UNITED STATES 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 September 30, 2007
Commission File Number 000-22787
FOUR OAKS FINCORP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2028446
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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 |X| Non-accelerated filer [ ]
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, 5,623,449
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of November 1, 2007)
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TABLE OF CONTENTS Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2007 (Unaudited) and December 31, 2006........ 3
Consolidated Statements of Income (Unaudited)
Three Months and Nine months Ended September 30, 2007 and
2006........................................................ 4
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months and Nine months Ended September 30, 2007 and
2006........................................................ 5
Consolidated Statement of Shareholders' Equity (Unaudited)
Nine months Ended September 30, 2007........................ 6
Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 2007 and 2006............... 7
Notes to Consolidated Financial Statements (Unaudited)...... 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.... 14
Item 4 - Controls and Procedures....................................... 14
Part II. OTHER INFORMATION
Item 1A - Risk Factors.................................................. 14
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds... 14
Item 6 - Exhibits...................................................... 15
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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,
2007 December 31,
(Unaudited) 2006*
------------- -------------
ASSETS (In thousands)
Cash and due from banks $ 17,627 $ 13,960
Interest-earning deposits 1,565 3,751
Investment securities available for sale 127,476 101,393
Loans 507,012 461,763
Allowance for loan losses (6,185) (5,566)
------------- -------------
Net loans 500,827 456,197
Accrued interest receivable 4,422 3,614
Bank premises and equipment, net 12,735 11,630
FHLB stock 4,693 4,194
Investment in life insurance 8,425 8,424
Other assets 5,289 4,974
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Total assets $ 683,059 $ 608,137
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 76,122 $ 72,087
Money market and NOW accounts 109,276 89,615
Savings 30,147 31,424
Time deposits, $100,000 and over 169,425 164,497
Other time deposits 129,336 109,245
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Total deposits 514,306 466,868
Borrowings 95,945 73,400
Subordinated debentures 12,372 12,372
Accrued interest payable 3,736 3,258
Other liabilities 2,868 2,916
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Total liabilities 629,227 558,814
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Shareholders' equity:
Common stock; $1.00 par value, 10,000,000 shares
authorized; 5,623,449 and 5,577,862 shares
issued and outstanding at September 30, 2007 and
December 31, 2006, respectively 5,623 5,578
Additional paid-in capital 11,661 10,016
Retained earnings 36,323 34,141
Accumulated other comprehensive income (loss) 225 (412)
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Total shareholders' equity 53,832 49,323
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Total liabilities and shareholders'
equity $ 683,059 $ 608,137
============= =============
* 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,
-------------------- ---------------------
2007 2006 2007 2006
--------- -------- --------- ---------
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 10,570 $ 9,146 $ 30,175 $ 25,858
Investment securities:
Taxable 1,576 1,261 4,413 3,206
Tax-exempt 42 38 127 110
Dividends 112 80 281 197
Interest-earning deposits 10 22 36 88
--------- -------- --------- ---------
Total interest and dividend income 12,310 10,547 35,032 29,459
--------- -------- --------- ---------
Interest expense:
Deposits 4,940 3,709 14,167 9,879
Borrowings 1,194 1,036 3,329 2,625
--------- -------- --------- ---------
Total interest expense 6,134 4,745 17,496 12,504
--------- -------- --------- ---------
Net interest income 6,176 5,802 17,536 16,955
Provision for loan losses 280 332 774 686
--------- -------- --------- ---------
Net interest income after provision for loan
losses 5,896 5,470 16,762 16,269
--------- -------- --------- ---------
Non-interest income:
Service charges on deposit accounts 513 539 1,526 1,541
Other service charges, commissions and fees 376 486 1,136 1,276
Loss on sale of investment securities (15) (17) (44) (103)
Gain on sale of loans - - 26 71
Gain (loss) on hedges 214 146 54 (162)
Merchant fees 110 171 336 304
Income from investment in bank-owned life insurance 20 332 1 515
--------- -------- --------- ---------
Total non-interest income 1,218 1,657 3,035 3,442
--------- -------- --------- ---------
Non-interest expense:
Salaries 2,152 1,793 6,340 5,159
Employee benefits 379 345 1,242 1,007
Occupancy expense 203 188 584 490
Equipment expense 365 369 1,026 1,098
