SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
Commission File Number 0-22787
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. |X|YES [ ]NO
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): [ ]YES |X|NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, 4,418,221
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of May 12, 2006)
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2006 and December 31, 2005...........................3
Consolidated Statements of Income
Three Months Ended March 31, 2006 and 2005.....................4
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2006 and 2005.....................5
Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 2006..............................6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2006 and 2005.....................7
Notes to Consolidated Financial Statements.................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..........15
Item 4 - Controls and Procedures.............................................15
Part II. OTHER INFORMATION
Item 1A. - Risk Factors.......................................................16
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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March 31, 2006 December 31,
(Unaudited) 2005*
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ASSETS (In thousands)
Cash and due from banks $ 14,381 $ 13,211
Interest-earning deposits 6,284 9,704
Investment securities available for sale 83,867 80,209
Loans 409,740 397,094
Allowance for loan losses (5,117) (4,965)
------------------ -----------------
Net loans 404,623 392,129
Accrued interest receivable 2,795 2,950
Bank premises and equipment, net 10,171 9,683
FHLB stock 3,429 3,655
Investment in life insurance 8,009 7,875
Other assets 3,589 2,994
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Total assets $ 537,148 $ 522,410
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 75,983 $ 68,993
Money market and NOW accounts 64,769 59,251
Savings 41,158 43,900
Time deposits, $100,000 and over 153,466 141,189
Other time deposits 85,271 84,200
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Total deposits 420,647 397,533
Borrowings 65,532 74,140
Accrued interest payable 2,593 2,255
Other liabilities 4,484 6,524
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Total liabilities 493,256 480,452
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Shareholders' equity:
Common stock; $1.00 par value, 10,000,000 shares
authorized; 4,412,000 and 4,379,258 shares issued and
outstanding at March 31, 2006 and December 31, 2005,
respectively 4,412 4,379
Additional paid-in capital 9,748 9,178
Retained earnings 30,691 29,161
Accumulated other comprehensive loss (959) (760)
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Total shareholders' equity 43,892 41,958
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Total liabilities and shareholders' equity $ 537,148 $ 522,410
================== =================
* 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
March 31,
----------------------------
2006 2005
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(In thousands, except
per share data)
Interest income:
Loans, including fees $ 8,216 $ 5,668
Investment securities:
Taxable 896 464
Tax-exempt 36 34
Dividends 55 32
Interest-earning deposits 36 25
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Total interest income 9,239 6,223
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Interest expense:
Deposits 2,915 1,375
Borrowings 725 430
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Total interest expense 3,640 1,805
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Net interest income 5,599 4,418
Provision for loan losses 186 187
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Net interest income after
provision for loan losses 5,413 4,231
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Non-interest income:
Service charges on deposit accounts 487 428
Other service charges, commissions and fees 359 264
Gain (loss) on sale of investment securities
available for sale (20) (54)
Gain (loss) on sale of loans 70 (2)
Merchant fees 91 83
Income from investment in bank owned life insurance 134 43
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Total non-interest income 1,121 762
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Non-interest expense:
Salaries 1,548 1,426
Employee benefits 324 314
Occupancy expenses 155 142
Equipment expenses 354 334
Professional and consulting fees 346 222
Other taxes and licenses 64 63
Merchant processing expenses 77 75
Other operating expenses 641 619
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Total non-interest expense 3,509 3,195
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Income before income taxes 3,025 1,798
Income taxes 1,090 622
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Net income $ 1,935 $ 1,176
============ ============
Net income per common share:
Basic and diluted $ .44 $ .27
============ ============
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
March 31,
-------------------------------------
2006 2005
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(Amounts in thousands)
Net income $ 1,935 $ 1,176
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Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on available
for sale securities (387) (757)
Tax effect 156 303
Reclassification of (gains) losses recognized in net income 20 54
Tax effect (8) (22)
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Net of tax amount (219) (422)
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Cash flow hedging activities:
Unrealized holding losses on cash flow hedging activities 34 (325)
Tax effect (14) 131
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Net of tax amount 20 (194)
