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 September 30, 1997
Commission File Number 0-22787
FOUR OAKS FINCORP, INC.
-----------------------
(Exact name of registrant 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
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(Address of principal executive offices)
Registrant 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,
par value $1.00 per share 851,072
- ------------------------- -----------------------------
(Title of Class) (Number of shares outstanding
as of September 30, 1997)
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(All amounts in thousands) September 30, December 31,
1997 1996
-------- -------
ASSETS
Cash and due from banks $ 5,897 5,047
Interest bearing bank balances 4,460 1,562
-------- -------
Total cash and cash equivalents 10,357 6,609
Investment securities (approximate market value of
$32,239 and $37,092 respectively) 32,239 37,092
Loans, net 135,142 108,036
Accrued interest receivable 2,597 2,052
Bank premises and equipment, net 5,131 4,450
Other real estate owned 147 147
Intangible assets 173 183
Prepaid expenses and other assets 797 544
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Total assets $186,583 159,113
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - noninterest bearing $ 27,028 21,073
NOW accounts 13,850 14,707
Savings 16,834 15,727
Time $100,000 and over 35,731 27,339
Other time 70,112 63,997
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Total deposits 163,555 142,843
Accrued interest payable 1,672 1,509
Other borrowed money 5,000 --
Other liabilities 411 398
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Total liabilities 170,638 144,750
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Shareholders' equity:
Capital stock:
Common stock, $1.00 par value, 5,000,000 shares authorized, 851,072 and
837,949 issued and outstanding at September 30, 1997
and December 31, 1996 respectively 851 838
Surplus 5,155 4,872
Retained earnings 9,910 8,604
Net unrealized gain (loss) on marketable equity securities 29 49
-------- -------
Total shareholders' equity 15,945 14,363
-------- -------
Total liabilities and shareholders' equity $186,583 159,113
======== =======
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 nine
months ended months ended
September 30, September 30,
1997 1996 1997 1996
--------------- ---------------
Interest income:
Interest and fees on loans $3,396 2,705 9,282 7,495
Interest on investment securities:
US Government and agencies 412 348 1,269 1,142
Municipalities 71 66 219 198
Other investment securities 24 16 71 47
Interest on overnight investments 6 24 23 67
------ ----- ------ -----
Total interest income 3,909 3,159 10,864 8,949
Interest expense:
Interest on deposits 1,743 1,397 4,888 4,077
Interest on borrowed money 120 53 259 109
------ ----- ------ -----
Total interest expense 1,863 1,450 5,147 4,186
------ ----- ------ -----
Net interest income 2,046 1,709 5,717 4,763
Provision for loan losses 126 101 388 302
------ ----- ------ ------
Net interest income after provision
for loan losses 1,920 1,608 5,329 4,461
------ ----- ------ -----
Other income:
Service charges 267 157 703 459
Credit life commissions 21 16 64 54
Other operating income 76 72 256 191
Securities gains (losses) 6 2 16 2
------ ----- ------ -----
Total noninterest income 370 247 1,039 706
------ ----- ------ -----
Other expenses:
Salaries 598 498 1,696 1,426
Employee benefits 109 76 311 247
Occupancy expenses 63 45 175 132
Equipment expenses 69 64 230 192
Other operating expenses 548 452 1,514 1,236
------ ----- ------ -----
Total noninterest expense 1,387 1,135 3,926 3,233
------ ----- ------ -----
Income before income taxes 903 720 2,442 1,934
Income taxes 291 229 777 591
------ ----- ------ -----
Net income $ 612 491 1,665 1,343
====== ===== ====== =====
Net income per share $ 0.72 0.59 1.98 1.62
====== ===== ====== =====
Cash dividend paid per share $ 0.14 0.13 0.42 0.38
====== ===== ====== =====
Weighted average shares outstanding 845 834 842 831
====== ===== ====== =====
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 ........... (316,049)
Net change in
unrealized gain or loss
on securities available
for sale ............... (329,084)
Sale of common stock ..... 2,651 2,651 47,654
Dividend Reinvestment
Plan ................... 5,128 5,128 111,300
Net income ............... 1,343,377
---------- -------- ---------- ---------- ---------
September 30, 1996
Balance ............... 836,058 $836,058 $4,827,239 $8,235,353 $(114,467)
========== ======== ========== ========== =========
December 31, 1996
