FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
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 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. 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, 3,482,019
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of August 9, 2005)
-1-
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004.............................................. 3
Consolidated Statements of Income
Three Months and Six Months Ended June 30, 2005 and 2004......................... 4
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2005 and 2004......................... 5
Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 2005................................................... 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004.......................................... 7
Notes to Consolidated Financial Statements....................................... 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................................ 11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 15
ITEM 4 - CONTROLS AND PROCEDURES.............................................................. 15
PART II. OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.......................... 16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 16
ITEM 6 - EXHIBITS............................................................................. 17
-2-
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31,
(Unaudited) 2004*
----------- ------------
ASSETS (In thousands)
Cash and due from banks $ 12,911 $ 10,634
Interest-earning deposits 4,430 3,615
Investment securities available for sale 59,459 52,342
Loans 351,219 312,815
Allowance for loan losses (4,334) (4,055)
--------- ---------
Net loans 346,885 308,760
Accrued interest receivable 2,439 2,210
Bank premises and equipment, net 9,902 10,149
FHLB stock 2,734 2,621
Investment in life insurance 6,138 6,054
Other assets 2,185 2,115
--------- ---------
Total assets $ 447,083 $ 398,500
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand $ 65,309 $ 59,528
Money market and NOW accounts 58,212 55,467
Savings 24,683 14,900
Time deposits, $100,000 and over 123,851 108,655
Other time deposits 81,076 76,757
--------- ---------
Total deposits 353,131 315,307
Borrowings 51,160 43,160
Accrued interest payable 1,677 1,201
Other liabilities 1,391 1,537
--------- ---------
Total liabilities 407,359 361,205
--------- ---------
Shareholders' equity:
Common stock; $1.00 par value, 10,000,000 shares
authorized; 3,479,207 and 3,438,107 shares issued
and outstanding at June 30, 2005 and December 31, 2004,
respectively 3,479 3,438
Additional paid-in capital 9,534 8,788
Retained earnings 26,967 25,091
Accumulated other comprehensive loss (256) (22)
--------- ---------
Total shareholders' equity 39,724 37,295
--------- ---------
Total liabilities and shareholders' equity $ 447,083 $ 398,500
========= =========
* 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,
---------------------- ------------------------
2005 2004 2005 2004
------- ------ -------- -------
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 6,245 $4,773 $ 11,913 $ 9,463
Investment securities:
Taxable 581 354 1,045 654
Tax-exempt 24 45 58 96
Dividends 41 32 73 54
Interest-earning deposits 17 11 42 16
------- ------ -------- -------
Total interest and dividend income 6,908 5,215 13,131 10,283
------- ------ -------- -------
Interest expense:
Deposits 1,666 983 3,041 1,925
Borrowings 487 418 917 814
------- ------ -------- -------
Total interest expense 2,153 1,401 3,958 2,739
------- ------ -------- -------
Net interest income 4,755 3,814 9,173 7,544
Provision for loan losses 191 422 378 990
------- ------ -------- -------
Net interest income after
provision for loan losses 4,564 3,392 8,795 6,554
------- ------ -------- -------
Non-interest income:
Service charges on deposit accounts 476 511 904 1,007
Other service charges, commissions and fees 286 290 550 448
Gain (loss) on sale of investment securities (59) 50 (113) 106
Gain on sale of loans 52 15 50 15
Merchant fees 86 73 169 172
Income from investment in bank-owned life insurance 41 43 84 92
------- ------ -------- -------
Total non-interest income 882 982 1,644 1,840
------- ------ -------- -------
Non-interest expense:
Salaries 1,505 1,332 2,931 2,655
Employee benefits 310 232 624 525
Occupancy expense 131 120 273 255
Equipment expense 329 320 663 596
Professional and consulting fees 305 147 527 299
Other taxes and licenses 71 48 134 110
Merchant processing expense 86 87 161 152
Other operating expense 671 574 1,290 1,058
------- ------ -------- -------
