U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended
------------------
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)
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524
- --------------------------------------------------------------------------------
(Address of principal executive office, including zip code)
(919) 963-2177
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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. Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes No X
-- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, 2,724,765
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of August 12, 2004)
-1-
Page No.
----------
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003...................... 3
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2004 and 2003.. 4
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2004 and 2003... 5
Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2004............................. 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003..................... 7
Notes to Consolidated Financial Statements.................. 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
Item 4 - Controls and Procedures......................................... 13
Part II. OTHER INFORMATION
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities............................................. 14
Item 4 - Submission of Matters to a Vote of Security Holders.............. 14
Item 6 - Exhibits and Reports on Form 8-K................................. 15
-2-
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, 2004 December 31,
(Unaudited) 2003*
-------------- -------------
ASSETS (In thousands)
Cash and due from banks $ 12,125 $ 10,548
Interest-earning deposits 4,075 5,277
Investment securities available for sale 50,591 38,203
Loans 300,511 272,623
Allowance for loan losses (3,805) (3,430)
-------------- -------------
Net loans 296,706 269,193
Accrued interest receivable 2,163 1,893
Bank premises and equipment, net 10,196 10,582
FHLB stock 2,150 1,923
Investment in life insurance 4,489 2,897
Other assets 2,445 1,205
-------------- -------------
Total assets $ 384,940 $ 341,721
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 57,144 $ 50,829
Money market and NOW accounts 55,804 43,927
Savings 14,106 13,038
Time deposits, $100,000 and over 97,844 85,100
Other time deposits 78,922 80,024
-------------- -------------
Total deposits 303,820 272,918
Borrowings 43,160 33,160
Accrued interest payable 1,342 1,284
Other liabilities 2,771 1,479
-------------- -------------
Total liabilities 351,093 308,841
-------------- -------------
Shareholders' equity:
Common stock; $1.00 par value,
10,000,000 shares authorized;
2,722,991 and 2,676,263 shares
issued and outstanding at June 30,
2004 and December 31, 2003,
respectively 2,723 2,676
Additional paid-in capital 8,932 8,029
Retained earnings 23,043 21,867
Accumulated other comprehensive
income (loss) (851) 308
-------------- -------------
Total shareholders' equity 33,847 32,880
-------------- -------------
Total liabilities and
shareholders' equity $ 384,940 $ 341,721
============== =============
* Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2004 2003 2004 2003
--------- ----------- ---------- ------------
(In thousands, except per share data)
Interest income:
Loans, including fees $ 4,773 $ 4,187 $ 9,463 $ 8,273
Investment securities:
Taxable 354 403 654 830
Tax-exempt 45 52 96 107
Dividends 32 22 54 47
Interest-earning deposits 11 26 16 47
--------- ----------- ------------ -----------
Total interest income 5,215 4,690 10,283 9,304
--------- ----------- ------------ -----------
Interest expense:
Deposits 983 1,125 1,925 2,399
Borrowings 418 386 814 767
--------- ----------- ------------ -----------
Total interest
expense 1,401 1,511 2,739 3,166
--------- ----------- ------------ -----------
Net interest
income 3,814 3,179 7,544 6,138
Provision for loan losses 422 423 990 766
--------- ----------- ------------ -----------
Net interest income
after provision for
loan losses 3,392 2,756 6,554 5,372
--------- ----------- ------------ -----------
Non-interest income:
Service charges on deposit
accounts 511 460 1,007 903
Other service charges,
commissions and fees 363 204 620 455
Gain on sale of investment
securities available for
sale 50 48 106 213
Gain on sale of loans 15 148 15 148
Increase in cash surrender
value of life insurance 43 - 92 -
--------- ----------- ------------ -----------
Total non-interest
income 982 860 1,840 1,719
--------- ----------- ------------ -----------
Non-interest expense:
Salaries 1,332 1,284 2,655 2,449
Employee benefits 232 259 525 532
Occupancy expenses 120 120 255 230
Equipment expenses 320 273 596 556
Professional and
consulting fees 147 206 299 377
Other taxes and licenses 48 58 110 118
Merchant fees 87 79 152 147
Other operating expenses 574 474 1,058 888
--------- ----------- ------------ -----------
Total non-interest
expense 2,860 2,753 5,650 5,297
--------- ----------- ------------ -----------
Income before income
taxes 1,514 863 2,744 1,794
--------- ----------- ------------ -----------
Income taxes 532 245 963 548
