Attached files
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EX-32.2 - EXHIBIT 32.2 - FOUR OAKS FINCORP INC | fofn6302016ex322.htm |
EX-32.1 - EXHIBIT 32.1 - FOUR OAKS FINCORP INC | fofn6302016ex321.htm |
EX-31.2 - EXHIBIT 31.2 - FOUR OAKS FINCORP INC | fofn6302016ex312.htm |
EX-31.1 - EXHIBIT 31.1 - FOUR OAKS FINCORP INC | fofn6302016ex311.htm |
EX-10.1 - EXHIBIT 10.1 - FOUR OAKS FINCORP INC | ex101-aremploymentagreemen.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016
Commission File Number 000-22787
FOUR OAKS FINCORP, INC. |
(Exact name of registrant as specified in its charter) |
NORTH CAROLINA | 56-2028446 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification Number) |
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524 |
(Address of principal executive office, including zip code) |
(919) 963-2177 |
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYES oNO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) xYES oNO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
oYES xNO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, | 33,780,011 |
par value $1.00 per share | (Number of shares outstanding |
(Title of Class) | August 10, 2016) |
-1-
TABLE OF CONTENTS | Page No. | |
June 30, 2016 (Unaudited) and December 31, 2015 | ||
Three and Six Months Ended June 30, 2016 and 2015 | ||
Consolidated Statements of Comprehensive Income (Unaudited) | ||
Three and Six Months Ended June 30, 2016 and 2015 | ||
Six Months Ended June 30, 2016 and 2015 | ||
Six Months Ended June 30, 2016 and 2015 | ||
-2-
Part I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
June 30, 2016 | December 31, 2015 | ||||||
(Unaudited) | (*) | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 19,326 | $ | 17,375 | |||
Interest-earning deposits | 15,265 | 9,380 | |||||
Cash and cash equivalents | 34,591 | 26,755 | |||||
Certificates of deposits held for investment | 21,805 | 23,520 | |||||
Investment securities available-for-sale, at fair value | 64,608 | 70,281 | |||||
Investment securities held-to-maturity, at amortized cost | 58,462 | 65,354 | |||||
Total investment securities | 123,070 | 135,635 | |||||
Loans held for sale | 681 | 1,145 | |||||
Loans | 487,115 | 458,313 | |||||
Allowance for loan losses | (9,069 | ) | (9,616 | ) | |||
Net loans | 478,046 | 448,697 | |||||
Accrued interest receivable | 1,526 | 1,594 | |||||
Bank premises and equipment, net | 12,213 | 12,293 | |||||
FHLB stock | 3,596 | 3,288 | |||||
Investment in life insurance | 14,862 | 14,777 | |||||
Foreclosed assets | 2,519 | 1,760 | |||||
Deferred tax assets, net | 14,922 | 16,679 | |||||
Other assets | 5,168 | 5,244 | |||||
TOTAL ASSETS | $ | 712,999 | $ | 691,387 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Deposits: | |||||||
Noninterest-bearing demand | $ | 138,245 | $ | 132,044 | |||
Money market, NOW accounts and savings accounts | 196,513 | 180,214 | |||||
Time deposits, $250,000 and over | 65,044 | 65,718 | |||||
Other time deposits | 151,973 | 164,358 | |||||
Total deposits | 551,775 | 542,334 | |||||
Borrowings | 70,000 | 60,000 | |||||
Subordinated debentures | 12,372 | 12,372 | |||||
Subordinated promissory notes | 11,500 | 11,500 | |||||
Accrued interest payable | 401 | 437 | |||||
Other liabilities | 3,096 | 4,338 | |||||
TOTAL LIABILITIES | 649,144 | 630,981 | |||||
Commitments and Contingencies (Note F) | |||||||
Shareholders’ equity: | |||||||
Common stock, $1.00 par value, 80,000,000 shares authorized; 33,780,011 and 33,595,812 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively | 33,780 | 33,596 | |||||
Additional paid-in capital | 31,723 | 31,666 | |||||
Accumulated deficit | (2,868 | ) | (4,571 | ) | |||
Accumulated other comprehensive income (loss) | 1,220 | (285 | ) | ||||
Total shareholders' equity | 63,855 | 60,406 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 712,999 | $ | 691,387 |
(*) 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)
(Amounts in thousands, except share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 6,306 | $ | 6,284 | $ | 12,395 | $ | 12,648 | ||||||||
Taxable investments | 776 | 780 | 1,616 | 1,625 | ||||||||||||
Dividends | 100 | 87 | 181 | — | 166 | |||||||||||
Interest-earning deposits | 116 | 132 | 225 | 308 | ||||||||||||
Total interest and dividend income | 7,298 | 7,283 | 14,417 | 14,747 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 592 | 599 | 1,193 | 1,243 | ||||||||||||
Borrowings | 366 | 778 | 744 | 1,547 | ||||||||||||
Subordinated debentures | 62 | 51 | 121 | 100 | ||||||||||||
Subordinated promissory notes | 217 | 254 | 399 | 506 | ||||||||||||
Total interest expense | 1,237 | 1,682 | 2,457 | 3,396 | ||||||||||||
Net interest income | 6,061 | 5,601 | 11,960 | 11,351 | ||||||||||||
Provision for loan losses | — | — | — | — | ||||||||||||
Net interest income after provision for loan losses | 6,061 | 5,601 | 11,960 | 11,351 | ||||||||||||
Non-interest income: | ||||||||||||||||
Service charges on deposit accounts | 361 | 382 | 718 | 797 | ||||||||||||
Other service charges, commissions and fees | 896 | 1,043 | 1,647 | 1,833 | ||||||||||||
Gains on sale of investment securities available-for-sale, net | 266 | — | 266 | 56 | ||||||||||||
Income from investment in life insurance | 42 | 48 | 85 | 98 | ||||||||||||
Indemnification from third party payment processor clients | — | 164 | — | 343 | ||||||||||||
Other non-interest income | 10 | 53 | 28 | 93 | ||||||||||||
Total non-interest income | 1,575 | 1,690 | 2,744 | 3,220 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Salaries | 2,755 | 2,776 | 5,348 | 5,392 | ||||||||||||
Employee benefits | 594 | 536 | 1,223 | 1,092 | ||||||||||||
Occupancy expenses | 335 | 362 | 671 | 691 | ||||||||||||
Equipment expenses | 142 | 185 | 290 | 422 | ||||||||||||
Professional and consulting fees | 683 | 612 | 1,223 | 1,382 | ||||||||||||
FDIC assessments | 122 | 204 | 250 | 379 | ||||||||||||
Foreclosed asset-related costs, net | 58 | 158 | 157 | 261 | ||||||||||||
Collection expenses | 30 | 10 | 89 | 145 | ||||||||||||
Other operating expenses | 1,547 | 1,534 | 2,789 | 2,915 | ||||||||||||
Total non-interest expense | 6,266 | 6,377 | 12,040 | 12,679 | ||||||||||||
Income before income taxes | 1,370 | 914 | 2,664 | 1,892 | ||||||||||||
Income tax expense (benefit) | 498 | (16,572 | ) | 961 | (16,572 | ) | ||||||||||
Net income | $ | 872 | $ | 17,486 | $ | 1,703 | $ | 18,464 | ||||||||
Basic net income per common share | $ | 0.03 | $ | 0.54 | $ | 0.05 | $ | 0.58 | ||||||||
Diluted net income per common share | $ | 0.03 | $ | 0.54 | $ | 0.05 | $ | 0.57 | ||||||||
Weighted Average Shares Outstanding, Basic | 32,433,959 | 32,098,488 | 32,353,717 | 32,066,815 | ||||||||||||
Weighted Average Shares Outstanding, Diluted | 32,845,246 | 32,255,459 | 32,685,544 | 32,169,375 |
The accompanying notes are an integral part of the consolidated financial statements.
-4-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income | $ | 872 | $ | 17,486 | $ | 1,703 | $ | 18,464 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Securities available-for-sale: | |||||||||||||||
Unrealized holding gains (losses) on available-for-sale securities | 1,112 | (1,326 | ) | 2,661 | (699 | ) | |||||||||
Tax effect | (309 | ) | — | (877 | ) | — | |||||||||
Reclassification of gains recognized in net income | (266 | ) | — | (266 | ) | (56 | ) | ||||||||
Tax effect | — | — | — | — | |||||||||||
Amortization of unrealized losses on investment securities transferred from available-for-sale to held-to-maturity | (9 | ) | (15 | ) | (20 | ) | (31 | ) | |||||||
Tax effect | 3 | — | 7 | — | |||||||||||
Total other comprehensive income (loss) | 531 | (1,341 | ) | 1,505 | (786 | ) | |||||||||
Comprehensive income | $ | 1,403 | $ | 16,145 | $ | 3,208 | $ | 17,678 |
The accompanying notes are an integral part of the consolidated financial statements.
-5-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except share data)
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 | 32,032,327 | $ | 32,032 | $ | 32,520 | $ | (24,579 | ) | $ | 756 | $ | 40,729 | ||||||||||
Net income | — | — | — | 18,464 | — | 18,464 | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (786 | ) | (786 | ) | ||||||||||||||
Stock based compensation | — | — | 284 | — | — | 284 | ||||||||||||||||
Issuance of common stock | 101,313 | 102 | 43 | — | — | 145 | ||||||||||||||||
Issuance of restricted stock | 1,446,000 | 1,446 | (1,446 | ) | — | — | — | |||||||||||||||
BALANCE, JUNE 30, 2015 | 33,579,640 | $ | 33,580 | $ | 31,401 | $ | (6,115 | ) | $ | (30 | ) | $ | 58,836 |
Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Total shareholders' equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2015 | 33,595,812 | $ | 33,596 | $ | 31,666 | $ | (4,571 | ) | $ | (285 | ) | $ | 60,406 | |||||||||
Net income | — | — | — | 1,703 | — | 1,703 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 1,505 | 1,505 | ||||||||||||||||
Stock based compensation | — | — | 152 | — | — | 152 | ||||||||||||||||
Issuance of common stock | 96,687 | 96 | 63 | — | — | 159 | ||||||||||||||||
Excess income tax benefit | — | — | 1 | — | — | 1 | ||||||||||||||||
Issuance of restricted stock | 210,000 | 210 | (210 | ) | — | — | — | |||||||||||||||
Forfeiture of restricted stock | (85,000 | ) | (85 | ) | 85 | — | — | — | ||||||||||||||
Stock withheld for payment of taxes | (37,488 | ) | (37 | ) | (34 | ) | — | — | (71 | ) | ||||||||||||
BALANCE, JUNE 30, 2016 | 33,780,011 | $ | 33,780 | $ | 31,723 | $ | (2,868 | ) | $ | 1,220 | $ | 63,855 |
The accompanying notes are an integral part of the consolidated financial statements.
