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 June 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 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, 891,617
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of June 30, 1998)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands) June 30, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ............................ $ 6,232 6,454
Interest bearing bank balances ..................... 946 2,114
-------- --------
Total cash and cash equivalents .................... 7,178 8,568
Investment securities, available for sale .......... 34,940 35,082
Loans, net ......................................... 154,579 138,099
Accrued interest receivable ........................ 2,845 2,007
Bank premises and equipment, net ................... 5,122 5,092
Other real estate owned ............................ 1,071 193
Intangible assets .................................. 162 169
Prepaid expenses and other assets .................. 916 861
-------- --------
Total assets ....................................... 206,813 190,071
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing ................... $ 28,232 24,761
NOW accounts ................................... 14,156 15,132
Savings ........................................ 17,578 17,252
Time $100,000 and over ......................... 43,564 37,833
Other time ..................................... 79,450 73,010
-------- --------
Total deposits ................................. 182,980 167,988
Accrued interest payable ........................... 2,043 1,914
Other borrowed money ............................... 3,000 3,000
Other liabilities .................................. 540 302
-------- --------
Total liabilities .................................. 188,563 173,204
======== ========
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares
authorized, 891,617 and 875,648 issued and
outstanding at June 30, 1998 and
December 31, 1997 respectively .................. 892 876
Surplus ............................................ 5,982 5,602
Retained earnings .................................. 11,223 10,249
Accumulated other comprehensive income ............. 153 140
-------- --------
Total shareholders' equity ......................... 18,250 16,867
-------- --------
Total liabilities and shareholders' equity ......... $206,813 190,071
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
(All amounts in thousands, except per share data) For the three For the six
months ended months ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ........................................... $3,756 3,131 7,214 5,886
Interest on investment securities:
US Government and agencies ......................................... 491 427 966 857
Municipalities ..................................................... 53 71 113 148
Other investment securities ........................................ 8 27 29 47
Interest on overnight investments .................................... 48 8 78 17
------ ------ ------ ------
Total interest income ...................................... 4,356 3,664 8,400 6,955
Interest expense:
Interest on deposits ................................................. 2,003 1,609 3,902 3,145
Interest on borrowed money ........................................... 43 109 91 139
------ ------ ------ ------
Total interest expense ..................................... 2,046 1,718 3,993 3,284
------ ------ ------ ------
Net interest income .................................................... 2,310 1,946 4,407 3,671
Provision for loan losses .............................................. 272 199 465 262
------ ------ ------ ------
Net interest income after provision
for loan losses ................................................. 2,038 1,747 3,942 3,409
------ ------ ------ ------
Other income:
Service charges ...................................................... 295 249 585 436
Credit life commissions .............................................. 27 22 60 43
Other operating income ............................................... 130 88 216 180
Securities gains (losses) ............................................ 5 12 5 10
------ ------ ------ ------
Total noninterest income .................................... 457 371 866 669
------ ------ ------ ------
Other expenses:
Salaries ............................................................. 661 590 1,301 1,098
Employee benefits .................................................... 122 118 274 202
Occupancy expenses ................................................... 65 53 121 112
Equipment expenses ................................................... 87 82 172 161
Other operating expenses ............................................. 560 449 1,091 966
------ ------ ------ ------
Total noninterest expense .................................. 1,495 1,292 2,959 2,539
------ ------ ------ ------
Income before income taxes ............................................. 1,000 826 1,849 1,539
Income taxes ........................................................... 346 280 609 486
------ ------ ------ ------
Net income ............................................................. $ 654 546 1,240 1,053
====== ====== ====== ======
