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 June 30, 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:
Common Stock, 1,357,000
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of June 30, 1999)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, DECEMBER 31,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 5,666 7,950
Interest bearing bank balances 1,104 670
--------- ---------
Total cash and cash equivalents 6,770 8,620
Investment securities, available for sale 38,496 43,692
Loans, net 165,117 153,438
Accrued interest receivable 2,697 2,250
Bank premises and equipment, net 4,789 4,982
Other real estate owned 954 517
Intangible assets 147 155
Prepaid expenses and other assets 1,106 722
--------- ---------
TOTAL ASSETS $ 220,076 214,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 32,703 29,703
NOW accounts 14,483 15,462
Savings 20,189 20,453
Time $100,000 and over 50,557 45,379
Other time 76,323 77,428
--------- ---------
Total deposits 194,255 188,425
Accrued interest payable 1,955 2,145
Other borrowed money 3,000 3,770
Other liabilities 373 493
--------- ---------
TOTAL LIABILITIES 199,583 194,833
--------- ---------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000
shares authorized, 1,357,000 and 1,349,000
issued and outstanding at June 30, 1999
and December 31, 1998, respectively 1,357 1,349
Surplus 6,022 5,786
Retained earnings 13,476 12,293
Accumulated other comprehensive income (362) 115
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 20,493 19,543
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 220,076 214,376
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------------- -----------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $3,869 3,837 7,685 7,295
Interest on investment securities:
US Government and agencies 508 491 1,008 966
Municipalities 48 53 97 113
Other investment securities 23 8 26 29
Interest on overnight investments 16 48 60 78
-------- ------- ------- -------
Total interest income 4,464 4,437 8,876 8,481
Interest expense:
Interest on deposits 1,806 2,003 3,639 3,902
Interest on borrowed money 70 43 116 91
-------- ------- -------- --------
Total interest expense 1,876 2,046 3,755 3,993
-------- ------- -------- --------
Net interest income 2,588 2,391 5,121 4,488
Provision for loan losses 273 272 428 465
-------- ------- -------- --------
Net interest income after provision
for loan losses 2,315 2,119 4,693 4,023
-------- ------- -------- --------
Other income:
Service charges 243 146 466 436
Credit life commissions 15 27 27 60
Other operating income 242 140 389 226
Securities gains (losses) 0 5 (14) 5
-------- ------- -------- --------
Total noninterest income 500 318 868 727
-------- ------- -------- --------
Other expenses:
Salaries 783 661 1,518 1,301
Employee benefits 125 122 270 274
Occupancy expenses 67 65 131 121
Equipment expenses 109 87 199 172
Other operating expenses 562 502 1,164 1,033
-------- ------ -------- -------
Total noninterest expense 1,646 1,437 3,282 2,901
-------- ----- -------- ------
Income before income taxes 1,169 1,000 2,279 1,849
Income taxes 421 346 798 609
-------- ------ --------- --------
NET INCOME $ 748 654 1,481 1,240
======= ===== ======== =======
NET INCOME PER COMMON SHARE $ 0.55 0.49 1.10 0.94
======= ===== ========= ========
NET INCOME PER COMMON SHARE,
ASSUMING DILUTION $ 0.55 0.49 1.09 0.93
======= ===== ========= ========
CASH DIVIDEND PAID PER SHARE $ 0.11 0.10 0.22 0.20
======= ===== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
(ALL AMOUNTS IN THOUSANDS) 1999 1998
---- ----
Operating activities
Net income $ 1,481 1,240
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 428 465
Provision for depreciation 179 162
(Gain) loss on sale of securities 14 ( 5)
Loss on repossessed/foreclosed assets 0 5
Gain on sale of fixed assets 0 ( 5)
Increase in prepaid & other assets ( 58) ( 52)
Increase in interest receivable ( 447) ( 838)
Decrease in other liabilities ( 120) 238
Increase (Decrease) in interest payable ( 190) 128
Net amortization of bond premiums & discounts ( 8) 2
----------- ------------
Net cash provided (used) by operating activities 1,279 1,340
----------- ------------
Investing activities
Proceeds from sales of investment securities 17,493 9,797
Purchase of investment securities ( 13,098) ( 9,630)
Net increase in loans outstanding ( 12,107) ( 17,878)
Capital expenditures ( 123) ( 262)
Proceeds from sale of capital assets 137 75
Proceeds from sale of assets acquired in
settlement of loans 0 46
Capital expenditures on assets acquired in
settlement of loans ( 437) 0
----------- ------------
Net cash used by investment activities ( 8,135) ( 17,852)
----------- ------------
Financing activities
Net increase (decrease) in short-term borrowings ( 770) --
Net increase in deposit accounts 5,830 14,992
Proceeds from issuance of common stock 244 396
Cash dividends ( 298) ( 266)
----------- ------------
Net cash provided by financing activities 5,006 15,122
----------- ------------
Increase (Decrease) in cash and cash equivalents ( 1,850) ( 1,390)
Cash and cash equivalents at beginning of period 8,620 8,568
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,770 7,178
======= ========
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 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 month and six month periods ended June 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Net Income (numerator) $ 748,000 654,000 1,481,000 1,240,000
========== ========== ========= =========
Shares for Basic EPS (denom.) 1,354,000 1,333,500 1,351,921 1,328,130
Dilutive effect of stock options 6,402 4,373 6,402 4,373
---------- ---------- --------- ---------
Adjusted shares for diluted EPS $ 1,360,402 1,337,873 1,360,402 1,332,503
========== ========== ========= =========
</TABLE>
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.
