US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 of the Securities Exchange Act of 1934 for
the Quarterly Period Ended March 31, 1999
Commission File Number 0-22787
FOUR OAKS FINCORP, INC.
(Exact name of small business issuer 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)
Issuer's Telephone Number, including area code 919-963-2177
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
1,352,000
Common Stock, ---------
Par value $1.00 per share (Number of shares outstanding
- ------------------------- as of March 31, 1999)
(Title of Class)
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(ALL AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,960 7,950
Interest bearing bank balances 1,330 670
-------- ------
Total cash and cash equivalents 9,290 8,620
Investment securities, available for sale 39,253 43,692
Loans, net 158,510 153,438
Accrued interest receivable 2,397 2,250
Bank premises and equipment, net 4,824 4,982
Other real estate owned 691 517
Intangible assets 151 155
Prepaid expenses and other assets 899 722
-------- -------
TOTAL ASSETS $216,015 214,376
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 33,351 29,703
NOW accounts 14,380 15,462
Savings 21,124 20,453
Time $100,000 and over 46,122 45,379
Other time 75,493 77,428
-------- --------
Total deposits 190,470 188,425
Accrued interest payable 1,885 2,145
Other borrowed money 3,000 3,770
Other liabilities 601 493
-------- --------
TOTAL LIABILITIES 195,956 194,833
-------- --------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized,
1,352,000 and 1,349,000 issued and outstanding at
March 31, 1999 and December 31, 1998 respectively 1,352 1,349
Surplus 5,876 5,786
Retained earnings 12,878 12,293
Accumulated other comprehensive income ( 47) 115
---------- ------
Total shareholders' equity 20,059 19,543
--------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $216,015 214,376
========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE MONTHS ENDED:
MARCH 31, MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $3,816 3,458
Interest on investment securities:
US Government and agencies 500 475
Municipalities 49 60
Other investment securities 3 21
Interest on overnight investments 44 30
-------- -------
Total interest income 4,412 4,044
-------- -------
Interest expense:
Interest on deposits 1,833 1,899
Interest on borrowed money 46 48
-------- -------
Total interest expense 1,879 1,947
-------- -------
Net interest income 2,533 2,097
Provision for loan losses 155 193
-------- -------
Net interest income after provision for loan losses 2,378 1,904
-------- -------
Other income:
Service charges 223 290
Credit life commissions 12 33
Other operating income 147 86
Securities gains (losses) ( 14) --
------- ------
Total noninterest income 368 409
------- ------
Other expenses:
Salaries 735 640
Employee benefits 145 152
Occupancy expenses 64 56
Equipment expenses 90 85
Other operating expenses 602 531
------- -------
Total noninterest expense 1,636 1,464
------- -------
Income before income taxes 1,110 849
Income taxes 377 263
------- -------
NET INCOME $ 733 586
======= =======
NET INCOME PER COMMON SHARE $ 0.54 0.47
======= =======
NET INCOME PER COMMON SHARE, ASSUMING DILUTION $ 0.54 0.46
======= =======
CASH DIVIDEND PAID PER SHARE $ 0.11 0.10
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
(ALL AMOUNTS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income $ 733 586
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 155 193
Provision for depreciation 65 78
(Gain) loss on sale of securities 14 --
(Gain) loss on sale of repossessed\foreclosed assets 4 --
Write off of loans, net of recoveries 60 38
(Increase) Decrease in prepaid & other assets ( 435) ( 50)
(Increase) Decrease in interest receivable ( 147) ( 220)
Increase (Decrease) in other liabilities 108 196
Increase (Decrease) in interest payable ( 260) ( 169)
Net amortization of bond premiums & discounts ( 15) 1
------------ ----------
Net cash provided by operating activities 282 653
------------ ----------
Investing activities
Proceeds from sales of investment securities 17,237 6,713
Purchase of investment securities (13,143) ( 4,130)
Net increase in loans outstanding ( 5,167) ( 9,470)
Capital expenditures ( 44) ( 229)
Sale of land 137 --
------------ ----------
Net cash used by investment activities ( 980) ( 7,116)
------------ ----------
Financing activities
Net increase (decrease) in short-term borrowings ( 770) --
Net increase in deposit accounts 2,045 7,959
Proceeds from issuance of common stock 241 261
Cash dividends ( 148) ( 133)
----------- ----------
Net cash provided by financing activities 1,368 8,087
----------- ----------
Increase (Decrease) in cash and cash equivalents 670 1,624
Cash and cash equivalents at beginning of period 8,620 8,568
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,290 10,192
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<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 on Form 10-KSB for the year ended December 31, 1998.
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 March 31, 1999 and 1998, respectively:
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Net Income (numerator) $ 733,000 $ 586,000
=========== ==========
Shares for Basic EPS (denominator) 1,352,000 1,257,000
Dilutive effect of stock options 6,244 8,633
----------- ----------
Adjusted shares for diluted EPS 1,358,244 1,265,633
=========== ==========
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 component of
other comprehensive income relates to unrealized gains and losses on available
for sale securities.
