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, 2000
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, 2,066,000
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of July 31, 2000)
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>
(All amounts in thousands) June 30, December 31,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,848 10,416
Interest bearing bank balances 1,638 3,934
--------- ---------
Total cash and cash equivalents 9,486 14,350
Investment securities, available for sale 42,210 43,880
Loans, net 179,188 164,226
Accrued interest receivable 2,840 2,271
Bank premises and equipment, net 5,678 4,775
Other real estate owned 555 501
Intangible assets 133 140
Prepaid expenses and other assets 1,420 1,322
--------- ---------
Total assets $241,510 231,465
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 33,877 31,059
NOW accounts 15,476 16,895
Savings 18,226 19,345
Time $100,000 and over 50,859 51,370
Other time 78,226 76,042
--------- ---------
Total deposits 196,664 194,711
Accrued interest payable 1,954 2,024
Other borrowed money 19,005 12,200
Other liabilities 481 633
--------- ---------
Total liabilities 218,104 209,568
--------- ---------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized, 2,065,000 and
2,050,000 issued and outstanding at June 30, 2000
and December 31, 1999, respectively 2,065 2,050
Surplus 5,903 5,599
Retained earnings 16,138 14,793
Accumulated other comprehensive income (loss) (700) (545)
--------- ---------
Total shareholders' equity 23,406 21,897
--------- ---------
Total liabilities and shareholders' equity $ 241,510 231,465
========= =========
</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 six
months ended months ended
June 30, June 30,
2000 1999 2000 1999
--------------- ---------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $4,410 3,869 8,524 7,685
Interest on investment securities:
US Government and agencies 595 508 1,198 1,008
Municipalities 45 48 97 97
Other investment securities 19 23 34 26
Interest on overnight investments 8 16 17 60
------- ------- ------- --------
Total interest income 5,077 4,464 9,870 8,876
Interest expense:
Interest on deposits 1,983 1,806 3,892 3,639
Interest on borrowed money 291 70 460 116
------- ------- ------- --------
Total interest expense 2,274 1,876 4,352 3,755
------- ------- ------- --------
Net interest income 2,803 2,588 5,518 5,121
Provision for loan losses 131 273 201 428
------- ------- ------- --------
Net interest income after provision
for loan losses 2,672 2,315 5,317 4,693
------- ------- ------- --------
Other income:
Service charges 250 243 480 466
Credit life commissions 9 15 24 27
Other operating income 203 242 365 389
Securities gains (losses) (1) 0 (1) (14)
------- ------- ------- --------
Total noninterest income 461 500 868 868
------- ------- ------- --------
Other expenses:
Salaries 867 783 1,637 1,518
Employee benefits 147 125 305 270
Occupancy expenses 57 67 123 131
Equipment expenses 97 109 208 199
Other operating expenses 614 562 1,313 1,164
------- ------- ------- --------
Total noninterest expense 1,782 1,646 3,586 3,282
------- ------- ------- --------
Income before income taxes 1,351 1,169 2,599 2,279
Income taxes 501 421 920 798
------- ------- ------- --------
Net income $ 850 748 1,679 1,481
======= ======= ======= ========
Net income per common share $ 0.41 0.37 0.81 0.73
======= ======= ======= ========
Net income per common share,
assuming dilution $ 0.41 0.37 0.81 0.73
======= ======= ======= ========
Cash dividend paid per share $ 0.08 0.07 0.16 0.14
======= ======= ======= ========
</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 six months ended
June 30, June 30,
(All amounts in thousands) 2000 1999
---- ----
Operating activities
<S> <C> <C>
Net income $1,679 1,481
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 201 428
Provision for depreciation 193 179
(Gain) loss on sale of securities 1 14
Loss on repossessed/foreclosed assets 27 0
Increase in prepaid & other assets (71) (495)
Increase in interest receivable (569) (447)
Decrease in other liabilities (152) (120)
Increase (Decrease) in interest payable (70) (190)
Net amortization of bond premiums & discounts (1) (8)
--------- ---------
Net cash provided (used) by operating activities 1,238 842
--------- ---------
Investing activities
Proceeds from sales of investment securities 1,798 17,493
Purchase of investment securities (389) (13,098)
Net increase in loans outstanding (15,163) (12,107)
Capital expenditures (1096) (123)
Sale of land --- 137
--------- ---------
Net cash used by investment activities (14,850) (7,698)
--------- ---------
Financing activities
Net increase (decrease) in short-term borrowings 6,805 (770)
Net increase (decrease) in deposit accounts 1,953 5,830
Proceeds from issuance of common stock 319 244
Cash dividends (329) (298)
--------- ---------
Net cash provided by financing activities 8,748 5,006
--------- ---------
Increase (Decrease) in cash and cash equivalents (4,864) (1,850)
Cash and cash equivalents at beginning of period 14,350 8,620
--------- ---------
Cash and cash equivalents at end of period $ 9,486 6,770
========= =========
</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 on Form 10-KSB for the year ended December 31, 1999.