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Total other comprehensive loss (199) (616)
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Comprehensive income $ 1,736 $ 560
================== =================
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, 2005 4,379,258 $ 4,379 $ 9,178 $ 29,161 $ (760) $ 41,958
Net income - - - 1,935 - 1,935
Other comprehensive loss - - - - (199) (199)
Issuance of common stock 35,242 35 447 - - 482
Current income tax benefit - - 99 - - 99
Stock-based compensation - - 24 - - 24
Purchases and retirement of
common stock (2,500) (2) - (53) - (55)
Cash dividends of $.08 per share - - - (352) - (352)
--------- ----------- ------------ ------------ ------------- ------------
Balance, March 31, 2006 4,412,000 $ 4,412 $ 9,748 $ 30,691 $ (959) $ 43,892
========= =========== =========== ============ ============= ============
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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Three Months Ended
March 31,
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2006 2005
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(In thousands)
Cash flows from operating activities:
Net income $ 1,935 $ 1,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 186 187
Provision for depreciation and amortization 258 260
Net amortization of bond premiums and discounts (2) 9
Stock-based compensation 24 -
Loss on sale of securities 20 54
(Gain) loss on sale of loans (70) 2
Loss on disposition of premises and equipment 1 -
Gain on sale of foreclosed assets (14) -
Increase in cash surrender value of life insurance (134) (43)
Changes in assets and liabilities:
Increase in other assets (502) (354)
Decrease in interest receivable 155 116
(Decrease) increase in other liabilities (2,098) 27
Increase in interest payable 338 357
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Net cash provided by operating activities 97 1,791
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Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 2,332 10,711
Purchase of securities available for sale (6,375) (23,321)
Redemption (purchase) of FHLB stock 226 (113)
Net increase in loans (12,610) (9,364)
Additions to premises and equipment (743) (216)
Purchase of bank-owned life insurance - (1)
Proceeds from sale of foreclosed assets 124 268
Expenditures on foreclosed assets (5) -
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Net cash used in investment activities (17,051) (22,036)
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Cash flows from financing activities:
Net proceeds from borrowings (8,608) -
Net increase in deposit accounts 23,114 25,071
Proceeds from issuance of common stock 506 405
Excess tax benefits from stock options 99 38
Purchase and retirement of common stock (55) -
Cash dividends paid (352) (305)
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Net cash provided by financing activities 14,704 25,209
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Net (decrease) increase in cash and cash equivalents (2,250) 4,964
Cash and cash equivalents at beginning of period 22,915 14,249
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Cash and cash equivalents at end of period $ 20,665 $ 19,213
============= ============
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 periods ended March 31, 2006
and 2005, 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. In March 2006,
the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware
statutory business trust (the "Trust"), for the sole purpose of issuing Trust
Preferred Securities (as defined in Note 5 below). The Trust is not included in
the consolidated financial statements of the Company, in accordance with
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities (revised December 2003) - an
interpretation of ARB No. 51" ("FIN 46R"), as described in Note 5 below.
Operating results for the three-month period ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2006.
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, 2005. 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 are computed based on the weighted
average number of shares outstanding during each period after retroactively
adjusting for 5-for-4 stock split paid on November 25, 2005. 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
March 31,
------------------------------
2006 2005
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Weighted average number of common shares
used in computing basic net income per share 4,394,093 4,314,701
Effect of dilutive stock options 28,712 27,515
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Weighted average number of common shares
and dilutive potential common shares used
in computing diluted net income per share 4,422,805 4,342,216
============= ==============
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As of March 31, 2006 and 2005, there were no antidilutive shares outstanding.
NOTE 3 - STOCK COMPENSATION PLANS
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123R") which was issued by FASB in December
2004. SFAS No. 123R revises SFAS No.123 "Accounting for Stock Based
Compensation," and supersedes APB No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and its related interpretations. SFAS No. 123R requires
recognition of the cost of employee services received in exchange for an award
of equity instruments in the financial statements over the period the employee
is required to perform the services in exchange for the award (presumptively the
vesting period). SFAS No. 123R also requires measurement of the cost of employee
services received in exchange for an award based on the grant-date fair value of
the award. SFAS No. 123R also amends SFAS No. 95 "Statement of Cash Flows," to
require that excess tax benefits be reported as financing cash inflows, rather
than as a reduction of taxes paid, which is included within operating cash
flows.