-6-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended | |||||||
June 30, | |||||||
2016 | 2015 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 1,703 | $ | 18,464 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Deferred income tax expense (benefit) | 887 | (16,572 | ) | ||||
Provision for depreciation and amortization | 338 | 351 | |||||
Net amortization of bond premiums and discounts | 450 | 591 | |||||
Stock based compensation | 152 | 284 | |||||
Excess tax benefits from stock options | 1 | — | |||||
Gain on sale of investment securities | (266 | ) | (56 | ) | |||
Loss on disposition of bank premises and equipment | 7 | — | |||||
Gain on sale of foreclosed assets, net | (18 | ) | (33 | ) | |||
Valuation adjustment on foreclosed assets | 36 | 249 | |||||
Earnings on investment in bank-owned life insurance | (85 | ) | (98 | ) | |||
Gain on sale of mortgage loans held for sale | (228 | ) | (293 | ) | |||
Originations of mortgage loans held for sale | (9,347 | ) | (14,314 | ) | |||
Proceeds from sale of loans held for sale | 10,039 | 14,976 | |||||
Changes in assets and liabilities: | |||||||
Other assets | 76 | 1,181 | |||||
Accrued interest receivable | 68 | 1 | |||||
Other liabilities | (1,242 | ) | 582 | ||||
Accrued interest payable | (36 | ) | 60 | ||||
Net cash provided by operating activities | 2,535 | 5,373 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sales and calls of investment securities available-for-sale | 5,198 | 3,618 | |||||
Proceeds from maturities and calls of investment securities held-to-maturity | 100 | — | |||||
Proceeds from paydowns of investment securities available-for-sale | 3,195 | 3,263 | |||||
Proceeds from paydowns of investment securities held-to-maturity | 6,513 | 7,942 | |||||
Purchases of investment securities available-for-sale | (250 | ) | (18,861 | ) | |||
Redemption of certificates of deposits held for investment | 1,715 | 2,059 | |||||
(Purchase) redemption of FHLB stock | (308 | ) | 224 | ||||
Net increase in loans outstanding | (30,366 | ) | (5,310 | ) | |||
Purchases of bank premises and equipment | (265 | ) | (197 | ) | |||
Proceeds from sales of foreclosed assets | 240 | 1,840 | |||||
Net cash used in investing activities | (14,228 | ) | (5,422 | ) | |||
Cash flows from financing activities: | |||||||
Net proceeds from borrowings | 10,000 | — | |||||
Net increase (decrease) in deposit accounts | 9,441 | (117,608 | ) | ||||
Proceeds from issuance of common stock | 159 | 145 | |||||
Shares withheld for payment of taxes | (71 | ) | — | ||||
Net cash provided by (used in) financing activities | 19,529 | (117,463 | ) | ||||
Change in cash and cash equivalents | 7,836 | (117,512 | ) | ||||
Cash and cash equivalents at beginning of period | 26,755 | 158,527 | |||||
Cash and cash equivalents at end of period | $ | 34,591 | $ | 41,015 |
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended | |||||||
June 30, | |||||||
2016 | 2015 | ||||||
Supplemental disclosures of cash flow information: | |||||||
Interest paid on deposits and borrowings | $ | 2,493 | $ | 3,336 | |||
Supplemental disclosures of noncash investing and financing activities: | |||||||
Unrealized gains (losses) on investment securities available-for-sale | $ | 2,395 | $ | (755 | ) | ||
Amortization of net losses on investment securities transferred to held-to-maturity | (20 | ) | (31 | ) | |||
Transfer of loans to foreclosed assets | 1,017 | 1,015 | |||||
Loans transferred from held for sale to held for investment | — | 109 | |||||
Loans transferred from held for investment to held for sale | — | 2,510 |
The accompanying notes are an integral part of the consolidated financial statements.
-8-
FOUR OAKS FINCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The organization and business of Four Oaks Fincorp, Inc., a bank holding company incorporated under the laws of the State of North Carolina (the "Company"), accounting policies followed by the Company, and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. This Quarterly Report should be read in conjunction with such Annual Report.
The accompanying unaudited consolidated financial statements are prepared in accordance with instructions for Form 10-Q and the applicable rules and regulations of the Securities and Exchange Commission. In management’s opinion, the financial information contained in the accompanying unaudited consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the six months ended June 30, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts and transactions of the Company, and its wholly-owned subsidiary, Four Oaks Bank & Trust Company (the "Bank"). Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.
Certain amounts previously presented in the Company's Consolidated Financial Statements for the prior periods have been reclassified to conform to current classifications. All such reclassifications had no impact on the prior periods' Statements of Operations, Comprehensive Income, or Shareholders' Equity as previously reported.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update replaces the incurred loss impairment methodology with one that reflects current expected credit losses (CECL) and requires consideration of a broader range of reasonable and supportable forecasted information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update amends several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of adoption of the new standard on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to be recorded as an asset on the balance sheet for the right to use the leased asset and a liability for the corresponding lease obligation for leases with terms of more than 12 months. The accounting treatment for lessors will remain relatively unchanged. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting treatment related to classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. Upon adoption, investments in equity securities, except those accounted for under the equity method or that result in the consolidation of the investee, will be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at cost minus impairment, plus or minus changes from observable price changes in an orderly transaction. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of certain provisions is permitted. The Company does not believe the adoption of this ASU will have a material impact on the Company's consolidated financial statements.
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In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The existing recognition and measurement guidance for debt issuance costs are not affected by this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. We adopted ASU No. 2015-03 and there was no impact to the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. On August 12, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. Based on ASU 2015-14, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The Company continues to evaluate the impact of adopting the new standard on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
-10-
NOTE B - NET INCOME PER SHARE
Basic net income per share represents earnings credited to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options.
Basic and diluted net income per common share have been computed based upon net income as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below (amounts in thousands, except share data):
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income available to common shareholders | $ | 872 | $ | 17,486 | $ | 1,703 | $ | 18,464 | |||||||
Weighted average number of common shares - basic | 32,433,959 | 32,098,488 | 32,353,717 | 32,066,815 | |||||||||||
Effect of dilutive stock options | 37,251 | 15,922 | 36,031 | 15,412 | |||||||||||
Effect of dilutive restricted stock awards | 374,036 | 141,049 | 295,796 | 87,148 | |||||||||||
Weighted average number of common shares - dilutive | 32,845,246 | 32,255,459 | 32,685,544 | 32,169,375 | |||||||||||
Basic earnings per common share | $ | 0.03 | $ | 0.54 | $ | 0.05 | $ | 0.58 | |||||||
Diluted earnings per common share | $ | 0.03 | $ | 0.54 | $ | 0.05 | $ | 0.57 | |||||||
Anti-dilutive awards | 12,305 | 176,857 | 12,305 | 176,857 |
-11-
NOTE C – INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities available-for-sale and securities held-to-maturity as of June 30, 2016 and December 31, 2015 are as follows (amounts in thousands):
June 30, 2016 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 19,852 | $ | 1,244 | $ | — | $ | 21,096 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 12,888 | 268 | — | 13,156 | |||||||||||
FNMA & FHLMC | 29,278 | 328 | — | 29,606 | |||||||||||
Other debt securities | 750 | — | — | 750 | |||||||||||
Total | $ | 62,768 | $ | 1,840 | $ | — | $ | 64,608 |
June 30, 2016 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,405 | $ | 84 | $ | — | $ | 3,489 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 52,812 | 1,324 | — | 54,136 | |||||||||||
FNMA | 2,245 | 64 | — | 2,309 | |||||||||||
Total | $ | 58,462 | $ | 1,472 | $ | — | $ | 59,934 |
December 31, 2015 | |||||||||||||||
Securities Available-for-Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 24,789 | $ | 225 | $ | 447 | $ | 24,567 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 13,512 | 68 | 50 | 13,530 | |||||||||||
FNMA & FHLMC | 32,024 | — | 351 | 31,673 | |||||||||||
Other debt securities | 500 | — | — | 500 | |||||||||||
Equity securities | 11 | — | — | 11 | |||||||||||
Total | $ | 70,836 | $ | 293 | $ | 848 | $ | 70,281 |
December 31, 2015 | |||||||||||||||
Securities Held-to-Maturity: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Taxable municipal securities | $ | 3,531 | $ | 1 | $ | 20 | $ | 3,512 | |||||||
Mortgage-backed securities | |||||||||||||||
GNMA | 59,185 | 509 | 230 | 59,464 | |||||||||||
FNMA | 2,638 | 19 | — | 2,657 | |||||||||||
Total | $ | 65,354 | $ | 529 | $ | 250 | $ | 65,633 |
-12-
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 December 31, 2015 (amounts in thousands). There were no unrealized losses on securities at June 30, 2016.
December 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Available-for-Sale: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 20 | $ | 16,888 | $ | 447 | — | $ | — | $ | — | $ | 16,888 | $ | 447 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 3 | 10,010 | 50 | — | — | — | 10,010 | 50 | |||||||||||||||||||||
FNMA & FHLMC | 11 | 31,673 | 351 | — | — | — | 31,673 | 351 | |||||||||||||||||||||
Total temporarily impaired securities | 34 | $ | 58,571 | $ | 848 | — | $ | — | $ | — | $ | 58,571 | $ | 848 |
December 31, 2015 | |||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Securities Held-to-Maturity: | # Securities | Fair value | Unrealized losses | # Securities | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||||
Taxable municipal securities | 9 | $ | 3,325 | $ | 20 | — | $ | — | $ | — | $ | 3,325 | $ | 20 | |||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||
GNMA | 14 | 20,784 | 116 | 3 | 5,130 | 114 | 25,914 | 230 | |||||||||||||||||||||
Total temporarily impaired securities | 23 | $ | 24,109 | $ | 136 | 3 | $ | 5,130 | $ | 114 | $ | 29,239 | $ | 250 |
Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If it is determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
There were no unrealized losses on securities at June 30, 2016 and no other than temporary impairment losses were recognized during the three and six months ended June 30, 2016.
