-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EovAI4l7IVNx4IFLgCopma/L3FjogVkHS/HelOSkez2uWo3f7NcBPn9cDMqt7QfO F155DDaA4i/LhacfiJiuEg== 0000950168-98-001010.txt : 19980401 0000950168-98-001010.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950168-98-001010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUR OAKS FINCORP INC CENTRAL INDEX KEY: 0001040799 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 562028446 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22787 FILM NUMBER: 98583586 BUSINESS ADDRESS: STREET 1: 6144 US 301 SOUTH STREET 2: P O BOX 309 CITY: FOUR OAKS STATE: NC ZIP: 27524 BUSINESS PHONE: 9199632177 10-K 1 FOUR OAKS FINCORP, INC. 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number 0-22787 FOUR OAKS FINCORP, INC. (Exact name of registrant as specified in its charter) North Carolina 56-2028446 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 6144 U S 301 South Four Oaks, North Carolina (Address of principal executive offices) 27524 (Zip Code) Registrant's telephone number, including area code: (919) 963-2177 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. |_| $23,696,192 (Aggregate market value of voting stock held by nonaffiliates of the registrant) 884,958 (Number of shares of Common Stock, par value $1.00 per share, outstanding as of March 9, 1998) Documents Incorporated by Reference Where Incorporated (1) Annual Report to Shareholders for Part II and IV Fiscal Year Ended December 31, 1997 (2) Proxy Statement for the Annual Part III Meeting of Shareholders to be held April 27, 1998. PART I Item 1 - Business. On February 5, 1997, Four Oaks Bank & Trust Company (the "Bank") formed Four Oaks Fincorp, Inc. ( the "Company") for the purpose of serving as a holding company for the Bank. Thereafter, the Bank caused the Company to form a wholly-owned subsidiary interim North Carolina banking corporation, New Four Oaks Bank (the "Interim Bank"), to facilitate the reorganization. On July 1, 1997, the Interim Bank merged with and into the Bank (the "Merger"). The Bank is the survivor of the Merger and, as of the date of the Merger, the Interim Bank no longer exists. The effect of the Merger is that the Company is a holding company for the Bank and is the sole shareholder of the Bank. The Company has no significant assets other than the capital stock of the Bank. The corporate offices of the Company and the Bank are located at 6144 US 301 South, Four Oaks, North Carolina 27524. Pursuant to the Merger, the Bank's Common Stock has been converted on a share-for-share basis into Common Stock of the Company that have rights, privileges and preferences identical to those of the Bank. The Common Stock of the Company is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") pursuant to Rule 12g-3 promulgated under the 1934 Act. Effective July 1, 1997, the Bank no longer files reports with the Federal Deposit Insurance Corporation pursuant to Section 12(i) of the 1934 Act. Effective such date, the Company has been filing reports with the Securities and Exchange Commission (the "Commission") pursuant to the 1934 Act. The Bank was incorporated under the laws of the State of North Carolina in 1912. The Bank is not a member of the Federal Reserve System. In addition to the main office, the Bank has a branch office in Four Oaks located at 111 North Main Street, one in Clayton, North Carolina at 102 East Main Street, two in Smithfield, North Carolina at 128 North Second Street, and 403 South Bright Leaf Boulevard, one in Garner, North Carolina at 200 Glen Road and one in Benson, North Carolina at 200 E. Church Street. The Bank is a community bank engaged in the general commercial banking business in Johnston County, North Carolina which is located in Eastern North Carolina. Johnston County is contiguous to Wake, Wayne, Wilson, Harnett, Sampson and Nash counties. As of December 31, 1997, the Bank had assets of $190,071,000, net loans outstanding of $138,099,000 and deposits of $167,988,000. The Bank has enjoyed considerable growth over the past five years as evidenced by the 107% increase in assets, the 129% increase in net loans outstanding, and the 108% increase in deposits since December 31, 1992. The Bank provides a full range of banking services, including such services as checking accounts, savings accounts, NOW accounts, money market accounts, certificates of deposit, a student checking and savings program; loans for businesses, agriculture, real estate, personal uses, home improvement and automobiles; equity lines of credit; credit cards; individual retirement accounts; discount brokerage services; safe deposit boxes; bank money orders; electronic funds transfer services, including wire transfers; traveler's checks; and free notary services to all Bank customers. In addition, the Bank provides automated teller machine access to its customers for cash withdrawals through the services of the HONOR and CIRRUS networks which offer customers access to automated teller machines nationwide. At present, the Bank does not provide the services of a trust