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 March 31, 2008
Commission File Number 000-22787
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 or a smaller reporting company.
See the definition of "large accelerated filer" and "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer |X|
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
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, 6,236,907
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of May 7, 2008)
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TABLE OF CONTENTS Page No.
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 2008 (Unaudited) and December 31, 2007................................. 3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 2008 and 2007....................................... 4
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, 2008 and 2007....................................... 5
Consolidated Statement of Shareholders' Equity (Unaudited)
Three Months Ended March 31, 2008................................................ 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2008 and 2007....................................... 7
Notes to Consolidated Financial Statements (Unaudited)........................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........................... 16
Item 4 - Controls and Procedures.............................................................. 16
Part II. OTHER INFORMATION
Item 1A - Risk Factors......................................................................... 17
Item 6 - Exhibits............................................................................. 18
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FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
March 31, 2008 December 31,
(Unaudited) 2007*
--------------- ---------------
ASSETS (Amounts in thousands)
Cash and due from banks $ 14,011 $ 14,394
Interest-earning deposits 21,431 3,881
Investment securities available for sale 137,442 114,301
Loans 566,374 545,270
Allowance for loan losses (6,800) (6,653)
--------------- ---------------
Net loans 559,574 538,617
Accrued interest receivable 3,640 3,564
Bank premises and equipment, net 12,598 12,627
FHLB stock 6,312 5,010
Investment in life insurance 10,172 10,041
Other assets 5,741 5,868
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Total assets $ 770,921 $ 708,303
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 75,616 $ 74,687
Money market and NOW accounts 124,912 126,300
Savings 28,456 28,041
Time deposits, $100,000 and over 185,737 172,513
Other time deposits 142,607 136,222
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Total deposits 557,328 537,763
Borrowings 137,600 97,000
Subordinated debentures 12,372 12,372
Accrued interest payable 4,060 4,055
Other liabilities 2,746 2,483
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Total liabilities 714,106 653,673
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Shareholders' equity:
Common stock; $1.00 par value, 10,000,000 shares
authorized; 6,227,278 and 6,165,197 shares issued and
outstanding at March 31, 2008 and December 31, 2007,
respectively 6,227 6,165
Additional paid-in capital 22,376 21,545
Retained earnings 27,477 26,477
Accumulated other comprehensive income 735 443
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Total shareholders' equity 56,815 54,630
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Total liabilities and shareholders' equity $ 770,921 $ 708,303
=============== ===============
* 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,
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2008 2007
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(In thousands, except per share data)
Interest and dividend income:
Loans, including fees $ 10,386 $ 9,680
Investment securities:
Taxable 1,513 1,317
Tax-exempt 57 43
Dividends 158 75
Interest-earning deposits 17 13
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Total interest and dividend income 12,131 11,128
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Interest expense:
Deposits 4,698 4,413
Borrowings 1,267 1,058
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Total interest expense 5,965 5,471
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Net interest income 6,166 5,657
Provision for loan losses 288 262
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Net interest income after provision for loan losses 5,878 5,395
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Non-interest income:
Service charges on deposit accounts 531 489
Other service charges, commissions and fees 381 351
Gain on sale of investment securities 133 1
Gain on sale of loans 5 26
Gain on hedges 97 98
Merchant fees 110 67
Income from investment in bank-owned life insurance 131 35
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Total non-interest income 1,388 1,067
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Non-interest expenses:
Salaries 2,332 2,049
Employee benefits 517 448
Occupancy expense 222 187
Equipment expense 379 319
Professional and consulting fees 381 313
Other taxes and licenses 75 52
Merchant processing expense 91 58
Other operating expense 968 836
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Total non-interest expenses 4,965 4,262
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Income before income taxes 2,301 2,200
Provision for income taxes 804 750
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Net income $ 1,497 $ 1,450
=============== ===============
Basic net income per common share $ 0.24 $ 0.24
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Diluted net income per common share $ 0.24 $ 0.23
=============== ===============
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,
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2008 2007
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(Amounts in thousands)
Net income $ 1,497 $ 1,450
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Other comprehensive income:
Securities available for sale:
Unrealized holding gains on available for sale securities 764 120
Tax effect (392) (48)
Reclassification of gains recognized in net income (133) (1)
Tax effect 53 -
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Net of tax amount 292 71