Professional and consulting fees 212 240 938 836
Other taxes and licenses 80 71 212 215
Merchant processing expense 92 182 284 266
Other operating expense 823 719 2,549 2,144
--------- -------- --------- ---------
Total non-interest expense 4,306 3,907 13,175 11,215
--------- -------- --------- ---------
Income before income taxes 2,808 3,220 6,622 8,496
Provision for income taxes 996 1,074 2,311 2,974
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Net income $ 1,812 $ 2,146 $ 4,311 $ 5,522
========= ======== ========= =========
Basic net income per common share $ 0.29 $ 0.35 $ 0.70 $ 0.91
========= ======== ========= =========
Diluted net income per common share $ 0.29 $ 0.35 $ 0.70 $ 0.90
========= ======== ========= =========
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,
------------------- --------------------
2007 2006 2007 2006
-------- -------- -------- --------
(In thousands, except per share data)
Net income $ 1,812 $ 2,146 $ 4,311 $ 5,522
-------- -------- -------- --------
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (loss) on
available for sale securities 1,586 727 615 (323)
Tax effect (634) (187) (246) 130
Reclassification of losses recognized in
net income 15 17 44 103
Tax effect (6) (7) (18) (41)
-------- -------- -------- --------
Net of tax amount 961 550 395 (131)
-------- -------- -------- --------
Cash flow hedging activities:
Unrealized holding gains on cash flow
hedging activities 70 232 402 198
Tax effect (28) (93) (160) (80)
-------- -------- -------- --------
Net of tax amount 42 139 242 118
-------- -------- -------- --------
Total other comprehensive income (loss) 1,003 689 637 (13)
-------- -------- -------- --------
Comprehensive income $ 2,815 $ 2,835 $ 4,948 $ 5,509
======== ======== ======== ========
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 income/(loss) equity
----------- --------- ------------ --------- -------------- --------------
(Amounts in thousands, except share and per share data)
Balance, December 31, 2006 5,577,862 $ 5,578 $ 10,016 $ 34,141 $ (412) $ 49,323
Net income - - - 4,311 - 4,311
Other comprehensive income - - - - 637 637
Issuance of common stock 81,394 81 1,272 - - 1,353
Current income tax benefit - - 203 - - 203
Stock-based compensation - - 170 - - 170
Purchases and retirement
of common stock (35,807) (36) - (840) - (876)
Cash dividends of $.23 per
share - - - (1,289) - (1,289)
----------- --------- ------------ --------- -------------- --------------
Balance, September 30,
2007 5,623,449 $ 5,623 $ 11,661 $ 36,323 $ 225 $ 53,832
=========== ========= ============ ========= ============== ==============
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,
---------------------------
2007 2006
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(In thousands)
Cash flows from operating activities:
Net income $ 4,311 $ 5,522
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 774 686
Provision for depreciation and amortization 742 776
Net amortization (accretion) of bond premiums and discounts 31 (24)
Stock-based compensation 170 104
Loss on sale of securities 44 103
Gain on sale of loans (26) (71)
Loss on disposition of premises and equipment 78 1
Loss (gain) on sale of foreclosed assets 11 (14)
Increase in cash surrender value of life insurance (1) (515)
Net change in hedging activity 54 (162)
Changes in assets and liabilities:
Other assets 341 (1,019)
Interest receivable (808) (507)
Other liabilities 300 (2,636)
Interest payable 478 854
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Net cash provided by operating activities 6,499 3,098
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Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 28,794 13,064
Purchase of securities available for sale (54,293) (39,233)
Purchase of FHLB stock (1,003) (1,285)
Redemption of FHLB stock 504 1,039
Net increase in loans (47,248) (48,294)
Additions to premises and equipment (1,914) (2,331)
Proceeds from sale of foreclosed assets 782 124
Expenditures on foreclosed assets (14) (5)
----------- -----------
Net cash used in investment activities (74,392) (76,921)
----------- -----------
Cash flows from financing activities:
Net proceeds (repayments) from borrowings 22,545 (11,140)
Net increase in deposit accounts 47,438 70,448
Proceeds from subordinated debentures - 12,372
Proceeds from issuance of common stock 1,353 1,105
Excess benefits from stock options 203 124
Purchase and retirement of common stock (876) (55)
Cash dividends paid (1,289) (1,060)
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Net cash provided by financing activities 69,374 71,794
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,481 (2,029)
Cash and cash equivalents at beginning of period 17,711 22,915
----------- -----------
Cash and cash equivalents at end of period $ 19,192 $ 20,886
=========== ===========
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 and nine month periods ended
September 30, 2007 and 2006, respectively, 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 and nine month
period ended September 30, 2007 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2007.