Net income per common share ............................................ $ 0.73 0.65 1.40 1.25
====== ====== ====== ======
Net income per common share,
assuming dilution ................................................ $ 0.73 0.65 1.40 1.23
====== ====== ====== ======
Cash dividend paid per share ........................................... 0.15 0.14 0.30 0.28
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
<S> <C> <C>
For the six months ended
June 30, June 30,
(All amounts in thousands) 1998 1997
---- ----
Operating activities
Net income ............................................. $ 1,240 1,053
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses ........................... 465 262
Provision for depreciation .......................... 162 142
(Gain) loss on sale of securities ................... (5) (10)
(Gain) loss on sale of repossessed/foreclosed assets 5 29
Write off of loans, net of recoveries ............... (230) (42)
Gain on sale of fixed assets ........................ (5) --
(Increase) Decrease in prepaid & other assets ....... (52) (72)
(Increase) Decrease in interest receivable .......... (838) (342)
Increase (Decrease) in other liabilities ............ 238 (200)
Increase (Decrease) in interest payable ............. 128 17
Net amortization of bond premiums & discounts ....... 2 4
-------- --------
Net cash provided from (used by) operating activities 1,110 841
-------- --------
Investing activities
Proceeds from sales of investment securities ........ 9,797 8,080
Purchase of investment securities ................... (9,630) (4,012)
Net increase in loans outstanding ................... (16,715) (23,476)
Capital expenditures ................................ (262) (678)
Proceeds from sale of capital assets ................ 75 --
Proceeds from sale of assets acquired in
settlement of loans ............................ 46 20
Acquisition of assets acquired in settlement of loans (933) (6)
-------- --------
Net cash used by investment activities .............. (17,622) (20,072)
======== ========
Financing activities
Net increase (decrease) in short-term borrowings .... -- 10,240
Net increase in deposit accounts .................... 14,992 10,452
Proceeds from issuance of common stock .............. 396 137
Cash dividends ...................................... (266) (235)
-------- --------
Net cash provided by financing activities ........... 15,122 20,594
-------- --------
Increase (Decrease) in cash and cash equivalents ....... (1,390) 1,363
Cash and cash equivalents at beginning of period ....... 8,568 6,608
-------- --------
Cash and cash equivalents at end of period ............. $ 7,178 7,971
======== ========
</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 three
months ended June 30, 1998 and 1997, respectively:
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Net Income (numerator) ................. $1,240,000 $1,053,000
========== ==========
Shares for Basic EPS (denominator) ..... 884,000 840,000
Dilutive effect of stock options ....... 3,700 14,385
---------- ----------
Adjusted shares for diluted EPS ....... 887,700 854,385
========== ==========
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 six months ended June 30, 1998
and 1997 was $1,253,000 and $875,000, respectively. Information concerning the
Company's other comprehensive income for the six months ended June 30, 1998 and
1997, respectively, is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------ ------
Unrealized gains (losses) on available for sale securities .. $ 21 $(293)
Reclassification of gains recognized in net income .......... -- --
Income tax expense (benefit) relating to unrealized gains
on available for sale securities ...................... (8) 115
----- -----
Other comprehensive income (loss) ........................... $ 13 $(178)
===== =====
</TABLE>
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. Subsequent Event.
On June 24, 1998, the Company declared a three for two stock split effected
in the form of a stock dividend for shareholders of record as of July 6, 1998,
payable on July 21, 1998. Had the split been retroactively applied, total shares
outstanding would have been 1,337,425 and 1,313,472 at June 30, 1998 and
December 31, 1997, respectively. Earnings per common share, earnings per common
share assuming dilution and cash dividends per share would have been $0.93,
$0.93, $0.20 and $0.84, $0.82, $0.19 for the six months ended June 30, 1998 and
1997, respectively.
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 six months ended June 30, 1998, interest bearing
bank balances and investment securities combined decreased 14%. These funds
along with funds generated by the 9% increase in deposits were used to fund net
loan increases of 12%. 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 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.
During the six months ended June 30, 1998, other real estate owned increased
$925,000 due to the foreclosure of three properties and decreased $46,000 due to
the sale of one property. The Company presently owns four properties recorded at
the lower of loan value or expected selling price (i.e., ended June 30, 1998
fair market value).
Total shareholder's equity increased 8% due to net income and proceeds from
sales of stock minus dividends paid.
