SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005
Commission File Number 0-22787
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FOUR OAKS FINCORP, INC.
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(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)
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524
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(Address of principal executive office, including zip code)
(919) 963-2177
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes No X
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, 3,488,241
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of November 10, 2005)
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004.........................3
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 2005 and 2004...4
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2005 and 2004...5
Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 2005.............................6
Consolidated Statements of Cash Flows
Nine Months Ended September 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......16
Item 4 - Controls and Procedures.........................................16
Part II. OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.....16
Item 6 - Exhibits........................................................17
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, 2005 December 31,
(Unaudited) 2004*
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ASSETS (Amounts in thousands, except per share data)
Cash and due from banks $ 11,550 $ 10,634
Interest-earning deposits 1,081 3,615
Investment securities available for sale 64,164 52,342
Loans 378,346 312,815
Allowance for loan losses (4,700) (4,055)
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Net loans 373,646 308,760
Accrued interest receivable 2,483 2,210
Bank premises and equipment, net 9,874 10,149
FHLB stock 3,184 2,621
Investment in life insurance 7,828 6,054
Other assets 2,504 2,115
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Total assets $ 476,314 $ 398,500
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand $ 69,557 $ 59,528
Money market and NOW accounts 58,777 55,467
Savings 38,618 14,900
Time deposits, $100,000 and over 128,126 108,655
Other time deposits 81,656 76,757
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Total deposits 376,734 315,307
Borrowings 55,165 43,160
Accrued interest payable 2,065 1,201
Other liabilities 1,440 1,537
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Total liabilities 435,404 361,205
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Commitments (Note 4)
Shareholders' equity:
Common stock; $1.00 par value, 10,000,000 shares authorized; 3,488,241 and
3,438,107 shares issued and outstanding at September 30, 2005 and December
31, 2004, respectively 3,488 3,438
Additional paid-in capital 9,740 8,788
Retained earnings 28,120 25,091
Accumulated other comprehensive loss (438) (22)
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Total shareholders' equity 40,910 37,295
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Total liabilities and shareholders' equity $ 476,314 $ 398,500
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* Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
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2005 2004 2005 2004
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(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 7,078 $ 5,128 $ 18,991 $ 14,591
Investment securities:
Taxable 578 414 1,623 1,068
Tax-exempt 24 35 82 131
Dividends 29 23 102 77
Interest-earning deposits 57 9 99 25
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Total interest and dividend income 7,766 5,609 20,897 15,892
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Interest expense:
Deposits 2,138 1,069 5,179 2,994
Borrowings 558 436 1,475 1,250
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Total interest expense 2,696 1,505 6,654 4,244
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Net interest income 5,070 4,104 14,243 11,648
Provision for loan losses 498 401 876 1,391
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Net interest income after
provision for loan losses 4,572 3,703 13,367 10,257
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Non-interest income:
Service charges on deposit accounts 488 478 1,392 1,485
Other service charges, commissions and fees 385 268 935 716
Gain (loss) on sale of investment securities (66) (42) (179) 64
Gain on sale of loans 3 11 53 26
Merchant fees 130 93 299 265
Income from investment in bank-owned life insurance 170 263 254 355
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Total non-interest income 1,110 1,071 2,754 2,911
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Non-interest expense:
Salaries 1,560 1,295 4,491 3,950
Employee benefits 354 254 978 779
Occupancy expense 134 125 407 380
Equipment expense 328 314 991 910
Professional and consulting fees 230 163 757 512
Other taxes and licenses 63 40 197 150
Merchant processing expense 99 80 260 232
Other operating expense 590 518 1,880 1,526
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Total non-interest expense 3,358 2,789 9,961 8,439
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Income before income taxes 2,324 1,985 6,160 4,729
Provision for income taxes 857 654 2,200 1,617
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Net income $ 1,467 $ 1,331 $ 3,960 $3,112
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Basic net income per common share $ .34 $ .31 $ .91 $ .73
============ ============ ============= ============
Diluted net income per common share $ .33 $ .31 $ .91 $ .73
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The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2005 2004 2005 2004
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(In thousands)
Net income $ 1,467 $ 1,331 $ 3,960 $ 3,112
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Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on
available for sale securities (184) 1,337 (574) (46)
Tax effect 73 (535) 230 18
Reclassification of (gains) losses recognized
in net income 66 42 179 (64)
Tax effect (26) (17) (72) 26