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, 2006. 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 a 10% stock dividend payable on November 9, 2007, and a 5-for-4
stock split paid on November 10, 2006. 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 Nine months Ended
September 30, September 30,
----------------------- -----------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Weighted average number of
common shares used in computing
basic net income per share 6,180,326 6,091,242 6,165,315 6,070,339
Effect of dilutive stock options 15,247 54,033 28,647 47,570
----------- ----------- ----------- -----------
Weighted average number of
commons shares and dilutive
potential common shares used in
computing diluted net income
per share 6,195,573 6,145,275 6,193,962 6,117,909
=========== =========== =========== ===========
As of September 30, 2007 and 2006, there were no antidilutive shares
outstanding.
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NOTE 3 - COMMITMENTS
As of September 30, 2007, loan commitments were as follows (in thousands):
Commitments to extend credit $ 119,160
Undisbursed lines of credit 28,373
Letters of credit 2,190
NOTE 4 - INCOME TAXES
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109 ("FIN 48"). FIN 48 provides guidance on financial statement recognition and
measurements of tax positions taken, or expected to be taken, in tax returns.
The initial adoption of FIN 48 had no impact on the Company's consolidated
financial statements. As of January 1, 2007, there were no unrecognized tax
benefits. The amount of unrecognized tax benefits may increase or decrease for
various reasons including adding amounts for current year tax positions,
expiration of open income tax returns due to statute of limitations, changes in
management's judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the addition or elimination of uncertain
tax positions.
The Company's policy is to report interest and penalties, if any, related to
unrecognized tax benefits in other non-interest expense in the Statement of
Income.
The Company's federal and state income tax returns are open and subject to
examination from the 2004 tax return year and forward.
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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 the Company's Consolidated
Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly
Report.
Comparison of Financial Condition at
September 30, 2007 and December 31, 2006
The Company's total assets grew from $608.1 million at December 31, 2006 to
$683.1 million at September 30, 2007, an increase of $75.0 million or 12.3%. The
Company's liquid assets, consisting of cash and cash equivalents and investment
securities available for sale, increased $27.6 million during the nine months
ended September 30, 2007 compared to liquid assets as of December 31, 2006,
primarily from increases in investment securities of $26.1 million. Additional
funds available from deposit growth of $47.4 million provided the Company with
an opportunity to increase investment securities available for sale during the
first nine months of 2007. Net loans grew from $456.2 million at December 31,
2006 to $500.8 million at September 30, 2007, primarily due to a $40.4 million
growth in loans secured by real estate. The Company's loan portfolio continues
to reflect a trend towards growth in commercial real estate lending and
construction loans. Deposits from the Company's local market continued to be its
primary funding source, increasing by $41.6 million in the first nine months of
2007 compared to deposits from the local market as of December 31, 2006, while
wholesale deposits increased by $5.8 million for the same periods. Deposits grew
from $466.9 million at December 31, 2006 to $514.3 million at September 30,
2007. This increase occurred primarily due to growth in the Company's time
deposit accounts of $24.9 million, in its noninterest-bearing deposits of $4.0
million and in its interest checking deposits of $19.7 million. Deposit growth
for the Company continued despite a 50 basis point decrease in the national
prime rate on September 18, 2007. Growth in the investment and loan portfolios
attributed to an increase of $22.5 million in borrowings at September 30, 2007.
Total shareholders' equity increased approximately $4.5 million from $49.3
million at December 31, 2006 to $53.8 million at September 30, 2007. This
increase in shareholders' equity resulted principally from income from
operations of $4.3 million, net proceeds from the issuance of common stock from
stock option exercises of $697,000, dividend reinvestment in the amount of
$860,000, other comprehensive gains of $637,000, and stock compensation expense
of $170,000. Offsetting these increases were dividends paid to the Company's
shareholders of $1.3 million, and the repurchase and retirement of common stock
of $876,000. At September 30, 2007, 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, 2007 and 2006
Net Income. Net income for the three months ended September 30, 2007 was $1.8
million, or $.29 basic net income per share, as compared with net income of $2.1
million, or $.35 basic net income per share, for the three months ended
September 30, 2006, a decrease of $334,000 or $.06 basic net income per share.
Net income declined primarily due to lower margins, declines in non-interest
income, and increased operating costs related to the Company's recent expansion.
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.
- 10 -
Net interest income for the three months ended September 30, 2007 was $6.2
million, an increase of $391,000 compared to the three months ended September
30, 2006, primarily due to higher balances in the loan and investment
portfolios. Average interest-earning assets increased $77.3 million for the
quarter. The increase of $84.5 million in average interest-bearing liabilities
resulted in higher interest expense, but the effect of rising rates is
diminishing. The margins decreased slightly as the yields on liabilities rose
while yields on assets remained fairly steady resulting in a decrease in the
Company's net interest margin by 38 basis points from 4.27% during the three
months ended September 30, 2006 to 3.89% during the three months ended September
30, 2007.
