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