The Company adopted SFAS No.123R using the modified-prospective-transition
method application as permitted under SFAS No. 123R. Accordingly, prior period
amounts have not been restated. Under this method, the Company is required to
record compensation expense for all awards granted after the date of adoption
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value
method as prescribed by APB No. 25 and thus recognized no compensation expense
for options granted with exercise prices equal to the fair market value of the
Company's common stock on the date of grant.
As of March 31, 2006, the Company maintains a Nonqualified Stock Option Plan
(the "Plan"), which provides for grants of nonqualified stock options to
officers and directors of the Company and its subsidiaries and has not been
approved by shareholders. The Plan is administered by the compensation committee
of the Company's board of directors, which has broad discretionary authority to
administer the Plan, and issues options at a price approximating market as
determined by the committee. As of March 31, 2006, 976,563 shares had been
reserved for issuance under the Plan. All options granted subsequent to a 1997
amendment will be 100% vested one year from the grant date and will expire after
such period as is determined by the board of directors at the time of grant.
Options granted prior to the amendment have ten year lives and a five year level
vesting provision.
The Company granted 33,400 and 38,875 nonqualified stock options for the three
month period ended March 31, 2006 and March 31, 2005, respectively, with a
weighted-average fair value of $4.77 and $3.78 per option, respectively.
The compensation cost that has been charged against income for the Plan was
approximately $24,000 for the three month period ended March 31, 2006. The
Company recorded a deferred tax benefit in the amount of $15,000 related to
share-based compensation during the three month period ended March 31, 2006.
The fair market value of each option award is estimated on the date of grant
using the Black-Scholes option pricing model using the assumptions noted in the
following table. The risk-free interest rate is based on a U.S. Treasury
instrument with a life that is similar to the expected life of the option grant.
Expected volatility is based on the historical volatility of shares of the
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Company's common stock based on the prior three years trading history. The
expected term of the options is based on the average life of previously issued
stock options. The expected dividend yield is based on current yield on date of
grant. The options are not subject to any post-vesting restrictions.
The following table illustrates the assumptions that the Company used in the
Black-Scholes option pricing model for determining the fair value of options
granted to employees in the three month periods ended March 31, 2006 and 2005
under the Plan.
Three Months Ended
March 31,
-----------------------
2006 2005
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Dividend yield 1.53% 1.84%
Expected volatility 20.72% 24.31%
Risk free interest rate 4.73% 3.75%
Expected life 4 years 4 years
A summary of the status of the Company's outstanding stock options under the
Plan for the three months ended March 31, 2006 are presented below:
Weighted average
Options Option Price
Outstanding Per Share
----------------- -----------------
Balance December 31, 2005 150,992 $13.45
Granted 33,400 $23.00
Exercised (26,786) $10.72
Forfeited - -
Expired (600) $10.24
-----------------
Balance March 31, 2006 157,006 $15.96
=================
Additional information concerning the Company's outstanding stock options under
the Plan as of March 31, 2006 is as follows:
Remaining
Number Contractual Number
Exercise Price Outstanding Life Exercisable
- -------------- ----------- ----------- -----------
$ 5.92 6,592 .94 years 6,592
$11.52 42,435 .92 years 42,435
$14.08 35,704 1.90 years 35,704
$18.20 38,875 2.90 years 38,875
$23.00 33,400 3.90 years -
--------- -----------
157,006 123,606
========= ===========
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At March 31, 2006 the aggregate intrinsic value of outstanding and exercisable
options amounted to $1.30 million and $1.26 million, respectively. The total
intrinsic value of options exercised during the three months ended March 31,
2006 was $320,000. The fair value of the options vested during the period was
$39,000.
As of March 31, 2006, there was $120,000 of unrecognized cost related to
non-vested share-based compensation arrangements granted under this plan. That
cost is expected to be recognized over a weighted average period of 10.5 months.