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Cash flow hedging activities:
Unrealized holding gains on cash flow hedging activities - 127
Tax effect - (50)
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Net of tax amount - 77
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Total other comprehensive income 292 148
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Comprehensive income $ 1,789 $ 1,598
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Accumulated
Common stock Additional other Total
------------------------- paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income equity
------------------------- --------------- --------------- --------------- ---------------
(Amounts in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2007 6,165,197 $ 6,165 $ 21,545 $ 26,477 $ 443 $ 54,630
Net income - - - 1,497 - 1,497
Other comprehensive income - - - - 292 292
Issuance of common stock 62,081 62 681 - - 743
Current income tax benefit - - 102 - - 102
Stock based compensation - - 48 - - 48
Cash dividends of $ .08 per
share - - - (497) - (497)
------------------------- --------------- --------------- --------------- ---------------
BALANCE AT MARCH 31, 2008 6,227,278 $ 6,227 $ 22,376 $ 27,477 $ 735 $ 56,815
========================= =============== =============== =============== ===============
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,
-----------------------------------
2008 2007
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(Amounts in thousands)
Cash flows from operating activities:
Net income $ 1,497 $ 1,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 288 262
Provision for depreciation and amortization 269 243
Net amortization of bond premiums and discounts 3 6
Stock based compensation 48 53
Gain on sale of investment securities (133) (1)
Gain on sale of loans (5) (26)
Loss on disposition of premises and equipment 4 -
Loss on sale of foreclosed assets 45 -
Income from investment in life insurance (131) (35)
(Gain) loss on hedges (97) 26
Changes in assets and liabilities:
Other assets 228 289
Interest receivable (76) (184)
Other liabilities 360 261
Interest payable 5 408
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Net cash provided by operating activities 2,305 2,752
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Cash flows from investing activities:
Proceeds from sales and calls of investment securities
available for sale 54,046 10,520
Purchases of investment securities available for sale (76,425) (26,652)
Purchase of FHLB stock (1,302) (49)
Net increase in loans (21,310) (14,803)
Purchase of bank premises and equipment (242) (579)
Acquistion costs (422) -
Proceeds from sales of foreclosed assets 36 115
Net (expenditures) recoveries on foreclosed assets (32) 10
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Net cash used by investing activities (45,651) (31,438)
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Cash flow from financing activities:
Net proceeds (repayments) from borrowings 40,600 (1,600)
Net increase in deposit accounts 19,565 28,406
Proceeds from issuance of common stock 743 548
Excess tax benefits from stock options 102 158
Purchase and retirement of common stock - (579)
Cash dividends paid (497) (392)
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Net cash provided by financing activities 60,513 26,541
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Net increase (decrease) in cash and cash equivalents 17,167 (2,145)
Cash and cash equivalents at beginning of period 18,275 17,711
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Cash and cash equivalents at end of the period $ 35,442 $ 15,566
=============== ===============
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 March 31, 2008 and for the three month periods ended
March 31, 2008 and 2007, 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 period ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2008.
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, 2007. 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. 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,
-------------------------
2008 2007
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Weighted average number of common shares
used in computing basic net income per share 6,193,428 6,148,797
Effect of dilutive stock options 7,768 37,499
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Weighted average number of commons shares and
dilutive potential common shares used in
computing diluted net income per share 6,201,196 6,186,296
========== ==========
As of March 31, 2008 there were 137,328 antidilutive shares outstanding. At
March 31, 2007, there were no antidilutive stock options outstanding.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 3 - COMMITMENTS
As of March 31, 2008, loan commitments were as follows (in thousands):
Commitments to extend credit $ 118,074
Undisbursed lines of credit 28,873
Letters of credit 2,658
NOTE 4- FAIR VALUE MEASUREMENT
On January 1, 2008, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements," which defines fair value,
establishes a framework for measuring fair value under accounting principles
generally accepted in the United States, and enhances disclosures about fair
value measurements. The Company elected not to delay the application of SFAS No.
157 to nonfinancial assets and nonfinancial liabilities, as allowed by Financial
Accounting Standards Board ("FASB") Staff Position SFAS 157-2. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value and, therefore, does not expand the use of fair value in
any new circumstances. Fair value is defined as the exchange price that would be
received to sell an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 clarifies that
fair value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data. SFAS No. 157 requires fair value
measurements to be separately disclosed by level within the fair value
hierarchy. Under SFAS No. 157, the Company bases fair values on the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. For assets and
liabilities recorded at fair value, it is the Company's policy to maximize the
use of observable inputs and minimize the use of unobservable inputs when
developing fair value measurements, in accordance with the fair value hierarchy
in SFAS No. 157.
