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 September 30, 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's 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, 1,342,003
- -------------------------- -----------------------------
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of September 30, 1998)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands) September 30, December 31,
<S> <C> <C>
1998 1997
---- ----
(Unaudited)
ASSETS
Cash and due from banks ........................................ $ 6,175 6,454
Interest bearing bank balances ................................. 4,447 2,114
-------- --------
Total cash and cash equivalents ................................ 10,622 8,568
Investment securities .......................................... 35,582 35,082
Loans, net ..................................................... 155,623 138,099
Accrued interest receivable .................................... 3,008 2,007
Bank premises and equipment, net ............................... 5,054 5,092
Other real estate owned ........................................ 1,201 193
Intangible assets .............................................. 158 169
Prepaid expenses and other assets .............................. 874 861
-------- --------
Total assets ................................................... $212,122 190,071
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing ............................... $ 29,966 24,761
NOW accounts ............................................... 15,070 15,132
Savings .................................................... 18,825 17,252
Time $100,000 and over ..................................... 45,024 37,833
Other time ................................................. 78,775 73,010
-------- --------
Total deposits ............................................. 187,660 167,988
Accrued interest payable ....................................... 2,070 1,914
Other borrowed money ........................................... 3,000 3,000
Other liabilities .............................................. 473 302
-------- --------
Total liabilities .............................................. 193,203 173,204
-------- --------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized,
1,342,003 and 1,313,472 issued and outstanding
at September 30, 1998 and December 31, 1997 respectively 1,342 1,313
Surplus ........................................................ 5,640 5,165
Retained earnings .............................................. 11,731 10,249
Net unrealized gain (loss) on marketable equity securities ..... 206 140
-------- --------
Total shareholders' equity ..................................... 18,919 16,867
-------- --------
Total liabilities and shareholders' equity ..................... $212,122 190,071
======== ========
</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 For the nine
months ended months ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans .......... $3,895 3,430 11,241 9,354
Interest on investment securities:
US Government and agencies ........ 466 412 1,432 1,269
Municipalities .................... 51 71 164 219
Other investment securities ....... 10 24 40 71
Interest on overnight investments ... 23 6 101 23
----- ----- ------ ------
Total interest income ..... 4,445 3,943 12,978 10,936
Interest expense:
Interest on deposits ................ 2,083 1,743 5,985 4,888
Interest on borrowed money .......... 51 120 142 259
----- ----- ------ ------
Total interest expense .... 2,134 1,863 6,127 5,147
----- ----- ------ ------
Net interest income ................... 2,311 2,080 6,851 5,789
Provision for loan losses ............. 311 126 776 388
----- ----- ------ ------
Net interest income after provision
for loan losses .................. 2,000 1,954 6,075 5,401
----- ----- ------ ------
Other income:
Service charges ..................... 291 204 650 573
Credit life commissions ............. 21 21 81 64
Other operating income .............. 104 81 329 261
Securities gains (losses) ........... 0 6 5 16
----- ----- ------ ------
Total noninterest income ...... 416 312 1,065 914
----- ----- ------ ------
Other expenses:
Salaries ............................ 683 598 1,995 1,706
Employee benefits ................... 84 109 347 300
Occupancy expenses .................. 62 63 184 175
Equipment expenses .................. 87 69 259 230
Other operating expenses ............ 538 524 1,545 1,462
----- ----- ------ ------
Total noninterest expense . 1,454 1,363 4,330 3,873
----- ----- ------ ------
Income before income taxes ............ 962 903 2,810 2,442
Income taxes .......................... 319 291 928 777
----- ----- ------ ------
Net income ............................ $ 643 612 1,882 1,665
====== ====== ====== ======
Net income per share .................. $ 0.48 0.48 1.42 1.31
====== ====== ====== ======
Net income per common share,
assuming dilution ................ $ 0.48 0.48 1.41 1.30
====== ====== ====== ======
Cash dividend paid per share .......... $ 0.10 0.09 0.30 0.27
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
For the nine months ended
September 30, September 30,
(All amounts in thousands) 1998 1997
---- ----
Operating activities
<S> <C> <C>
Net income ............................................. $ 1,882 1,665
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses ........................... 776 390
Provision for depreciation .......................... 246 212
(Gain) loss on sale of securities ................... (5) (16)
(Gain) loss on sale of repossessed\foreclosed assets 11 28
Write off of loans, net of recoveries ............... -- (85)
(Increase) Decrease in prepaid & other assets ....... (887) (376)
(Increase) Decrease in interest receivable .......... (1001) (545)