department. The majority of the Bank's customers are individuals and small to medium-size businesses located in Johnston County and surrounding areas. The deposits and loans are well diversified with no material concentration in a single industry or group of related industries. There are no seasonal factors that would have any material adverse effect on the Bank's business, and the Bank does not rely on foreign sources of funds or income. From its headquarters located in Four Oaks and its six offices located in Four Oaks, Clayton, Smithfield, Garner and Benson, the Bank serves a major portion of Johnston County. Johnston County has a diverse economy and is not dependent on any one particular industry. The leading industries in the area include electronics, pharmaceutical, textile, agriculture, livestock, and poultry. 2 Commercial banking in North Carolina is extremely competitive due in large part to statewide branching. The Bank competes in its market area with some of the largest banking organizations in the state and other financial institutions such as federally and state-chartered savings and loan institutions and credit unions as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of the Bank's competitors have broader geographic markets and higher lending limits than the Bank and are also able to provide more services and make greater use of media advertising. Interstate banking in North Carolina and other Southeastern states has greatly increased the size and financial resources of some of the Bank's competitors. In addition, as a result of interstate banking, out-of-state commercial banks may compete in North Carolina by acquiring North Carolina banks and thus increase the prospects for additional competition in North Carolina. See "Holding Company Regulation" below. Despite the competition in its market area, the Bank believes that it has certain competitive advantages which distinguish it from its competition. The Bank believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing the very best service possible at reasonable and competitive prices. The Bank believes that it offers customers modern, high-tech banking services without forsaking community values such as prompt, personal service and friendliness. Amounts spent on research activities relating to the development or improvement of services have been immaterial over the past five years. At December 31, 1997, the Bank employed 81 full time equivalent employees. The following table sets forth certain financial data and ratios with respect to the Bank for the years ended December 31, 1997, 1996, and 1995. This information should be read in conjunction with and is qualified in its entirety by reference to the more detailed audited financial statements and notes thereto which accompany this report: 1997 1996 1995 ---- ---- ---- (In thousands, except ratios) Net Income $2,122 $1,821 $1,524 Average equity capital accounts $15,495 $13,580 $12,132 Ratio of net income to average equity capital accounts 13.69% 13.41% 12.56% Average daily total deposits $154,397 $129,775 $110,395 Ratio of net income to average daily total deposits 1.37% 1.40% 1.38% Average daily loans $130,376 $103,559 $85,223 Ratio of average daily loans to average daily total deposits 84.44% 79.80% 77.20% Governmental Regulation Holding companies, banks and many of their non-bank affiliates are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company's or the Bank's business. Supervision, regulation and examination of the Company and the Bank by bank regulatory agencies is intended primarily for the protection of the Bank's depositors rather than holders of the Common Stock of the Company. Holding Company Regulation General. The Company is a holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company and the Bank are subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank, (ii) taking any 3 action that causes a bank to become a subsidiary of the bank holding company, (iii) acquiring all or substantially all of the assets of any bank or (iv) merging or consolidating with any other bank holding company. The BHCA generally prohibits a bank holding company, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. For example, banking, operating a thrift institution, acquiring or servicing loans, leasing personal property, conducting discount securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities. Pursuant to delegated authority, the Federal Reserve Bank of Richmond has authority to approve certain activities of holding companies within its district, including the Company, provided the nature of the activity has been approved by the Federal Reserve. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions of banks and bank holding companies without geographic limitation, subject to any state requirement that the bank has been organized for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to, or following the proposed acquisition, controls no more than ten percent of the total amount of deposits of insured depository institutions in the U.S. and no more than 30% of such deposits in any state (or such lesser or greater amount set by state law). In addition, the IBBEA permits a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching prior to May 31, 1997. The state of North Carolina has "opted in" to such legislation, effective June 22, 1995. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo interstate branching. As a result of North Carolina's opt-in law, North Carolina law permits unrestricted interstate de novo branching. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Federal Reserve may issue cease and desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve also regulates certain debt obligations, changes in control of bank holding companies and capital requirements. Under the provisions of the North Carolina law, the Company is registered with and subject to supervision by the North Carolina Commissioner of Banks (the "Commissioner"). Capital Requirements. The Federal Reserve has established risk-based capital guidelines for bank holding companies and state member banks based on the capital framework for international banking organizations developed by the Basle Committee on Banking Regulations and Supervisory Practices. The minimum standard for the ratio of capital to risk-weighted assets (including certain off balance sheet obligations, such as standby letters of credit) is eight percent. At least half of this capital must consist of common equity, retained earnings and a limited amount of perpetual preferred stock and minority interests in the equity accounts 4 of consolidated subsidiaries, less certain goodwill items ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of mandatory convertible debt securities and a limited amount of other preferred stock, subordinated debt and loan loss reserves. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts ("Leverage Ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of between four percent and five percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") will continue to consider a "tangible Tier 1 Leverage Ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised the Company of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to it. As of December 31, 1997 the Company had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 11.7%, 12.9% and 8.5%, respectively, all in excess of the minimum requirements. Bank Regulation The Bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the Commissioner and the Federal Reserve. The Federal Reserve and the Commissioner regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations, and other similar corporate actions, and to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The Federal Reserve and the Commissioner regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, issuances of securities, capital adequacy, loss reserves, and compliance with the Community Reinvestment Act of 1977 (the "CRA") as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are also subject to state usury laws and certain federal laws concerning interest rates. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum of $100,000 per insured depositor. The FDIC issues regulations and conducts periodic examinations, requires the filing of reports, and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies, and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer, or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties, or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose. Although the Company is not subject to any direct legal or regulatory restrictions on dividends (other than the requirements under the North Carolina corporation laws that a distribution may not be made if after giving it effect the Company would not be able to pay its debts as they become due in the usual course of business or the Company's total assets would be less than its liabilities), the Company's ability to pay cash dividends is dependent upon the amount of dividends paid by its subsidiary. The ability of the Bank to pay dividends to the Company is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under the North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the bank has surplus of a specified level. Federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payment is deemed to constitute an unsafe and unsound practice. 5 Like the Company, the Bank is required by federal regulations to maintain certain minimum capital levels. The levels required of the Bank are the same as required for the Corporation. At December 31, 1997, the Bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 11.5%, 12.7% and 8.5%, respectively, all in excess of the minimum requirements. The Bank is subject to insurance assessments imposed by the FDIC. Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule providing for annual assessment rates ranging from 0% to .27% of an institution's average assessment base, applicable to institutions insured by both the BIF and the Savings Association Insurance Fund ("SAIF"). The actual assessment to be paid by each insured institution is based on the institution's assessment risk classification, which is based on whether the institution is considered "well capitalized," "adequately capitalized" or "under capitalized," as such terms are defined in the applicable federal regulations, and whether the institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The FDIC also is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Treasury Department and, beginning in 1997, all banks are required to pay additional annual assessments at the rate of .013%. Effective January 1, 1999, there will be a merger of the SAIF and the BIF insurance funds of the FDIC. Banks are also subject to the CRA, which requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Monetary Policy and Economic Controls The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve Board, whose actions directly affect the money supply and, in general, affect banks' lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve Board regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits. Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks have eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks' cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, are facing a significant challenge to maintain acceptable net interest margins. 6 Executive Officers of the Company. The following table sets forth certain information with respect to the executive officers of the Company: Positions and Offices with Company Year first and business experience Name Age employed during past five years ---- --- -------- ---------------------- Ayden R. Lee, Jr. 49 1980 Chief Executive Officer, President and Director of the Company and the Bank Clifton L. Painter 48 1986 Senior Executive Vice President, Chief Operating Officer of the Company and the Bank, City Executive of the Bank Nancy S. Wise 42 1991 Senior Vice President, Chief Financial Officer of the Company and the Bank W. Leon Hiatt, III 30 1994 Senior Vice President of the Company and the Bank, Loan Administrator of the Bank. From March 1990 until joining the Bank, Mr. Hiatt served as a Financial Institutions Examiner for the FDIC Item 2 - Properties. The Bank owns its main office which is located at 6144 U S 301 South, Four Oaks, North Carolina. The main office which was constructed by the Bank in 1985 is a 12,000 square foot facility on 1.64 acres of land. The Bank leases an additional branch office in downtown Four Oaks located at 111 North Main Street from M.S. Canaday, a director of the Company and the Bank. Under the terms of the lease, which the Bank believes to be arms-length, the Bank paid $780 per month in rent in 1997. The term of the lease is currently five years beginning January 1, 1994 with annual increases based on the Consumer Price Index. The Bank owns a 5,000 square foot facility renovated in 1992 on 1.15 acres of land located at 5987 U S 301 South, Four Oaks, North Carolina which houses the training center and the Bank's wide area network central link. In addition, the Bank owns the following: Location Year Built Present Function Square Feet - -------- ---------- ---------------- ----------- 102 East Main Street 1986 Branch Office 4,200 Clayton, North Carolina 200 E. Church Street 1987 Branch Office 2,000 Benson, North Carolina 128 North Second Street 1991 Branch Office 3,400 Smithfield, North Carolina 6365 U. S. 301 South (1) (1) 1,202 Four Oaks, North Carolina 403 S. Bright Leaf Blvd. 1995(2) Limited-Service Facility 720 Smithfield, North Carolina 200 Glen Road 1996 Branch Office 3,600 Garner, North Carolina - ----------------------------- (1) This office was closed in 1995. (2) This building was remodeled in 1995. 7 Item 3 - Legal Proceedings. The Company is not involved in any material legal proceedings at the present time. Item 4 - Submission of Matters to a Vote of Security Holders. None. PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters. This information is incorporated by reference from Page 31, "Corporate Information" of the Company's 1997 Annual Report to Shareholders included as Exhibit 13.1. Item 6 - Selected Financial Data. This information is incorporated by reference from Page 5, "Selected Financial Data" of the Company's 1997 Annual Report to Shareholders included as Exhibit 13.1. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is incorporated by reference from Pages 7-15, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 1997 Annual Report to Shareholders included as Exhibit 13.1. Item 8 - Financial Statements and Supplementary Data. This information is incorporated by reference from Pages 16-30, of the Company's 1997 Annual Report to Shareholders included as Exhibit 13.1. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10 - Directors and Executive Officers of the Registrant. Director information is incorporated by reference from Pages 4 and 5, "Election of Directors" and Pages 7 and 8, "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1998. Information on the Company's executive officers is included under the caption "Executive Officers of the Company" on Page 7 of this report. Item 11 - Executive Compensation and Transactions. This information is incorporated by reference from Pages 6, 7 and 8, "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1998. Item 12 - Security Ownership of Certain Beneficial Owners and Management. This information is incorporated by reference from Pages 2 and 3, "Security Ownership of Management and Certain Beneficial Owners" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1998. 8 Item 13 - Certain Relationships and Related Transactions. This information is incorporated by reference from Page 7, "Executive Compensation-Certain Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1998. PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements and Schedules. 1. The following financial statements are incorporated by reference herein from the Company's 1997 Annual Report to Shareholders included as Exhibit 13.1 to this Form 10-K. 1997 Annual Report Page ----------- (i) Report of Independent Accountants. 16 (ii) Consolidated Balance Sheets, December 31, 1997 and 1996. 17 (iii) Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. 18 (iv) Consolidated Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995. 19 (v) Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. 20 (vi) Notes to Consolidated Financial Statements. 21-30 2. Report of predecessor accountant, Daniel G. Matthews & Associates, Inc. concerning financial statements for 1995 presented in the Company's 1997 Annual Report to Shareholders is filed as Exhibit 13.2 to this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ending December 31, 1997. (c) Exhibits. The following exhibits are filed as part of this annual report. Management contracts or compensatory plans or arrangements are listed in Exhibits 10.1, 10.2, 10.3 and 10.4 below:
Exhibit No. Description of Exhibit ----------- ---------------------- 2(1) Agreement and Plan of Reorganization and Merger by and between the Bank and the Company dated February 24, 1997 3.1(1) Articles of Incorporation of the Company 3.2(1) Bylaws of the Company 4(1) Specimen of certificate for Company's Common Stock 10.1(2) Employment Agreement with Ayden R. Lee, Jr. 10.2(2) Severance Compensation Agreement with Ayden R. Lee, Jr. 10.3(1) Nonqualified Stock Option Plan 9 10.4(1) Employee Stock Purchase and Bonus Plan 10.5(1) Dividend Reinvestment and Stock Purchase Plan 13.1 Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1997, which are incorporated herein by reference. 13.2 Report of Daniel G. Matthews & Associates, Inc. concerning financial statements for 1995 presented in the 1997 Annual Report to Shareholders 21 Subsidiaries of the Company 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Daniel G. Matthews & Associates, Inc. 27 Financial Data Schedule
- --------------------- (1) Filed as an exhibit to the Form 8-K12G3 filed with the SEC on July 1, 1997 and incorporated herein by reference. (2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 1997 and incorporated herein by reference. 10 FORWARD LOOKING INFORMATION Information set forth in this Annual Report on Form 10-K under the caption "Business" and incorporated by reference herein from the Company's Annual Report to Shareholders contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 1934 Act, which statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's 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 the Company's actual operating results to differ materially from those in the forward looking statements, including, without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, the failure of assumptions underlying the establishment of the allowance for possible loan losses, the low trading volume of the Common Stock, other considerations described in connection with specific forward looking statements and other cautionary elements specified in documents incorporated by reference in this Annual Report on Form 10-K. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 16, 1998 By: /s/ Ayden R. Lee, Jr. ---------------------- Ayden R. Lee, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 16, 1998 /s/ Ayden R. Lee, Jr. ---------------------- Ayden R. Lee, Jr. President, Chief Executive Officer and Director Date: March 16, 1998 /s/ Nancy S. Wise ------------------ Nancy S. Wise Senior Vice President and Chief Financial Officer Date: March 16, 1998 /s/ William J. Edwards ----------------------- William J. Edwards Director Date: March 16, 1998 /s/ Warren L. Grimes --------------------- Warren L. Grimes Director Date: March 16, 1998 /s/ Harold J. Sturdivant ------------------------- Harold J. Sturdivant Director Date: March 16, 1998 /s/ Percy Y. Lee ----------------- Percy Y. Lee Director Date: March 16, 1998 /s/ Merwin S. Canaday ---------------------- Merwin S. Canaday Director Date: March 16, 1998 /s/ Paula C. Bowman -------------------- Paula C. Bowman Director EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 2(1) Agreement and Plan of Reorganization and Merger by and between the Bank and the Company dated February 24, 1997 3.1(1) Articles of Incorporation of the Company 3.2(1) Bylaws of the Company 4(1) Specimen of certificate for Company's Common Stock 10.1(2) Employment Agreement with Ayden R. Lee, Jr. 10.2(2) Severance Compensation Agreement with Ayden R. Lee, Jr. 10.3(1) Nonqualified Stock Option Plan 10.4(1) Employee Stock Purchase and Bonus Plan 10.5(1) Dividend Reinvestment and Stock Purchase Plan 13.1 Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, which are incorporated herein by reference. 