Provision for Loan Losses. The provision for loan losses was $280,000 and
$332,000 for the three months ended September 30, 2007 and 2006, respectively, a
decrease of $52,000. Net charge-offs of $25,000 were recorded for the three
months ended September 30, 2007 compared to net charge-offs of $75,000 during
the three months ended September 30, 2006. Non-performing assets aggregated $2.7
million at September 30, 2007, an increase of $1.4 million from the $1.3 million
at December 31, 2006, while the allowance for loan losses, expressed as a
percentage of gross loans, was 1.22% at September 30, 2007 and 1.21% at December
31, 2006, respectively. The increase in non-performing assets primarily was due
to one foreclosure of a commercial property in the first quarter of 2007 and
construction loan foreclosures for one builder in the third quarter of 2007.
Management believes that the allowance is adequate to absorb probable losses
inherent in the loan portfolio.
Non-Interest Income. Non-interest income decreased $439,000 for the three months
ended September 30, 2007 to $1.2 million as compared to $1.6 million for the
same period in 2006. The decrease was primarily a result of market pricing,
causing a decline in income from cash surrender value of the bank-owned life
insurance of $312,000. Other decreases include a one-time distribution from the
Community Reinvestment Act ("CRA") investment in 2006 of $235,000 and decreases
in service charge income of $26,000 and merchant fees of $61,000. Partially
offsetting the decrease were increases in the market valuation of the interest
rate hedge of $68,000, increases in credit card income of $28,000, and servicing
fees on loans of $55,000. The Company is in the process of changing bank-owned
life insurance policies in order to reduce the volatility in the related
earnings. Volatility due to the market pricing of hedges will continue until
such time as the hedges become qualified for special hedge accounting rules or
the election is made to carry the hedged liabilities at fair market value.
Non-Interest Expense. Non-interest expense increased $416,000 to $4.3 million
for the three months ended September 30, 2007 compared to $3.9 million for the
three months ended September 30, 2006. This increase was due in part to
increases in salaries and employee benefits of $393,000, which resulted from
normal salary adjustments, rising benefits costs, additional staffing, and
rising insurance costs. For the three months ended September 30, 2007, net
occupancy and equipment expenses increased $11,000, and other operating expenses
increased $121,000, partially offset by a decrease in merchant processing fees
of $90,000. The primary increases in other non-interest expense for the three
months ended September 30, 2007 included increases in credit card processing
fees of $36,000, losses on the stored value card program of $19,000, and an
increase of $12,000 in advertising expense. 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 35.5% and 33.3% for the three
months ended September 30, 2007 and 2006, respectively.
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Results of Operations for the Nine months Ended
September 30, 2007 and 2006
Net Income. Net income for the nine months ended September 30, 2007 was $4.3
million, or $.70 basic net income per share, as compared with net income of $5.5
million or $.91 basic net income per share for the nine months ended September
30, 2006, a decrease of $1.2 million or $.21 per share. Net income declined
primarily due to lower margins, declines in non-interest income, and increased
operating costs related to the Company's recent expansion.
Net Interest Income. Net interest income was $17.5 million and $16.9 million for
the nine month periods ended September 30, 2007 and September 30, 2006,
respectively. Interest and dividend income was $35.0 million and $29.5 million
for the nine months ended September 30, 2007 and 2006, respectively. This
increase in interest and dividend income was offset by an increase in interest
expense on deposits and borrowings of $5.0 million to $17.5 million for the nine
months ended September 30, 2007 from $12.5 million for the nine months ended
September 30, 2006. This increase in interest expense was primarily due to
deposit growth of $47.4 million and an increase in borrowings of $22.5 million
during the nine months ended September 30, 2007. The increase in
interest-bearing liabilities funded the increase in interest-earning assets,
with the loans and deposits growing due to expansion into new markets and
increased market share in mature markets. Yields on interest-bearing liabilities
rose while yields on interest-earning assets remained fairly steady, resulting
in a decrease in the Company's net interest margin by 55 basis points from 4.41%
for the nine month period of 2006 to 3.86% for the nine month period of 2007.
Provision for Loan Losses. The Company's provision for loan losses was $774,000
and $686,000 for the nine months ended September 30, 2007 and 2006,
respectively, an increase of $88,000. This increase was primarily due to loan
growth. Net charge-offs of $155,000 were recorded during the first nine months
of 2007, compared to $84,000 for the first nine months of 2006. Non-performing
assets aggregated $2.7 million at September 30, 2007, increasing $873,000 from
the $1.9 million at September 30, 2006, while the allowance for loan losses,
expressed as a percentage of gross loans, was 1.22% at September 30, 2007 and
1.25% at September 30, 2006. This $873,000 increase was primarily due to one
foreclosure of a commercial property in the first quarter of 2007 and
construction loan foreclosures for one builder during the third quarter of 2007.