Fair value measurements for assets and liabilities where there exists limited or
no observable market data and, therefore, are based primarily upon estimates,
are often calculated based on the economic and competitive environment, the
characteristics of the asset or liability and other factors. Therefore, the
results cannot be determined with precision and may not be realized in an actual
sale or immediate settlement of the asset or liability. Additionally, there may
be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results of current or future values.
The Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale are recorded at fair value on a recurring basis.
Additionally, from time to time, the Company may be required to record at fair
value other assets on a nonrecurring basis. These nonrecurring fair value
adjustments typically would involve application of lower of cost or market
accounting or write-downs of individual assets.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - FAIR VALUE MEASUREMENT (Continued)
Under SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. These levels
are:
Level 1 -- Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange.
Level 2 -- Valuations are obtained from readily available pricing sources via
independent providers for market transactions involving similar assets or
liabilities. The company's principal market for these securities is the
secondary institutional markets and valuations are based on observable market
data in those markets. Level 2 securities include U. S. Government agency
obligations, state and municipal bonds and mortgage-backed securities.
Level 3 -- Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted cash flow
models and similar techniques, and not based on market exchange, dealer, or
broker traded transactions. Level 3 valuations incorporate certain assumptions
and projections in determining the fair value assigned to such assets or
liabilities. Level 3 financial instruments consist of the Company's derivative
financial instruments. The Company obtains pricing for these instruments from
third parties who have experience in valuing these types of securities.
Following is a description of valuation methodologies used for assets and
liabilities recorded at fair value.
Investment Securities Available-for-Sale
- ----------------------------------------
Investment securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
Loans
- -----
The Company does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows. Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. At March 31, 2008, none of the impaired
loans were evaluated based on the fair value of the collateral. In accordance
with SFAS No. 157, impaired loans where an allowance is established based on the
fair value of collateral require classification in the fair value hierarchy.
When the fair value of the collateral is based on an observable market price or
a current appraised value, the Company would record the impaired loan as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company would
record the impaired loan as nonrecurring Level 3.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 4 - FAIR VALUE MEASUREMENT (Continued)
Derivative Assets and Liabilities
- ---------------------------------
Derivative instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market prices are
not readily available. For those derivatives, the Company measures fair value
using models that use primarily market observable inputs, such as yield curves
and option volatilities, and include the value associated with counterparty
credit risk. The Company classifies derivatives instruments held or issued for
risk management purposes as Level 2. As of March 31, 2008 the Company's
derivative instruments consist solely of interest rate swaps.
Foreclosed Assets
- -----------------
Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management's estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the foreclosed asset as nonrecurring Level 3. There were no fair
value adjustments related to foreclosed real estate of $1.7 million at March 31,
2008.
Below is a table that presents information about certain assets and liabilities
measured at fair value on a recurring basis:
Fair Value Measurements at
March 31, 2008, Using
-------------------------------------------
Total Carrying Quoted Prices in Significant
Amount in The Assets/Liabilities Active Markets Other Significant
Consolidated Measured at Fair for Identical Observable Unobservable
Balance Sheet Value Assets Inputs Inputs
Description 3/31/2008 3/31/2008 (Level 1) (Level 2) (Level 3)
- --------------------------------- ---------------- -------------- ------------ -------------
Available-for-sale
securities $ 137,442 $ 137,442 $ 2,396 $ 135,046 $ -
Interest rate swaps 35 35 - 35 -
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 5 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 allows entities to
measure financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected must be reported in
earnings at each subsequent reporting date. The fair value option can be applied
instrument by instrument, however the election is irrevocable. The Company's
adoption of SFAS No. 159 on January 1, 2008 had no financial statement impact
because the Company did not elect the fair value option for any of its financial
assets or liabilities.