Total non-interest expense 3,408 2,860 6,603 5,650
------- ------ -------- -------
Income before income taxes 2,038 1,514 3,836 2,744
Provision for income taxes 721 532 1,343 963
------- ------ -------- -------
Net income $ 1,317 $ 982 $ 2,493 $ 1,781
======= ====== ======== =======
Basic net income per common share $ .38 $ .29 $ .72 $ .53
======= ====== ======== =======
Diluted net income per common share $ .38 $ .29 $ .72 $ .52
======= ====== ======== =======
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,
----------------------- -----------------------
2005 2004 2005 2004
------- ------- ------- -------
(Amounts in thousands)
Net income $ 1,317 $ 982 $ 2,493 $ 1,781
------- ------- ------- -------
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on
available for sale securities 366 (1,754) (391) (1,383)
Tax effect (146) 701 157 553
Reclassification of (gains) losses recognized
in net income 59 (50) 113 (106)
Tax effect (23) 20 (45) 43
------- ------- ------- -------
Net of tax amount 256 (1,083) (166) (893)
------- ------- ------- -------
Cash flow hedging activities:
Unrealized holding gains (losses) on cash flow
hedging activities 210 (796) (115) (444)
Tax effect (84) 318 47 178
------- ------- ------- -------
Net of tax amount 126 (478) (68) (266)
------- ------- ------- -------
Total other comprehensive income (loss) 382 (1,561) (234) (1,159)
------- ------- ------- -------
Comprehensive income (loss) $ 1,699 $ (579) $ 2,259 $ 622
======= ======= ======= =======
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 Loss Equity
----------- ----------- ----------- -------- ----------- -------------
(Amounts in Thousands, Except Share and Per Share Data)
Balance, December 31, 2004 3,438,107 $ 3,438 $ 8,788 $ 25,091 $ (22) $ 37,295
Net income -- -- -- 2,493 -- 2,493
Other comprehensive loss -- -- -- -- (234) (234)
Issuance of common stock 41,100 41 698 -- -- 739
Current income tax benefit -- -- 48 -- -- 48
Cash dividends of $.18 per share -- -- -- (617) -- (617)
----------- ------- -------- -------- -------- ---------
Balance, June 30, 2005 3,479,207 $ 3,479 $ 9,534 $ 26,967 $ (256) $ 39,724
=========== ======= ======== ======== ======== =========
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,
--------------------------
2005 2004
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 2,493 $ 1,781
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 378 990
Provision for depreciation and amortization 520 474
Net amortization of bond premiums and discounts 14 108
(Gain) loss on sale of investment securities 113 (106)
Gain on sale of loans (50) (15)
Loss on disposition of premises and equipment -- 29
Increase in cash surrender value of life insurance (84) (92)
Changes in assets and liabilities:
Other assets (251) (408)
Interest receivable (229) (270)
Other liabilities 51 1,236
Interest payable 476 58
-------- --------
Net cash provided by operating activities 3,431 3,785
-------- --------
Cash flows from investing activities:
Proceeds from sales and calls of investment securities available for sale 21,887 11,444
Proceeds from maturities of investment securities available for sale -- 9,955
Purchase of investment securities available for sale (29,409) (35,278)
Net increase in loans (38,530) (28,771)
Additions to premises and equipment (266) (110)
Purchase of Federal Home Loan Bank stock (113) (227)
Proceeds from sale of foreclosed assets 410 161
Purchases of bank-owned life insurance -- (1,500)
-------- --------
Net cash used in investment activities (46,021) (44,326)
-------- --------
Cash flows from financing activities:
Net proceeds from borrowings 8,000 10,000
Net increase in deposit accounts 37,560 30,612
Proceeds from issuance of common stock 739 912
Purchases and retirement of common stock -- (65)
Cash dividends paid (617) (543)
-------- --------
Net cash provided by financing activities 45,682 40,916
-------- --------
Net increase in cash and cash equivalents 3,092 375
Cash and cash equivalents at beginning of period 14,249 15,825
-------- --------
Cash and cash equivalents at end of period $ 17,341 $ 16,200
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
-7-
FOUR OAKS FINCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial information contained in the accompanying
unaudited consolidated financial statements 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, 2005 and 2004, 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, 2005
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2005.
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-K
for the year ended December 31, 2004. This quarterly report should be read in
conjunction with such annual report.
