US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
for the Quarterly Period Ended March 31, 1998
Commission File Number 0-22787
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)
6144 U. S. 301 South
Four Oaks, N. C. 27524
(Address of principal executive offices)
Registrant Telephone Number, including area code 919-963-2177
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: _X_ Yes ___ No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Common Stock, 887,482
Par value $1.00 per share (Number of shares outstanding
(Title of Class) as of March 31, 1998)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
<TABLE>
<CAPTION>
(All amounts in thousands) March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,980 6,454
Interest bearing bank balances 5,212 2,114
-------- --------
Total cash and cash equivalents 10,192 8,568
Investment securities, available for sale 32,512 35,082
Loans, net 147,414 138,099
Accrued interest receivable 2,227 2,007
Bank premises and equipment, net 5,243 5,092
Other real estate owned 193 193
Intangible assets 165 169
Prepaid expenses and other assets 852 861
-------- --------
Total assets $198,798 190,071
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 26,715 24,761
NOW accounts 13,798 15,132
Savings 17,728 17,252
Time $100,000 and over 40,375 37,833
Other time 77,331 73,010
-------- --------
Total deposits 175,947 167,988
Accrued interest payable 1,745 1,914
Other borrowed money 3,000 3,000
Other liabilities 498 302
-------- --------
Total liabilities 181,190 173,204
-------- --------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized,
887,482 and 875,648 issued and outstanding at March 31, 1998
and December 31, 1997 respectively 887 876
Surplus 5,851 5,602
Retained earnings 10,703 10,249
Accumulated other comprehensive income 167 140
-------- --------
Total shareholders' equity 17,608 16,867
-------- --------
Total liabilities and shareholders' equity $198,798 190,071
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
(All amounts in thousands, except per share data) For the three months ended:
March 31, March 31,
1998 1997
------ ------
<S> <C> <C>
Interest income:
Interest and fees on loans $3,458 2,755
Interest on investment securities:
US Government and agencies 475 430
Municipalities 60 77
Other investment securities 21 20
Interest on overnight investments 30 9
------ ------
Total interest income 4,044 3,291
------ ------
Interest expense:
Interest on deposits 1,899 1,536
Interest on borrowed money 48 30
------ ------
Total interest expense 1,947 1,566
------ ------
Net interest income 2,097 1,725
Provision for loan losses 193 63
------ ------
Net interest income after provision for loan losses 1,904 1,662
------ ------
Other income:
Service charges 290 187
Credit life commissions 33 21
Other operating income 86 92
Securities gains (losses) -- (2)
------ ------
Total noninterest income 409 298
------ ------
Other expenses:
Salaries 640 504
Employee benefits 152 88
Occupancy expenses 56 59
Equipment expenses 85 79
Other operating expenses 531 517
------ ------
Total noninterest expense 1,464 1,247
------ ------
Income before income taxes 849 713
Income taxes 263 206
------ ------
Net income $ 586 507
====== ======
Net income per common share $ 0.67 0.61
====== ======
Net income per common share, assuming dilution $ 0.66 0.60
====== ======
Cash dividend paid per share $ 0.15 0.14
====== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
For the three
months ended
March 31, March 31,
(All amounts in thousands) 1998 1997
-------- --------
Operating activities
Net income $ 586 507
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 193 63
Provision for depreciation 78 71
(Gain) loss on sale of securities -- 2
(Gain) loss on sale of repossessed\foreclosed assets -- 21
Write off of loans, net of recoveries 38 17
(Increase) Decrease in prepaid & other assets (52) (1)
(Increase) Decrease in interest receivable (220) 10
Increase (Decrease) in other liabilities 196 (89)
Increase (Decrease) in interest payable (169) (68)
Net amortization of bond premiums & discounts 1 1
-------- --------
Net cash provided from (used by) operating activities 651 534
-------- --------
Investing activities
Proceeds from sales of investment securities 6,713 5,276
Purchase of investment securities (4,130) (1,152)
Net increase in loans outstanding (9,470) (12,100)
Capital expenditures (229) (97)
Proceeds from sale of assets acquired in
settlement of loans -- 34
Acquisition of assets acquired in settlement of loans 2 (29)
-------- --------
Net cash used by investment activities (7,114) (8,068)
-------- --------
Financing activities
Net increase (decrease) in short-term borrowings -- 2,000
Net increase in deposit accounts 7,959 6,340
Proceeds from issuance of common stock 261 --
Cash dividends (133) (117)
-------- --------
Net cash provided by financing activities 8,087 8,223
-------- --------
Increase (Decrease) in cash and cash equivalents 1,624 689
Cash and cash equivalents at beginning of period 8,568 6,608
-------- --------
Cash and cash equivalents at end of period $ 10,192 7,297
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
FOUR OAKS FINCORP, INC.