Information concerning the Company's total comprehensive income and other
comprehensive income for the three month and six month periods ended June 30,
1999 and 1998, respectively, is as follows (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
For Three For Six
Months ended Months Ended
June 30 June 30
1999 1998 1999 1998
------------- --------------
<S> <C> <C> <C> <C>
Net Income $ 748 654 1,481 1,240
----- ----- ----- -----
Unrealized gains (losses) on available for sale securities (524) ( 15) (809) 26
Reclassification of gains (losses) recognized in net income 0 ( 5) 14 (5)
Income tax (expense) benefit relating to unrealized gains
(losses) on available for sale securities (209) 4 318 (8)
----- ----- ----- -----
Other comprehensive income (loss) (315) ( 14) (477) 13
------ ---- ----- -----
Comprehensive Income $ 433 640 1,004 1,253
===== ===== ===== =====
</TABLE>
4. New Accounting Pronouncement: The Company will adopt the provisions of SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended, effective with the fiscal quarter beginning July 1, 2000. 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.
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 month period ended June 30, 1999, interest
bearing bank balances and investment securities combined decreased 11%. These
funds along with funds generated by the 3% increase in deposits were used to
fund net loan increases of 8%. 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 month period, other real estate owned increased $437,000 due to
improvements on two properties. The Company presently owns three properties
recorded at the lower of loan value plus improvements or expected selling price
(i.e. fair market value).
6
<PAGE>
Total shareholder's equity increased 5% due to net income and proceeds from
sales of stock minus dividends paid.
RESULTS OF OPERATIONS. Net income increased 19% and 14% for the six months and
three months ended June 30, 1999, respectively, as compared to the same periods
in 1998. The increase results from the effective management of the interest
margin and increases in other income derived from new products and services. The
7% and 5% increase in loan income for the six months and three months ended June
30, 1999, respectively, is due to loan growth since yield on loans have remained
consistent. Interest earned on investments remained steady. Interest expense for
the six months and three months ended June 30, 1999, respectively, decreased 6%
and 8% over the same periods in 1998 due to lower interest rates being paid
which also resulted in lower growth rates on deposits. Average interest bearing
deposits of $159,758,000 for the quarter ended June 30, 1999 earned an
annualized average interest rate of 4.57% compared to average interest bearing
deposits of $152,494,000 for the quarter ended June 30, 1998, which earned an
annualized average interest rate of 5.13%.
Other expenses increased 11% and 10% for the six months and three months ended
June 30, 1999, respectively, as compared to the same periods of 1998. 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 1.21% is favorable compared to historical
trends. At June 30, 1999, the Company's nonperforming loans were $1,376,000 or
0.82% of our total gross loans as compared to $1,890,000 or 1.21% at June 30,
1998. Our reserve for loan loss of $2,170,000 or 1.30% of total gross loans is
considered adequate to cover probable credit losses in the present portfolio.
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);
7
<PAGE>
(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 all items this phase has been completed);
and (v) Implementation, which includes having all systems throughout the Bank
Year 2000 compliant. Currently, all systems are manually compliant, however
certain upgrades will be required during the third quarter of 1999 to bring the
systems to real-time compliance.
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 created a Business Resumption Contingency Plan which covers all mission
critical and non-mission critical areas of the Bank's operations. The
contingency plan was completed and approvd by the Boad of Directors on June 21,
1999. The contingency plan covers all mission critical areas and significant
non-mission critical areas of the bank. The contingency plan is being tested
during the third quarter of 1999. The test results will be reviewed by the Year
2000 Committee, which consists of Senior Management. The committee will update
any procedures or forms that require modification. All updates, modifications,
or corrections made to the contingency plan will be documented and sent to the
Board of Directors for approval. All employee training and testing will be
completed by November 30, 1999.
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
8
<PAGE>
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 Company's 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 26, 1999, the Company held its Annual Meeting of Shareholders
during which the shareholders elected seven nominees to the Company's Board of
Directors to serve until the next Annual Meeting or until their successors are
elected and qualified. The votes were cast as follows:
FOR WITHHELD
--- --------
M.S. Canaday 1,149,933 19,763
Ayden R. Lee, Jr. 1,149,933 19,763
Harold J. Sturdivant 1,149,933 19,763
Paula Canaday Bowman 1,149,933 19,763
William J. Edwards 1,149,933 19,763
Percy Y. Lee 1,149,933 19,763
Warren L. Grimes 1,149,933 19,763
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
9
<PAGE>
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: AUGUST 13, 1999 By: /S/ AYDEN R. LEE, JR.
--------------- -----------------------
Ayden R. Lee, Jr.
President and
Chief Executive Officer
Date: AUGUST 13, 1999 By: /S/ NANCY S. WISE
--------------- -----------------
Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule
10
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,666
<INT-BEARING-DEPOSITS> 1,104
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,496
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 167,287
<ALLOWANCE> 2,170
<TOTAL-ASSETS> 220,076
<DEPOSITS> 194,255
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,328
<LONG-TERM> 3,000
0
0
<COMMON> 1,357
<OTHER-SE> 19,136
<TOTAL-LIABILITIES-AND-EQUITY> 220,076
<INTEREST-LOAN> 3,869
<INTEREST-INVEST> 579
<INTEREST-OTHER> 16
<INTEREST-TOTAL> 4,464
<INTEREST-DEPOSIT> 1,806
<INTEREST-EXPENSE> 1,876
<INTEREST-INCOME-NET> 2,588
<LOAN-LOSSES> 273
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,646
<INCOME-PRETAX> 1,169
<INCOME-PRE-EXTRAORDINARY> 1,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 1.90
<LOANS-NON> 422
<LOANS-PAST> 388
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,945
<CHARGE-OFFS> 281
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 2,170
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,170
</TABLE>