Certain amounts in 2004 were reclassified to conform with the presentation in
2005. These reclassifications had no effect on the Company's previously reported
net income or shareholders' equity.
NOTE 2 - NET INCOME PER SHARE
Basic and diluted net income per common share are 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 October 29, 2004. 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:
-8-
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2005 2004 2005 2004
--------- --------- --------- --------
Weighted average number of
common shares used in computing
basic net income per share 3,472,129 3,397,500 3,461,989 3,382,500
Effect of dilutive stock options 22,605 20,259 23,156 18,620
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential
common shares used in computing
diluted net income
per share 3,494,734 3,417,759 3,485,145 3,401,120
========= ========= ========= =========
As of June 30, 2005 and 2004, there were no antidilutive shares outstanding for
both three month and six month periods.
NOTE 3 - STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards, ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, ("SFAS No. 123") 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, SFAS No. 123 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 APB Opinion No. 25, no
compensation cost is recognized for them. The Company has elected to continue
with the accounting methodology in APB 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,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(Amounts in thousands, except per share data)
Net income:
As reported $ 1,317 $ 982 $ 2,493 $ 1,781
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (23) (16) (43) (31)
--------- --------- --------- ---------
Pro forma $ 1,294 $ 966 $ 2,450 $ 1,750
========= ========= ========= =========
Basic earnings per share:
As reported $ .38 $ .29 $ .72 $ .53
Pro forma .37 .28 .71 .52
Diluted earnings per share:
As reported $ .38 $ .29 $ .72 $ .52
Pro forma .37 .28 .70 .51
-9-
In December 2004, the FASB issued SFAS No.123 (revised 2004), SHARE-BASED
PAYMENT, ("SFAS No. 123(R)"), which is a revision of SFAS No. 123. The
implementation of SFAS No. 123(R) has been delayed and will not take effect
until January 1, 2006. Additional details on the expected impact for the Company
are included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2004, in Note A to the Consolidated Financial Statements.
NOTE 4 - COMMITMENTS
At June 30, 2005, loan commitments were as follows (in thousands):
Commitments to extend credit $ 69,960
Undisbursed lines of credit 23,314
Letters of credit 1,953
-10-
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, 2005 AND DECEMBER 31, 2004
During the first half of 2005, the Company's total assets grew from $398.5
million at December 31, 2004 to $447.1 million, an increase of $48.6 million or
12.2%. Considerable deposit growth of $37.8 million provided additional funds
for loan growth as well as providing the opportunity to increase our investment
portfolio as yields improved during the first half of 2005. Our liquid assets,
consisting of cash and cash equivalents and investment securities available for
sale, experienced a net increase of $10.2 million during the first half of 2005,
primarily from increases in investment securities of $7.1 million. Substantial
growth in our loan portfolio continued to reflect a trend towards growth in
commercial real estate lending. Net loans, grew from $308.8 million at December
31, 2004 to $346.9 million at June 30, 2005 largely in loans secured by real
estate. Loans secured by real estate grew $33.3 million from December 31, 2004
to June 30, 2005 and grew $22.8 million from March 31, 2005 to June 30, 2005,
primarily in real estate construction loans.
Deposits from our local market customers continued to be our primary funding
source, increasing by $22.3 million, while deposits outside our local customer
base increased $15.5 million. In total, deposits grew from $315.3 million at
December 31, 2004 to $353.1 million at June 30, 2005. Local market funds grew
primarily in savings deposits. Our "Super Savings" marketing campaign to attract
new savings deposits provided for most of the $9.8 million increase in savings
deposits during the first half of 2005. Local markets also provided additional
funds in non-interest bearing deposits and interest checking deposits,
increasing $5.8 million and $2.7 million, respectively, at June 30, 2005
compared to December 31, 2004. Our deposit growth during the first half of 2005
was attributable to expanding calling efforts and marketing our specials as we
increased our rates in response to continued pricing pressures from our
competitive market.