--------- ----------- ------------ -----------
Net income $ 982 $ 618 $ 1,781 $ 1,246
========= =========== ============ ===========
Net income per common share:
Basic $ .36 $ .23 $ .66 $ .46
========= =========== ============ ===========
Diluted $ .36 $ .23 $ .65 $ .46
========= =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income (UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
---------- --------- --------- ---------
(Amounts in thousands)
Net income $ 982 $ 618 $ 1,781 $ 1,246
--------- --------- ---------- ---------
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains
(losses) on available for
sale securities (1,754) 258 (1,383) 538
Tax effect 701 (102) 553 (216)
Reclassification of gains
recognized in net income (50) (48) (106) (213)
Tax effect 20 19 43 85
--------- --------- ---------- ---------
Net of tax amount (1,083) 127 (893) 194
--------- --------- ---------- ---------
Cash flow hedging activities:
Unrealized holding losses
on cash flow
hedging activities (796) - (444) -
Tax effect 318 - 178 -
--------- --------- ---------- ---------
Net of tax amount (478) - (266) -
--------- --------- ---------- ---------
Total other comprehensive
income (loss) (1,561) 127 (1,159) 194
--------- --------- ---------- ---------
Comprehensive income (loss) $ (579) $ 745 $ 622 $ 1,440
========= ========= ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
Four Oaks Fincorp, Inc.
Consolidated Statement of Shareholders' Equity (unaudited)
- --------------------------------------------------------------------------------
Accumulated
Additional other Total
Common stock paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income (loss) equity
------ ------ ------- --------- ------------- ------
(Amounts in thousands, except share and per share data)
Balance, December 31, 2003 2,676,263 $ 2,676 $ 8,029 $21,867 $ 308 $32,880
Comprehensive income:
Net income - - - 1,781 - 1,781
Other comprehensive loss - - - - (1,159) (1,159)
Common stock issued pursuant to:
Issuance of common stock 16,879 17 354 - - 371
Exercise of stock options 32,649 33 508 - - 541
Current income tax benefit - - 41 - - 41
Purchases and retirement of
common stock (2,800) (3) - (62) - (65)
Cash dividends of $.20 per share - - - (543) - (543)
--------- ------- -------- ------- ------ -------
Balance, June 30, 2004 2,722,991 $ 2,723 $ 8,932 $23,043 $ (851) $33,847
========= ======= ======== ======= ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
-----------------------
2004 2003
--------- ---------
(In thousands)
Operating activities:
Net income $ 1,781 $ 1,246
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 990 766
Provision for depreciation and amortization 474 447
Net amortization of bond premiums and
discounts 108 283
Gain on sale of securities (106) (213)
Gain on sale of loans (15) (148)
Loss on disposal of capital assets 29 -
Gain on sale of foreclosed assets - (4)
Increase in cash surrender value of life
insurance (92) -
Changes in assets and liabilities:
Increase in other assets (408) (374)
(Increase) decrease in interest receivable (270) 131
Increase in other liabilities 1,236 3,214
Increase (decrease) in interest payable 58 (243)
---------- ----------
Net cash provided by operating
activities 3,785 5,105
---------- ----------
Investing activities:
Proceeds from sales and calls of securities
available for sale 11,444 29,674
Proceeds from maturities of securities
available for sale 9,955 -
Purchase of securities available for sale (35,278) (21,413)
Net increase in loans (28,771) (24,336)
Purchases of premises and equipment (110) (694)
Investment in life insurance (1,500) (3,000)
Purchase of Federal Home Loan Bank stock (227) (175)
Proceeds from sales of foreclosed assets 161 418
Expenditures on foreclosed assets - (3)
---------- ----------
Net cash used in investment
activities (44,326) (19,529)
---------- ----------
Financing activities:
Net proceeds from borrowings 10,000 3,500
Net increase in deposit accounts 30,612 7,242
Proceeds from issuance of common stock 912 641
Purchase and retirement of common stock (65) (271)
Cash dividends (543) (475)
---------- ----------
Net cash provided by
financing activities 40,916 10,637
---------- ----------
Increase (decrease) in cash and
cash equivalents 375 (3,787)
Cash and cash equivalents at beginning of
period 15,825 19,054
---------- ----------
Cash and cash equivalents at
end of period $ 16,200 $ 15,267
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial information contained in the
accompanying consolidated financial statements, which is unaudited, reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial information as of and for the three month and
six month periods ended June 30, 2004 and 2003, in conformity with accounting
principles generally accepted in the United States of America. The consolidated
financial statements include the accounts of Four Oaks Fincorp, Inc. (the
"Company") and its wholly-owned subsidiaries, Four Oaks Bank & Trust Company
(the "Bank"), and Four Oaks Mortgage Services, LLC, a mortgage origination
subsidiary. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three month and six month
periods ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2004.