-13-
The amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2016 by expected maturities are shown on the following table (amounts in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2016 | |||||||
Securities Available-for-Sale: | Amortized Cost | Fair Value | |||||
Taxable municipal securities: | |||||||
Due after ten years | $ | 19,852 | $ | 21,096 | |||
Total taxable municipal securities | 19,852 | 21,096 | |||||
Mortgage-backed securities - GNMA/FNMA & FHLMC: | |||||||
Due after ten years | 42,166 | 42,762 | |||||
Total mortgage-backed securities - GNMA/FNMA & FHLMC | 42,166 | 42,762 | |||||
Other debt securities: | |||||||
Due after five years through ten years | 750 | 750 | |||||
Total other debt securities | 750 | 750 | |||||
Total available-for-sale securities | $ | 62,768 | $ | 64,608 | |||
Securities Held-to-Maturity: | |||||||
Taxable municipal securities: | |||||||
Due within one year | $ | 156 | $ | 157 | |||
Due after one year through five years | 2,192 | 2,237 | |||||
Due after five years through ten years | 1,057 | 1,095 | |||||
Total taxable municipal securities | 3,405 | 3,489 | |||||
Mortgage-backed securities - GNMA/FNMA: | |||||||
Due after five years through ten years | 7,374 | 7,627 | |||||
Due after ten years | 47,683 | 48,818 | |||||
Total mortgage-backed securities - GNMA/FNMA | 55,057 | 56,445 | |||||
Total held-to-maturity securities | $ | 58,462 | $ | 59,934 |
Securities with a carrying value of approximately $75.6 million and $61.1 million at June 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, borrowing lines, and for other purposes required or permitted by law. Sales and calls of securities available-for-sale for the six months ended June 30, 2016 and 2015 of $5.2 million and $3.6 million generated net realized gains of $266,000 and $56,000, respectively, and no gross realized losses for either period. Sales and calls of securities available-for-sale for the three months ended June 30, 2016 and 2015 of $5.2 million and $1.0 million generated net realized gains of $266,000 and $0, respectively, and no gross realized losses for either period.
-14-
NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis. Each class of loans is subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Loans are primarily made in the Company's market area in North Carolina, principally Johnston, Wake, Harnett, Duplin, Sampson, and Moore counties. There have been no significant changes to the loan class definitions outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The classification of loan segments as of June 30, 2016 and December 31, 2015 are summarized as follows (amounts in thousands):
June 30, 2016 | December 31, 2015 | ||||||
Commercial and industrial | $ | 22,796 | $ | 23,163 | |||
Commercial construction and land development | 45,439 | 50,510 | |||||
Commercial real estate | 236,962 | 208,737 | |||||
Residential construction | 38,458 | 36,618 | |||||
Residential mortgage | 133,822 | 128,442 | |||||
Consumer | 7,099 | 6,638 | |||||
Consumer credit cards | 2,014 | 2,240 | |||||
Business credit cards | 1,272 | 1,168 | |||||
Other | 65 | 1,257 | |||||
Gross loans | 487,927 | 458,773 | |||||
Less: | |||||||
Net deferred loan fees | (812 | ) | (460 | ) | |||
Net loans before allowance | 487,115 | 458,313 | |||||
Allowance for loan losses | (9,069 | ) | (9,616 | ) | |||
Total net loans | $ | 478,046 | $ | 448,697 | |||
Loans held for sale | $ | 681 | $ | 1,145 |
-15-
Allowance for Loan Losses and Recorded Investment in Loans
The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on at least a quarterly basis, which includes a review of loans both specifically and collectively evaluated for impairment.
The following tables are an analysis of the allowance for loan losses by loan segment as of and for the three and six months ended June 30, 2016 and 2015 and as of and for the twelve months ended December 31, 2015 (amounts in thousands).
Three Months Ended | |||||||||||||||||||||||||||||||
June 30, 2016 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 252 | $ | 5,040 | $ | 2,250 | $ | 292 | $ | 1,102 | $ | 95 | $ | 53 | $ | 9,084 | |||||||||||||||
Provision for loan losses | (57 | ) | (178 | ) | 242 | (21 | ) | 34 | (26 | ) | 6 | — | |||||||||||||||||||
Loans charged-off | (35 | ) | (97 | ) | — | — | — | (29 | ) | — | (161 | ) | |||||||||||||||||||
Recoveries | 22 | 51 | — | — | 11 | 61 | 1 | 146 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (13 | ) | (46 | ) | — | — | 11 | 32 | 1 | (15 | ) | ||||||||||||||||||||
Balance, end of period | $ | 182 | $ | 4,816 | $ | 2,492 | $ | 271 | $ | 1,147 | $ | 101 | $ | 60 | $ | 9,069 | |||||||||||||||
Six Months Ended | |||||||||||||||||||||||||||||||
June 30, 2016 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 221 | $ | 5,470 | $ | 2,268 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 9,616 | |||||||||||||||
Provision for loan losses | (29 | ) | (619 | ) | 787 | (55 | ) | (65 | ) | (29 | ) | 10 | — | ||||||||||||||||||
Loans charged-off | (59 | ) | (97 | ) | (565 | ) | — | — | (70 | ) | — | (791 | ) | ||||||||||||||||||
Recoveries | 49 | 62 | 2 | 21 | 21 | 87 | 2 | 244 | |||||||||||||||||||||||
Net (charge-offs) recoveries | (10 | ) | (35 | ) | (563 | ) | 21 | 21 | 17 | 2 | (547 | ) | |||||||||||||||||||
Balance, end of period | $ | 182 | $ | 4,816 | $ | 2,492 | $ | 271 | $ | 1,147 | $ | 101 | $ | 60 | $ | 9,069 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 1 | $ | 522 | $ | 133 | $ | — | $ | 7 | $ | — | $ | — | $ | 663 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 181 | $ | 4,294 | $ | 2,359 | $ | 271 | $ | 1,140 | $ | 101 | $ | 60 | $ | 8,406 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 24,068 | $ | 45,439 | $ | 236,962 | $ | 38,458 | $ | 133,822 | $ | 9,113 | $ | 65 | $ | 487,927 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 27 | $ | 1,132 | $ | 1,813 | $ | 287 | $ | 1,517 | $ | — | $ | — | $ | 4,776 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 24,041 | $ | 44,307 | $ | 235,149 | $ | 38,171 | $ | 132,305 | $ | 9,113 | $ | 65 | $ | 483,151 |
(1) At June 30, 2016, there were $220,000 in impaired loans collectively evaluated for impairment with $31,000 in reserves established.
-16-
Three Months Ended | |||||||||||||||||||||||||||||||
June 30, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 170 | $ | 5,102 | $ | 2,670 | $ | 412 | $ | 1,318 | $ | 82 | $ | 36 | $ | 9,790 | |||||||||||||||
Provision for loan losses | (73 | ) | 38 | 195 | (94 | ) | (154 | ) | 53 | 35 | — | ||||||||||||||||||||
Loans charged-off | (38 | ) | (19 | ) | (202 | ) | — | (17 | ) | (44 | ) | (42 | ) | (362 | ) | ||||||||||||||||
Recoveries | 94 | 185 | 6 | — | 77 | 21 | 1 | 384 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 56 | 166 | (196 | ) | — | 60 | (23 | ) | (41 | ) | 22 | ||||||||||||||||||||
Balance, end of period | $ | 153 | $ | 5,306 | $ | 2,669 | $ | 318 | $ | 1,224 | $ | 112 | $ | 30 | $ | 9,812 | |||||||||||||||
Six Months Ended | |||||||||||||||||||||||||||||||
June 30, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 119 | $ | 5,105 | $ | 2,382 | $ | 436 | $ | 1,206 | $ | 89 | $ | 40 | $ | 9,377 | |||||||||||||||
Provision for loan losses | (59 | ) | (284 | ) | 303 | (118 | ) | 60 | 68 | 30 | — | ||||||||||||||||||||
Loans charged-off | (47 | ) | (19 | ) | (206 | ) | — | (165 | ) | (98 | ) | (42 | ) | (577 | ) | ||||||||||||||||
Recoveries | 140 | 504 | 190 | — | 123 | 53 | 2 | 1,012 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 93 | 485 | (16 | ) | — | (42 | ) | (45 | ) | (40 | ) | 435 | |||||||||||||||||||
Balance, end of period | $ | 153 | $ | 5,306 | $ | 2,669 | $ | 318 | $ | 1,224 | $ | 112 | $ | 30 | $ | 9,812 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 498 | $ | 116 | $ | 2 | $ | — | $ | 3 | $ | — | $ | 619 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 153 | $ | 4,808 | $ | 2,553 | $ | 316 | $ | 1,224 | $ | 109 | $ | 30 | $ | 9,193 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 27,769 | $ | 51,388 | $ | 204,569 | $ | 27,962 | $ | 134,586 | $ | 8,604 | $ | 431 | $ | 455,309 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 3,857 | $ | 3,496 | $ | 771 | $ | 1,886 | $ | 3 | $ | 41 | $ | 10,054 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 27,769 | $ | 47,531 | $ | 201,073 | $ | 27,191 | $ | 132,700 | $ | 8,601 | $ | 390 | $ | 445,255 |
(1) At June 30, 2015, there were $304,000 impaired loans collectively evaluated for impairment with $24,000 in reserves established.