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, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
--------------------- -------------------
<S> <C> <C> <C> <C>
Net Income (numerator) $ 850,000 $ 748,000 $ 1,679,000 $ 1,481,000
========== ========= ========= =========
Shares for Basic EPS (denom.) 2,060,000 2,031,000 2,065,000 2,025,000
Dilutive effect of stock options 10,306 9,607 10,306 9,607
---------- --------- --------- ---------
Adjusted shares for diluted EPS $ 2,070,306 $ 2,040,607 $ 2,075,306 $ 2,034,607
========== ========= ========= =========
</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,
2000 and 1999, respectively, is as follows (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
For Three For Six
Months ended Months Ended
June 30 June 30
2000 1999 2000 1999
------------ --------------
<S> <C> <C> <C> <C>
Net Income $ 850 $ 748 $ 1,679 $ 1,481
----- ----- ----- -----
Unrealized gains (losses) on available for sale securities 74 (524) (256) (809)
Reclassification of gains (losses) recognized in net income (1) (0) (1) 14
Income tax (expense) benefit relating to unrealized gains
(losses) on available for sale securities (29) 209 103 318
----- ----- ----- -----
Other comprehensive income (loss) 44 (315) (154) (477)
----- ----- ----- -----
Comprehensive Income $ 894 $ 433 $ 1,525 $ 1,004
===== ===== ===== =====
</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.
5. Stock Split: On March 20, 2000, the Company declared a three for two stock
split effected in the form of a stock dividend for shareholders of record as of
March 31, 2000, payable on April 7, 2000. Total shares outstanding at December
31, 1999 in the Balance Sheet, net income per common share, net income per
common share assuming dilution and cash dividend paid per share for the three
and six months ended June 30, 1999 and the six months ended June 30, 2000 in the
Consolidated Statements of Income, and the shares for basic EPS for the three
and six months ended June 30, 1999 and the six months ended June 30, 2000 in
note 2 herein have been adjusted to reflect the March 31, 2000 three for two
stock split.
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 our Consolidated Financial Statements and Notes thereto.
Financial Condition. For the six months ended June 30, 2000, interest bearing
bank balances and investment securities combined decreased 8%. Borrowings
increased $6,805,000. These funds, plus the $1,953,000 increase in deposits,
were used to fund net loan increases of 9%. 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.
6
<PAGE>
Accrued interest receivable increased 19% due to loan growth, rising interest
rates, and the seasonal nature of our agricultural loans which fund during the
spring and summer and pay out in the fall and winter.
During the six months ended June 30, 2000, other real estate owned increased to
$555,000 due to the improvements to one property. We presently own one property
recorded at the lower of adjusted loan value or expected selling price (i.e,
June 30, 2000 fair market value). The property's anticipated value equals or
exceeds the recorded amount.
Total shareholder's equity increased 7%, primarily due to net income and
dividend reinvestment plan purchases.
Results of Operations. Net income increased 13% and 14% for the six months and
three months ended June 30, 2000, respectively, as compared to the same period
in 1999. The increase resulted from the effective management of interest margin,
minimizing operating costs, enhancing other noninterest income and maintaining
good asset quality. The 13% and 15% increase in loan income for the six months
and three months ended June 30, 2000, respectively, reflects loan growth and
rate increases. Interest earned on investments has increased 13% due to 10% and
9% increases in investment accounts and higher interest rates during the six
months and three months ended June 30, 2000 as compared to the six months and
three months ended June 30, 1999. Interest expense for the six months and three
months ended June 30, 2000, respectively, increased 16% and 21% over the same
period in 1999 due to deposit growth, higher deposit rates, and increased levels
of borrowings.
Other expenses have increased 9% and 8% for the six months and three months
ended June 30, 2000, respectively, over the six months and three months ended
June 30, 1999. This increase is primarily due to higher salaries and operating
costs resulting from additional accounts and transactions as we continue to
grow.
Our delinquency rate of 1.39% is favorable compared to historical trends. At
June 30, 2000, our nonperforming loans were $1,189,000 or 0.65% of our total
gross loans as compared to $1,376,000 or 0.82% at June 30, 1999 and 847,000 or
0.51% at December 31, 1999. Our reserve for loan loss of $2,450,000 or 1.35% of
total gross loans is considered adequate to cover future credit losses in the
present portfolio at June 30, 2000. We plan to increase our reserves during the
third quarter to reflect more stringent internal loan classifications in
response to regulatory review. The effect of such increase on earnings is not
expected to exceed $200,000 for 2000 and our annual earnings estimates are not
being revised.
We plan to open a branch in the town of Fuquay-Varina, North Carolina, in
September 2000. We plan to purchase the lot and place a modular bank building on
site for approximately two years while a permanent building is planned and
constructed.
Our new adminstration offices are expected to be ready in late 2000. This 15,000
square foot structure will house most of the Company's administrative functions.
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
7
<PAGE>
Securities Exchange Act of 1934, as amended, which statements represent our
judgment concerning the future and are subject to risks and uncertainties that
could cause our 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.
We caution that any such forward looking statements are further qualified by
important factors that could cause our 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 our Common Stock, other considerations described in connection
with specific forward looking statements and other cautionary elements specified
in the Company's periodic filings with the Securities and Exchange Commission,
including without limitation it's Annual Report on Form 10-KSB, Quarterly
Reports on Form 10-QSB, and Current Reports on Form 8-K.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 24, 2000, 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 997,821.502 8,794.958
Ayden R. Lee, Jr. 997,821.502 8,794.958
Paula Canaday Bowman 997,821.502 8,794.958
William J. Edwards 997,821.502 8,794.958
Percy Y. Lee 997,821.502 8,794.958
Warren L. Grimes 997,821.502 8,794.958
R. Max Raynor 997,821.502 8,794.958
8
<PAGE>
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 March 28, 2000,
to amend certain of the Company's effective registration statements 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
April 7, 2000.
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
9