The organization and business of the Company, accounting policies followed
by the Company and other information are contained in the notes to the
consolidated financial statements filed as part of the Company's annual report
on Form 10-KSB for the year ended December 31, 2003. This quarterly report
should be read in conjunction with such annual report.
NOTE 2 - NET INCOME PER SHARE
Basic and diluted net income per common share is computed based on the
weighted average number of shares outstanding during each period after
retroactively adjusting for a 5-for-4 stock split paid on November 10, 2003.
Diluted net income per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the net income of the Company.
Basic and diluted net income per common share have been computed based upon
net income as presented in the accompanying consolidated statements of income
divided by the weighted average number of common shares outstanding or assumed
to be outstanding as summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
-------- --------- --------- --------
Weighted average number of common
shares used in computing basic net
income per share 2,718,000 2,698,750 2,706,000 2,690,000
Effect of dilutive stock options 16,207 8,669 14,896 7,815
--------- --------- --------- ---------
Weighted average number of
common shares and dilutive
potential common shares used
in computing diluted net income
per share 2,734,207 2,707,419 2,720,896 2,697,815
========= ========= ========= =========
As of June 30, 2004 and 2003, there were no antidilutive shares outstanding
for both three month and six month periods.
-8-
FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 3 - STOCK COMPENSATION PLANS
SFAS No. 123, Accounting for Stock-Based Compensation, encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plans have no
intrinsic value at the grant date as they are granted with an exercise price
equal to the fair market value on that date and, under Opinion No. 25, no
compensation cost is recognized for them. The Company has elected to continue
with the accounting methodology in Opinion No. 25 and, as a result, has provided
the following pro forma disclosures of net income and earnings per share and
other disclosures as if the fair value based method of accounting had been
applied.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(Amounts in thousands, except per share data)
Net income:
As reported $ 982 $ 618 $1,781 $1,246
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (16) (9) (31) (23)
----- ----- ------ ------
Pro forma $ 966 $ 609 $1,750 $1,223
===== ===== ====== ======
Basic earnings per share:
As reported $ .36 $ .23 $ .66 $ .46
Pro forma .36 .23 .65 .45
Diluted earnings per share:
As reported $ .36 $ .23 $ .65 $ .46
Pro forma .35 .22 .64 .45
NOTE 4 - COMMITMENTS
At June 30, 2004 loan commitments were as follows (in thousands):
Commitment to extend credit $ 50,348
Undisbursed lines of credit 19,851
-9-
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 its
subsidiaries and should be read in conjunction with our Consolidated Financial
Statements and Notes thereto.
Comparison of Financial Condition at
June 30, 2004 and December 31, 2003
During the six months ended June 30, 2004, the Company's total assets grew
from $341.7 million at December 31, 2003 to $384.9 million, an increase of $43.2
million or 12.65%. This increase in our assets resulted primarily from the
increase in our net loans of $27.5 million from $269.2 million at December 31,
2003 to $296.7 million at June 30, 2004. The growth in our loan portfolio
resulted primarily from increases in our loans secured by real estate, which
increased $29.7 million. In addition, our liquid assets, consisting of cash and
cash equivalents and investment securities available for sale, experienced a net
increase of $12.8 million. This growth in our assets was funded by increases in
both deposits and borrowings, which increased by $30.9 million and $10.0
million, respectively. Our investment in life insurance increased from $1.5
million at December 31, 2004 to $4.5 million at June 30, 2004. This insurance
provides the Company favorable tax-equivalent returns as means for offsetting a
portion of the cost of employee benefit plans.
