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 September 30, 1999
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Commission File Number 0-22787
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FOUR OAKS FINCORP, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
North Carolina 56-2028446
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(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, 1,362,000
par value $1.00 per share ---------
- ------------------------- (Number of shares outstanding
(Title of Class) as of September 30, 1999)
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
<TABLE>
<CAPTION>
<S> <C> <C>
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
ASSETS
Cash and due from banks $ 7,074 7,950
Interest bearing bank balances 1,169 670
--------- ---------
Total cash and cash equivalents 8,243 8,620
Investment securities, available for sale 39,874 43,692
Loans, net 167,154 153,438
Accrued interest receivable 2,973 2,250
Bank premises and equipment, net 4,745 4,982
Other real estate owned 782 517
Intangible assets 145 155
Prepaid expenses and other assets 1,138 722
--------- ---------
TOTAL ASSETS $ 225,054 214,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 31,184 29,703
NOW accounts 14,715 15,462
Savings 19,765 20,453
Time $100,000 and over 49,553 45,379
Other time 76,098 77,428
--------- ---------
Total deposits 191,315 188,425
Accrued interest payable 1,989 2,145
Other borrowed money 9,910 3,770
Other liabilities 652 493
--------- ---------
TOTAL LIABILITIES 203,866 194,833
--------- ---------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized,
1,362,000 and 1,349,000 issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 1,362 1,349
Surplus 6,157 5,786
Retained earnings 14,136 12,293
Accumulated other comprehensive income (467) 115
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 21,188 19,543
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 225,054 214,376
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 4,052 3,895 11,737 11,241
Interest on investment securities:
US Government and agencies 530 466 1,538 1,432
Municipalities 50 51 147 164
Other investment securities 13 10 39 40
Interest on overnight investments 7 23 67 101
------- ------- ------- -------
Total interest income 4,652 4,445 13,528 12,978
Interest expense:
Interest on deposits 1,810 2,083 5,449 5,985
Interest on borrowed money 106 51 222 142
------- ------- ------- -------
Total interest expense 1,916 2,134 5,671 6,127
------- ------- ------- -------
Net interest income 2,736 2,311 7,857 6,851
Provision for loan losses 127 311 555 776
------- ------- ------- -------
Net interest income after provision
for loan losses 2,609 2,000 7,302 6,075
------- ------- ------- -------
Other income:
Service charges 221 291 687 650
Credit life commissions 9 21 36 81
Other operating income 221 104 610 329
Securities gains (losses) 0 0 (14) 5
------- ------- ------- -------
Total noninterest income 451 416 1,319 1,065
------- ------- ------- -------
Other expenses:
Salaries 776 683 2,294 1,995
Employee benefits 169 84 439 347
Occupancy expenses 66 62 197 184
Equipment expenses 113 87 312 259
Other operating expenses 545 538 1,709 1,545
------- ------- ------- -------
Total noninterest expense 1,669 1,454 4,951 4,330
------- ------- ------- -------
Income before income taxes 1,391 962 3,670 2,810
Income taxes 583 319 1,381 928
------- ------- ------- -------
NET INCOME $ 808 643 2,289 1,882
======= ======= ======= =======
NET INCOME PER COMMON SHARE $ 0.59 0.48 1.69 1.42
======= ======= ======= =======
NET INCOME PER COMMON SHARE,
ASSUMING DILUTION $ 0.59 0.48 1.68 1.41
======= ======= ======= =======
CASH DIVIDEND PAID PER SHARE $ 0.11 0.10 0.33 0.30
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(ALL AMOUNTS IN THOUSANDS) 1999 1998
------------ ------------
Operating activities
Net income $ 2,289 1,882
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 555 776
Provision for depreciation 263 246
(Gain) loss on sale of securities 14 (5)
Loss on repossessed\foreclosed assets 13 11
Increase in prepaid & other assets (684) (787)
Increase in interest receivable (723) (1001)
Increase in other liabilities 159 184
Increase (Decrease) in interest payable (156) 156
Net amortization of bond premiums & discounts 1 2
-------- --------
Net cash provided by operating activities 1,731 1,464
-------- --------
Investing activities
Proceeds from sales of investment securities 18,800 14,298
Purchase of investment securities (15,579) (14,686)
Net increase in loans outstanding (14,271) (18,590)
Capital expenditures (26) (208)
-------- --------
Net cash used by investment activities (11,076) (19,186)
-------- --------
Financing activities
Net increase (decrease) in borrowings 6,140 --
Net increase in deposit accounts 2,890 19,672
Proceeds from issuance of common stock 384 504
Cash dividends (446) (400)
-------- --------
Net cash provided by financing activities 8,968 19,776
-------- --------
Increase (Decrease) in cash and cash equivalents (377) 2,054
Cash and cash equivalents at beginning of period 8,620 8,568
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,243 10,622
======== ========
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 nine month periods ended September 30, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income (numerator) $ 808,000 $ 643,000 $2,289,000 $1,882,000
========== ========== ========== ==========
Shares for Basic EPS (denom.) 1,358,000 1,337,000 1,354,000 1,330,000
Dilutive effect of stock options 6,853 4,994 6,853 4,994
---------- ---------- ---------- ----------
Adjusted shares for diluted EPS 1,364,853 1,341,994 1,360,853 1,334,994
========== ========== ========== ==========
</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 nine month periods ended September
30, 1999 and 1998, respectively, is as follows (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
For Three For Nine
Months ended Months Ended
September 30 September 30
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 808 $ 643 $ 2,289 $ 1,882
------- ------- ------- -------
Unrealized gains (losses) on available for sale securities (174) 88 (983) 114
Reclassification of gains (losses) recognized in net income 0 0 14 (5)
Income tax (expense) benefit relating to unrealized gains
(losses) on available for sale securities 69 (36) 387 (43)
------- ------- ------- -------
Other comprehensive income (loss) (105) 52 (582) 66
------- ------- ------- -------
Comprehensive Income $ 703 $ 695 $ 1,707 $ 1,948
======= ======= ======= =======
</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 nine months ended September 30, 1999, interest
bearing bank balances and investment securities combined decreased 6%.