Results of Operations. Net income increased 18% and 20% for the six months and
three months ended June 30, 1998, respectively, as compared to the same periods
in 1997. The increase results from the effective management of the interest
margin and increases in other income derived from new products and services. The
23% and 20% increase in loan income for the six months and three months ended
June 30, 1998, respectively, is due to loan growth and somewhat higher rates as
fixed rate loans continue to either reprice upward upon maturity or pay out.
Interest earned on investments has increased 13% due to higher volumes and
portfolio yields. Interest expense for the six months and three months ended
June 30, 1998, respectively, increased 22% and 19% over the same periods in 1997
due to total deposit growth of 19% from June 30, 1997 to June 30, 1998.
Other expenses increased 17% and 16% for the six months and three months ended
June 30, 1998, respectively, as compared to 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. In
addition, the opening of our Benson office in July 1997 has added expenses which
were not present during the six months ended June 30, 1997.
7
<PAGE>
The Company's delinquency rate of 1.85% is favorable compared to historical
trends. At June 30, 1998, the Company's nonperforming loans were $1,890,000 or
1.21% of our total gross loans as compared to $562,000 or 0.42% at June 30,
1997. Our reserve for loan loss of $1,960,000 or 1.25% of total gross loans is
considered adequate to cover future credit losses in the present portfolio.
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.
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
loan granting or renewal process. At this time, the Bank is unable to determine
what impact, if any, the Year 2000 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 material adverse impacts as a result of the Year
2000.
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 5. Other Events
Shareholder Proposals. As disclosed in more detail in the Company's
proxy statement in connection with its 1998 Annual Meeting of
Shareholders, as filed with the Securities and Exchange Commission on
April 3, 1998, any proposals that shareholders intend to present for a
vote of shareholders at the Company's 1999 Annual Meeting of
Shareholders, and that such shareholders desire to have included in
the Company's proxy statement and form of proxy will be made on a
case-by-case basis in accordance with the Company's judgment and the
rules and regulations promulgated by the SEC. Proposals received after
December 8, 1998 will not be considered for inclusion in the Company's
proxy materials for its 1999 Annual Meeting.
In addition, if a shareholder intends to present a matter for a vote
at the 1999 Annual Meeting of Shareholders, other than by submitting a
proposal for inclusion in the Company's proxy statement for that
meeting, the shareholder must give timely notice in accordance with
SEC rules. To be timely, a shareholder's notice must be received by
the Company's Corporate Secretary at its principal office, 6144 U.S.
301 South, Four Oaks, North Carolina 27524, on or before February 17,
1999.
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.
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 13, 1998 By:/s/ Ayden R. Lee, Jr.
--------------- ------------------------
Ayden R. Lee, Jr.
President and
Chief Executive Officer
Date: August 13, 1998 By:/s/ Nancy S. Wise
--------------- ------------------------
Nancy S. Wise
Senior Executive Vice President
and Chief Financial Officer
10
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule
11
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,232
<INT-BEARING-DEPOSITS> 946
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,940
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 156,539
<ALLOWANCE> 1,960
<TOTAL-ASSETS> 206,813
<DEPOSITS> 182,980
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,583
<LONG-TERM> 3,000
0
0
<COMMON> 892
<OTHER-SE> 17,358
<TOTAL-LIABILITIES-AND-EQUITY> 206,813
<INTEREST-LOAN> 7,214
<INTEREST-INVEST> 1,108
<INTEREST-OTHER> 78
<INTEREST-TOTAL> 8,400
<INTEREST-DEPOSIT> 3,902
<INTEREST-EXPENSE> 3,993
<INTEREST-INCOME-NET> 4,407
<LOAN-LOSSES> 465
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 2,959
<INCOME-PRETAX> 1,849
<INCOME-PRE-EXTRAORDINARY> 1,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,240
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 2.31
<LOANS-NON> 819
<LOANS-PAST> 339
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,725
<CHARGE-OFFS> 259
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 1,960
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,960
</TABLE>