Balance ............... 837,949 $837,949 $4,871,624 $8,604,139 $ 48,941
Cash dividends ........... (359,498)
Net change in
unrealized gain or loss
on securities available
for sale .............. (20,163)
Sale of common stock ..... 7,458 7,458 138,090
Dividend Reinvestment
Plan .................. 5,665 5,665 145,344
Net income ............... 1,664,985
---------- -------- ---------- ---------- ---------
September 30, 1997
Balance ............... 851,072 $851,072 $5,155,058 $9,909,626 $ 28,778
========== ======== ========== ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
For the nine months ended
September 30, September 30,
(All amounts in thousands) 1997 1996
---- ----
Operating activities
Net income $ 1,665 1,343
Adjustments to reconcile net income to cash
provided by operations:
Provision for loan losses 390 302
Provision for depreciation 212 152
(Gain) loss on sale of securities (16) (2)
(Gain) loss on sale of repossessed\foreclosed assets 28 54
Write off of loans, net of recoveries (85) (112)
(Increase) Decrease in prepaid & other assets (376) 2
(Increase) Decrease in interest receivable (545) (539)
Increase (Decrease) in other liabilities 43 153
Increase (Decrease) in interest payable 174 45
Net amortization of bond premiums & discounts (5) 1
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Net cash provided from (used by) operating activities 1,485 1,399
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Investing activities
Proceeds from sales of investment securities 13,534 11,033
Purchase of investment securities (8,660) (7,181)
Net increase in loans outstanding (27,411) (18,379)
Capital expenditures (859) (1,252)
Proceeds from sale of assets acquired in
settlement of loans 76 282
Acquisition of assets acquired in settlement of loans (66) (433)
-------- -------
Net cash used by investment activities (23,386) (15,930)
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Financing activities
Net increase (decrease) in short-term borrowings 5,000 --
Net increase in deposit accounts 20,712 20,329
Proceeds from issuance of common stock 297 166
Cash dividends (359) (316)
-------- -------
Net cash provided by financing activities 25,650 20,179
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Increase (Decrease) in cash and cash equivalents 3,749 5,648
Cash and cash equivalents at beginning of period 6,608 6,045
-------- -------
Cash and cash equivalents at end of period $ 10,357 11,693
======== =======
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
September 30, 1997 and December 31, 1996 are as follows:
U. S. Treasuries
and Agencies State & Local Other
September 30, 1997:
Book and Market value $ 25,250,843 $5,516,097 $ 1,471,686
Unrealized gains(losses) (6,849) 155,195 (60,267)
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:
September 30, December 31,
1997 1996
------------ ------------
Total Gross Loans $136,886,786 $109,476,023
Allowance for Possible Loan Losses 1,745,000 1,440,000
------------ ------------
Loans, net $135,141,786 $108,036,023
============ ============
Loan balances by category are as follows:
(in thousands)
Loans secured by real estate:
Construction and land development $ 17,832 15,118
Secured by farmland 6,181 6,914
Secured by 1-4 family residential properties 40,492 29,619
Secured by multifamily residential properties 2,193 1,636
Secured by nonfarm nonresidential properties 12,852 10,781
Agricultural loans 10,934 5,980
Commercial and industrial loans 22,691 19,956
Loans to individuals for household,
family and other personal expenses 22,804 18,698
Loans to State and Local government 173 109
All other loans 657 669
Lease Financing Receivables 203 95
LESS: Any unearned income on loans 125 99
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Total loans $ 136,887 109,476
============ ============
6
4. Allowance for Possible Loan Losses are as follows:
(All amounts in thousands)
September 30,
1997 1996
---- ----
Balance, beginning $1,440 $1,220
Provision charged to operating expense 388 302
Recoveries of amounts charged off 26 19
------ ------
1,854 1,541
Amounts charged off 109 131
------ ------
Balance, ending $1,745 $1,410
====== ======
5. Interest and dividend income on securities by source is as follows:
September 30,
1997 1996
---- ----
U. S. Treasuries and Agencies $1,269,085 $1,142,233
States and Political Subdivisions $ 219,369 $ 198,423
Other $ 71,145 $ 46,645
6. Interest expense on time certificates of deposit of $100,000 or more was
$1,397,467 and $1,060,978 at September 30, 1997 and 1996, respectively. Interest
expense on all other deposits was $3,491,030 and $3,016,610 at September 30,
1997 and 1996 respectively.