-17-
Twelve Months Ended | |||||||||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Allowances for loan losses: | Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | |||||||||||||||||||||||
Balance, beginning of period | $ | 119 | $ | 5,105 | $ | 2,382 | $ | 436 | $ | 1,206 | $ | 89 | $ | 40 | $ | 9,377 | |||||||||||||||
Provision for loan losses | (58 | ) | (615 | ) | 71 | (90 | ) | 497 | 121 | 74 | — | ||||||||||||||||||||
Loans charged-off | (74 | ) | (196 | ) | (578 | ) | (41 | ) | (713 | ) | (210 | ) | (69 | ) | (1,881 | ) | |||||||||||||||
Recoveries | 234 | 1,176 | 393 | — | 201 | 113 | 3 | 2,120 | |||||||||||||||||||||||
Net recoveries (charge-offs) | 160 | 980 | (185 | ) | (41 | ) | (512 | ) | (97 | ) | (66 | ) | 239 | ||||||||||||||||||
Balance, end of period | $ | 221 | $ | 5,470 | $ | 2,268 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 9,616 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 2 | $ | 989 | $ | 228 | $ | — | $ | — | $ | — | $ | — | $ | 1,219 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 219 | $ | 4,481 | $ | 2,040 | $ | 305 | $ | 1,191 | $ | 113 | $ | 48 | $ | 8,397 | |||||||||||||||
Loans: | |||||||||||||||||||||||||||||||
Balance, end of period | $ | 24,331 | $ | 50,510 | $ | 208,737 | $ | 36,618 | $ | 128,442 | $ | 8,878 | $ | 1,257 | $ | 458,773 | |||||||||||||||
Ending balance: individually evaluated for impairment | $ | 84 | $ | 2,564 | $ | 3,957 | $ | 721 | $ | 1,305 | $ | — | $ | — | $ | 8,631 | |||||||||||||||
Ending balance: collectively evaluated for impairment (1) | $ | 24,247 | $ | 47,946 | $ | 204,780 | $ | 35,897 | $ | 127,137 | $ | 8,878 | $ | 1,257 | $ | 450,142 |
(1) At December 31, 2015, there were $295,000 in impaired loans collectively evaluated for impairment with $42,000 in reserves established.
-18-
Credit Risk
The Company uses an internal grading system to assign the degree of inherent risk on each individual loan and monitors trends in portfolio quality. The grade is initially assigned by the lending officer or credit administration and reviewed by the loan administration function throughout the life of the loan. There have been no significant changes in credit grade definitions as outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The following tables are an analysis of the creditworthiness by loan class and credit card portfolio exposure as of June 30, 2016 and December 31, 2015 (amounts in thousands).
June 30, 2016 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,178 | $ | — | $ | — | $ | — | $ | — | $ | 1,462 | $ | — | $ | 2,640 | |||||||||||||||
2 - Strong | 898 | 798 | 2,939 | 111 | 14,671 | 573 | 5 | 19,995 | |||||||||||||||||||||||
3 - Standard | 9,673 | 11,706 | 110,502 | 9,463 | 56,509 | 1,150 | 10 | 199,013 | |||||||||||||||||||||||
4 - Acceptable | 10,710 | 30,026 | 113,602 | 28,597 | 55,911 | 3,835 | 50 | 242,731 | |||||||||||||||||||||||
5 - Special Mention | 310 | 1,736 | 7,551 | — | 5,213 | 80 | — | 14,890 | |||||||||||||||||||||||
6-8 - Substandard | 27 | 1,173 | 2,367 | 287 | 1,518 | — | — | 5,372 | |||||||||||||||||||||||
$ | 22,796 | $ | 45,439 | $ | 236,961 | $ | 38,458 | $ | 133,822 | $ | 7,100 | $ | 65 | $ | 484,641 |
Consumer - Credit Card | Business- Credit Card | ||||||
Performing | $ | 1,987 | $ | 1,260 | |||
Nonperforming | 27 | 12 | |||||
Total | $ | 2,014 | $ | 1,272 | |||
Total Loans | $ | 487,927 |
December 31, 2015 | |||||||||||||||||||||||||||||||
Real Estate | |||||||||||||||||||||||||||||||
Commercial and Industrial | Commercial Construction and Land Development | Commercial Real Estate | Residential Construction | Residential Mortgage | Consumer | Other | Totals | ||||||||||||||||||||||||
1 - Lowest Risk | $ | 1,942 | $ | — | $ | — | $ | — | $ | — | $ | 1,773 | $ | — | $ | 3,715 | |||||||||||||||
2 - Strong | 971 | 749 | 2,280 | — | 15,187 | 386 | 7 | 19,580 | |||||||||||||||||||||||
3 - Standard | 10,530 | 11,262 | 94,357 | 4,296 | 56,493 | 1,250 | 469 | 178,657 | |||||||||||||||||||||||
4 - Acceptable | 9,297 | 33,832 | 103,740 | 31,431 | 50,226 | 3,170 | 757 | 232,453 | |||||||||||||||||||||||
5 - Special Mention | 304 | 2,486 | 4,444 | 170 | 5,231 | 59 | — | 12,694 | |||||||||||||||||||||||
6-8 - Substandard | 119 | 2,181 | 3,916 | 721 | 1,305 | — | 24 | 8,266 | |||||||||||||||||||||||
$ | 23,163 | $ | 50,510 | $ | 208,737 | $ | 36,618 | $ | 128,442 | $ | 6,638 | $ | 1,257 | $ | 455,365 |
Consumer- Credit Card | Business- Credit Card | ||||||
Performing | $ | 2,211 | $ | 1,133 | |||
Non Performing | 29 | 35 | |||||
Total | $ | 2,240 | $ | 1,168 | |||
Total Loans | $ | 458,773 |
-19-
Asset Quality
The following tables are an age analysis of past due loans, including those on nonaccrual by loan class, as of June 30, 2016 and December 31, 2015 (amounts in thousands).
June 30, 2016 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | 20 | $ | 27 | $ | — | $ | 47 | $ | 22,749 | $ | 22,796 | |||||||||||
Commercial construction & land development | 68 | 1,173 | — | 1,241 | 44,198 | 45,439 | |||||||||||||||||
Commercial real estate | 10 | 1,332 | — | 1,342 | 235,620 | 236,962 | |||||||||||||||||
Residential construction | — | 287 | — | 287 | 38,171 | 38,458 | |||||||||||||||||
Residential mortgage | 215 | 1,226 | — | 1,441 | 132,381 | 133,822 | |||||||||||||||||
Consumer | 37 | — | — | 37 | 7,062 | 7,099 | |||||||||||||||||
Consumer credit cards | 65 | — | 27 | 92 | 1,922 | 2,014 | |||||||||||||||||
Business credit cards | 30 | — | 12 | 42 | 1,230 | 1,272 | |||||||||||||||||
Other loans | — | — | — | — | 65 | 65 | |||||||||||||||||
Total | $ | 445 | $ | 4,045 | $ | 39 | $ | 4,529 | $ | 483,398 | $ | 487,927 |
December 31, 2015 | |||||||||||||||||||||||
30-89 Days Past Due | Nonaccrual | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | ||||||||||||||||||
Commercial & industrial | $ | 56 | $ | 119 | $ | — | $ | 175 | $ | 22,988 | $ | 23,163 | |||||||||||
Commercial construction & land development | 211 | 1,626 | — | 1,837 | 48,673 | 50,510 | |||||||||||||||||
Commercial real estate | — | 2,929 | — | 2,929 | 205,808 | 208,737 | |||||||||||||||||
Residential construction | 133 | 721 | — | 854 | 35,764 | 36,618 | |||||||||||||||||
Residential mortgage | 499 | 1,203 | — | 1,702 | 126,740 | 128,442 | |||||||||||||||||
Consumer | 71 | — | — | 71 | 6,567 | 6,638 | |||||||||||||||||
Consumer credit cards | 95 | — | 29 | 124 | 2,116 | 2,240 | |||||||||||||||||
Business credit cards | 107 | — | 36 | 143 | 1,025 | 1,168 | |||||||||||||||||
Other loans | — | — | — | — | 1,257 | 1,257 | |||||||||||||||||
Total | $ | 1,172 | $ | 6,598 | $ | 65 | $ | 7,835 | $ | 450,938 | $ | 458,773 |
Nonperforming assets
Nonperforming assets at June 30, 2016 and December 31, 2015 consist of the following (amounts in thousands):
June 30, 2016 | December 31, 2015 | ||||||
Loans past due ninety days or more and still accruing | $ | 39 | $ | 65 | |||
Nonaccrual loans | 4,045 | 6,598 | |||||
Foreclosed assets | 2,519 | 1,760 | |||||
Total nonperforming assets | $ | 6,603 | $ | 8,423 |
-20-
Impaired Loans
The following tables illustrate the impaired loans by loan class as of June 30, 2016 and December 31, 2015 (amounts in thousands).
