US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 1997
Commission File Number 0-22787
FOUR OAKS FINCORP, INC.
(Exact name of registrant 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)
Registrant's Telephone Number, including area code 919-963-2177
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Common Stock, 843,158
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of June 30, 1997)
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(All amounts in thousands) June 30, December 31,
1997 1996
--------- ---------
ASSETS
Cash and due from banks $ 7,804 5,047
Interest bearing bank balances 167 1,562
--------- ---------
Total cash and cash equivalents 7,971 6,609
Investment securities (approximate market value of
$32,745 and $37,092 respectively) 32,745 37,092
Loans, net 131,292 108,036
Accrued interest receivable 2,394 2,052
Bank premises and equipment, net 4,986 4,450
Other real estate owned 147 147
Intangible assets 176 183
Prepaid expenses and other assets 790 544
--------- ---------
Total assets $180,501 159,113
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 24,918 21,073
NOW accounts 13,459 14,707
Savings 16,239 15,727
Time $100,000 and over 32,179 27,339
Other time 66,500 63,997
--------- ---------
Total deposits 153,295 142,843
Accrued interest payable 1,528 1,509
Other borrowed money 10,240 --
Other liabilities 298 398
--------- ---------
Total liabilities 165,361 144,750
--------- ---------
Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized, 843,158 and
837,949 issued and outstanding at June 30, 1997
and December 31, 1996 respectively 843 838
Surplus 5,004 4,872
Retained earnings 9,422 8,604
Net unrealized gain (loss) on marketable equity securities (129) 49
--------- ---------
Total shareholders' equity 15,140 14,363
--------- ---------
Total liabilities and shareholders' equity $180,501 159,113
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands except per share data) For the three For the six
months ended months ended
June 30, June 30,
1997 1996 1997 1996
----------------- ----------------
Interest income:
Interest and fees on loans $3,131 2,502 5,886 4,790
Interest on investment securities:
US Government and agencies 427 373 857 794
Municipalities 71 67 148 132
Other investment securities 27 15 47 31
Interest on overnight investments 8 21 17 43
------ ------ ------ ------
Total interest income 3,664 2,978 6,955 5,790
Interest expense:
Interest on deposits 1,609 1,353 3,145 2,680
Interest on borrowed money 109 43 139 56
------ ------ ------ ------
Total interest expense 1,718 1,396 3,284 2,736
------ ------ ------ ------
Net interest income 1,946 1,582 3,671 3,054
Provision for loan losses 199 94 262 201
------ ------ ------ ------
Net interest income after provision
for loan losses 1,747 1,488 3,409 2,853
------ ------ ------ ------
Other income:
Service charges 249 155 436 302
Credit life commissions 22 16 43 38
Other operating income 88 55 180 119
Securities gains (losses) 12 (6) 10 --
------ ------ ------ ------
Total noninterest income 371 220 669 459
------ ------ ------ ------
Other expenses:
Salaries 590 477 1,098 928
Employee benefits 118 87 202 171
Occupancy expenses 53 39 112 87
Equipment expenses 82 62 161 128
Other operating expenses 449 408 966 784
------ ------ ------ ------
Total noninterest expense 1,292 1,073 2,539 2,098
------ ------ ------ ------
Income before income taxes 826 635 1,539 1,214
Income taxes 280 201 486 362
------ ------ ------ ------
Net income $ 546 434 1,053 852
====== ====== ====== ======
Net income per share $ 0.65 0.53 1.25 1.03
====== ====== ====== ======
Cash dividend paid per share $ 0.14 0.13 .28 0.25
====== ====== ====== ======
Weighted average shares outstanding 841 832 840 830
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY - UNAUDITED
Common Stock Capital Retained Valuation
Shares Amount Surplus Earnings Allowance
December 31, 1995
Balance................... 828,279 $828,279 $ 4,668,285 $ 7,208,025 $ 214,617
Cash dividends............... (207,609)
Net change in
unrealized gain or loss
on securities available
for sale................... (460,172)
Sale of common stock......... 2,651 2,651 47,192
Dividend Reinvestment
Plan....................... 1,499 1,499 31,457
Net income................... 851,709
------- -------- ----------- ----------- ---------
June 30, 1996
Balance................... 832,429 $832,429 $ 4,746,934 $ 7,852,125 $(245,555)
======= ======== =========== =========== =========
December 31, 1996
Balance................... 837,949 $837,949 $ 4,871,624 $ 8,604,139 $ 48,941
Cash dividends............... (235,102)
Net change in
unrealized gain or loss
on securities available
for sale.................. (177,801)
Sale of common stock ........ 1,458 1,458 36,450
Dividend Reinvestment
Plan...................... 3,751 3,751 95,580
Net income................... 1,052,607
------- -------- ----------- ----------- ----------
June 30, 1997
Balance................... 843,158 $843,158 $ 5,003,654 $ 9,421,644 $(128,860)
======= ======== =========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
For the six months ended
June 30, June 30,