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Net of tax amount (71) 827 (237) (66)
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Cash flow hedging activities:
Unrealized holding gains (losses) on cash flow
hedging activities (185) 299 (300) (144)
Tax effect 74 (120) 121 58
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Net of tax amount (111) 179 (179) (86)
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Total other comprehensive income (loss) (182) 1,006 (416) (152)
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Comprehensive income $ 1,285 $ 2,337 $ 3,544 $ 2,960
============ ============= ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Accumulated
Common Stock Additional other Total
---------------------- 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 - - - 3,960 - 3,960
Other comprehensive loss - - - - (416) (416)
Issuance of common stock 50,134 50 893 - - 943
Current income tax benefit - - 59 - - 59
Cash dividends of $.22 per share - - - (931) - (931)
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Balance, September 30, 2005 3,488,241 $ 3,488 $ 9,740 $ 28,120 $ (438) $ 40,910
========= =========== =========== ============ ============= ============
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Nine Months Ended
September 30,
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2005 2004
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(In thousands)
Cash flows from operating activities:
Net income $ 3,960 $ 3,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 876 1,391
Provision for depreciation and amortization 780 726
Net amortization of bond premiums and discounts 18 151
(Gain) loss on sale of investment securities 179 (64)
Gain on sale of loans (53) (26)
Loss on disposition of premises and equipment - 29
Loss on sale of foreclosed assets - 26
Increase in cash surrender value of life insurance (254) (355)
Changes in assets and liabilities:
Other assets (436) (427)
Interest receivable (273) (206)
Other liabilities (339) 120
Interest payable 864 (56)
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Net cash provided by operating activities 5,322 4,421
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Cash flows from investing activities:
Proceeds from sales and calls of investment securities available for sale 28,153 28,065
Proceeds from maturities of investment securities available for sale - -
Purchase of investment securities available for sale (40,567) (38,477)
Net increase in loans (65,921) (35,969)
Additions to premises and equipment (494) (262)
Purchase of Federal Home Loan Bank stock (563) (227)
Proceeds from sale of foreclosed assets 528 161
Purchases of bank-owned life insurance (1,520) (2,763)
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Net cash used in investment activities (80,384) (49,472)
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Cash flows from financing activities:
Net proceeds from borrowings 12,005 10,000
Net increase in deposit accounts 61,427 31,965
Proceeds from issuance of common stock 943 1,054
Purchases and retirement of common stock - (65)
Cash dividends paid (931) (816)
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Net cash provided by financing activities 73,444 42,138
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Net decrease in cash and cash equivalents (1,618) (2,913)
Cash and cash equivalents at beginning of period 14,249 15,825
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Cash and cash equivalents at end of period $ 12,631 $ 12,912
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
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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 nine month periods ended
September 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 nine month periods ended September 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 two 5-for-4 stock splits payable on November 25, 2005 and 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:
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Three Months Ended Nine Months Ended
September 30, September 30,
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2005 2004 2005 2004
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Weighted average number of
common shares used in computing
basic net income per share 4,353,594 4,257,813 4,336,266 4,237,500
Effect of dilutive stock options 32,788 21,888 30,556 22,813
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Weighted average number of common shares
and dilutive potential common shares
used in computing diluted net income
per share 4,386,382 4,279,701 4,366,822 4,260,313
============= ============= ============= ==============
As of September 30, 2005 and 2004, there were no antidilutive shares outstanding
for either three month or the nine 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 Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2005 2004 2005 2004
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(Amounts in thousands, except per share data)
Net income:
As reported $ 1,467 $ 1,331 $ 3,960 $ 3,112
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (23) (16) (66) (47)
-------------- ------------- -------------- --------------
Pro forma $ 1,444 $ 1,315 $ 3,894 $ 3,065
============= ============= ============= ==============
Basic earnings per share:
As reported $ .34 $ .31 $ .91 $ .73
Pro forma .33 .31 .90 .73
Diluted earnings per share:
As reported $ .33 $ .31 $ .91 $ .73
Pro forma .33 .30 .89 .72
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In December 2004, the Financial Accounting Standards Board 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 September 30, 2005, loan commitments were as follows (in thousands):
Commitments to extend credit $ 68,427
Undisbursed lines of credit 24,462
Letters of credit 2,427
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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
September 30, 2005 and December 31, 2004
During the third quarter of 2005, the Company continued to sustain considerable
growth in total assets, reaching $476.3 million at September 30, 2005 from
$398.5 million at December 31, 2004, an increase of $77.8 million or 19.5%.