Deposits continue to be our primary funding source. During the six months
ended June 30, 2004, we had an increase in deposits of $30.9 million, from
$272.9 million at December 31, 2003 to $303.8 million. This increase occurred
primarily within our demand deposit and savings accounts, which increased by
$19.3 million. Also during the six months ended June 30, 2004, our borrowings,
which consist almost entirely of advances from the Federal Home Loan Bank,
increased $10.0 million to $43.2 million.
Total shareholders' equity increased approximately $1.0 million from $32.9
million at December 31, 2003 to $33.8 million at June 30, 2004. This increase in
shareholders' equity resulted principally from income from operations during the
period of $1.8 million, net proceeds from the exercise of stock options and
employee stock purchases of $953,000, and decreased as the result of the other
comprehensive loss during the period of $1.2 million and dividends paid of
$543,000. At June 30, 2004, both the Company and the Bank were considered to be
well capitalized, as such term is defined in applicable federal regulations.
Results of Operations for the Three Months Ended
June 30, 2004 and 2003
Net Income. Net income for the three months ended June 30, 2004 was
$982,000 or $.36 per basic share, as compared with net income of $618,000 or
$.23 per basic share for the three months ended June 30, 2003, an increase of
$364,000 or $.13 per share. For the three months ended June 30, 2004, the
increase resulted primarily from an increase in the Company's net interest
income of $635,000, which was partially offset by increases of $107,000 in other
non-interest expenses and $287,000 in income taxes.
Net Interest Income. Like most financial institutions, the primary
component of earnings for the Bank is net interest income. Net interest income
is the difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result from changes in
-10-
volume, spread and margin. For this purpose, volume refers to the average
dollar level of interest-earning assets and interest-bearing liabilities, spread
refers to the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities and margin refers to net
interest income divided by average interest-earning assets. Margin is influenced
by the level and relative mix of interest-earning assets and interest-bearing
liabilities, as well as by levels of non-interest-bearing liabilities and
capital.
Net interest income for the three months ended June 30, 2004 was $3.8
million and increased $635,000, compared to the three months ended June 30,
2003. Our average interest-earning assets increased $47.1 million for the three
months ended June 30, 2004 compared to the same period in 2003, while during the
same period, our average interest-bearing liabilities increased $38.9 million,
thereby resulting in an increase in the level of our net interest-earning assets
during the current year period of $8.2 million. The Company increased the
percentage of earning assets to total assets from 91.3% at June 30, 2003 to
92.8% at June 30, 2004. Additionally, the percentage of our deposits comprised
of lower rate demand deposit accounts increased from 39.5% at June 30, 2003 to
41.8% at June 30, 2004. Also, subsequent to the second quarter of 2003, the Bank
entered into an interest rate swap agreement that was used to hedge prime-based
loans. This interest rate swap increased interest income by $111,000 for the
three months ended June 30, 2004. As of June 30, 2004, the Bank also utilized
interest rate swaps to hedge its exposure to changes in the interest rates
related to a $19.0 million notional amount of brokered deposits. All of the
aforementioned factors combined to increase our net interest margin by 16 basis
points from 4.20% for the three month ended June 30, 2003 to 4.36% for the three
months ended June 30, 2004.
Provision for Loan Losses. The provision for loan losses for the three
months ended June 30, 2003 and 2004 were essentially equal at $423,000 and
$422,000, respectively. Net loan charge-offs during the three months ended June
30, 2004 were $482,000 as compared to $218,000 for the three months ended June
30, 2003. Non-performing loans aggregated $3.1 million at June 30, 2004,
increasing from the $1.8 million at December 31, 2003, while the allowance for
loan losses, expressed as a percentage of gross loans, was 1.27% and 1.25% at
June 30, 2004 and December 31, 2003, respectively. We increased the allowance
relative to our gross loans principally due to the increased levels of
non-performing loans. Based on historic results, management believes that the
allowance is adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income increased $122,000 to $982,000 for
the three months ended June 30, 2004 compared to $860,000 for the same period in
2003. Increases for the three months ended June 30, 2004 included increases of
$51,000 in services charges and fees on deposit accounts and $159,000 in other
service charges, commissions and fees as a result of the Company's growth.