(All amounts in thousands) 1997 1996
-------- --------
Operating activities
Net income $ 1,053 852
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 262 201
Provision for depreciation 142 101
(Gain) loss on sale of securities (10) --
(Gain) loss on sale of repossessed assets 29 44
Write off of loans, net of recoveries (42) (83)
(Increase) Decrease in prepaid & other assets (72) 35
(Increase) Decrease in interest receivable (342) (271)
Increase (Decrease) in other liabilities (200) (10)
Increase (Decrease) in interest payable 17 15
Net amortization of bond premiums & discounts 4 (4)
-------- --------
Net cash provided from (used by) operating activities 841 880
-------- --------
Investing activities
Proceeds from sales of investment securities 8,080 9,996
Purchase of investment securities (4,012) (6,090)
Net increase in loans outstanding (23,476) (17,171)
Capital expenditures (678) (641)
Proceeds from sale of assets acquired in
settlement of loans 20 65
Acquisition of assets acquired in settlement of loans (6) (218)
-------- --------
Net cash used by investment activities (20,072) (14,059)
-------- --------
Financing activities
Net increase (decrease) in short-term borrowings 10,240 4,800
Net increase in deposit accounts 10,452 6,948
Proceeds from issuance of common stock 137 83
Cash dividends (235) (208)
-------- --------
Net cash provided by financing activities 20,594 11,623
-------- --------
Increase (Decrease) in cash and cash equivalents 1,363 (1,556)
Cash and cash equivalents at beginning of period 6,608 6,045
-------- --------
Cash and cash equivalents at end of period $ 7,971 4,489
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
5
FOUR OAKS FINCORP, INC.
Notes to Financial Statements
1. Cash and Due From Banks. Cash and due from banks consists of non-interest
bearing balances due from other banks and cash. The Federal Reserve requires
Four Oaks Fincorp, Inc. (the "Company") to maintain average reserve balances of
$500,000.
2. Investment Securities. The book value and market value of securities at June
30, 1997 and December 31, 1996 are as follows:
U.S. Treasuries
and Agencies State & Local Other
June 30, 1997:
Book and Market value $25,989,866 $5,423,374 $1,331,549
Unrealized gains(losses) (207,188) 100,833 (64,205)
December 31, 1996:
Book and Market value $30,208,120 $5,991,326 $ 892,769
Unrealized gains(losses) 35,104 149,921 (62,084)
All of the Company's investments have been categorized Available for Sale
under the Mark-to-Market accounting rules and the unrealized gains and losses
are recorded in shareholder's equity.
3. Loans Receivable. Loans, net, consist of:
June 30, December 31,
1997 1996
------------ ------------
Total Gross Loans $132,951,841 $109,476,023
Allowance for Possible Loan Losses 1,660,000 1,440,000
------------ ------------
Loans, net $131,291,841 $108,036,023
============ ============
Loan balances by category are as follows:
(in thousands)
Loans secured by real estate:
Construction and land development $ 17,189 15,118
Secured by farmland 6,116 6,914
Secured by 1-4 family residential properties 36,342 29,619
Secured by multifamily residential properties 2,076 1,636
Secured by nonfarm nonresidential properties 12,995 10,781
Agricultural loans 13,215 5,980
Commercial and industrial loans 22,824 19,956
Loans to individuals for household,
family and other personal expenses 21,515 18,698
Loans to State and Local government 88 109
All other loans 594 669
Lease Financing Receivables 139 95
LESS: Any unearned income on loans 141 99
------------ ------------
Total loans $ 132,952 109,476
============ ============
6
4. Allowance for Possible Loan Losses are as follows:
(All amounts in thousands)
June 30,
1997 1996
---- ----
Balance, beginning $ 1,440 $ 1,220
Provision charged to operating expense 262 201
Recoveries of amounts charged off 24 16
-------- --------
1,726 1,437
Amounts charged off 66 99
-------- --------
Balance, ending $ 1,660 $ 1,338
======== ========
5. Interest and dividend income on securities by source is as follows:
June 30,
1997 1996
---- ----
U. S. Treasuries and Agencies $857,249 $794,079
States and Political Subdivisions $148,227 $132,022
Other $ 46,528 $ 30,929
6. Interest expense on time certificates of deposit of $100,000 or more was
$880,872 and $690,909 at June 30, 1997 and 1996, respectively. Interest expense
on all other deposits was $2,264,134 and $1,988,667 at June 30, 1997 and 1996
respectively.
7. Standby letters of credit were $1,103,000 and $444,000 at June 30, 1997 and
1996, respectively. Unfunded commitments were $23,382,000 and $13,268,000 at
June 30, 1997 and 1996, respectively.
8. 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 financial statements and notes thereto in the Four Oaks Bank & Trust
Company annual report for the year ended December 31, 1996. The results of
operations for the six month period ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
9. 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.
7
10. Earnings per share are calculated by dividing net income by the weighted
average number of common and dilutive common equivalent shares outstanding.
