized gross realized gains of $462,000 and $1.0 million, and gross losses of $0, respectively.

Sales and calls of securities available for sale and equity securities during the three months ended September 30, 2013 and 2012 were $8.0 million and $10.7 million, respectively. For the three months ended September 30, 2013 and 2012 generated gross realized gains were $92,000 and $349,000 and gross losses of $0, respectively.


-14-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

NOTE E – LOANS

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis.   Each class of loans detailed below is subject to risks that could have an adverse impact on the credit quality of the loan portfolio.  Loans are primarily made in the Company's market area in North Carolina, principally Johnston County, and parts of Wake, Harnett, Duplin, and Sampson counties.
Commercial and industrial loans
Each commercial loan or lease is underwritten based primarily upon the customer's ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. A complete understanding of the borrower's businesses, including the experience and background of the principals, is obtained prior to approval.  To the extent that the loan or lease is secured by collateral, the likely value of the collateral and what level of strength the collateral brings to the transaction is evaluated.  This collateral is generally comprised of personal property or business assets, such as inventory or accounts receivable. To the extent that the principals or other parties provide personal guarantees, the relative financial strength and liquidity of each guarantor is assessed.  Common risks include general economic conditions within the markets the Bank serves, as well as risks that are specific to each transaction, including operational performance of the business, collectability of receivables, demand for products and services, personal events such as disability or change in marital status, and reductions in the value of collateral. 
Commercial construction and land development loans
Commercial construction and land development loans are fully underwritten based on the borrower's repayment capacity and experience, as well as the project's structure, market, and financial feasibility. All debts and sources of income are analyzed prior to commitment. These loans are highly dependent on the supply and demand for commercial real estate and developed lots in the markets served by the Bank. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.
Commercial real estate loans
Commercial real estate loans consist primarily of loans secured by nonresidential owner or non-owner occupied real estate, multifamily housing, and agricultural loans.  Owner-occupied commercial properties are real estate properties whose loan repayment capacities are based on the credit strength and cash flow of the business occupying and operating the property. Non-owner occupied and multifamily commercial real estate are primarily dependent on successful operation or management of the property.  The primary risk associated with these loans is the ability of the income-producing property to collateralize the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in customers having to provide rental rate concessions to achieve adequate occupancy rates.  While commercial real estate loans are normally secured by commercial buildings for office, storage and warehouse space, it is possible that the liquidation of the collateral will not fully satisfy the obligation. 
Residential construction loans
Residential construction loans are made to both individuals and builders/contractors and are typically secured by 1-4 family residential property.  The Bank has stringent underwriting and initial investment requirements for new residential construction loans. The primary source of repayment on these loans comes from funds due to the sale of the underlying property or from permanent financing obtained by the individual building the residence. Significant and rapid declines in real estate values or demand can result in increased difficulty in selling these properties and/or converting these construction loans to permanent loans. Such a decline in values has led to unprecedented levels of foreclosures and losses within the banking industry. 
Residential mortgage loans
Each residential mortgage loan is underwritten by performing an analysis of the borrower's cash flow, as well as reviewing credit reports for items such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries.  Since these loans are secured by collateral, the likely value of that collateral is evaluated.  Common risks to these loans that are not specific to individual transactions include general economic conditions within the markets the Bank serves, particularly unemployment and potential declines in real estate values.  Personal events such as disability or change in marital status also add risk to residential mortgage loans.  Revolving mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render a second lien position to be effectively unsecured.  Additional risks include lien perfection inaccuracies and disputes

-15-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

with first lien holders that may further weaken the collateral position.  Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer and other loans
Consumer and other loans include loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles, including boats and motorcycles, as well as unsecured consumer debt.  The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.  Consumer loan collections are sensitive to job loss, illness and other personal factors.
The classification of loans as of September 30, 2013 and December 31, 2012 are summarized as follows:
 
September 30, 2013
 
December 31, 2012
 
(amounts in thousands)
Commercial and industrial loans
$
27,286

 
$
29,563

Commercial construction and land development
70,227

 
90,899

Commercial real estate
197,858

 
181,194

Residential construction
27,144

 
20,445

Residential mortgage
163,890

 
165,009

Consumer
8,928

 
9,664

Other
1,085

 
1,278

Gross loans
496,418

 
498,052

Less:
 

 
 

Net deferred loan fees
(429
)
 
(123
)
Net loans before allowance
495,989

 
497,929

Allowance for loan losses
(12,296
)
 
(16,549
)
 
 
 
 
Total net loans 
$
483,693

 
$
481,380


Nonperforming assets at September 30, 2013 and December 31, 2012 consist of the following:
 
September 30, 2013
 
December 31, 2012
 
(amounts in thousands)
Loans past due ninety days or more and still accruing
$
25

 
$
32

Nonaccrual loans
33,873

 
35,970

Foreclosed assets
10,443

 
15,136

 Total
$
44,341

 
$
51,138










-16-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

Allowance for Loan Losses
 
The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business.  Management evaluates the adequacy of this allowance at least quarterly during which time those loans that are identified as impaired are evaluated individually.