Increase (Decrease) in other liabilities ............ 184 43
Increase (Decrease) in interest payable ............. 156 174
Net amortization of bond premiums & discounts ....... 2 (5)
-------- --------
Net cash provided from (used by) operating activities 1,364 1,485
-------- --------
Investing activities
Proceeds from sales of investment securities ........ 14,298 13,534
Purchase of investment securities ................... (14,686) (8,660)
Net increase in loans outstanding ................... (18,590) (27,411)
Capital expenditures ................................ (208) (859)
Proceeds from sale of assets acquired in
settlement of loans ............................ 100 76
Acquisition of assets acquired in settlement of loans -- (66)
-------- --------
Net cash used by investment activities .............. (19,086) (23,386)
-------- --------
Financing activities
Net increase (decrease) in short-term borrowings .... -- 5,000
Net increase in deposit accounts .................... 19,672 20,712
Proceeds from issuance of common stock .............. 504 297
Cash dividends ...................................... (400) (359)
-------- --------
Net cash provided by financing activities ........... 19,776 25,650
-------- --------
Increase (Decrease) in cash and cash equivalents ....... 2,054 3,749
Cash and cash equivalents at beginning of period ....... 8,568 6,608
-------- --------
Cash and cash equivalents at end of period ............. $ 10,622 10,357
======== ========
</TABLE>
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 (the "Bank"). 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. Earnings Per Share.
The following table provides a reconciliation of income available to common
shareholders and the average number of common shares outstanding for the nine
months ended September 30, 1998 and 1997, respectively:
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Net Income (numerator) $ 1,882,000 $ 1,665,000
========== ==========
Shares for Basic EPS (denominator) 1,330,000 842,000
Dilutive effect of stock options 4,059 14,514
---------- ----------
Adjusted shares for diluted EPS 1,333,438 856,428
========== ==========
3. Comprehensive Income.
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.
The Company's total comprehensive income for the nine months ended September
30, 1998 and 1997 was $1,948,000 and $1,693,000, respectively. Information
concerning the Company's other comprehensive income for the nine months ended
September 30, 1998 and 1997, respectively, is as follows (in thousands):
1998 1997
---- ----
Unrealized gains (losses) on available for sale securities $ 109 $ 37
Reclassification of gains recognized in net income -- --
Income tax expense (benefit) relating to unrealized gains
on available for sale securities (43) (9)
----- ----
Other comprehensive income (loss) $ 66 $ 28
===== ====
5
<PAGE>
4. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on the Company's results of
operations or its financial position.
5. In October 1998, FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
(FAS 134). FAS 134 amends existing classification and accounting
treatment of mortgage-backed securities, retained after mortgage loans held of
sale as securitized for entities engaged in mortgage banking activities. These
securities previously were classified and accounted for as trading and now may
be classified as held-to-maturity or available-for-sale, also. FAS 134 is
effective for the first fiscal quarter beginning after December 15, 1998. FAS
134 is not expected to have a material effect on the Company's financial
statements.
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. For the nine months ended September 30, 1998, interest
bearing bank balances and investment securities combined increased 8%. These
funds along with funds generated by the 12% increase in deposits were used to
fund net loan increases of 13%. For the nine months ended September 30, 1998,
borrowings decreased by $2,000,000. The Company's 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 increased construction of residential and commercial
properties. Accrued interest receivable has increased due to the increased
volume of loans and the fact that the farm loans presently being funded are
expected to pay both principal and interest in the fall after harvest.
For the nine months ended September 30, 1998, other real estate owned increased
to $1,201,000 due to the foreclosure of three properties since December 31,
1997. The Company presently has four properties recorded at the lower of
adjusted loan value or expected selling price (i.e, September 30, 1998 fair
market value). The properties anticipated values equal or exceed the recorded
amount.
Total shareholder's equity increased 12%, primarily attributable to the increase
in retained earnings resulting from the Company's three for two split of its
common stock effected as a stock dividend to shareholders of record at the close
of business on July 6, 1998.
Results of Operations. Net income increased 13% and 5% for the nine months and
three months ended September 30, 1998, respectively, as compared to the same
periods in 1997. The increases resulted from the effective management of the
interest margin and increases in other income derived from new products and
services. The 20% and 15% increase in loan income for the nine months and three
months ended September 30, 1998, respectively, is due to loan growth. Interest
earned on investments has increased due to portfolio growth and higher portfolio
yields. Interest expense for the nine months and three months ended September
30, 1998, respectively, increased 19% and 15% over the same periods in 1997 due
to total deposit growth of 15%, for both periods.