June 30, 2016 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 21 | $ | 21 | $ | — | $ | 21 | $ | — | |||||||||
Commercial construction & land development | 483 | 1,313 | — | 520 | — | ||||||||||||||
Commercial real estate | 1,517 | 1,999 | — | 1,534 | 20 | ||||||||||||||
Residential construction | 287 | 288 | — | 267 | — | ||||||||||||||
Residential mortgage | 1,472 | 1,508 | — | 1,494 | 12 | ||||||||||||||
Subtotal: | 3,780 | 5,129 | — | 3,836 | 32 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | 6 | 6 | 1 | 6 | — | ||||||||||||||
Commercial construction & land development | 690 | 1,072 | 528 | 699 | 1 | ||||||||||||||
Commercial real estate | 296 | 296 | 133 | 296 | — | ||||||||||||||
Residential mortgage | 224 | 303 | 32 | 227 | 3 | ||||||||||||||
Subtotal: | 1,216 | 1,677 | 694 | 1,228 | 4 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 3,013 | 4,707 | 662 | 3,076 | 21 | ||||||||||||||
Residential | 1,983 | 2,099 | 32 | 1,988 | 15 | ||||||||||||||
Grand Total | $ | 4,996 | $ | 6,806 | $ | 694 | $ | 5,064 | $ | 36 |
-21-
December 31, 2015 | |||||||||||||||||||
As of Date | Year to Date | ||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
With no related allowance recorded: | |||||||||||||||||||
Commercial and industrial | $ | 67 | $ | 67 | $ | — | $ | 63 | $ | 3 | |||||||||
Commercial construction & land development | 737 | 1,706 | — | 1,031 | 19 | ||||||||||||||
Commercial real estate | 2,258 | 2,614 | — | 2,020 | 50 | ||||||||||||||
Residential construction | 721 | 722 | — | 408 | 8 | ||||||||||||||
Residential mortgage | 1,305 | 1,312 | — | 1,191 | 51 | ||||||||||||||
Subtotal: | 5,088 | 6,421 | — | 4,713 | 131 | ||||||||||||||
With an allowance recorded: | |||||||||||||||||||
Commercial and industrial | 52 | 63 | 7 | 58 | 4 | ||||||||||||||
Commercial construction & land development | 1,948 | 3,020 | 1,006 | 2,086 | 122 | ||||||||||||||
Commercial real estate | 1,699 | 1,699 | 228 | 1,713 | 79 | ||||||||||||||
Residential mortgage | 139 | 217 | 20 | 183 | 8 | ||||||||||||||
Subtotal: | 3,838 | 4,999 | 1,261 | 4,040 | 213 | ||||||||||||||
Totals: | |||||||||||||||||||
Commercial | 6,761 | 9,169 | 1,241 | 6,971 | 277 | ||||||||||||||
Residential | 2,165 | 2,251 | 20 | 1,782 | 67 | ||||||||||||||
Grand Total: | $ | 8,926 | $ | 11,420 | $ | 1,261 | $ | 8,753 | $ | 344 |
-22-
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered and the loan is considered performing. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual and nonperforming until such time as continued performance has been demonstrated, which is typically a period of at least six consecutive payments.
The following table provides a summary of loans modified as TDRs at June 30, 2016 and December 31, 2015 (amounts in thousands).
June 30, 2016 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | — | $ | 393 | $ | 393 | $ | — | ||||||||
Commercial real estate | 481 | 363 | 844 | — | ||||||||||||
Residential mortgage | 219 | — | 219 | — | ||||||||||||
Total modifications | $ | 700 | $ | 756 | $ | 1,456 | $ | — |
December 31, 2015 | ||||||||||||||||
Accrual | Nonaccrual | Total TDRs | Allowance for Loan Losses Allocated | |||||||||||||
Commercial construction and land development | $ | 1,059 | $ | 557 | $ | 1,616 | $ | 447 | ||||||||
Commercial real estate | 1,028 | 574 | 1,602 | 20 | ||||||||||||
Residential mortgage | 226 | — | 226 | — | ||||||||||||
Total modifications | $ | 2,313 | $ | 1,131 | $ | 3,444 | $ | 467 |
There were no new TDRs made to borrowers for the three and six months ended June 30, 2016 and there were no TDR loans modified during the previous twelve months that had a payment default for the three and six months ended June 30, 2016.
-23-
NOTE E – BORROWINGS
At June 30, 2016 and December 31, 2015, borrowed funds included the following Federal Home Loan Bank ("FHLB") advances (amounts in thousands):
Maturity | Interest Rate | June 30, 2016 | ||||||
August 9, 2017 | 0.73% | Fixed | $ | 10,000 | ||||
February 5, 2018 | 2.06% | Fixed | 10,000 | |||||
May 25, 2018 | 1.13% | Fixed | 10,000 | |||||
June 5, 2018 | 2.25% | Fixed | 5,000 | |||||
June 5, 2018 | 2.55% | Fixed | 5,000 | |||||
September 18, 2018 | 2.71% | Fixed | 10,000 | |||||
April 29, 2019 | 2.54% | Fixed | 5,000 | |||||
April 29, 2019 | 2.62% | Fixed | 5,000 | |||||
April 29, 2019 | 2.83% | Fixed | 10,000 | |||||
$ | 70,000 |
Maturity | Interest Rate | December 31, 2015 | ||||||
February 22, 2016 | 0.48% | Fixed | $ | 10,000 | ||||
August 14, 2017 | 3.94% | Fixed | 5,000 | |||||
February 5, 2018 | 2.06% | Fixed | 10,000 | |||||
June 5, 2018 | 2.25% | Fixed | 5,000 | |||||
June 5, 2018 | 2.55% | Fixed | 5,000 | |||||
June 5, 2018 | 3.03% | Fixed | 5,000 | |||||
September 10, 2018 | 3.14% | Fixed | 10,000 | |||||
September 18, 2018 | 2.71% | Fixed | 10,000 | |||||
$ | 60,000 |
FHLB advances are secured by a floating lien covering the Company's loan portfolio of qualifying mortgage loans, as well as specific bonds in the investment portfolio. At June 30, 2016, the Company had available lines of credit totaling $142.3 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at June 30, 2016 and December 31, 2015 were 2.06% and 2.38%, respectively.
In addition to the above advances, the Company has lines of credit of $37.0 million from various financial institutions to purchase federal funds on a short-term basis. The Company has no federal funds purchases outstanding as of June 30, 2016.
-24-
NOTE F - COMMITMENTS AND CONTINGENCIES
Commitments
The following table presents loan commitments at June 30, 2016 (amounts in thousands).
June 30, 2016 | |||
Commitments to extend credit | $ | 33,621 | |
Undisbursed lines of credit | 98,058 | ||
Financial stand-by letters of credit | 439 | ||
Performance stand-by letters of credit | 484 | ||
Legally binding commitments | 132,602 | ||
Unused credit card lines | 16,279 | ||
Total | $ | 148,881 |
Pledged Assets
Certain assets are pledged to secure municipal deposits, borrowings, and borrowing capacity, subject to certain limits, at the FHLB and the Federal Reserve Bank of Richmond (the "FRB"), as well as for other purposes as required or permitted by law. FHLB borrowings are secured by securities and a floating lien covering the Company's loan portfolio of qualifying residential (1-4 units) first mortgage and commercial real estate loans. The following table provides the total market value of pledged assets by asset type at June 30, 2016 (amounts in thousands).
June 30, 2016 | |||
Securities | $ | 75,612 | |
Loans | 25,822 |
Litigation Proceedings
There have been no material developments in the description of material litigation proceedings as reported in Note L to the consolidated financial statements filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as updated in Note F to the consolidated financial statements filed as part of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
Additionally, the Company is party to certain legal actions in the ordinary course of its business. The Company believes these actions are routine in nature and incidental to the operation of its business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on its business, financial condition, results of operations, cash flows or prospects. If, however, the Company's assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, its business, financial condition, results of operations, cash flows and prospects could be adversely affected.
-25-
NOTE G – FAIR VALUE MEASUREMENT
Fair Value Measured on a Recurring Basis.
The Company measures certain assets at fair value on a recurring basis, as described below.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities have historically included equity securities traded on an active exchange, such as the New York Stock Exchange. As of June 30, 2016, there were no Level 1 securities. Level 2 securities include taxable municipalities and mortgage-backed securities issued by government sponsored entities. The Company’s mortgage-backed securities were primarily issued by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"). As of June 30, 2016, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities. Securities classified as Level 3 include other debt securities in less liquid markets and with no quoted market price.
The following table presents information about assets measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
June 30, 2016, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
Available-for-Sale Securities: | 6/30/2016 | 6/30/2016 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 21,096 | $ | 21,096 | $ | — | $ | 21,096 | $ | — | |||||||||
Mortgage-backed securities: | |||||||||||||||||||
GNMA | 13,156 | 13,156 | — | 13,156 | — | ||||||||||||||
FNMA & FHLMC | 29,606 | 29,606 | — | 29,606 | — | ||||||||||||||
Other debt securities | 750 | 750 | — | — | 750 | ||||||||||||||
Total available-for-sale securities | $ | 64,608 | $ | 64,608 | $ | — | $ | 63,858 | $ | 750 |
Fair Value Measurements at | |||||||||||||||||||
December 31, 2015, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
Available-for-Sale Securities: | 12/31/2015 | 12/31/2015 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Taxable municipal securities | $ | 24,567 | $ | 24,567 | $ | — | $ | 24,567 | $ | — | |||||||||
Mortgage-backed securities: | |||||||||||||||||||
GNMA | 13,530 | 13,530 | — | 13,530 | — | ||||||||||||||
FNMA & FHLMC | 31,673 | 31,673 | — | 31,673 | — | ||||||||||||||
Other debt securities | 500 | 500 | — | — | 500 | ||||||||||||||
Equity securities | 11 | 11 | — | 11 | — | ||||||||||||||
Total available-for-sale securities | $ | 70,281 | $ | 70,281 | $ | — | $ | 69,781 | $ | 500 |
-26-
The following table presents the reconciliation for the three and six months ended June 30, 2016 and 2015 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands).
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Securities Available-for-Sale: | 2016 | 2015 | 2016 | 2015 | |||||||||||
Beginning Balance | $ | 500 | $ | — | $ | 500 | $ | — | |||||||
Total realized and unrealized gains or (losses): | |||||||||||||||
Included in earnings | — | — | — | — | |||||||||||
Included in other comprehensive income | — | — | — | — | |||||||||||
Purchases, issuances and settlements | 250 | — | 250 | — | |||||||||||
Ending Balance | $ | 750 | $ | — | $ | 750 | $ | — |
Fair Value Measured on a Nonrecurring Basis.
The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale as a Level 2 valuation.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, when a loan is considered impaired, it is evaluated for impairment and written down to its estimated fair value or an allowance for loan losses is established. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, the Company records the impaired loan as nonrecurring Level 2. When there is no observable market prices, an appraised value is not available, or the Company determines the fair value of the collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.
Foreclosed Assets
Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3.
Assets measured at fair value on a non-recurring basis are included in the tables below at June 30, 2016 and December 31, 2015 (amounts in thousands).