7. Standby letters of credit were $1,382,000 and $652,000 at September 30, 1997
and 1996, respectively. Unfunded commitments were $25,889,000 and $18,755,000 at
September 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 consolidated 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 nine month period ended September 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: 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 September 30,
1997, the following computation would have been presented on the consolidated
statements of income:
Nine Months Ended
September 30, 1997
------------------
Basic income per common share:
Net Income 1,665,000
Weighted average common shares outstanding 845,000
Basic income per common share 1.98
Dilutive income per common share:
Net income 1,665,000
Weighted average common shares outstanding 845,000
Dilutive effect of stock options 21,110
Total shares 866,110
Dilutive income per common share 1.93
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 nine month period ended September 30, 1997,
interest bearing bank balances and investment securities combined decreased 5%.
These funds along with funds generated by the 15% increase in deposits and $5
million in borrowings were used to fund net loan increases of 25%. 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 properties anticipated value is
higher than the recorded amount.
Total shareholder's equity increased 11%, primarily attributable to the increase
in retained earnings.
Results of Operations. Net income increased 24% and 25% for the nine months and
three months ended September 30, 1997, respectively, as compared to the same
periods in 1996. The increases results from the effective management of the
interest margin and increases in other income derived from new products and
services. The 26% and 24% increase in loan income for the three months and nine
months ended September 30, 1997, respectively, is due to loan growth. Interest
earned on investments has increased due to higher portfolio yields. Interest
expense for the three months and nine months ended September 30, 1997,
respectively, increased 28% and 23% over the same periods in 1996 due to total
deposit growth of 15% and increased borrowings.
Other expenses have increased 22% and 21% for the three months and nine months
ended September 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 .98% is favorable compared to historical
trends. At September 30, 1997, the Company's nonperforming loans were $577,000
or 0.42% of total gross loans. The reserve for loan loss of $1,745,000 or 1.27%
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
3(i) Articles of Incorportaion of Registrant filed as Exhibit 3.1
to the Registrant's Current Report on Form 8-K (12G3), dated
July 1, 1997.
3(ii) Bylaws of Registrant filed as Exhibit 3.2 to the Registrant's
Current Report on Form 8-K (12G3), dated July 1, 1997.
4 Specimen of Certificate for Registrant's Common Stock filed as
Exhibit 4 to the Registrant's Current Report on Form 8-K
(12G3), dated July 1, 1997.
10.1 Dividend Reinvestment and Stock Purchase Plan
27 Financial Data Schedule
10
(b) Reports on Form 8-K
(i) On July 2, 1997, the Registrant filed a Form 8-K(12G3) 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.
11
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: November 12, 1997 By: /s Ayden R. Lee, Jr.
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Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: November 12, 1997 By: /s Nancy S. Wise
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Nancy S. Wise
Senior Executive Vice President and
Chief Financial Officer
12
INDEX TO EXHIBITS
Exhibit Description
10.1 Dividend Reinvestment and Stock Purchase Plan
27 Financial Data Schedule
13