In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations," ("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for recognition and measurement of
assets, liabilities and any noncontrolling interest acquired due to a business
combination. SFAS No. 141(R) expands the definitions of a business and a
business combination, resulting in an increased number of transactions or other
events that will qualify as business combinations. Under SFAS No. 141(R) the
entity that acquires the business (the "acquirer") will record 100 percent of
all assets and liabilities of the acquired business, including goodwill,
generally at their fair values. As such, an acquirer will not be permitted to
recognize the allowance for loan losses of the acquiree. SFAS No. 141(R)
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual. In most business combinations, goodwill will be recognized to the
extent that the consideration transferred plus the fair value of any
noncontrolling interests in the acquiree at the acquisition date exceeds the
fair values of the identifiable net assets acquired. Under SFAS No. 141(R),
acquisition-related transaction and restructuring costs will be expensed as
incurred rather than treated as part of the cost of the acquisition and included
in the amount recorded for assets acquired. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. Accordingly, for acquisitions
completed after December 31, 2008, the Company will apply the provisions of SFAS
No. 141(R).
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133."
SFAS No. 161 applies to all derivative instruments and related hedged items
accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 161 requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, results of
operations and cash flows. To meet those objectives, SFAS No. 161 requires (1)
qualitative disclosures about objectives for using derivatives by primary
underlying risk exposure (e.g., interest rate, credit or foreign exchange rate)
and by purpose or strategy (fair value hedge, cash flow hedge, net investment
hedge, and non-hedges), (2) information about the volume of derivative activity
in a flexible format that the preparer believes is the most relevant and
practicable, (3) tabular disclosures about balance sheet location and gross fair
value amounts of derivative instruments, income statement and other
comprehensive income location of gain and loss amounts on derivative instruments
by type of contract, and (4) disclosures about credit-risk related contingent
features in derivative agreements. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Accordingly, the Company will adopt the provisions of SFAS No. 161 in
the first quarter 2009. The Company does not expect the adoption of the
provisions of SFAS No. 161 to have a material effect on its financial condition
and results of operations.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 5 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.
NOTE 6 - MERGER WITH LONGLEAF COMMUNITY BANK
On April 17, 2008, the Company completed the acquisition of LongLeaf Community
Bank ("LongLeaf"), a $62 million bank headquartered in Rockingham, North
Carolina. Under the terms of the merger agreement, each share of LongLeaf
Community Bank common stock was converted into the right to receive either (i)
$16.50 in cash, without interest, (ii) 1.0 share of the Corporation's common
stock multiplied by an exchange ratio of 1.1542825 or (iii) 0.60 shares of the
Corporation's common stock multiplied by an exchange ratio of 1.1542825 plus an
amount equal to $6.60 in cash. Certain allocation procedures will be used to
cause the stock consideration to be paid to LongLeaf Community Bank shareholders
to be between 50% and 70% of the total merger consideration. In conjunction with
this transaction, certain intangibles will be recorded in the second quarter of
2008.
(The remainder of this page left blank.)
-13-
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
March 31, 2008 and December 31, 2007
The Company's total assets grew from $708.3 million at December 31, 2007 to
$770.9 million at March 31, 2008, an increase of $62.6 million or 8.8%. The
Company's liquid assets, consisting of cash and cash equivalents and investment
securities available for sale, increased $40.3 million during the three months
ended March 31, 2008 compared to liquid assets as of December 31, 2007,
primarily from increases in investment securities of $23.1 million and increases
in balances held at correspondent banks of $17.6 million. Net loans grew from
$538.6 million at December 31, 2007 to $559.6 million at March 31, 2008,
primarily due to a $17.4 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. Funding for the increased
liquid assets and loans came from an increase in borrowings of $40.6 million and
$19.6 million increase in deposits during the first quarter of 2008. Time
deposits accounted for the entire increase in deposits with $10.4 million being
derived from local depositors and $9.2 million coming from wholesale deposits.
This increase occurred primarily due to growth in the Company's time deposit
accounts of $19.6 million.
Total shareholders' equity increased approximately $2.2 million from $54.6
million at December 31, 2007 to $56.8 million at March 31, 2008. This increase
in shareholders' equity resulted from our net income of $1.5 million, net
proceeds from the issuance of common stock from stock option exercises of
$443,000, dividend reinvestment in the amount of $300,000, and other
comprehensive income of $292,000. Offsetting these increases were dividends paid
to the Company's shareholders of $497,000. At March 31, 2008, 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, 2008 and 2007
Net Income. Net income for the three months ended March 31, 2008 was $1.50
million, or $.24 basic net income per share, as compared with net income of
$1.45 million, or $.24 basic net income per share, for the three months ended
March 31, 2007, an increase of $47,000. Net income increased due to growth in
the Company's earning assets and improved non-interest income.