Total shareholders' equity increased $2.4 million from $37.3 million at December
31, 2004 to $39.7 million at June 30, 2005. This increase in shareholders'
equity resulted principally from net income from operations during the period of
$2.5 million and net proceeds from the issuance of common stock from stock
option exercises of $339,000, employee stock purchase of $125,000 and dividend
reinvestment in the amount of $323,000. Offsetting these increases were other
comprehensive losses of $234,000, and dividends paid to our shareholders of
$617,000. At June 30, 2005, 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, 2005 AND 2004
NET INCOME. Net income increased 34.1% in second quarter 2005 compared to second
quarter 2004. Net income for the three months ended June 30, 2005 was $1.3
million, or $.38 per basic share, as compared with net income of $982,000 or
$.29 per basic share for the three months ended June 30, 2004, an increase of
$335,000 or $.09 per basic share. This increase resulted primarily from an
increase in the Company's net interest income of $941,000 and decrease of
$231,000 in the provision for loan losses for the three months ended June 30,
2005, which was partially offset by the increase of net losses on the sales of
investments available for sale of $109,000 and increased non-interest expense of
$548,000.
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 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 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.
-11-
Net interest income for the three months ended June 30, 2005 was $4.8 million,
an increase of $941,000 compared to the three months ended June 30, 2004, which
resulted primarily from the increase in the level of our average
interest-earning assets of $49.7 million relative to the increase in the level
of our average interest-bearing liabilities of $41.4 million during the quarter.
Also, contributing to the increase in net interest income, was the average
growth in non-interest bearing demand deposits of $8.1 million. Strong loan
demand and continued normal growth in deposits were the contributing factors for
the increased level of interest-earning assets and interest-bearing liabilities.
The growth in demand deposits provided a partial offset to the $28.0 million
increase in higher costing time deposits. The above factors as well as the
positive repricing position of our earning assets to interest-bearing
liabilities in a rising rate environment, combined to increase our net interest
margin by 39 basis points from 4.38% in the 2004 quarter to 4.77% in the current
year quarter. During the past twelve months beginning July 1, 2004, there have
been nine increases in the prime interest rate which corresponded to the
increases in the benchmark federal funds rates as determined by the Federal
Reserve Open Market Committee. A substantial portion of our loan portfolio
reprices to correspond with each prime rate increase and the repricing occurs
sooner than our interest-bearing deposits which do not reprice as quickly or in
the same increments as our loan portfolio where interest rates are tied to the
prime rate.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $191,000 and
$422,000 for the three months ended June 30, 2005 and 2004, respectively, a
decrease of $231,000. Our provision for loan losses for the second quarter of
2004 was higher than the second quarter of 2005 due to differing levels of net
charge-offs and non-performing loans for the periods. Net charge-offs of $42,000
were recorded during the second quarter of 2005, compared to $482,000 for the
same period in 2004. Non-performing assets (nonaccrual loans, 90 day past due
loans and foreclosed assets) aggregated $1.5 million at June 30, 2005,
decreasing $104,000 from the $1.6 million at December 31, 2004 and decreasing
$1.6 million from the $3.1 million at June 30, 2004. Continued efforts to
improve asset quality including improved underwriting has contributed to fewer
net charge-offs and the decline in nonperforming assets. At June 30, 2005 the
allowance for loan losses, expressed as a percentage of gross loans, was 1.23%
compared to 1.30% at December 31, 2004. Management believes that the allowance
is adequate to absorb probable losses inherent in the loan portfolio.
NON-INTEREST INCOME. Non-interest income decreased $100,000 for the three months
ended June 30, 2005 to $882,000 as compared to $982,000 for the same period in
2004. The decline of $100,000 was primarily due to losses on sales of investment
securities of $59,000 for the three months ended June 30, 2005 compared to gains
of $50,000 on sales of investment securities for the prior year quarter. Service
charges on deposit accounts declined $35,000 from the comparable period in 2004.
The decline in these fees continues to be attributable to increased competition
among banking institutions to offer lower fees and a more enlightened customer
base as they continue to migrate into more cost efficient deposit products.
Offsetting the decreases above, net gains on the sales of loans increased
$37,000 and merchant fees increased $13,000 from the comparable period of 2004.
There were no other significant changes in any of the categories of income that
comprise our total non-interest income.