13.2 Report of Daniel G. Matthews & Associates, Inc. concerning financial statements for 1995 presented in the 1997 Annual Report to Shareholders 21 Subsidiaries of the Company 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Daniel G. Matthews & Associates, Inc. 27 Financial Data Schedule - -------------- (1) Filed as an exhibit to the Form 8-K12G3 filed with the SEC on July 1, 1997 and incorporated herein by reference. (2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 1997 and incorporated herein by reference. EX-13 2 EXHIBIT 13.1 EXHIBIT 13.1 TO FORM 10-K Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 1997 Selected Financial Data The following table sets forth certain selected financial data concerning the Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993. This information should be read in conjunction with and is qualified in its entirety by reference to the detailed audited financial statements and notes thereto which are included in this Annual Report.
1997 1996 1995 1994 1993 ------- ------- -------- ------- -------- Income Statement Data (in thousands): Interest income $ 14,827 12,249 10,465 8,070 7,105 Interest expense 7,045 5,694 4,785 3,132 2,933 -------- -------- -------- -------- -------- Net interest income 7,782 6,555 5,680 4,938 4,172 Provision for loan loss 785 397 385 224 239 -------- -------- -------- -------- -------- Net interest income after provision for loan loss 6,997 6,158 5,295 4,714 3,933 Other noninterest income 1,449 881 729 390 696 Other noninterest expenses 5,248 4,375 3,819 3,310 3,050 Income taxes 1,076 843 681 537 491 -------- -------- -------- -------- -------- Net income $ 2,122 1,821 1,524 1,257 1,088 ======== ======== ======== ======== ======== Per Share Data Net income $ 2.50 2.19 1.85 1.53 1.33 Year end book value 19.26 17.14 15.60 13.51 12.85 Dividends declared .56 .51 .47 .44 .42 Balanced Sheet Date (in thousands): Loans, net $138,099 108,036 88,668 73,814 66,370 Investments (1) 37,196 38,654 33,844 32,872 29,715 Total assets 190,071 159,113 133,421 116,674 103,609 Deposits 167,988 142,843 118,965 101,978 90,265 Shareholders' equity 16,867 14,363 12,919 11,122 10,559
(1) Includes federal funds sold and interest bearing bank balances. 5 Management's Discussion Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of the Company and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. General Four Oaks FinCorp Inc. (the "Company") has experienced significant sustained growth in assets and deposits over the last five years and under the present management. Assets increased from $91,652,995 at December 31, 1992 to $190,070,892 at December 31, 1997, while total deposits increased from $80,722,288 to $167,987,937. In addition, for 62 consecutive years the Company (prior to 1997, the Company's wholly owned subsidiary, Four Oaks Bank & Trust Company, the "Bank") has paid dividends which over the last five years have averaged 26% of the average net income of $1,562,000. Interest rates on deposits and loans are set at competitive rates while maintaining spreads of 3.80% and 3.87% in 1997 and 1996, respectively, between interest earned on average loans and investments and interest paid on average interest bearing deposits and short-term borrowing. Gross loans have increased from $61,062,503 at December 31, 1992 to $139,823,776 at December 31, 1997, while average net annual chargeoffs over the last five years were $225,891. The sustained growth provided by operations resulted in increases in total assets of 19.5%, 19.3%, and 14.4% for 1997, 1996, and 1995. Gross loans grew 27.7% in 1997 and 21.8% in 1996. Total investments (including federal funds sold and interest bearing bank balances) decreased 4% in 1997 and increased 14.2% in 1996. The Company closely monitors changes in the financial markets in order to maximize the yield on its assets. The growth in loans and investments is funded by the growth in total deposits of 17.6% in 1997 and 20.1% in 1996 and net income of $2,121,562 in 1997 and $1,820,850 in 1996. Net income for 1997 and 1996 increased 16.5% and 19.5% due to favorable interest margins and effective cost containment measures. Management historically has monitored and controlled increases in overhead expenses while being committed to developing the skills and enhancing the professionalism of the Company's employees. Employee turnover has been minimal, while the number of full-time equivalent employees has increased from 54 at December 31, 1992 to 81 at December 31, 1997. Results of Operations Interest income increased by 21.1% in 1997, 17.0% in 1996 and 29.7% in 1995. In 