The Company's comprehensive income for the three month periods ended March
31, 1999 and 1998 was $571,000 and $613,000, respectively. Information
concerning the Company's other comprehensive income for the three month periods
ended March 31, 1999 and 1998, respectively is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Unrealized gains (losses) on available for sale securities $ (284) $ 39
Reclassification of (gains) losses recognized in net income 14 --
Income tax expense (benefit) relating to unrealized gains
on available for sale securities 108 (12)
------ ------
Other comprehensive income $ (162) $ 27
====== ======
</TABLE>
<PAGE>
4. New Accounting Pronouncement: The Company will adopt the provisions of SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" effective
with the fiscal quarter beginning July 1, 1999. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that derivatives be recognized as either assets or
liabilities in the balance sheet and be measured at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and whether or not the derivative is designated as a hedging
instrument. SFAS No. 133 is not expected to have a material effect on the
Company's financial statements.
<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
results of operations and financial condition, liquidity and capital resources
of the Company and should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
FINANCIAL CONDITION. From December 31, 1998 to March 31, 1999, interest bearing
bank balances and investment securities combined decreased 9%. This decrease
along with funds generated by a 1% increase in deposits were used to fund net
loan increases of 3%. 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, 1998 except for
improvements being made to the properties. We presently have four properties
recorded at the adjusted loan value plus improvements and less the amounts
previously recovered. The expected selling price is higher than the recorded
amount.
Total shareholder's equity increased 3%, due to net income. The decrease in net
unrealized gain on securities results from our securities portfolio repricing
downward.
RESULTS OF OPERATIONS. Net income increased 25% for the three months ended March
31, 1999, as compared to the same period in 1998. The increase results from
managing the interest rate margin. The 9% increase in loan interest and fee
income is due to loan growth since yields on loans have remained consistent.
Interest earned on our investments has increased 2% due to higher portfolio
yields and a 1% increase in the average investment portfolio balances. Interest
expense for the quarter ended March 31, 1999 decreased 3% from the quarter ended
March 31, 1998, primarily due to lower rates paid on deposits. Average interest
bearing deposits of $158,560,000 for the quarter ended March 31, 1999 earned an
annualized average interest rate of 4.63% compared to average interest bearing
deposits of $147,156,000 for the quarter ended March 31, 1998 which earned an
annualized average interest rate of 5.16%.
Other expenses increased 12% for the three months ended March 31, 1999, over the
same period in 1998. This increase is primarily due to increases in salaries and
operating costs resulting from more accounts and transactions as we grow.
Our delinquency rate of 2.32% is favorable compared to historical trends. At
March 31, 1999, our nonperforming loans were $871,000 or 0.54% of total gross
loans as compared to $1,909,000 or 1.28% at March 31, 1998. Our reserve for loan
loss of $2,040,000 or 1.27% of total gross loans is considered adequate to cover
future credit losses in the present portfolio.
<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, "99" is stored on the system and represents 1999 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. "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 has
been completed); (iii) Renovation, which includes upgrading or replacing
non-compliant systems with compliant hardware and software (for mission critical
items this phase has been completed); (iv) Validation, which includes testing
systems (hardware and software) to verify compliance (for mission critical items
this phase has been completed); 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 which will cover all
mission critical and non-mission critical areas of the Bank's operations. The
contingency plan will be completed during the second quarter of 1999.
<PAGE>
FORWARD LOOKING INFORMATION. Information set forth in this Quarterly Report on
Form 10-QSB, 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-QSB.
<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
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUR OAKS FINCORP, INC.
Date: MAY 14, 1999 By:/S/ AYDEN R. LEE, JR.
------------ ---------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: MAY 14, 1999 By:/S/ NANCY S. WISE
------------ ---------------------
Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,960
<INT-BEARING-DEPOSITS> 1,330
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,253
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 160,550
<ALLOWANCE> 2,040
<TOTAL-ASSETS> 216,015
<DEPOSITS> 190,470
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,486
<LONG-TERM> 3,000
0
0
<COMMON> 1,352
<OTHER-SE> 18,707
<TOTAL-LIABILITIES-AND-EQUITY> 216,015
<INTEREST-LOAN> 3,816
<INTEREST-INVEST> 552
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 4,412
<INTEREST-DEPOSIT> 1,833
<INTEREST-EXPENSE> 1,879
<INTEREST-INCOME-NET> 2,533
<LOAN-LOSSES> 155
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 1,636
<INCOME-PRETAX> 1,110
<INCOME-PRE-EXTRAORDINARY> 1,110
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 733
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 1.26
<LOANS-NON> 557
<LOANS-PAST> 315
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,945
<CHARGE-OFFS> 74
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 2,040
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,040
</TABLE>