-12-
NON-INTEREST EXPENSE. Non-interest expense increased $548,000 to $3.4 million
for the three months ended June 30, 2005 compared to $2.9 million for the three
months ended June 30, 2004. This increase was due in part to an increase in
salaries and employee benefits of $251,000, which resulted from normal salary
adjustments, newly appointed officer or management level personnel, and rising
benefits costs. Employee benefit costs contributed $78,000 of the increase. In
addition to added salaries and benefits, the addition of two offices in January
2005, contributed to increased operating expenses including advertising expense
of approximately $18,000, materials, training and seminars of approximately
$22,000 and telephone expense of approximately $7,000. In addition to the
opening of new offices, upgrades in technology resulted in an increase in
equipment expense of $9,000 while the addition of in-store ATMs added
approximately $5,000 in expense for the quarter. Professional fees increased
$158,000 primarily due to increased regulatory requirements for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. Other increases included FDIC
insurance of approximately $22,000 and freight of approximately $12,000. There
were no other significant increases in any of the remaining non-interest
expenses which grew due to the Company's overall asset growth.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes, as a
percentage of income before income taxes, was 35.4% and 35.1% for the three
months ended June 30, 2005 and 2004, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2005 AND 2004
NET INCOME. Net income for the six months ended June 30, 2005 was $2.5 million,
or $.72 per basic share, as compared with net income of $1.8 million, or $.53
per basic share for the six months ended June 30, 2004, an increase of $712,000
or $.19 per basic share. For the six months ended June 30, 2005, the increase
resulted primarily from an increase in the Company's net interest income of $1.6
million, and decrease of $612,000 in the provision for loan losses, both of
which were partially offset by increases in securities losses of $219,000 and
$953,000 in other non-interest expenses.
NET INTEREST INCOME. Net interest income for the six months ended June 30, 2005
was $9.2 million, as compared with $7.5 million during the six months ended June
30, 2004, an increase of $1.6 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
period. Our average interest-earning assets increased $51.3 million for the six
months ended June 30, 2005 compared to the six months ended June 30, 2004, while
during the same period, our average interest-bearing liabilities increased $43.2
million, thereby resulting in an increase in the level of our net
interest-earning assets during the current year period of $8.1 million.
Additionally, our average non-interest-bearing deposits increased $7.8 million
for the six months ended June 30, 2005 compared to the corresponding period in
2004. Strong loan demand and continued normal growth in deposits were the
contributing factors for the increased level of interest-earning assets and
interest-bearing liabilities. All of the aforementioned factors in addition to
the positive repricing position of our earning assets to interest-bearing
liabilities in a rising rate environment, combined to increase our net interest
margin by 26 basis points from 4.48% for the six months ended June 30, 2004 to
4.74% for the six months ended June 30, 2005. Our loan portfolio has repriced
more frequently to increases in prime rates than our interest-bearing deposits
which do not reprice as quickly or in the same increments as our loan portfolio
where interest rates are tied to the prime rate.
-13-
PROVISION FOR LOAN LOSSES. The provision for loan losses was $378,000 and
$990,000 for the six months ended June 30, 2005 and 2004, respectively, a
decrease of $612,000. This decrease in provision for loan losses was
attributable to the decline in the level of net loan charge-offs of $516,000 for
the six months ended June 30, 2005 compared to the corresponding period in 2004
as well as a decline in nonperforming assets of $104,000 from $1.6 million at
December 31, 2004. Net loan charge-offs for the six months period ending June
30, 2005 and 2004, respectively were $99,000 and $615,000. Based upon historic
results, management believes that the allowance at 1.23% of gross loans is
adequate to absorb probable losses inherent in the loan portfolio.
NON-INTEREST INCOME. Non-interest income decreased $196,000 for the six months
ended June 30, 2005 to $1.6 million as compared to $1.8 million for the six
months ended June 30, 2004. The decline of $196,000 was primarily due to losses
on the sales of investments of $113,000 for the six months ended June 30, 2005
compared to net gains of $106,000 for the prior year six months period,
attributing $219,000 to the decrease in non-interest income. In addition,
service charges on deposit accounts decreased $103,000 for the same periods. The
decline in these fees is attributable to increased competition among banking
institutions to offer lower fees and a more enlightened customer base as they
continue to migrate into more cost efficient deposit products. Increases for the
six months ended June 30, 2005 compared to the corresponding period in 2004
include increases of $102,000 in other service charges, commission and fees as a
result of the Company's growth and gains on the sale of loans of $35,000.