The following tables are an analysis of the allowance for loan losses by loan class, as of and for the three and nine months ended September 30, 2013 and 2012 and as of and for the twelve months ended December 31, 2012.

 
Three Months Ended
 
September 30, 2013
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
and
Industrial
 
Commercial
Construction
and Land
Development
 
Commercial
Real
Estate
 
Residential
Construction
 
Residential
Mortgage
 
Consumer
 
Other
 
Totals
Allowances for loan losses:
(amounts in thousands)
Balance July 1, 2013
$
969

 
$
6,574

 
$
2,763

 
$
449

 
$
3,013

 
$
178

 
$
92

 
$
14,038

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(263
)
 
125

 
817

 
79

 
(718
)
 
(11
)
 
(29
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans charged-off
(207
)
 
(1,485
)
 
(503
)
 

 
(259
)
 
(52
)
 

 
(2,506
)
Recoveries
175

 
318

 
11

 

 
211

 
49

 

 
764

Net (charge-offs) recoveries
(32
)
 
(1,167
)
 
(492
)
 

 
(48
)
 
(3
)
 

 
(1,742
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance September 30, 2013
$
674

 
$
5,532

 
$
3,088

 
$
528

 
$
2,247

 
$
164

 
$
63

 
$
12,296




-17-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

 
Nine Months Ended
 
September 30, 2013
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
and
Industrial
 
Commercial
Construction
and Land
Development
 
Commercial
Real
Estate
 
Residential
Construction
 
Residential
Mortgage
 
Consumer
 
Other
 
Totals
Allowances for loan losses:
(amounts in thousands)
Balance January 1, 2013
$
1,185

 
$
7,251

 
$
2,961

 
$
423

 
$
4,471

 
$
188

 
$
70

 
$
16,549

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(670
)
 
1,128

 
836

 
243

 
(1,553
)
 
58

 
(7
)
 
35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans charged-off
(267
)
 
(3,343
)
 
(1,728
)
 
(138
)
 
(1,164
)
 
(216
)
 

 
(6,856
)
Recoveries
426

 
496

 
1,019

 

 
493

 
134

 

 
2,568

Net (charge-offs) recoveries
159

 
(2,847
)
 
(709
)
 
(138
)
 
(671
)
 
(82
)
 

 
(4,288
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance September 30, 2013
$
674

 
$
5,532

 
$
3,088

 
$
528

 
$
2,247

 
$
164

 
$
63

 
$
12,296

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance: individually
evaluated for impairment
$
212

 
$
667

 
$
688

 
$

 
$
234

 
$

 
$

 
$
1,801

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Balance: collectively
evaluated for impairment
$
462

 
$
4,865

 
$
2,400

 
$
528

 
$
2,013

 
$
164

 
$
63

 
$
10,495

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
$
27,286

 
$
70,227

 
$
197,858

 
$
27,144

 
$
163,890

 
$
8,928

 
$
1,085

 
$
496,418

Less: ending Balance: individually
evaluated for impairment
936

 
14,328

 
13,519

 
695

 
14,124

 
19

 

 
43,621

Ending balance: collectively
evaluated for impairment
$
26,350

 
$
55,899

 
$
184,339

 
$
26,449

 
$
149,766

 
$
8,909

 
$
1,085

 
$
452,797



 
Three Months Ended
 
September 30, 2012
 
 
 
Real Estate
 
 
 
 
 
 
 
Commercial
and
Industrial
 
Commercial
Construction
and Land
Development
 
Commercial
Real
Estate
 
Residential
Construction
 
Residential
Mortgage
 
Consumer
 
Other
 
Totals
 
(amounts in thousands)
Allowances for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance July 1, 2012
$
1,786

 
$
8,010

 
$
3,290

 
$
401

 
$
4,438

 
$
482

 
$
11

 
$
18,418

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
(493
)
 
1,783

 
733

 
(108
)
 
103

 
16

 
55

 
2,089

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans charged-off
(241
)
 
(2,580
)
 
(791
)
 
(1
)
 
(508
)
 
(75
)
 

 
(4,196
)
Recoveries
142

 
145

 
123

 

 
170

 
30

 


 
610

Net (charge-offs) recoveries
(99
)
 
(2,435
)
 
(668
)
 
(1
)
 
(338
)
 
(45
)
 

 
(3,586
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance September 30, 2012
$
1,194

 
$
7,358

 
$
3,355

 
$
292

 
$
4,203

 
$
453

 
$
66

 
$
16,921



-18-

FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements - (Continued)
 
 
 

 
Nine Months Ended
 
September 30, 2012