Considerable deposit growth of $61.4 million or 19.5%, since December 31, 2004
continued to provide additional funds for loan growth and the opportunity to
increase our investment portfolio as yields improved throughout 2005. Our liquid
assets, consisting of cash and cash equivalents and investment securities
available for sale, experienced a net increase of $10.2 million over December
31, 2004, primarily from increases in investment securities of $11.8 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 $373.6 million at September 30, 2005 largely as a result of
growth in loans secured by real estate. Loans secured by real estate grew $58.6
million from December 31, 2004 to September 30, 2005 and grew $25.3 million from
June 30, 2005, primarily in real estate construction loans as a result of a
continued shift in the focus of our markets, from an agricultural focus to a
more surburban focus.
Deposits from our local market customers continued to be our primary funding
source, increasing by $45.2 million during the first three quarters of 2005,
while deposits outside our local customer base increased $16.2 million. In
total, deposits grew from $315.3 million at December 31, 2004 to $376.7 million
at September 30, 2005. Local market funds grew primarily in savings deposits and
time deposits. Our "Super Savings" marketing campaign to attract new savings
deposits provided for most of the $23.7 million increase in savings deposits
during the first three quarters of 2005. Local markets also provided additional
funds in non-interest bearing deposits and interest checking deposits,
increasing $10.0 million and $3.3 million, respectively, at September 30, 2005
compared to December 31, 2004. Our deposit growth throughout the first nine
months of 2005 was attributable to increased deposit rates as national prime
increased from 5.25% to 6.75% from January 1 to September 30, 2005 and increased
marketing and branch calling efforts in response to our intensely competitive
market.
Total shareholders' equity increased $3.6 million from $37.3 million at December
31, 2004 to $40.9 million at September 30, 2005. This increase in shareholders'
equity resulted principally from net income from operations during the period of
$4.0 million and net proceeds from the issuance of common stock from stock
option exercises of $391,000, employee stock purchase of $125,000 and dividend
reinvestment in the amount of $486,000. Offsetting these increases were other
comprehensive losses of $416,000 and dividends paid to our shareholders of
$931,000. At September 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
September 30, 2005 and 2004
Net Income. Net income increased 10.2% in third quarter 2005 compared to third
quarter 2004. Net income for the three months ended September 30, 2005 was $1.5
million, or $.34 per basic share, as compared with net income of $1.3 million or
$.31 per basic share for the three months ended September 30, 2004, an increase
of $136,000, or $.03 per basic share. This increase resulted primarily from an
increase in the Company's net interest income of $966,000, which was partially
offset by an increase in provision for loan losses of $97,000, increased
non-interest expense of $569,000 and an increase in provision for income taxes
of $203,000.
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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.
Net interest income for the three months ended September 30, 2005 was $5.1
million, an increase of $966,000, or 23.5% compared to the three months ended
September 30, 2004. The increase was largely attributable to a net increase in
volume of average interest-earning assets which provided $855,000 of the
increase in net interest income and higher rates provided the additional
$111,000 of the increase. The volume of our average interest-earning assets grew
$73.0 million compared to the volume of our average interest-bearing
liabilities, which grew $57.0 million during the three months ended September
30, 2005 compared to three months ended September 30, 2004. Again, strong loan
demand and continued normal growth in deposits were the contributing factors for
these increases. Also, contributing to the increase in net interest income, was
the average growth in non-interest bearing demand deposits of $12.8 million. The
growth in demand deposits provided a partial offset to the $28.3 million
increase in higher costing time deposits. The above factors as well as the
positive repricing position of our interest-earning assets to interest-bearing
liabilities in a rising rate environment, combined to increase our net interest
margin by 11 basis points from 4.54% in third quarter 2004 to 4.65% in the
current year third quarter. Beginning on July 1, 2004, there have been eleven
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 $498,000 and
$401,000 for the three months ended September 30, 2005 and 2004, respectively,
an increase of $97,000. Although our level of net charge-offs and non-performing
assets were lower for the third quarter of 2005 compared to the third quarter of
2004, net charge-offs increased compared to the first and second quarters of
2005. Net charge-offs of $132,000 were recorded during the third quarter of
2005, compared to $42,000 and $57,000 for the second and first quarters of 2005,
respectively, and $205,000 for the third quarter of 2004. Non-performing assets,
which consist of loans past due 90 days or more, real estate acquired in the
settlement of loans, and loans on nonaccrual status, aggregated $1.3 million at
September 30, 2005, decreasing $268,000 from the $1.6 million at December 31,
2004 and decreasing $1.2 million from the $2.5 million at September 30, 2004.