NON-INTEREST EXPENSE. Non-interest expense increased $953,000 to $6.6 million
for the six months ended June 30, 2005 compared to $5.7 million for the six
months ended June 30, 2004. This increase was primarily due to an increase in
salaries and employee benefits of $375,000, which resulted from normal salary
adjustments, the addition of new personnel, and rising insurance costs. The
remaining non-interest expenses increased by $578,000 due to the Company's
continued growth including additional advertising expense of approximately
$48,000, telephone expense of approximately $21,000, materials and training of
approximately $18,000 and freight of approximately $16,000. Also included in the
above are increases in losses of approximately $21,000 on sales of foreclosed
property, approximately $34,000 in waived charges and professional fees of
$228,000 due to increased regulatory requirements for compliance with Section
404 of the Sarbanes-Oxley Act of 2002.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes, as a
percentage of income before income taxes, was 35.0% and 35.1% for the six months
ended June 30, 2005 and 2004, respectively.
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. Management believes that the
Company's 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 $39.7 million or 8.9% of total assets at June 30, 2005 and $37.3
million or 9.4% of total assets at December 31, 2004.
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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 (the "Exchange Act"), 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 (the
"Commission"), including without limitation, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, and current Reports on Form 8-K.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe there has not been any significant change in the overall analysis of
financial instruments considered market risk sensitive, as measured by the
factors of contractual maturities, average interest rates and the difference
between estimated fair values and book values, since the analysis prepared and
presented in conjunction with our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
As required by paragraph (b) of Rule 13a-15 under 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) during the period covered by this report that we believe have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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, 2005.
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(1) Share Program(2) the Program(2)
- ------------------------------- ------------------- -------------------- -------------------- -------------------
April 1, 2005 to April 30, 2005 5,OOO $23.65 -- --
May 1, 2005 to May 31, 2005 -- $ -- -- --
June 1, 2005 to June 30, 2005 1,000 $25.00 -- --
------------------- -------------------- ------------------- -------------------
6,000 $24.33 -- --
(1) Represents purchase of stock by the Company on behalf of the Employee
Stock Ownership Plan.
(2) On December 10, 2001, the Company announced the authorization by its
Board of Directors of a program to repurchase up to 100,000 shares of
the Company's outstanding common stock, which expires on December 31,
2005. The Company did not repurchase any stock under the program
during the three months ended June 30, 2005. As of June 30, 2005, the
Company had repurchased an aggregate of 63,389 shares of common stock
under the Program and 36,611 shares remained authorized for repurchase
under the Program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 25, 2005, the Company held its Annual Meeting of Shareholders. Of
3,454,241 shares entitled to vote at the meeting, 2,158,884 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 2006 Annual Meeting of Shareholders or until their successors are
elected and qualified. The votes were cast as follows:
For Withheld
--------- --------
M. S. Canaday 2,157,630 1,254
Percy Y. Lee 2,157,630 1,254
Warren L. Grimes 2,157,630 1,254
Ayden R. Lee, Jr. 2,157,448 1,435
William J. Edwards 2,157,171 1,712
Dr. R. Max Raynor 2,157,043 1,840
William Ashley Turner 2,151,674 7,209
Paula Canaday Bowman 2,149,006 9,878
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PROPOSAL 2: To ratify the action of the audit committee of the board of
directors in approving Dixon Hughes PLLC as independent accountants for the
Company for the fiscal year ending December 31, 2005. The votes were cast as
follows:
For Against Withheld
--------- ------- --------
2,152,980 1,474 4,429
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
- ------- ------------
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
-17-
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 12, 2005 By: /S/ AYDEN R. LEE, JR.
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: August 12, 2005 By: /S/ NANCY S. WISE
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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
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