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, 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, 2,072,000
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of October 31, 2000)
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(All amounts in thousands) September 30, December 31,
2000 1999
--------- ---------
(Unaudited) *
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,315 10,416
Interest bearing bank balances 905 3,934
--------- ---------
Total cash and cash equivalents 9,220 14,350
Investment securities, available for sale 43,196 43,880
Loans, net 189,099 164,226
Accrued interest receivable 3,236 2,271
Bank premises and equipment, net 7,293 4,775
Other real estate owned 533 501
Intangible assets 130 140
Prepaid expenses and other assets 1,561 1,322
--------- ---------
Total assets $ 254,268 231,465
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 34,838 31,059
NOW accounts 15,558 16,895
Savings 17,894 19,345
Time $100,000 and over 57,146 51,370
Other time 81,480 76,042
--------- ---------
Total deposits 206,916 194,711
Accrued interest payable 2,246 2,024
Other borrowed money 20,380 12,200
Other liabilities 507 633
--------- ---------
Total liabilities 230,049 209,568
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value, 5,000,000 shares authorized,
2,072,000 and 2,050,000 issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 2,072 2,050
Capital surplus 6,045 5,599
Retained earnings 16,542 14,793
Accumulated other comprehensive income (loss) (440) (545)
--------- ---------
Total shareholders' equity 24,219 21,897
--------- ---------
Total liabilities and shareholders' equity $ 254,268 231,465
========= =========
</TABLE>
*Derived from audited financial statements
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 nine
months ended months ended
September 30, September 30,
2000 1999 2000 1999
-------------------- ---------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,755 4,052 13,279 11,737
Interest on investment securities:
US Government and agencies 578 530 1,776 1,538
Municipalities 45 50 142 147
Other investment securities 23 13 57 39
Interest on overnight investments 8 7 25 67
------- ------- ------- -------
Total interest income 5,409 4,652 15,279 13,528
Interest expense:
Interest on deposits 2,248 1,810 6,140 5,449
Interest on borrowed money 363 106 823 222
------- ------- ------- -------
Total interest expense 2,611 1,916 6,963 5,671
------- ------- ------- -------
Net interest income 2,798 2,736 8,316 7,857
Provision for loan losses 470 127 671 555
------- ------- ------- -------
Net interest income after provision
for loan losses 2,328 2,609 7,645 7,302
------- ------- ------- -------
Other income:
Service charges 256 221 736 687
Credit life commissions 23 9 47 36
Other operating income 185 221 551 610
Securities gains (losses) 2 0 1 (14)
------- ------- ------- -------
Total noninterest income 466 451 1,335 1,319
------- ------- ------- -------
Other expenses:
Salaries 838 776 2,475 2,294
Employee benefits 181 169 486 439
Occupancy expenses 62 66 185 197
Equipment expenses 122 113 330 312
Other operating expenses 744 545 2,058 1,709
------- ------- ------- -------
Total noninterest expense 1,947 1,669 5,534 4,951
------- ------- ------- -------
Income before income taxes 847 1,391 3,446 3,670
Income taxes 277 583 1,197 1,381
------- ------- ------- -------
Net income $ 570 808 2,249 2,289
======= ======= ======= =======
Net income per common share $ 0.28 0.40 1,09 1,13
======= ======= ======= =======
Net income per common share,
assuming dilution $ 0.28 0.40 1.09 1.13
======= ======= ======= =======
Cash dividend paid per share $ 0.08 0.07 0.24 0.21
======= ======= ======= =======
</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 nine months ended
September 30, September 30,
(All amounts in thousands) 2000 1999
-------- --------
<S> <C> <C>
Operating activities
Net income $ 2,249 2,289
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 671 555
Provision for depreciation 301 263
(Gain) loss on sale of securities (1) 14
Loss on repossessed/foreclosed assets 34 13
Increase in prepaid & other assets (459) (684)
Increase in interest receivable (965) (723)
Decrease (Increase) in other liabilities (126) 159
Increase (Decrease) in interest payable 222 (156)
Net amortization of bond premiums & discounts -- 1
-------- --------
Net cash provided (used) by operating activities 1,926 1,731
-------- --------
Investing activities
Proceeds from sales of investment securities 1,800 18,800
Purchase of investment securities (845) (15,579)
Net increase in loans outstanding (25,544) (14,271)
Capital expenditures (2,819) (26)
-------- --------
Net cash used by investment activities (27,408) (11,076)
-------- --------
Financing activities
Net increase (decrease) in borrowings 8,180 6,140
Net increase (decrease) in deposit accounts 12,205 2,890
Proceeds from issuance of common stock 468 384
Cash dividends (501) (446)
-------- --------
Net cash provided by financing activities 20,352 8,968
-------- --------
Increase (Decrease) in cash and cash equivalents (5,130) (377)
Cash and cash equivalents at beginning of period 14,350 8,620
-------- --------
Cash and cash equivalents at end of period $ 9,220 8,243
======== ========
</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 nine month periods ended September 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Income (numerator) $ 570,000 $ 808,000 $2,249,000 $2,289,000
========== ========== ========== ==========
Shares for Basic EPS (denom.) 2,069,000 2,037,000 2,072,000 2,031,000
Dilutive effect of stock options 14,356 10,278 14,356 10,278
---------- ---------- ---------- ----------
Adjusted shares for diluted EPS $2,083,356 $2,047,278 $2,083,684 $2,040,750
========== ========== ========== ==========
</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, 2000 and 1999, respectively, is as follows (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
For Three For Nine
Months ended Months Ended
September 30 September 30
2000 1999 2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net Income $ 570 $ 808 $ 2,249 $ 2,289
------- ------- ------- -------
Unrealized gains (losses) on available for sale securities 431 (174) 173 (983)
Reclassification of gains (losses) recognized in net income 0 (0) 1 14
Income tax (expense) benefit relating to unrealized gains
(losses) on available for sale securities (172) 69 (69) 387
------- ------- ------- -------
Other comprehensive income (loss) 259 (105) 105 (582)
------- ------- ------- -------
Comprehensive Income $ 829 $ 703 $ 2,354 $ 1,707
======= ======= ======= =======
</TABLE>
4. New Accounting Pronouncement: The Company has adopted 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 our Consolidated Financial Statements and Notes thereto.