Continued efforts to improve asset quality including improved underwriting has
contributed to fewer net charge-offs and the decline in non-performing assets
compared to prior years. At September 30, 2005, the allowance for loan losses,
expressed as a percentage of gross loans, was 1.24% compared to 1.30% at
December 31, 2004. Management believes that the allowance is adequate to absorb
probable losses inherent in the loan portfolio.
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Non-Interest Income. Non-interest income increased to $1.1 million for the three
months ended September 30, 2005, an increase of $39,000 compared to the three
months ended September 30, 2004. The increase was primarily a result of an
increase in service charges, commissions and fees of $117,000, which was
primarily offset with a decline in income of $93,000 from the investment in
bank-owned life insurance for the three months ended September 30, 2005 compared
to corresponding prior year period. Service charges on deposit accounts
increased slightly during the three months ended September 30, 2005, by $10,000,
from the three months ended September 30, 2004. Increased competition among
banking institutions to offer lower fees on deposit accounts continued to slow
the growth in deposit- related fees during the third quarter of 2005. Losses on
the sales of investment securities increased $24,000. Merchant fees increased
$37,000 over 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.
Non-Interest Expense. Non-interest expense increased $569,000 to $3.4 million
for the quarter ended September 30, 2005 compared to $2.8 million for the three
months ended September 30, 2004. This increase was due primarily to an increase
in salaries and employee benefits of $365,000, which resulted from normal salary
adjustments, newly appointed officer or management level personnel, and rising
benefits costs. Employee benefit costs contributed $100,000 of the increase. The
number of full time equivalent employees increased to 135 for September 30, 2005
compared to 123 for September 30, 2004. 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 $22,000,
occupancy expense of approximately $9,000, and materials, training and seminars
of approximately $12,000. Upgrades in technology also resulted in an increase in
equipment expense of approximately $14,000 while the addition of in-store ATMs
added approximately $3,000 in expense for the quarter compared to the prior year
quarter. Professional fees continued to be higher during the third quarter of
2005 compared to the third quarter of 2004, increasing $67,000 for quarter, due
to increased regulatory requirements for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Other increases for the third quarter compared to
the prior year third quarter include freight and postage, up approximately
$31,000, checks, forgery and other losses, up approximately $22,000, merchant
processing expense up approximately $19,000, and other taxes and licenses, up
approximately $23,000. There were no other significant increases in any of the
remaining non-interest expenses that increased 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 36.9% and 32.9% for the three
months ended September 30, 2005 and 2004, respectively.
Results of Operations for the Nine Months Ended
September 30, 2005 and 2004
Net Income. Net income for the nine months ended September 30, 2005 was $4.0
million, or $.91 per basic share, as compared with net income of $3.1 million,
or $.73 per basic share for the nine months ended September 30, 2004, an
increase of $848,000, or $.18 per basic share. For the nine months ended
September 30, 2005, the increase resulted primarily from an increase in the
Company's net interest income of $2.6 million, and a decrease of $515,000 in the
provision for loan losses, both of which were partially offset by increases in
securities losses of $243,000, $1.5 million in other non-interest expenses and
$583,000 in provision for income taxes.
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Net Interest Income. Net interest income for the nine months ended September 30,
2005 was $14.2 million, as compared with $11.6 million during the nine months
ended September 30, 2004, an increase of $2.6 million, primarily resulting from
our net increase in volume of average interest-earning assets. The net increase
in average earning asset volume provided $1.9 million while increases in rates
provided $667,000 of the increase in net interest income. Our average
interest-earning assets increased $58.7 million for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004, while
during the same period, our average interest-bearing liabilities increased $47.9
million, thereby resulting in an increase in the level of our net
interest-earning assets during the current year period of $10.8 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. Additionally, our average non-interest-bearing deposits increased
$9.5 million for the nine months ended September 30, 2005 compared to the
corresponding period in 2004.