Management believes that the allowance is adequate to absorb probable losses
inherent in the loan portfolio.
Non-Interest Income. Non-interest income decreased $407,000 for the nine months
ended September 30, 2007 to $3.0 million from $3.4 million for the same period
in 2006. The decrease was primarily a result of market pricing, causing a
decline in income from cash surrender value of bank-owned life insurance of
$514,000, and a one-time distribution from the CRA investment in 2006 of
$235,000. Partially offsetting the decrease was an increase in the valuation of
interest rate swaps of $216,000, an increase in merchant processing fees of
$32,000 due to an increase in electronic banking transactions, a decrease in
losses on sales of investment securities due to favorable market conditions, and
an increase in commissions received by the financial services division of
$103,000. There were no other significant changes in any of the categories of
income that comprise the Company's total non-interest income. The Company is in
the process of changing bank-owned life insurance policies in order to reduce
the volatility in the related earnings. Volatility due to the market pricing of
hedges will continue until such time as the hedges become qualified for special
hedge accounting rules or the election is made to carry the hedged liabilities
at fair market value.
Non-Interest Expense. Non-interest expense increased $2.0 million to $13.2
million for the nine months ended September 30, 2007 compared to $11.2 million
for the nine months ended September 30, 2006. This increase was primarily due to
an increase in salaries and employee benefits of $1.4 million which resulted
from new hires for offices that opened during 2006, administrative positions
filled due to the Company's growth, and normal increases in wages and benefits
costs. An increase in professional fees of $102,000, and other operating
expenses of $435,000 also contributed to the increased expenses. The other
operating expenses primarily increased due to operating from new facilities in
Wallace, Sanford, and Zebulon during 2007. The primary increases in other
non-interest expense for the first nine months of 2007 included donations and
charities expenses of $57,000, ATM operating fees of $71,000, postage expense of
$22,000, losses on sales of repossessions of $25,000, printing and office supply
expenses of $29,000, meals, travel and entertainment of $20,000, and a loss of
$77,000 due to the recognition of obsolescence of various fixed assets. There
were no other significant increases in any of the remaining non-interest
expenses.
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Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 34.9% and 35.0% for the nine
months ended September 30, 2007 and 2006, 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 Company'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 the Bank and are being used to provide funding for
continued growth of the Bank. The Bank also 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 $53.8 million, or 7.9%, of total assets at September
30, 2007 and $49.3 million, or 8.1%, of total assets at December 31, 2006.
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 its 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 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.
- 13 -
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 or derivative commodity 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, 2006.
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 Quarterly Report. As defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and
procedures means controls and other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on their evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that as of the end of the period covered
by this Quarterly 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 Quarterly Report that the
Company believes have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes in the Company's risk factors from those
disclosed in its Annual Report on Form 10-K for the year ended December 31,
2006.
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, 2007:
- 14 -
Total
Number Maximum
of Shares Number of
Purchased Shares That
as Part of May Yet Be
Total Number Average Publicly Purchased
of Shares Price Paid Announced Under the
Period Purchased (1) per Share Program (1) Program (1)
July 1, 2007 to July 31, 2007 - $ - - 101,205
August 1, 2007 to August 31,
2007 4,490 $ 19.62 4,490 96,715
September 1, 2007 to September
30, 2007 5,746 $ 20.15 5,746 90,969
-------------- ----------- ----------- -----------
Total 10,236 $ 19.92 10,236 90,969
============== =========== =========== ===========
(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 was set to expire on December 31,
2006. On December 20, 2006, the Board of Directors announced that it
authorized an extension of the repurchase program, which will now expire on
December 31, 2007, and that it further authorized an increase of the
authorized number of shares to be repurchased from 100,000 to 200,000
shares. The Company repurchased 10,236 shares of stock under the program
during the three months ended September 30, 2007. As of September 30, 2007,
of the 200,000 authorized shares of the Company's common stock designated
for repurchase an aggregate of 109,031 shares have already been repurchased
and 90,969 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
- 15 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUR OAKS FINCORP, INC.
Date: November 8, 2007 By: /s/ Ayden R. Lee, Jr.
-------------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: November 8, 2007 By: /s/ Nancy S. Wise
-------------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
- 16 -
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