Fair Value Measurements at | |||||||||||||||||||
June 30, 2016, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
6/30/2016 | 6/30/2016 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Loans held for sale | $ | 681 | $ | 681 | $ | — | $ | 681 | $ | — | |||||||||
Impaired loans | 1,758 | 1,758 | — | — | 1,758 | ||||||||||||||
Foreclosed assets | 2,519 | 2,519 | — | — | 2,519 |
-27-
Fair Value Measurements at | |||||||||||||||||||
December 31, 2015, Using | |||||||||||||||||||
Total Carrying Amount in the Consolidated Balance Sheet | Assets Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
12/31/2015 | 12/31/2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Loans held for sale | $ | 1,145 | $ | 1,145 | $ | — | $ | 1,145 | $ | — | |||||||||
Impaired loans | 3,540 | 3,540 | — | — | 3,540 | ||||||||||||||
Foreclosed assets | 1,760 | 1,760 | — | — | 1,760 |
Quantitative Information about Level 3 Fair Value Measurements
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at June 30, 2016 (amounts in thousands, except percentages).
Total Carrying Amount at June 30, 2016 | Valuation Methodology | Range of Inputs | |||||
Recurring measurements: | |||||||
Other debt securities | $ | 750 | Probability of default | 0% | |||
Loss given default | 100% | ||||||
Nonrecurring measurements: | |||||||
Impaired loans | $ | 1,758 | Collateral discounts | 9 - 50% | |||
Foreclosed assets | $ | 2,519 | Discounted appraisals | 10 - 30% |
Collateral discounts to determine fair value on impaired loans varies widely and result from the consideration of the following factors: the age of the most recent appraisal, the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.
The following table reflects the general range of collateral discounts for impaired loans by segment.
Loan Segment: | Range of Percentages |
Commercial construction and land development | 10% - 40% |
Commercial real estate | 9% - 50% |
Residential construction | 9% - 30% |
Residential mortgage | 9% - 20% |
All other segments | 9% - 20% |
As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance than that noted above.
-28-
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents are equal to the fair value due to the liquid nature of the financial instruments.
Certificate of Deposits
These investments are valued at carrying amounts for fair value purposes.
Securities Available-for-Sale and Securities Held-to-Maturity
Fair values of investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held For Sale
The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Loans
The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for a 5% current liquidity and market discount assumption. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing.
FHLB Stock
The carrying amount of FHLB stock approximates fair value.
Deposits
The fair value of non-maturing deposits such as noninterest-bearing demand, money market, NOW, and savings accounts, are by definition, equal to the amount payable on demand. Fair value for maturing deposits such as CDs and IRAs are estimated using a discounted cash flow approach that applies current interest rates to expected maturities.
Borrowings, Subordinated Debentures, and Subordinated Promissory Notes
The fair value of borrowings, subordinated debentures, and subordinated promissory notes, is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximates fair value.
-29-
The following table presents information for financial assets and liabilities as of June 30, 2016 and December 31, 2015 (amounts in thousands).
June 30, 2016 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 34,591 | $ | 34,591 | $ | 34,591 | $ | — | $ | — | |||||||
Certificates of deposit | 21,805 | 21,805 | — | 21,805 | — | ||||||||||||
Securities available-for-sale | 64,608 | 64,608 | — | 63,858 | 750 | ||||||||||||
Securities held-to-maturity | 58,462 | 59,934 | — | 59,934 | — | ||||||||||||
Loans held for sale | 681 | 681 | — | 681 | — | ||||||||||||
Loans, net | 478,046 | 440,716 | — | — | 440,716 | ||||||||||||
FHLB stock | 3,596 | 3,596 | — | 3,596 | — | ||||||||||||
Accrued interest receivable | 1,526 | 1,526 | — | 1,526 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 551,775 | $ | 551,946 | $ | — | $ | 551,946 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 23,872 | 23,872 | — | — | 23,872 | ||||||||||||
Borrowings | 70,000 | 71,977 | — | 71,977 | — | ||||||||||||
Accrued interest payable | 401 | 401 | — | 401 | — |
December 31, 2015 | |||||||||||||||||
Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | $ | 26,755 | $ | 26,755 | $ | 26,755 | $ | — | $ | — | |||||||
Certificates of deposit | 23,520 | 23,520 | — | 23,520 | — | ||||||||||||
Securities available-for-sale | 70,281 | 70,281 | — | 69,781 | 500 | ||||||||||||
Securities held-to-maturity | 65,354 | 65,633 | — | 65,633 | — | ||||||||||||
Loans held for sale | 1,145 | 1,145 | — | 1,145 | — | ||||||||||||
Loans, net | 448,697 | 423,285 | — | — | 423,285 | ||||||||||||
FHLB stock | 3,288 | 3,288 | — | 3,288 | — | ||||||||||||
Accrued interest receivable | 1,594 | 1,594 | — | 1,594 | — | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | $ | 542,334 | $ | 541,818 | $ | — | $ | 541,818 | $ | — | |||||||
Subordinated debentures and subordinated promissory notes | 23,872 | 23,872 | — | — | 23,872 | ||||||||||||
Borrowings | 60,000 | 61,709 | — | 61,709 | — | ||||||||||||
Accrued interest payable | 437 | 437 | — | 437 | — |
-30-
NOTE H - REGULATORY RESTRICTIONS
North Carolina banking law requires that the Bank may not pay a dividend that would reduce its capital below the applicable required capital. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the Bank. Although not currently limited by regulatory authorities, there were no dividends paid to the Company by the Bank during the six months ended June 30, 2016.
Current federal regulations require that the Company and the Bank maintain a minimum ratio of total capital to risk weighted assets of 8.0%, with at least 6.0% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Company and the Bank must maintain a common equity Tier 1 capital ratio of 4.5% and a leverage ratio of 4.0%. For the Bank to be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. There is no such category for well capitalized at the Company level. At June 30, 2016, the Bank was classified as well capitalized for regulatory capital purposes.
Capital ratios for the Bank and the Company are presented in the table below.
Actual Ratio | Minimum For Capital Adequacy Purposes | Minimum to be Well Capitalized under Prompt Corrective Action Provisions | |||||||||
6/30/2016 | 12/31/2015 | Ratio | Ratio | ||||||||
Bank | |||||||||||
Total Capital (to Risk Weighted Assets) | 15.6 | % | 15.6 | % | 8.0 | % | 10.0 | % | |||
Tier I Capital (to Risk Weighted Assets) | 14.4 | % | 14.4 | % | 6.0 | % | 8.0 | % | |||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 14.4 | % | 14.4 | % | 4.5 | % | 6.5 | % | |||
Tier I Capital (to Average Assets) | 10.6 | % | 10.2 | % | 4.0 | % | 5.0 | % | |||
Company | |||||||||||
Total Capital (to Risk Weighted Assets) | 15.9 | % | 16.0 | % | 8.0 | % | N/A | ||||
Tier I Capital (to Risk Weighted Assets) | 12.4 | % | 12.4 | % | 6.0 | % | N/A | ||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 10.9 | % | 11.3 | % | 4.5 | % | N/A | ||||
Tier I Capital (to Average Assets) | 9.2 | % | 8.8 | % | 4.0 | % | N/A |
In July 2015, the Bank entered into a Written Agreement (the "2015 Written Agreement") with the FRB replacing the Written Agreement the Company and the Bank entered into with the FRB and the North Carolina Office of the Commissioner of Banks in 2011. Under the terms of the 2015 Written Agreement, the Bank submitted and implemented the following plans:
•a written plan to assure ongoing board oversight of the Bank's management and operations;
•a written program for the review of new products, services, or business lines; and
• | an enhanced written program for conducting appropriate levels of customer due diligence by the Bank. |
In addition, the Bank agreed that it will within 30 days after the end of each calendar quarter following the date of the 2015 Written Agreement, submit to FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2015 Written Agreement and the results thereof.
-31-
NOTE I - RESTRICTED STOCK
A summary of the activity of the Company's restricted stock awards for the six months ended June 30, 2016 is presented below:
Restricted Stock | Weighted Average Grant-Date Fair Value | |||||
Unvested at December 31, 2015: | 1,363,175 | $ | 1.64 | |||
Granted | 210,000 | 1.90 | ||||
Vested | (149,325 | ) | 1.53 | |||
Forfeited | (85,000 | ) | 1.66 | |||
Unvested at June 30, 2016: | 1,338,850 | $ | 1.69 |
The Company measures the fair value of restricted shares based on the price of the Company's common stock on the grant date, and compensation expense is recorded over the vesting period. The related compensation expense recognized for restricted stock awards for the six months ended June 30, 2016 and 2015 was $150,000 and $270,000, respectively. At June 30, 2016, the Company estimates there was $2.0 million of total unrecognized compensation cost related to unvested restricted stock granted under the plan. That cost is expected to be recognized over the next three years. The grant-date fair value of restricted stock grants vested during the six months ended June 30, 2016 was $1.53.
-32-
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the financial condition and results of operations of Four Oaks Fincorp, Inc. (the “Company”) and its subsidiaries and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report. Unless the context otherwise indicates, references in this report to "we," "us" and "our" refer to the Company and its subsidiaries.
Comparison of Financial Condition at June 30, 2016 and December 31, 2015
The Company’s total assets increased $21.6 million or 3.1% from $691.4 million at December 31, 2015 to $713.0 million at June 30, 2016. Cash, cash equivalents, and investments were $183.1 million at June 30, 2016 compared to $189.2 million at December 31, 2015, a decrease of $6.1 million or 3.2%. Strong loan demand resulted in balance growth of $28.8 million or 6.3% as outstanding gross loans grew to $487.1 million at June 30, 2016 compared to $458.3 million at December 31, 2015.
Total liabilities were $649.1 million at June 30, 2016, an increase of $18.1 million or 2.9%, from $631.0 million at December 31, 2015. Total deposits increased $9.5 million or 1.7% during the six month period ended June 30, 2016, from $542.3 million at December 31, 2015, to $551.8 million at June 30, 2016. Long-term borrowings were $70.0 million at June 30, 2016 compared to $60.0 million at December 31, 2015, an increase of $10.0 million or 16.7%. Total shareholders’ equity increased $3.5 million or 5.7%, from $60.4 million at December 31, 2015, to $63.9 million at June 30, 2016.