Offsetting these increases was a decrease in the gain on the sale of loans in
the amount of $133,000, from $148,000 for the three month period ended June 30,
2003 to $15,000 for the same period in 2004.
Non-Interest Expense. Non-interest expense increased $107,000 to $2.9
million for the three months ended June 30, 2004 compared to $2.8 million for
the three months ended June 30, 2003. This increase was primarily due to an
increase in other operating expenses of $100,000 due to the Company's growth.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 35.0% and 28.4% for the quarters
ended June 30, 2004 and 2003, respectively.
-11-
Results of Operations for the Six Months Ended
June 30, 2004 and 2003
Net Income. Net income for the six months ended June 30, 2004 was $1.8
million, or $.66 per basic share, as compared with net income of $1.2 million,
or $.46 per basic share for the six months ended June 30, 2003, an increase of
$535,000 or $.20 per share. For the six months ended June 30, 2004, the increase
resulted primarily from an increase in the Company's net interest income of $1.4
million, which was partially offset by increases of $224,000 in the provision
for loan losses, $415,000 in the provision for income taxes and $353,000 in
other non-interest expenses.
Net Interest Income. Net interest income for the six months ended June 30,
2004 was $7.5 million, as compared with $6.1 million during the six months ended
June 30, 2003, an increase of $1.4 million, which resulted primarily from the
increase in the level of our average interest-earning assets relative to the
increase in the level of our average interest-bearing liabilities during the
quarter. Our average interest-earning assets increased $42.0 million for the six
months ended June 30, 2004 compared to the six months ended June 30, 2003, while
during the same period, our average interest-bearing liabilities increased $30.7
million, thereby resulting in an increase in the level of our net
interest-earning assets during the current year period of $11.3 million. The
Company increased the percentage of earning assets to total assets from 91.3% at
June 30, 2003 to 92.8% at June 30, 2004. Additionally, the percentage of our
deposits comprised of lower rate demand deposit accounts increased from 39.5% at
June 30, 2003 to 41.8% at June 30, 2004. Also, subsequent to the second quarter
of 2003, the Bank entered into an interest rate swap agreement that was used to
hedge prime-based loans. This interest rate swap increased interest income by
$222,000 for the six months ended June 30, 2004. As of June 30, 2004, the Bank
also utilized interest rate swaps to hedge its exposure to changes in the
interest rates related to a $19.0 million notional amount of brokered deposits.
All of the aforementioned factors combined to increase our net interest margin
by 32 basis points from 4.16% for the six months ended June 30, 2003 to 4.48%
for the six months ended June 30, 2004.
Provision for Loan Losses. The provision for loan losses was $990,000 and
$766,000 for the six months ended June 30, 2004 and 2003, respectively, an
increase of $224,000. This increase in provision for loan losses was primarily
due to $615,000 of net loan charge-offs during the six months ended June 30,
2004 compared to $461,000 of net charge-offs in the six months ended June 30,
2003 and due to increasing the level of the allowance for loan losses from 1.25%
to 1.27%. Based upon historic results, management believes that the allowance is
adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income increased $121,000 for the six
months ended June 30, 2004 to $1.8 million as compared to $1.7 million for the
six months ended June 30, 2003. Increases for the six months ended June 30, 2004
include increases of $104,000 in service charges and fees on deposit accounts
and $165,000 in other service charges, commission and fees as a result of the
Company's growth. During 2004, the Company has earned income of $92,000 from its
investment in life insurance products in which it had invested in during 2003.
Offsetting these increases were decreases in the gain on sale of investment and
gain on sale of loans in the amounts of $107,000 and $133,000, respectively.
Non-Interest Expense. Non-interest expense increased $353,000 to $5.7
million for the six months ended June 30, 2004 compared to $5.3 million for the
six months ended June 30, 2003. This increase was primarily due to an increase
in salaries and employee benefits of $199,000, which resulted from normal salary
adjustments, the addition of new personnel, and rising insurance costs. The
remaining non-interest expenses increased by $154,000 due to the Company's
continued growth.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 35.1% and 30.5% for the six months
ended June 30, 2004 and 2003, respectively.