Other expenses have increased 12% and 5% for the nine months and three months
ended September 30, 1998, respectively, over the same periods of 1997. This
increase is primarily due to higher salaries and operating costs resulting from
additional accounts and transactions as the Company continues to grow.
The Company's delinquency rate of 1.86% is favorable compared to historical
trends. At September 30, 1998, the Company's nonperforming loans were $1,315,000
or 0.83% of total gross loans. The reserve for loan loss of $1,990,000 or 1.27%
of total gross loans is considered adequate to cover future credit losses in the
present portfolio. The provision for loan losses of $776,000 for the nine months
ended September 30, 1998 increased 100% over the same period of 1997 due to
additions to the reserve to offset chargeoffs on three problem loans.
7
<PAGE>
Year 2000. 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 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 plan (the "Plan") whereby the
Bank is reviewing the Year 2000 issues that may be faced by the Bank and its
third-party vendors to ensure that the Bank's applications can properly process
dates leading up to and after January 1, 2000. To assist in this effort, the
Company has hired the services of a consultant to review the Plan and assist the
Company in achieving Year 2000 compliance for mission critical items by December
31, 1998. "Mission critical" items include, among other things, data processing
and item processing.
The Plan consists of the following 5 phases: (i) Awareness, which includes
customer and employee awareness of the Year 2000 problem and the establishment
of a Year 2000 committee comprised of senior management (Phase one is
substantially complete at this time); (ii) Assessment, which includes
identifying all systems (hardware and software) that could be affected by the
Year 2000 problem and testing them primarily by rolling dates forward to
December 31, 1999 and allowing the system to process the data (Phase two is
scheduled to be completed sometime during the fourth quarter of 1998); (iii)
Renovation, which includes upgrading or replacing non-compliant systems with
compliant hardware and software; (iv) Validation, which includes testing systems
(hardware and software) to verify compliance (for mission critical items this
Phase is scheduled to be completed by December 31, 1998); and (v)
Implementation, which includes having all systems throughout the Bank Year 2000
compliant by June 30, 1999.
The Company does not currently expect that the costs for ensuring that the
Bank's applications properly process dates leading up to and after January 1,
2000 will be material to its financial condition and expects that the process
will not result in a 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.
As a lending institution, the Bank is also exposed to potential risk if
borrowers suffer Year 2000-related difficulties and are unable to repay their
loans. The Bank is discussing the Year 2000 issue with borrowers as part of the
Assessment phase of the Plan and during the loan granting or renewal process. At
this time, the Bank is unable to determine what impact, if any, the Year 2000
problem will have on the loan payment performance of the Bank's borrowers. Thus
far, however, none of the Bank's borrowers have reported the expectation of a
material adverse impact on their ability to repay loans as a result of the Year
2000 problem.
The Bank is in the process of creating a contingency plan as part of the
Assessment phase. The contingency plan will cover all mission critical and
non-mission critical areas of the Bank's operations. The Bank estimates that the
contingency plan will be complete sometime during the fourth quarter of 1998.
8
<PAGE>
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.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings involving the
Company.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated July 21,
1998, to amend certain effective registration statements of the
Company to increase the number of shares registered thereunder to
include the additional shares resulting from the application of
the Company's three-for-two stock split to the registered shares
remaining unsold under such registration statements as of July
21, 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: November 12, 1998 By: /s/ Ayden R. Lee, Jr.
----------------- ----------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: November 12, 1998 By: /s/ Nancy S. Wise
----------------- ----------------------
Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,175
<INT-BEARING-DEPOSITS> 4,447
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,582
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 157,613
<ALLOWANCE> 1,990
<TOTAL-ASSETS> 212,122
<DEPOSITS> 187,660
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,543
<LONG-TERM> 3,000
0
0
<COMMON> 1,342
<OTHER-SE> 17,577
<TOTAL-LIABILITIES-AND-EQUITY> 212,122
<INTEREST-LOAN> 11,241
<INTEREST-INVEST> 1,636
<INTEREST-OTHER> 101
<INTEREST-TOTAL> 12,978
<INTEREST-DEPOSIT> 5,985
<INTEREST-EXPENSE> 6,127
<INTEREST-INCOME-NET> 6,851
<LOAN-LOSSES> 776
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 4,335
<INCOME-PRETAX> 2,810
<INCOME-PRE-EXTRAORDINARY> 2,810
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,882
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 2.59
<LOANS-NON> 634
<LOANS-PAST> 681
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,725
<CHARGE-OFFS> 559
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 1,990
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,990
</TABLE>