Cash received from option exercises under all share-based payment arrangements
for the three months ended March 31, 2006 was $306,000. The tax benefit realized
for tax deductions from option exercise of the share-based payment arrangements
during the three months ended March 31, 2006 was $99,000.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123R to
options granted under the Company's stock option plans for the three months
ended March 31, 2005. For purposes of this pro forma disclosure, the value of
the options is estimated using the Black-Scholes option-pricing model and
amortized to expense over the options' vesting periods.
Three Months Ended
March 31, 2005
----------------------
(Amounts in thousands,
except per share data)
Net income:
As reported $ 1,176
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (20)
---------
Pro forma $ 1,156
=========
Basic earnings per share:
As reported $ .27
Pro forma .27
Diluted earnings per share:
As reported $ .27
Pro forma .27
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NOTE 4 - COMMITMENTS
As of March 31, 2006, loan commitments were as follows (in thousands):
Commitments to extend credit $ 81,408
Undisbursed lines of credit 25,156
Letters of credit 6,012
NOTE 5 - TRUST PREFERRED SECURITIES
On March 31, 2006, $12.0 million of trust preferred securities ("Trust Preferred
Securities") were placed through Four Oaks Statutory Trust I (the "Trust"). The
Trust issuer has invested the total proceeds from the sale of the Trust
Preferred in Junior Subordinated Deferrable Interest Debentures (the
"Debentures") issued by the Company, and is recorded in borrowings on the
accompanying consolidated balance sheet. The Trust Preferred Securities pay
cumulative cash distributions quarterly at an annual rate, reset quarterly,
equal to three month LIBOR plus 1.35%. The dividends paid to holders of the
Trust Preferred Securities, which will be recorded as interest expense, are
deductible for income tax purposes. The Trust Preferred Securities are
redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15,
September 15, December 15 or March 15. Redemption is mandatory at June 15, 2036.
The Company has fully and unconditionally guaranteed the Trust Preferred
Securities through the combined operation of the Debentures and other related
documents. The Company's obligation under the guarantee is unsecured and
subordinate to senior and subordinated indebtedness of the Company. The Trust
Preferred Securities qualify as Tier I capital for regulatory capital purposes
subject to certain limitations.
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 the Company's Consolidated
Financial Statements and Notes thereto in Item 1 of this report.
Comparison of Financial Condition at
March 31, 2006 and December 31, 2005
During the three months ended March 31, 2006, the Company's total assets grew
from $522.4 million at December 31, 2005 to $537.1 million, an increase of $14.7
million or 2.82%. Our liquid assets, consisting of cash and cash equivalents and
investment securities available for sale, experienced a net increase of $1.4
million, primarily from a $3.7 million increase in investment securities and a
$1.2 million increase in cash and due from Banks, partially offset by a decrease
of $3.4 million in interest-earning deposits. Additional funds available from
deposit growth provided an opportunity to increase investments as yields
improved during the three months ended March 31, 2006. Net loans grew from
$392.1 million at December 31, 2005 to $404.6 million at March 31, 2006 due to
an $18.4 million growth in loans secured by real estate. Our loan portfolio
continues to reflect a trend towards growth in commercial real estate lending.
Deposits from the Company's local market continued to be its primary funding
source, increasing by $16.8 million, while wholesale deposits increased $6.3
million. Total deposits grew from $397.5 million at December 31, 2005 to $420.6
million as March 31, 2006. This increase occurred due to a $13.3 million
increase in the Company's time deposit accounts and a $7.0 million increase in
its non-interest bearing deposits and a $5.5 million increase in its interest
checking deposits. Deposit growth was supported by increased deposit rates as
the national prime rate increased from 7.25% at December 31, 2005 to 7.75% at
March 31, 2006.