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 21 basis points
from 4.50% for the nine months ended September 30, 2004 to 4.71% for the nine
months ended September 30, 2005. Our loan portfolio, where interest rates are
tied to the prime rate, 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. The prime interest rate which corresponds
to increases in the benchmark federal funds rates as determined by the Federal
Reserve Open Market Committee has increased in various increments from 4.25% at
July 1, 2004 to 6.75% as of September 20, 2005.
Provision for Loan Losses. The provision for loan losses was $876,000 and $1.4
million for the nine months ended September 30, 2005 and 2004, respectively, a
decrease of $515,000. This decrease in provision for loan losses was
attributable to the decline in the level of net charge-offs of $590,000 for the
nine months ended September 30, 2005 compared to the corresponding period in
2004 as well as a decline in nonperforming assets of $268,000 from $1.6 million
at December 31, 2004 and a decline of $1.2 million from September 30, 2004. Net
loan charge-offs for the nine months period ending September 30, 2005 and 2004,
respectively, were $231,000 and $821,000. Continued efforts to improve asset
quality including improved underwriting has contributed to fewer net charge-offs
and the decline in non-performing assets compared to prior years. Based upon
historic results, management believes that the allowance at 1.24% of gross loans
is adequate to absorb probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income decreased $157,000 for the nine months
ended September 30, 2005 to $2.8 million as compared to $2.9 million for the
nine months ended September 30, 2004. The decline was primarily due to losses on
the sales of investments of $179,000 for the nine months ended September 30,
2005 compared to net gains of $64,000 for the corresponding period in 2004,
attributing $243,000 to the decrease in non-interest income. In addition,
service charges on deposit accounts during the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004 decreased $93,000 and
income from investment in bank-owned life insurance decreased $101,000. Fees on
service charges on deposit accounts continue to trend downward as a result of
increased competition among banking institutions to offer lower fees on deposit
accounts. Other service charges, commission and fees increased $219,000 for the
nine months ended September 30, 2005 compared to the corresponding period of
2004 as a result of the Company's growth.
Non-Interest Expense. Non-interest expense increased $1.5 million to $10.0
million for the nine months ended September 30, 2005 compared to $8.4 million
for the nine months ended September 30, 2004. This increase was primarily due to
an increase in salaries and employee benefits of $740,000, which resulted from
normal salary adjustments, the addition of new personnel, and rising insurance
costs. The remaining non-interest expenses increased by $782,000 due to the
Company's continued growth including increased equipment and occupancy expense
of $81,000 and $27,000, respectively, as well as additional travel and auto
expense of $38,000, advertising expense of approximately $70,000, telephone
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expense of approximately $18,000, materials and training of approximately
$30,000 and postage and freight of approximately $49,000. Other increases for
the nine month period include increases in losses of approximately $13,000 on
sales of foreclosed property and increases of approximately $29,000 in waived
charges, approximately $32,000 in checks, forgery and other losses,
approximately $13,000 in directors fees', approximately $28,000 in merchant
processing expense and approximately $47,000 in other taxes and licenses.
Professional fees of approximately $757,000 were incurred during the first nine
months of 2005, up $245,000 over the corresponding period of 2004 reflecting
continued increased costs due to regulatory requirements for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. There were no other significant
increases in any of the remaining non-interest expenses that increased 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 35.7% and 34.2% for the nine
months ended September 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 $40.9 million or 8.6% of total assets at September 30, 2005 and $37.3
million or 9.4% of total assets at December 31, 2004.
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.
- 15 -
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.
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 September 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)
------------- ------------- -------------- -------------- ---------------
July 1, 2005 to July 31, 2005 400 $ 25.75 - -
August 1, 2005 to August 31, 2005 - $ - - -
September 1, 2005 to September 30, 2005 - $ - - -
------------- -------------- -------------- ---------------
Total 400 $ 25.75 - -
============= ============== ============== ===============
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(1) Represents purchase of stock on the open market 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 September 30, 2005. As of September 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 6. EXHIBITS
Exhibit 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
- 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: November 14, 2005 By: /s/ Ayden R. Lee, Jr.
---------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: November 14, 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