Financial Condition. For the nine months ended September 30, 2000, interest
bearing bank balances and investment securities combined decreased 8%.
Borrowings increased $8,180,000. These funds, plus the $12,205,000 increase in
deposits, were used to fund net loan increases of 15%. Our loan volumes are
increasing due to seasonal funding of agricultural loans as well as growth in
real estate, commercial, and consumer lending. We opened an office in
Fuquay-Varina, North Carolina on October 16, 2000, but the lending officers
began soliciting customers in this market during the third quarter. The office
opened with $8 million of loans and $4 million of deposits. Our local economy
remains healthy with unemployment rates low and construction of residential and
commercial properties continuing. Accrued interest receivable increased 42% 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.
6
<PAGE>
During the nine months ended September 30, 2000, other real estate owned
increased to $533,000 due to the improvement of one property and the acquisition
of one property. During the three month period ended September 30, 2000, other
real estate decreased due to the sale of a portion of one property. We presently
own two properties which are recorded at the carrying value or the fair value
less cost of sale.
Total shareholder's equity increased 11%, primarily due to net income and
dividend reinvestment plan purchases.
Results of Operations. Net income decreased 2% and 29% for the nine months and
three months ended September 30, 2000, respectively, as compared to the same
periods in 1999. The decrease resulted from increases to the provision for loan
losses and expenses associated with expansion activities. The Company's
provision for loan loss was increased $343,000 during the three month period
ended September 30, 2000 as a result of recommendation by the Bank's primary
regulators which resulted in management revising its estimate of loan loss
exposure. The 13% and 17% increase in interest income on loans for the nine
months and three months ended September 30, 2000, respectively, reflects loan
growth and rate increases. Interest earned on investments has increased 12% and
9% due to higher interest rates during the nine months and three months ended
September 30, 2000 as compared to the nine months and three months ended
September 30, 1999. Interest expense for the nine months and three months ended
September 30, 2000, respectively, increased 23% and 37% over the nine months and
three months ended September 30, 1999 due to deposit growth, higher deposit
rates, and increased levels of borrowings.
Other expenses have increased 12% and 17% for the nine months and three months
ended September 30, 2000, respectively, over the nine months and three months
ended September 30, 1999. This increase is primarily due to higher salaries,
increased staffing, and operating costs resulting from additional accounts and
transactions as we continue to grow.
At September 30, 2000, our nonperforming loans were $1,607,000 or 0.84% of our
total gross loans as compared to $1,247,000 or 0.74% at September 30, 1999 and
847,000 or 0.51% at December 31, 1999. Our reserve for loan loss of $2,735,000
or 1.43% of total gross loans is considered adequate to cover losses in the
portfolio at September 30, 2000. We are actively taking measures to improve our
loan underwriting and have increased our staff in this area by five employees
since June 30, 2000.
We opened a branch in the town of Fuquay-Varina, Wake County, North Carolina,
October 16, 2000. We plan to operate from a temporary modular bank building for
approximately two years while a permanent building is planned and constructed.
Our new adminstrative offices are expected to be completed 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 Securities Exchange Act of 1934, as
amended, which statements represent our judgment
7
<PAGE>
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 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 5. Other information
As a North Carolina bank, the deposits of which are insured by the Federal
Deposit Insurance Corporation ("FDIC"), the Bank is subject to the supervision,
examination and regulation of the North Carolina Commissioner of Banks (the
"Commissioner") and the FDIC (collectively, the Commissioner and the FDIC are
referred to herein as the "Regulators"). The Regulators have recently completed
their regular periodic examination of the Bank. The Regulators found certain
loan administration deficiencies which resulted in increased risk in the Bank's
loan portfolio. The Board of Directors of the Bank has approved a written action
plan to improve the Bank's loan administration procedures, to increase the
allowance for loan losses, to correct deficiences noted on specific loans, to
adopt and implement policies and procedures governing the electronic banking
program, and to report progress on this plan to the Board and the Regulators.
Actions already taken by the Bank to accomplish the goals of the action plan
include increased staffing in loan review, implementation of new policies and
procedures, and additions to the allowance for loan and lease losses. The Bank
will furnish quarterly reports to the Regulators detailing its implementation of
these steps.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
8
<PAGE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated September 12,
2000, to announce the approval by the Company's Board of Directors of
the engagement of Dixon Odom PLLC as the Company's independent public
accountants for the year ended December 31, 2000, to replace
PricewaterhouseCoopers LLC.
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 14, 2000 By: /s/ Ayden R. Lee, Jr.
----------------- --------------------------
Ayden R. Lee, Jr.
President and
Chief Executive Officer
Date: November 14, 2000 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