Notes to Financial Statements
1. The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary Four Oaks Bank & Trust
Company. All significant intercompany items have been eliminated. The
significant accounting policies followed by the Company for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. The accompanying financial statements do not
purport to contain all the necessary financial disclosures that might otherwise
be necessary in the circumstances and should be read in conjunction with the
consolidated financial statements and notes thereto in the Company's annual
report for the year ended December 31, 1997.
2. The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" on December 31, 1997. SFAS No. 128 requires the
Company to change its method for computing, presenting and disclosing earnings
per share information. As required, all prior period data presented has been
restated to conform to the provisions of SFAS No. 128.
The following table provides a reconciliation of income available to common
shareholders and the average number of common shares outstanding for the three
months ended March 31, 1998 and 1997, respectively:
Three Months Ended
March 31, March 31,
1998 1997
-------- --------
Net Income (numerator) $586,000 $507,000
======== ========
Shares for Basic EPS (demoninator) 879,000 838,000
Dilutive effect of stock options 4,484 13,888
-------- --------
Adjusted shares for diluted EPS 883,484 851,888
======== ========
3. On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS 130 requires
the disclosure of an amount that represents total comprehensive income and the
components of comprehensive income in a financial statement. As required by SFAS
No. 130, prior year information has been modified to conform with the new
presentation.
Comprehensive income includes net income and all other changes to the
Company's equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other comprehensive
income relate to unrealized gains and losses on available for sale securities.
5
<PAGE>
The Company's total comprehensive income for the three month periods ended
March 31, 1998 and 1997 was $613,000 and $338,000, respectively. Information
concerning the Company's other comprehensive income for the three month periods
ended March 31, 1998 and 1997, respectively, is as follows (in thousands):
1998 1997
----- -----
Unrealized gains (losses) on available for sale securities $ 39 $(274)
Reclassification of gains recognized in net income -- --
Income tax expense (benefit) relating to unrealized gains
on available for sale securities (12) 105
----- -----
Other comprehensive income $ 27 $(169)
===== =====
4. On January 1, 1998, the Company adopted SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 has had no
material impact on the financial statements of the Company.
6
<PAGE>
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 the Company and should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
FINANCIAL CONDITION. From December 31, 1997 to March 31, 1998, interest bearing
bank balances and investment securities combined increased 1%. Funds generated
by the 5% increase in deposits were used to fund net loan increases of 7%. Our
loan volumes are increasing due to seasonal funding of agricultural loans as
well as growth in real estate, commercial, and consumer lending. Our local
economy remains healthy with unemployment rates low and construction of
residential and commercial properties continuing. Accrued interest receivable
has increased due to the increased volume of loans and the fact that the farm
loans presently being funded should pay both principal and interest in the fall
after harvest.
Other real estate owned remains unchanged from December 31, 1997. We presently
have two properties recorded at the adjusted loan value after reducing the value
for amounts previously recovered. The expected selling price is higher than the
recorded amount.
Total shareholder's equity increased 4%, due to net income, the increase in net
unrealized gain on securities as our securities portfolio repriced upward, and
the exercise of stock options for 9,310 shares.