Results of Operations for the Three Months Ended June 30, 2016 and 2015
Net Income. Net income for the three months ended June 30, 2016 was $872,000, or $0.03 net income per basic and diluted share, as compared to net income of $17.5 million, or $0.54 net income per basic and diluted share, for the three months ended June 30, 2015. The year-over-year $16.6 million decrease in net income is due to the partial reversal of the valuation allowance against deferred tax assets that resulted in a $16.6 million income tax benefit in the second quarter of 2015. For the quarter ended June 30, 2016, the Company reported a provision for income taxes totaling $498,000. Pre-tax net income for the three months ended June 30, 2016 was $1.4 million compared to $914,000 for the same period in 2015, an increase of $456,000 primarily due to increased net interest income as a result of declining interest expense.
Net Interest Income. Net interest income is the difference between interest income, principally from loan and investment securities, and interest expense, largely on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread, and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.
Net interest income increased to $6.1 million for the three months ended June 30, 2016 compared to $5.6 million as of this same period in 2015, an increase of $460,000. Interest income remained flat at $7.3 million for the second quarter of 2016 and 2015. Average interest earning assets declined $33.0 million when comparing the period ended June 30, 2016 to this same period in 2015 as the growth in loans was offset by reductions in the investment portfolio and low yield interest earning deposits in banks. Interest expense for the period ended June 30, 2016 improved $445,000 as a result of the balance sheet strategies executed in 2015 which entailed reducing high cost Federal Home Loan Bank ("FHLB") borrowings and refinancing the Company's subordinated debt. Interest expense totaled $1.2 million for the three months ended June 30, 2016 compared to $1.7 million for the same period in 2015. Net interest margin improved 46 basis points to 3.75% for the quarter ended June 30, 2016, as compared to 3.29% for the same period ended June 30, 2015.
Provision for Loan Losses. The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management’s consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. During the three months ended June 30, 2016 and June 30, 2015, no provision for the allowance for loan losses was recognized in earnings.
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Non-Interest Income. Non-interest income decreased $115,000 to $1.6 million for the quarter ended June 30, 2016, as compared to $1.7 million for the quarter ended June 30, 2015. This decrease was driven by the absence of $164,000 in Automated Clearing House ("ACH") third party payment processors indemnification income as the Company completed the exit from this line of business in 2015. Additionally contributing to the decrease in non-interest income was premium income on the sale of government guaranteed loans decreasing $120,000 to $54,000 for the three months ended June 30, 2016 compared to $174,000 as of this same period in 2015. Offsetting these declines was an increase in gains on the sale of investment securities available for sale totaling $266,000 for the three months ended June 30, 2016, as compared to the same period in 2015.
Non-Interest Expense. Non-interest expense decreased $111,000 to $6.3 million for the quarter ended June 30, 2016, as compared to $6.4 million for the quarter ended June 30, 2015. This decrease was largely attributable to declines in foreclosed asset related expenses of $100,000 and FDIC insurance premiums of $82,000, offset by an increase of $71,000 in professional and consulting fees. The declines in both categories are largely related to continued improvement in asset quality measures and overall reductions in the number and amount of foreclosed assets.
Income Taxes. The Company recorded a provision for income taxes totaling $498,000 for the quarter ended June 30, 2016, as compared to an income tax benefit of $16.6 million for the same period in 2015, which resulted from the partial reversal of the valuation allowance against the Company's deferred tax assets executed in the second quarter of 2015.
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Results of Operations for the Six Months Ended June 30, 2016 and 2015
Net Income. Net income for the six months ended June 30, 2016 was $1.7 million, or $0.05 net income per basic and diluted share, as compared to net income of $18.5 million, or $0.58 net income per basic and $0.57 per diluted share, for the six months ended June 30, 2015. The year-over-year $16.8 million decrease in net income is primarily due to the partial reversal of the valuation allowance against deferred tax assets that resulted in a $16.6 million income tax benefit in the second quarter of 2015 compared to a provision for income taxes totaling $961,000 for the same period in 2016. Pre-tax net income for the six months ended June 30, 2016 was $2.7 million compared to $1.9 million for the same period in 2015, an increase of $772,000. Improvements in net interest income, coupled with declining non-interest expenses were primary contributors to the increase, which was partially offset by declines in non-interest income for the six month period.
Net Interest Income. Net interest income for the six months ended June 30, 2016 was $12.0 million, as compared to $11.4 million for the six months ended June 30, 2015, an increase of $609,000. Cost of funds continues to decline as interest expense for the period ended June 30, 2016 improved $939,000, which was primarily a result of the balance sheet strategies executed in 2015 that entailed reducing high cost FHLB borrowings and refinancing the Company's subordinated debt. This improvement in funding costs was partially offset by declines in interest income on loans for the six month period as there was limited recovery of lost interest on nonaccrual loans compared to this same period in 2015. Net interest margin improved 56 basis points to 3.72% for the six month period ended June 30, 2016, as compared to 3.16% for the same period ended June 30, 2015.
Provision for Loan Losses. The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management's consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. During the six months ended June 30, 2016 and June 30, 2015, no provision for the allowance for loan losses was recognized in earnings.
Non-Interest Income. Non-interest income for the six months ended June 30, 2016 was $2.7 million, as compared to $3.2 million for the six months ended June 30, 2015, a decrease of $476,000. The decline in non-interest income stems primarily from the absence of ACH third party payment processor indemnification income, as the Company exited this business line in 2015, coupled with reduced premium income on the sale of government guaranteed loans. During the six months ended June 30, 2016, non-interest income included loan premium and indemnification income of $56,000 and $0, respectively, compared to $213,000 and $343,000 for the same period in 2015. Offsetting these declines was a $210,000 increased gains on the sale of investment securities available for sale for the six months ended June 30, 2016, as compared to the same period in 2015.
Non-Interest Expenses. Non-interest expense for the six months ended June 30, 2016 was $12.0 million, as compared to $12.7 million for the six months ended June 30, 2015, a decrease of $639,000 as declines were seen in various categories as the Company continues to review ways to increase efficiency and reduce the overall expense base. Continued improvement in asset quality contributed to declines in multiple categories as did the absence of technology conversion related expenses that were present during 2015.
Income Taxes. As noted above, the Company began recording income tax expense during the first quarter of 2016 and reported a provision for income taxes totaling $961,000 for the six months ended June 30, 2016, as compared to an income tax benefit of $16.6 million for the same period in 2015, which resulted from the partial reversal of the valuation allowance against the Company's deferred tax assets executed in the second quarter of 2015.
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Asset Quality
Asset quality continued to improve during the quarter ended June 30, 2016. The Company completed its asset resolution plan in 2015 and management believes problem assets are at a manageable level in which resolution can occur in the normal course of business. Classified assets as of June 30, 2016, which include loans risk graded substandard or lower and foreclosed assets, totaled $7.9 million compared to $10.1 million at December 31, 2015, a decline of $2.2 million. The classified assets to capital ratio totaled 9.5% as of June 30, 2016 compared to 12.5% at year end 2015.
Nonperforming Assets
Nonperforming assets are comprised of nonperforming loans, accruing loans which are past due 90 days or more, repossessed assets, and other real estate owned ("foreclosed assets"). As of June 30, 2016, nonperforming assets declined $1.8 million or 21.6% when compared to December 31, 2015.
The following table describes our nonperforming asset portfolio by loan class as of June 30, 2016 and December 31, 2015 (amounts in thousands, except ratios).
June 30, 2016 | December 31, 2015 | ||||||
Nonaccrual loans: | |||||||
Commercial and industrial | $ | 27 | $ | 119 | |||
Commercial construction and land development | 1,173 | 1,626 | |||||
Commercial real estate | 1,332 | 2,929 | |||||
Residential construction | 287 | 721 | |||||
Residential mortgage | 1,226 | 1,203 | |||||
Total nonaccrual loans | 4,045 | 6,598 | |||||
Past due 90 days or more and still accruing: | |||||||
Consumer credit cards | 27 | 29 | |||||
Business credit cards | 12 | 36 | |||||
Total past due 90 days and still accruing | 39 | 65 | |||||
Foreclosed assets: | |||||||
Commercial and industrial | 3 | 3 | |||||
Commercial construction and land development | 1,486 | 1,493 | |||||
Commercial real estate | 945 | 82 | |||||
Residential construction | — | 69 | |||||
Residential mortgage | 85 | 113 | |||||
Total foreclosed assets | 2,519 | 1,760 | |||||
Total nonperforming assets | $ | 6,603 | $ | 8,423 | |||
Nonperforming loans to gross loans | 0.8 | % | 1.4 | % | |||
Nonperforming assets to total assets | 0.9 | % | 1.2 | % | |||
Allowance coverage of nonperforming loans | 222.1 | % | 144.3 | % |
Nonaccrual Loans
Loans are moved to nonaccrual status and recognition of interest income ceases when it is probable that full collectibility of principal and interest in accordance with the terms of the loan agreement may not occur. Nonaccrual loans as a percentage of gross loans decreased to 0.8% as of June 30, 2016 compared to 1.4% as of December 31, 2015. At June 30, 2016, there were 29 nonaccrual loans totaling $4.0 million compared to 42 loans totaling $6.6 million at December 31, 2015. The amount of interest income for the six months ended June 30, 2016 that would have been reported on loans in nonaccrual status as of June 30, 2016 totaled $116,000.
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Foreclosed Assets
At June 30, 2016, there were 35 foreclosed properties valued at a total of $2.5 million compared to 35 foreclosed properties valued at $1.8 million as of December 31, 2015. The primary driver of the increase in value of foreclosed properties was due to the addition of one property in the amount of $863,000 in the first quarter of 2016.
Troubled Debt Restructurings
Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.
The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered and the loan is considered performing. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual and nonperforming until such time as continued performance has been demonstrated, which is typically a period of at least six consecutive payments.
As of June 30, 2016, there were four restructured loans in accrual status compared to eight as of December 31, 2015. Regardless of whether any individual TDR is performing, all TDRs are considered to be impaired and are evaluated as such in the allowance for loan losses calculation. As of June 30, 2016, the recorded investment in performing TDRs and their related allowance for loan losses totaled $700,000 and $0, respectively. Outstanding nonperforming TDRs totaled $756,000 with $0 in specific reserves as of June 30, 2016. The amount of interest recognized for performing and nonperforming TDRs during the first six months of 2016 were approximately $25,000 and $0, respectively.