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During March 2006, the Company formed Four Oaks Statutory Trust I, a Delaware
trust for the sole purpose of issuing $12.0 million in Trust Preferred
Securities, with a liquidation amount of $1,000 per capital security, in pooled
offerings of Trust Preferred Securities. The Trust sold its common securities to
the Company for an aggregate principal amount of $372,000, resulting in total
proceeds from the offering of approximately $12.4 million. The Trust used the
proceeds to purchase $12.4 million in principal amount of the Debentures. The
Debentures have a 30-year maturity and are redeemable after five years by the
Company with certain exceptions. The Debentures will require quarterly interest
payments (subject to certain deferment options) and bear interest at a variable
rate equal to the three month LIBOR plus 1.35%, with LIBOR adjusted quarterly.
The net proceeds increased the regulatory capital of the Bank and are being used
to provide funding for continued growth of the Bank and are included in
borrowings on the consolidated balance sheet.
Total shareholders' equity increased approximately $1.9 million from $42.0
million at December 31, 2005 to $43.9 million at March 31, 2006. This increase
in shareholders' equity resulted principally from income from operations during
the period of $1.9 million, net proceeds from the issuance of common stock from
stock option exercises of $386,000, dividend reinvestment in the amount of
$194,000, and stock compensation expense of $24,000 resulting from the Company's
adoption of SFAS No. 123(R) at the beginning of 2006. Offsetting these increases
were other comprehensive losses of $199,000, dividends paid to its shareholders
of $352,000 and the repurchase of common stock of $55,000. At March 31, 2006,
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
March 31, 2006 and 2005
Net Income. Net income for the three months ended March 31, 2006 was $1.9
million, or $.44 basic net income per share, as compared with net income of $1.2
million, or $.27 basic net income per share for the three months ended March 31,
2005, an increase of $759,000 or $.17 per share. This increase resulted
primarily from a $1.2 million increase in the Company's net interest income for
the three months ended March 31, 2006, as the effect of loan growth outpaced the
effect of increased rates paid on interest bearing deposits.
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 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. The Debentures issued in connection with the offering of Trust
Preferred Securities will bear interest based on the three month LIBOR plus 1.35
%, with LIBOR adjusted quarterly and, accordingly, the Company expects interest
expense will increase in 2006 as a result of the interest payments on the
Debentures.
Net interest income for the three months ended March 31, 2006 was $5.6 million,
an increase of $1.2 million compared to the three months ended March 31, 2005,
which resulted primarily from the increase in the level of the Company's average
interest-earning assets of $111.1 million relative to the increase in the level
of its average interest-bearing liabilities of $92.8 million during the quarter.
Also, contributing to the increase in net interest income was the average growth
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in interest free demand deposits of $12.3 million. The growth in demand deposits
provided a partial offset to the $26.5 million increase in higher costing time
deposits. The accelerated repricing rate on deposits resulted in a decrease in
the Company's net interest margin by 9 basis points from 4.72% during the three
months ended March 31, 2005 to 4.63% during the three months ended March 31,
2006.
Provision for Loan Losses. The provision for loan losses was $186,000 and
$187,000 for the three months ended March 31, 2006 and 2005, respectively, a
decrease of $1,000. Net charge-offs of $34,000 were recorded during the three
months ended March 31, 2006, compared to $57,000 for the three months ended
March 31, 2005. Non-performing loans aggregated $974,000 at March 31, 2006,
decreasing $344,000 from the $1.3 million at December 31, 2005, while the
allowance for loan losses, expressed as a percentage of gross loans, was 1.25%
at March 31, 2006 and December 31, 2005, respectively. Management believes that
the allowance is adequate to absorb probable losses inherent in the loan
portfolio.
Non-Interest Income. Non-interest income increased $359,000 for the three months
ended March 31, 2006 to $1.1 million as compared to $762,000 for the same period
in 2005. The increase of $359,000 in comparison with the prior year period was
primarily due to increases in bank-owned life insurance income of $91,000, gain
on sale of loans of $72,000, and service charges on deposit accounts of $59,000.
During the three months ended March 31, 2006 as compared to the same period of
2005, other service charges, commissions and fees increased $95,000, of which
$42,000 was attributable to increased commissions from the Company's financial
services department, $21,000 was attributable to increased profits from our
investment in Four Oaks Mortgage Company, L.P., and $14,000 was attributable to
increased gains from the sale of repossessed loan collateral. There were no
other significant changes in any of the categories of income that comprise the
Company's total non-interest income.