RESULTS OF OPERATIONS. Net income increased 16% for the three months ended March
31, 1998, as compared to the same period in 1997. The increases result from
effectively managing the interest margin. The 26% increase in loan income is due
to loan growth and somewhat higher rates as fixed rate loans continue to reprice
upward upon maturity or pay out. Interest earned on our investments has
increased 9% due to higher portfolio yields. Interest expense, for the quarter
ended March 31, 1998, increased 24% over the quarter ended March 31, 1997,
primarily due to total deposit growth of 18%.
Other expenses increased 17% for the three months ended March 31, 1998, over the
same period in 1997. This increase is primarily due to increases in salaries and
operating costs resulting from more accounts and transactions as we grow. In
addition, the opening of our Benson office in July 1997 has added expenses which
were not present during the three month period ended March 31, 1997.
Our delinquency rate of 2.32% is favorable compared to historical trends. At
March 31, 1998, our nonperforming loans were $1,909,000 or 1.28% of total gross
loans as compared to $586,000 or 0.48% at March 31, 1997. Our reserve for loan
loss of $1,880,000 or 1.26% of total gross loans is considered adequate to cover
future credit losses in the present portfolio.
7
<PAGE>
YEAR 2000 COMPLIANCE. As the year 2000 approaches, an important business issue
has emerged regarding how existing application software programs and operating
systems can accommodate this date value. Many existing application software
products, including the Company's, were designed to accommodate a two-digit
year. For example, "98" is stored on the system and represents 1998 and "00"
represents 1900. The Bank primarily utilizes a third-party vendor for processing
its primary banking applications. In addition, the Bank also uses third-party
vendor application software for all ancillary computer applications. The
third-party vendor for the Company's banking applications is in the process of
modifying, upgrading or replacing its computer applications to ensure Year 2000
compliance. In addition, the Company has instituted a Year 2000 compliance
program whereby the Bank is reviewing the Year 2000 issues that may be faced by
its other third-party vendors. To assist in this effort, the Company has hired
the services of a consultant to review the Company's plan and assist it in
achieving Year 2000 compliance by December 31, 1998. Under such program, the
Company will examine the need for modifications or replacement of all non-Year
2000 compliant pieces of software. The Company does not currently expect that
the cost of its Year 2000 compliance program will be material to its financial
condition and expects that it will satisfy such compliance program without
material disruption of its operations. In the event that the Bank's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Bank's business, results of operations or financial condition could be adversely
affected.
FORWARD LOOKING INFORMATION. Information set forth in this Quarterly Report on
Form 10-Q, including under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which statements represent the Company's judgment concerning the future
and are subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of the forward looking
terminology, such as "may," "will," "expect," "anticipate," "estimate," or
"continue" or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's 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, the failure of
assumptions underlying the establishment of the allowance for possible loan
losses, the low trading volume of the Common Stock, other considerations
described in connection with specific forward looking statements and other
cautionary elements specified in documents incorporated by reference in this
Quarterly Report on Form 10-Q.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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: May 14, 1998 By: /s Ayden R. Lee, Jr.
--------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: May 14, 1998 By: /s Nancy S. Wise
----------------
Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
9
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule
10
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,980
<INT-BEARING-DEPOSITS> 5,212
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,513
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 149,294
<ALLOWANCE> 1,880
<TOTAL-ASSETS> 198,798
<DEPOSITS> 175,947
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,243
<LONG-TERM> 3,000
0
0
<COMMON> 887
<OTHER-SE> 16,134
<TOTAL-LIABILITIES-AND-EQUITY> 198,798
<INTEREST-LOAN> 3,458
<INTEREST-INVEST> 556
<INTEREST-OTHER> 30
<INTEREST-TOTAL> 4,044
<INTEREST-DEPOSIT> 1,899
<INTEREST-EXPENSE> 1,947
<INTEREST-INCOME-NET> 2,097
<LOAN-LOSSES> 193
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,464
<INCOME-PRETAX> 849
<INCOME-PRE-EXTRAORDINARY> 849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 586
<EPS-PRIMARY> .67
<EPS-DILUTED> .66
<YIELD-ACTUAL> 1.13
<LOANS-NON> 1,545
<LOANS-PAST> 364
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,725
<CHARGE-OFFS> 46
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,880
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,880
</TABLE>
