Our opinion on Four Oaks Bank Stock.

About two years ago we posted a piece about Four Oaks Bank holding company.  We noted in the piece we had NO concerns about the safety of customer's money in the bank and that no one needed to worry if they had savings, checking, loans, or any kind of business with FOFN.  Truth is some people do not understand the difference in a bank and a bank holding company.  The bank and it's deposits and customer's business are insured by the FDIC, a bank holding company is the for profit private entity that either makes profits or loses money in operating the bank. So with this past month's huge share sale we believe it is time to revisit that post. 

FOFN is a community bank that as part of normal business activity lent out funds to customers to purchase real estate before the downturn of 2008 and 2009 that got the bank holding company in trouble due to non payment of mortgages.  FOFN had to foreclose on a lot of that real estate and those foreclosures with the depressed real estate prices have taken a toll on the capital of bank holding company and the profits of the bank. The bank also had to settle with the feds regarding some lending practices which cost the bank some additional capital. 

FOFN recently held a large share offering with current shareholders getting the opportunity to buy stock at $1 per share.   One investor, who we will call an angel investor, bought a huge portion of the offering and now owns just under 50% of the outstanding shares.  For all intents and purposes the large investor has control of the bank holding company. 

What is the future of FOFN and where do we believe the share price will go now?  We believe FOFN holding company will survive on it's own due to the recent share offering.   FOFN at it's height was making about $1 per share on just under a 9 million share float and selling in a high twenties price, which was a rich 20 plus PE multiple.  That stock price was earned in a market where small banks stock sold at a premium due to possible buyout value and a booming real estate market which seemed to see real estate values go up forever.  Neither of those market situations are what is happening now and will not in the foreseeable future. 

Let's assume the bank can get back to earning $7 million per year, which is about what it was earning before the financial crisis.  Let's assume the angel investor maybe changes some management and they clean out what is left of the non performing assets.  If so we would expect a premium value in the stock at somewhere near $3.20 per share , or about 15 PE.  If the stock is valued at a normal banking PE of around 12 one can expect a stock price of around $2.50 per share.  Our assumptions are 21 cents per share earnings or $7 million annual earnings divided by now much larger 33 million share float.  Of course if one is holding shares at a $1 cost, having the shares selling at a $3 value is a big gain.  We would expect with large share holdings of a thinly traded stock that selling out of the shares will push share prices down a good bit.  Therefore shareholders could end up holding shares for longer than desired due to the inability to sell out large positions at desired prices. 

If we held the shares we would be gone in the low $2 per share if we bought in at $1 per share.  We were asked by several people if we would have bought the shares at $1.  The answer is no on share purchase, but not because we thought there was not money to be made, but rather our assets would make more elsewhere.  There is not much risk in the shares going forward as we see little downside risk, but frankly the slow rabbits have already been caught in FOFN stock with the current price trading around $1.70.  As for our opinion simply put would we had rather have been in FOFN the last two years or say Facebook, or maybe Apple stock?  Would we rather be in Facebook or Google the next three years instead of FOFN?  The answer for us is easy.