Non-Interest Expense. Non-interest expense increased $314,000 to $3.5 million
for the three months ended March 31, 2006 compared to $3.2 million for the three
months ended March 31, 2005. This increase was due in part to increases in
salaries and employee benefits of $132,000, which resulted from normal salary
adjustments, rising benefits costs, and additional staffing. For the three
months ended March 31, 2006, occupancy and equipment expenses increased $13,000
and $20,000, respectively, professional and consulting fees increased $124,000,
and other operating expenses increased $22,000. The increases in professional &
consulting fees are directly related to increased compliance costs resulting
from regulatory requirements arising from the Sarbanes-Oxley Act of 2002. The
primary increases in other non-interest expense for the three months ended March
31, 2006 included materials, training and seminars of approximately $13,000 and
membership fees of approximately $7,000. There were no other significant
increases in any of the remaining non-interest expenses.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 36.0% and 34.6% for the three
months ended March 31, 2006 and 2005, respectively.
Liquidity and Capital Resources
The Company's 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, during March 2006, the net proceeds from the
offering of the Trust Preferred Securities increased the regulatory capital of
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the Bank and are being used to provide funding for continued growth of the Bank.
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 its operating needs and the operating
needs of the Bank for the next eighteen months. Total shareholders' equity was
$43.9 million, or 8.2 %, of total assets at March 31, 2006 and $42.0 million, or
8.0%, of total assets at December 31, 2005.
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 the Company's judgment concerning the future and are
subject to risks and uncertainties that could cause its 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.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause our actual operating results to
differ materially from those anticipated 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 the Company's common stock, other considerations described
in connection with specific forward looking statements and other cautionary
elements specified in Part II, Item 1A of this report and the Company's periodic
filings with the Securities and Exchange Commission (the "Commission"),
including without limitation, its Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, and Current Reports on Form 8-K.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes there has not been any material 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 its Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.
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 Securities and
Exchange Commission's rules and forms.
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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 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2005.
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 March 31, 2006:
Total Number
of Shares Maximum Number
Purchased as of Shares That
Total Number Average Price Part of Publicly May Yet Be
of Shares Paid per Announced Purchased Under
Period Purchased (1) Share Program the Program (1)
------ -------------- ------------- ---------------- ---------------
January 1, 2006 to January 31, 2006 - $ - - -
February 1, 2006 to February 28, 2006 2,500 $ 22.15 2,500 34,111
March 1, 2006 to March 31, 2006 - $ - - -
-------------- ------------- ---------------- ---------------
Total 2,500 $ 22.15 2,500 34,111
============== ============= ================ ===============
(1) 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, 2006.
During the first quarter 2006, the Company repurchased 2,500 shares of
stock under the program at a price of 22.15. As of March 31, 2006, there
were an aggregate of 100,000 shares of the Company's common stock that have
been approved for repurchase under the program, of which an aggregate of
65,889 shares have already been repurchased and 34,111 shares remained
authorized for repurchase under the program.
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ITEM 6. EXHIBITS
Exhibit Description
- ------- -----------
10.1 Amended and Restated Declaration of Trust of Four Oaks Statutory
Trust I, dated as of March 30, 2006 (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 5,
2006)
10.2 Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March
30, 2006 (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 5, 2006)
10.3 Indenture, dated as of March 30, 2006 by and between Four Oaks
Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating
to Junior Subordinated Debt Securities Due June 15, 2036
(incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 5, 2006)
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: May 15, 2006 By: /s/ Ayden R. Lee, Jr.
---------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: May 15, 2006 By: /s/ Nancy S. Wise
---------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Amended and Restated Declaration of Trust of Four Oaks Statutory
Trust I, dated as of March 30, 2006 (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 5,
2006)
10.2 Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March
30, 2006 (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 5, 2006)
10.3 Indenture, dated as of March 30, 2006 by and between Four Oaks
Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating
to Junior Subordinated Debt Securities Due June 15, 2036
(incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 5, 2006)
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