The following table presents performing and nonperforming TDRs at June 30, 2016 and December 31, 2015 (amounts in thousands).
Performing TDRs: | June 30, 2016 | December 31, 2015 | |||||
Commercial construction and land development | $ | — | $ | 1,059 | |||
Commercial real estate | 481 | 1,028 | |||||
Residential mortgage | 219 | 226 | |||||
Total performing TDRs | $ | 700 | $ | 2,313 |
Nonperforming TDRs: | June 30, 2016 | December 31, 2015 | |||||
Commercial construction and land development | $ | 393 | $ | 557 | |||
Commercial real estate | 363 | 574 | |||||
Total nonperforming TDRs | $ | 756 | $ | 1,131 |
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Allowance for Loan Losses and Summary of Loss Experience
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed. Management evaluates the adequacy of our allowance for loan losses on at least a quarterly basis. The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations. Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
The following table summarizes the Company's loan loss experience by class for the three and six months ended June 30, 2016 and 2015 (amounts in thousands, except ratios).
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Balance at beginning of period | $ | 9,084 | $ | 9,790 | $ | 9,616 | $ | 9,377 | |||||||
Charge-offs: | |||||||||||||||
Commercial and industrial | 35 | 38 | 59 | 47 | |||||||||||
Commercial construction and land development | 97 | 19 | 97 | 19 | |||||||||||
Commercial real estate | — | 202 | 565 | 206 | |||||||||||
Residential mortgage | — | 17 | — | 165 | |||||||||||
Consumer | 29 | 44 | 70 | 98 | |||||||||||
Other | — | 42 | — | 42 | |||||||||||
Total charge-offs | 161 | 362 | 791 | 577 | |||||||||||
Recoveries: | |||||||||||||||
Commercial and industrial | 22 | 94 | 49 | 140 | |||||||||||
Commercial construction and land development | 51 | 185 | 62 | 504 | |||||||||||
Commercial real estate | — | 6 | 2 | 190 | |||||||||||
Residential construction | — | — | 21 | — | |||||||||||
Residential mortgage | 11 | 77 | 21 | 123 | |||||||||||
Consumer | 61 | 21 | 87 | 53 | |||||||||||
Other | 1 | 1 | 2 | 2 | |||||||||||
Total recoveries | 146 | 384 | 244 | 1,012 | |||||||||||
Net (charge-offs) recoveries | (15 | ) | 22 | (547 | ) | 435 | |||||||||
Provision for loan losses | — | — | — | — | |||||||||||
Balance at end of period | $ | 9,069 | $ | 9,812 | $ | 9,069 | $ | 9,812 | |||||||
Ratio of net charge-offs to average gross loans | — | % | — | % | 0.12 | % | — | % |
The allowance for loan losses at June 30, 2016 was $9.1 million, which represents 1.9% of total loans held for investment compared to $9.8 million or 2.2% as of June 30, 2015. The decrease in amount and percentage to total loans is due to the net charge-offs for the quarter and loan growth of $28.8 million for the second quarter of 2016. For the six months ended June 30, 2016, charge-offs outpaced recoveries resulting in a net loan charge-off of $547,000 compared with net recoveries of $435,000 for the prior year period.
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The allowance for loan losses on individually reviewed impaired loans totaled $663,000 as of June 30, 2016, compared to $1.2 million as of December 31, 2015, a 46% decrease. The primary driver of the reduction is the absence of one relationship that was refinanced with additional collateral and removed from impaired status. The allowance for loan losses on the loans reviewed collectively remained constant at $8.4 million at June 30, 2016 and December 31, 2015.
Because of the nature of the Company’s primary markets and business, a significant portion of the loan portfolio is secured by commercial real estate, including residential and commercial acquisition, development, and construction properties. As of June 30, 2016, approximately 93% of the loan portfolio had real estate as a primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. Real estate values in many markets have improved. The Company continues to thoroughly review and monitor its commercial real estate concentration and the associated allowance and sets limits by sector and region based on this internal review.
The following table summarizes the Company’s allowance for loan losses by category and percent of loans within each category at June 30, 2016, and December 31, 2015 (amounts in thousands, except ratios).
June 30, 2016 | December 31, 2015 | ||||||||||||
Amount | % of loans in each category | Amount | % of loans in each category | ||||||||||
Commercial and industrial | $ | 182 | 5 | % | $ | 221 | 5 | % | |||||
Commercial construction and land development | 4,816 | 9 | % | 5,470 | 11 | % | |||||||
Commercial real estate | 2,492 | 49 | % | 2,268 | 46 | % | |||||||
Residential construction | 271 | 8 | % | 305 | 8 | % | |||||||
Residential mortgage | 1,147 | 27 | % | 1,191 | 28 | % | |||||||
Consumer | 101 | 2 | % | 113 | 2 | % | |||||||
Other | 60 | — | % | 48 | — | % | |||||||
Total | $ | 9,069 | 100 | % | $ | 9,616 | 100 | % |
Liquidity and Capital Resources
Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources. The term "liquidity" refers to our ability to generate adequate amounts of cash to meet our needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures our liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents (net of federal requirements to maintain reserves against deposit liabilities), investment securities eligible for pledging to secure borrowings, investments available-for-sale, loan repayments, loan sales, deposits and borrowings from the FHLB secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines. During the first six months of 2016, the Company's primary use of its excess liquidity was to fund growth in the loan portfolio.
The Company sold $11.5 million aggregate principal amount of subordinated promissory notes to certain accredited investors in December 2015. These notes are due on November 30, 2025 and the Company is obligated to pay interest at an annualized rate of 6.25% payable in quarterly installments commencing on March 1, 2016. The Company may prepay the notes at any time after November 30, 2020, subject to compliance with applicable law. The proceeds were used to refinance the Company's outstanding subordinated promissory notes issued in 2009.
Management believes that the Company’s liquidity sources are adequate to meet its operating needs for at least the next 12 months. Total shareholders’ equity was $63.9 million at June 30, 2016 and $60.4 million at December 31, 2015. Supplementing customer deposits as a source of funding, we have available lines of credit from various correspondent banks to purchase federal funds on a short-term basis of approximately $37.0 million that remain unused at June 30, 2016. As of June 30, 2016, the Bank has the credit capacity to borrow up to $142.3 million from the FHLB with $70.0 million outstanding.
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The Bank had total risk based capital of 15.6%, Tier 1 risk based capital of 14.4%, a leverage ratio of 10.6%, and common equity Tier 1 capital of 14.4% at June 30, 2016, as compared to 15.6%, 14.4%, 10.2%, and 14.4%, respectively, at December 31, 2015. The Company had total risk based capital of 15.9%, Tier 1 risk based capital of 12.4%, a leverage ratio of 9.2%, and common equity Tier 1 capital of 10.9% at June 30, 2016, as compared to 16.0%, 12.4%, 8.8%, and 11.3%, respectively, at December 31, 2015.
The Company has not paid any cash dividends on its common stock since it suspended dividends in the fourth quarter of 2010. As a bank holding company, the Company’s ability to declare and pay dividends depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. A decision to pay any dividend in the future would be determined based on a number of factors including capital position and capital adequacy, ongoing operations and profitability, the risk profile of the institution and general market conditions, among other things.
Regulatory Update
In July 2015, the Bank entered into a Written Agreement (the "2015 Written Agreement") with the Federal Reserve Bank of Richmond (the "FRB") replacing the Written Agreement the Company and the Bank entered into with the FRB and the North Carolina Office of the Commissioner of Banks in 2011. Under the terms of the 2015 Written Agreement, the Bank submitted and implemented the following plans:
•a written plan to assure ongoing board oversight of the Bank's management and operations;
•a written program for the review of new products, services, or business lines; and
• | an enhanced written program for conducting appropriate levels of customer due diligence by the Bank. |
In addition, the Bank agreed that it will within 30 days after the end of each calendar quarter following the date of the 2015 Written Agreement, submit to FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2015 Written Agreement and the results thereof.
The Bank continues to make progress in improving each of these areas and believes that it will be able to demonstrate full compliance with this agreement in the future.
Forward-Looking Information
Information set forth in this Quarterly Report on Form 10-Q, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology, such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereof or comparable terminology.
We caution that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including, without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, our ability to comply with the 2015 Written Agreement, the failure of assumptions underlying the establishment of the allowance for possible loan losses, our ability to maintain an effective internal control environment, the low trading volume of our common stock and the risks discussed in Part II, Item 1A. Risk Factors, and other considerations described in connection with specific forward-looking statements and other cautionary elements specified in the Company's periodic filings with the Commission, including without limitation, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
Any forward-looking statements contained in this Quarterly Report on Form 10-Q are as of the date hereof and we undertake no duty to update them if our view changes later, except as required by law. These forward-looking statements should not be relied upon as representing our view as of any date subsequent to the date hereof.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 4 – CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the SEC's rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that the Company believes have materially affected or are likely to materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
There have been no material developments in the description of material legal proceedings as reported in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2015, as updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.
Additionally, we are party to certain other legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.
ITEM 1A - RISK FACTORS
There have been no material changes in the Company’s risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
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ITEM 6 - EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q.
Exhibit No. | Description |
10.1 | Executive Employment Agreement with Lawrence F. DesPrés (management contract or compensatory plan, contract or arrangement) |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC. | |||
Date: | August 11, 2016 | By: | /s/ David H. Rupp |
David H. Rupp | |||
President and | |||
Chief Executive Officer | |||
Date: | August 11, 2016 | By: | /s/ Deanna W. Hart |
Deanna W. Hart | |||
Executive Vice President and | |||
Chief Financial Officer and | |||
Principal Accounting Officer |
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Exhibit Index
Exhibit No. | Description |
10.1 | Executive Employment Agreement with Lawrence F. DesPrés (management contract or compensatory plan, contract or arrangement) |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following materials from Four Oaks Fincorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statement of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
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