Net Interest Income. Like most financial institutions, the primary component of
earnings for the Company 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.
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Net interest income for the three months ended March 31, 2008 was $6.2 million,
an increase of $509,000 compared to the three months ended March 31, 2007,
primarily due to increases in the loan and investment securities portfolios.
Average interest-earning assets increased $103.1 million for the quarter. The
increase of $97.4 million in average interest-bearing liabilities resulted in
higher interest expense. The margins decreased slightly as the yields on assets
and liabilities fell resulting in a decrease in the Company's net interest
margin by 32 basis points from 3.93% during the three months ended March 31,
2007 to 3.61% during the three months ended March 31, 2008.
Provision for Loan Losses. The provision for loan losses was $288,000 and
$262,000 for the three months ended March 31, 2008 and 2007, respectively, an
increase of $26,000. Net charge-offs of $141,000 were recorded for the three
months ended March 31, 2008 compared to net charge-offs of $72,000 during the
three months ended March 31, 2007. Non-performing assets aggregated $4.8 million
at March 31, 2008, an increase of $1.8 million from the $3.0 million at December
31, 2007, while the allowance for loan losses, expressed as a percentage of
gross loans, was 1.20% at March 31, 2008 and 1.21% at December 31, 2007,
respectively. The increase in non-performing assets was due to increases in
non-accrual loans in the first quarter of 2008, primarily from one large
construction loan. Management believes that the allowance is adequate to absorb
probable losses inherent in the loan portfolio.
Non-Interest Income. Non-interest income increased $321,000 for the three months
ended March 31, 2008 to $1.4 million as compared to $1.1 million for the same
period in 2007. The increases were due primarily to the increase in service
charge income of $42,000, realized gains on the sale of security investments of
$132,000, an increase in the cash surrender value of bank owned life insurance
of $96,000, and an increase in merchant fees of $43,000.
Non-Interest Expense. Non-interest expense increased $703,000 to $5.0 million
for the three months ended March 31, 2008 compared to $4.3 million for the three
months ended March 31, 2007. This increase was due in part to increases in
salaries and employee benefits of $352,000, which resulted from normal salary
adjustments, rising benefits costs, additional staffing, and rising insurance
costs. In addition, for the three months ended March 31, 2008, net occupancy and
equipment expenses increased $95,000, professional and consulting fees increased
$68,000, other taxes and licenses increased $23,000, merchant processing
expenses increased $34,000 and other operating expenses increased $132,000. The
primary increases in other operating expenses for the three months ended March
31, 2008 included increases in advertising expense of $47,000, printing and
office supplies of $19,000, postage expense of $13,000, collection expense and
losses on repossessed property of $37,000 and ATM operation fees of $18,000.
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 34.9% and 34.1% for the three
months ended March 31, 2008 and 2007, respectively.
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Liquidity and Capital Resources
Our liquidity position is primarily dependent upon the bank's need to respond to
loan demand, the short-term demFand 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 marketable investment
securities. In addition, 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. Wholesale deposits can be
obtained as needed in large or small blocks at rates comparable to local market
time deposit rates. Management believes that our 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 $56.8 million, or 7.4%, of total
assets at March 31, 2008 and $54.6 million, or 7.7%, of total assets at December
31, 2007.
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 variousF "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,F 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.
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, 2007.
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
-16-
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,
2007.
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ITEM 6 - EXHIBITS
Exhibit Description
- ------- -----------
10.1 Amended and Restated Severance Agreement between the Company and
W. Leon Hiatt, III, dated February 22, 2008 (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 February
26, 2008)
10.2 Summary of the Material Terms of the Company's 2008 Bonus Plan
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-18-
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 8, 2008 By: /s/ Ayden R. Lee, Jr.
------------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: May 8, 2008 By: /s/ Nancy S. Wise
------------------------------------
Nancy S. Wise
Executive Vice President and
Chief Financial Officer
-19-
Exhibit Index
Exhibit Description
- ------- -----------
10.1 Amended and Restated Severance Agreement between the Company and
W. Leon Hiatt, III, dated February 22, 2008 (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 February
26, 2008)
10.2 Summary of the Material Terms of the Company's 2008 Bonus Plan
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002