-12-
Liquidity and Capital Resources
Our liquidity position is primarily dependent upon the Bank's need to
respond to loan demand, the short-term demand for funds caused by withdrawals
from deposit accounts (other than time deposits) and the liquidity of its
assets. The Bank's primary liquidity sources include cash and amounts due from
other banks, federal funds sold, and U.S. Government Agency and other short-term
investment securities. In addition, the Bank has the ability to borrow funds
from the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta and to
purchase federal funds from other financial institutions. Our management
believes that our liquidity sources are adequate to meet our operating needs and
the operating needs of the Bank for the next eighteen months. Total
shareholders' equity was $33.8 million or 8.8% of total assets at June 30, 2004
and $32.9 million or 9.6% of total assets at December 31, 2003.
Forward Looking Information
Information set forth in this Quarterly Report on Form 10-Q, 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 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 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
our periodic filings with the Securities and Exchange Commission, including
without limitation, our Annual Report on Form 10-KSB, Quarterly Reports on Form
10-Q, and current Reports on Form 8-K.
Item 4 - Controls and Procedures
- --------------------------------
As required by paragraph (b) of Rule 13a-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), an evaluation was carried out
under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective, in that they
provide reasonable assurances that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
required by the Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act)
-13-
during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Company's internal control
over financial reporting.
Part II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchaser" (as defined in Rule
10b-18(a)(3) under the Exchange Act), of the Company's common stock during the
three months ended June 30, 2004.
Total Number
of Shares
Purchased as Maximum Number
Part of of Shares That
Total Number Average Price Publicly May Yet Be
of Shares Paid per Announced Purchased Under
Period Purchased Share Program the Program
April 1, 2004 to April 30, 2004 - $ - - -
May 1, 2004 to May 31, 2004 4,595 $ 23.25 2,800 36,611
June 1, 2004 to June 30, 2004 - $ - - -
Year-to-date 4,595 $ 23.25 2,800
The table above includes purchases and retirement of common stock by the
Company. On December 10, 2001, we announced the authorization by our Board of
Directors of a program to repurchase up to 100,000 shares of our outstanding
common stock. As of June 30, 2004, there were an aggregate of 100,000 shares of
our common stock that have been approved for repurchase under the program, of
which an aggregate of 63,389 shares have already been repurchased.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 26, 2004, the Company held its Annual Meeting of Shareholders. Of
2,706,538 shares entitled to vote at the meeting, 1,859,220 shares voted. The
following proposals were submitted to the shareholders and voted on at the
meeting:
Proposal 1: To elect eight nominees to the Company's Board of Directors to
serve until the 2005 Annual Meeting of Shareholders or until their successors
are elected and qualified. The votes were cast as follows:
For Withheld
--------- --------
M. S. Canaday 1,859,220 0
Ayden R. Lee, Jr. 1,859,220 0
Paula Canaday Bowman 1,859,220 0
William J. Edwards 1,859,220 0
Percy Y. Lee 1,859,220 0
Warren L. Grimes 1,859,220 0
Dr. R. Max Raynor 1,856,716 2,504
William Ashley Turner 1,838,419 20,791
-14-
Proposal 2: To approve the amendment to the Company's Articles of
Incorporation to increase the aggregate number of shares of common stock that we
are authorized to issue from 5,000,000 shares to 10,000,000 shares. The votes
were cast as follows:
For Against Withheld
--------- ------- --------
1,790,924 68,295 1
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Description
- ------- -----------
10.1 Amended and Restated Employee Stock Purchase and Bonus Plan*
10.2 Amended and Restated Nonqualified Stock Option Plan*
31.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-4(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
____________
*Management Contract or Compensatory Plan
(b) Reports on Form 8-K.
On April 27, 2004, the Company furnished a Form 8-K to the SEC attaching a
press release dated April 26, 2004 announcing first quarter results for the
quarter ended March 31, 2004. Information furnished in the Form 8-K referenced
in the prior sentence is not deemed to be filed with the SEC.
-15-
SIGNATURES
Pursuant to the requirements of the Exchange Act, 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 16, 2004 By: /s/ Ayden R. Lee, Jr.
---------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: August 16, 2004 By: /s/ Nancy S. Wise
---------------------------------
Nancy S. Wise
Senior Vice President and
Chief Financial Officer
-16-
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Amended and Restated Employee Stock Purchase and Bonus Plan*
10.2 Amended and Restated Nonqualified Stock Option Plan*
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
_______
*Management Contract or Compensatory Plan
-17-