Common equivalent shares consist of stock options issued and outstanding. In
determining the number of equivalent shares outstanding, the treasury stock
method was applied. This method assumes that the number of shares issuable
upon exercise of the stock options is reduced by the number of common shares
assumed purchased at market prices with a portion of the proceeds from the
assumed exercise of the common stock options.
The Company will adopt Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" on December 31, 1997. SFAS No. 128 requires the
Company to change its method for computing, presenting and disclosing earnings
per share information. Upon adoption, all prior period data presented will be
restated to conform to the provisions of SFAS No. 128.
If the Company had adopted SFAS No. 128 for the period ended June 30, 1997,
the following computation would have been presented on the consolidated
statements of income:
Six Months Ended
June 30, 1997
---------------------------
Basic income per common share:
Net Income 1,053,000
Weighted average common shares outstanding 840,000
Basic income per common share 1.25
Dilutive income per common share:
Net income 1,053,000
Weighted average common shares outstanding 840,000
Dilutive effect of stock options 22,254
Total shares 862,254
Dilutive income per common share 1.22
11. In June 1997, SFAS 130, "Reporting Comprehensive Income" was issued and is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires the disclosure of an
amount that represents total comprehensive income and the components of
comprehensive income in a financial statement. The adoption of SFAS 130 is not
expected to have a material impact on the financial statements of the
Company.
In June 1997, SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information' was issued and is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 is not expected
to have a material impact on the financial statements of the Company.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition. For the six month period ended June 30, 1997, interest
bearing bank balances and investment securities combined decreased 14%. These
funds along with funds generated by the 7% increase in deposits and $4.8 million
in short term borrowings were used to fund net loan increases of 22%. 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. The
Company's local economy continues to experience low unemployment rates and
increased construction of residential and commercial properties. Accrued
interest receivable has increased due to the increased volume of loans and the
fact that the farm loans presently being funded are scheduled to pay both
principal and interest in the fall after harvest.
Other real estate owned remains unchanged from December 31, 1996. The Company
presently has one property recorded at the adjusted loan value after reducing
the value for amounts previously recovered. The expected selling price is higher
than the recorded amount.
Total shareholder's equity increased 5% which reflects a slightly reduced
percentage due to net income being offset by the increase in net unrealized loss
on securities as the Company's securities portfolio repriced downward during the
first six months of 1997.
Results of Operations. Net income increased 26% and 24% for the six months and
three months ended June 30, 1997, respectively, as compared to the same periods
in 1996. The increase results from the effective management of the interest
margin and increases in other income derived from new products and services. The
25% and 23% increase in loan income for the three months and six months ended
June 30, 1997, respectively, is due to loan growth and somewhat higher rates as
fixed rate funds continue to either reprice upward upon maturity or pay out.
Interest earned on investments has increased due to higher portfolio yields.
Interest expense for the three months and six months ended June 30, 1997,
respectively, increased 23% and 20% over the same periods in 1996 due to total
deposit growth of 22%.
Other expenses have increased 20% and 21% for the three months and six months
ended June 30, 1997, respectively, over the same periods of 1996. This increase
is primarily due to higher salaries and operating costs resulting from
additional accounts and transactions as the Company continues to grow. A new
branch location in Benson, North Carolina was opened in July 1997.
The Company's delinquency rate of 1.18% is favorable compared to historical
trends. At June 30, 1997, the Company's nonperforming loans were $562,000 or
0.42% of total gross loans as compared to $771,000 or 0.72% at June 30,
1996. The reserve for loan loss of $1,660,000 or 1.25% of total gross loans is
considered adequate to cover future credit losses in the present portfolio.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings involving the Registrant.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement between Four Oaks Bank & Trust
Company and Ayden R. Lee, Jr.
10.2 Severance Agreement between Four Oaks Bank & Trust
Company and Ayden R. Lee, Jr.
27 Financial Data Schedule
(b) Reports on Form 8-K
(i) On July 2, 1997, the Registrant filed a Form 8-K12G3 to
report the reorganization of Four Oaks Bank & Trust
Company ( the "Bank") into a bank holding company
structure (the "Reorganization"). Pursuant to the
Reorganization, the Registrant is the holding company
and sole shareholder of the Bank. The Registrant has no
significant assets other than the Common Stock of the
Bank. Pursuant to the Reorganization, the Bank's Common
Stock was converted on a share-for-share basis into
Common Stock of the Registrant that have rights,
privileges and preferences identical to those of the
Bank.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: August 13, 1997 By: /s/ Clifton L. Painter
--------------- ----------------------------
Clifton L. Painter
Senior Executive Vice President and
Chief Operating Officer
Date: August 13, 1997 By: /s/ Nancy S. Wise
--------------- ----------------------------
Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
11
INDEX TO EXHIBITS
Exhibit Description
10.1 Employment Agreement between Four Oaks Bank & Trust Company and
Ayden R. Lee, Jr.
10.2 Severance Agreement between Four Oaks Bank & Trust Company and
Ayden R. Lee, Jr.
27 Financial Data Schedule