Borrowings increased $6,140,000. These funds along with $2,890,000 generated by
the 2% increase in deposits were used to fund net loan increases of 9%. 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 decreased slightly due to slower loan growth and downward pressure on loan
rates in the market over the past twelve months.
6
<PAGE>
During the nine months ended September 30, 1999, other real estate owned
decreased to $782,000 due to the sale of a portion of one property. The Company
presently owns three properties recorded at the lower of adjusted loan value or
expected selling price (i.e, September 30, 1999 fair market value). The
properties anticipated values equal or exceed the recorded amount.
Total shareholder's equity increased 8%, primarily due to net income and
dividend reinvestment plan purchases.
RESULTS OF OPERATIONS. Net income increased 22% and 26% for the nine months and
three months ended September 30, 1999, respectively, as compared to the same
periods in 1998. The increases resulted from the effective management of the
interest margin, minimizing operating costs, enhancing other noninterest income
and maintaining good asset quality. The 4% and 3% increase in loan income for
the nine months and three months ended September 30, 1999, respectively,
reflects slow loan growth due to intense rate competition in our market.
Interest earned on investments has increased slightly despite the reduction in
the investments accounts. Interest expense for the nine months and three months
ended September 30, 1999, respectively, decreased 7% and 10% over the same
periods in 1998 due to slow deposit growth and lower deposit rates.
Other expenses have increased 14% and 17% for the nine months and three months
ended September 30, 1999, respectively, over 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 1.58% is favorable compared to historical
trends. At September 30, 1999, the Company's nonperforming loans were $1,247,000
or 0.74% of our total gross loans as compared to $1,315,000 or 0.83% at
September 30, 1998. Our reserve for loan loss of $2,250,000 or 1.33% of total
gross loans is considered adequate to cover future credit losses in the present
portfolio at September 30, 1999.
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. "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 has been
completed); (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
7
<PAGE>
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 all mission critical items this phase has been
completed); (iv) Validation, which includes testing systems (hardware and
software) to verify compliance (for all mission critical items this phase has
been completed); and (v) Implementation, which includes having all systems
throughout the Bank Year 2000 compliant was completed 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 has discussed the Year 2000 issue with borrowers as part of the
Assessment phase of the Plan and continues to discuss it 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 significant non-mission critical areas of the Bank's operations.
The contingency plan was completed and approved by the Board of Directors on
June 21, 1999. The goal of the contingency plan is to ensure that in the event
the Bank's internal systems fail as a result of the Year 2000, the Bank would
still be able to process transactions. The contingency plan was tested on
October 26, 1999 by shutting down one of the Bank's branch locations and
processing transactions manually. The test results have been reviewed by the
Year 2000 committee, which consists of senior management. The contingency plan
test results were favorable, with a very few exceptions. The test results
verified that the branch could operate on a manual basis for a period of time
with little or no disruption to the customer base. The systems verified were
loan processing, teller processing, and customer service processing. During the
test, these systems were processed using manual forms and paper reports. Based
on the test results, the Year 2000 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 is expected to 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
8
<PAGE>
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 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 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: NOVEMBER 12, 1999 By: /s/ AYDEN R. LEE, JR.
----------------------- -------------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: NOVEMBER 12, 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
9
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,074
<INT-BEARING-DEPOSITS> 1,169
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,874
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 169,404
<ALLOWANCE> 2,250
<TOTAL-ASSETS> 225,054
<DEPOSITS> 191,315
<SHORT-TERM> 3,910
<LIABILITIES-OTHER> 2,641
<LONG-TERM> 6,000
0
0
<COMMON> 1,362
<OTHER-SE> 19,926
<TOTAL-LIABILITIES-AND-EQUITY> 225,054
<INTEREST-LOAN> 11,737
<INTEREST-INVEST> 1,724
<INTEREST-OTHER> 67
<INTEREST-TOTAL> 13,528
<INTEREST-DEPOSIT> 5,449
<INTEREST-EXPENSE> 5,671
<INTEREST-INCOME-NET> 7,857
<LOAN-LOSSES> 555
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 4,951
<INCOME-PRETAX> 3,670
<INCOME-PRE-EXTRAORDINARY> 3,670
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,289
<EPS-BASIC> 1.69
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 3.73
<LOANS-NON> 465
<LOANS-PAST> 402
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,945
<CHARGE-OFFS> 343
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 2,250
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,250
</TABLE>