1997 and 1996, loan volumes were at record levels all year with much less seasonal fluctuation than we have had historically. This steady loan growth results from increased loan demand in our Smithfield, Clayton, Garner and Four Oaks markets and from our expanded market area served by our newest branch in Benson. Average gross loans were approximately $130,376,000 in 1997, $103,559,000 in 1996 and $85,223,000 in 1995. Average investments were approximately $33,802,000 in 1997, $30,748,000 in 1996 and $27,569,000 in 1995. Market rates fluctuated as average prime rates ranged from 8% to 9% during 1997, 1996 and 1995. However, growth in 1997, 1996 and 1995 interest income is primarily due to higher volumes. Interest expense increased 24% in 1997, 19% in 1996, 53% in 1995. Deposit rates peaked in 1995 and have remained relatively steady since that time. Noninterest income increased 49% and 21% primarily due to fees generated on new products in 1997 and 1996. While the Bank's stated service charges and fees have not significantly increased, the related income has risen due to higher account volumes and increased collection efforts. Noninterest expenses have increased from $3,818,514 in 1995 to $4,375,359 in 1996 and $5,248,318 in 1997. These increases are the result of increased operating expenses caused by the growth of the Bank. The Bank's growth has resulted in more employees, increased facilities and equipment costs, and an increase in the volume of transactions. Liquidity and Capital Resources The Bank's liquidity position is primarily dependent upon its need to respond to loan demand and short-term demand for funds caused by withdrawals from deposit accounts (other than time deposits) and upon the liquidity of its assets. The Bank's primary liquidity sources include cash and amounts due from other banks, federal funds sold, and U.S. Government Agency, and other short-term investment securities. In addition, the Bank has the ability to borrow funds from the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta and to purchase federal funds from other financial institutions. The Bank's management believes its liquidity sources are adequate to meet its operating needs. Total shareholders' equity was $16,866,997 or 8.9% of total assets and $14,362,652 or 9.0% of total assets at December 31, 1997 and 1996 respectively. Inflation The effect of inflation on financial institutions differs somewhat from the impact on other businesses. The performances of banks, with assets and liabilities that are primarily monetary in nature, are affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the price of goods and services will result in increased operating expenses. Income Taxes Income taxes, as a percentage of income before income taxes, for 1997, 1996 and 1995 were 33.6%, 31.6% and 30.9%. These changes were the result of management's redirection of funds between loans and different types of taxable and tax exempt interest-bearing assets in response to economic conditions and the Bank's liquidity requirements. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential The following schedule presents average balance sheet information for the years 1997 and 1996, along with related interest earned and average yields for interest-earning assets and the interest paid and average rates for interest-bearing liabilities. 7 Management's Discussion AVERAGE DAILY BALANCES, INTEREST INCOME/EXPENSES, AVERAGE YIELD/RATE
1997 1996 --------------------------- ---------------------------- average interest average average interest average (Dollars in thousands) daily income/ yield/ daily income/ yield/ balance expense rate balance expense rate ------- -------- ------- ------- -------- ------ ASSETS Cash and due from banks $ 5,123 $ 4,410 Interest bearing bank balances 1,430 $ 79 5.52% 2,644 $ 153 5.79% Investments: U.S. Treasuries and Agencies 26,987 1,713 6.35% 24,527 1,549 6.32% Tax exempt(1) 5,608 291 5.19% 5,251 274 5.22% Other investments 1,207 94 7.79% 970 64 6.60% -------- ----- ----- ------ ----- ----- Total investments(3) 33,802 2,098 6.21% 30,748 1,887 6.14% -------- ----- ----- ------ ----- ----- Commercial loans 26,795 2,494 9.31% 25,877 2,451 9.47% Installment loans 26,054 2,657 10.20% 18,026 1,799 9.98% Real estate loans 69,697 6,753 9.69% 54,038 5,406 10.00% Equity lines 6,797 601 8.84% 4,703 424 9.02% Overdraft lines and credit cards 1,033 146 14.13% 915 129 14.10% -------- ------ ------ ------- ------ ------ Gross loans(2) 130,376 12,651 9.70% 103,559 10,209 9.86% Loan loss reserve (1,623) (1,321) -------- ------ ------ ------- ------ ------ Net loans 128,753 12,651 9.83% 102,238 10,209 9.99% -------- ------ ------ ------- ------ ------ Total fixed assets 4,983 4,055 Other assets 3,095 2,934 -------- Total assets $177,186 $14,828 8.37% $147,029 $12,249 8.33% ======== ======= ======= ======== ======= ===== Total interest earning assets $165,608 $14,828 8.95% $136,951 $12,249 8.94% ======== ======= ======= ======== ======= ===== Liabilities and Shareholders' Equity Deposits: Demand $22,959 $19,433 NOW accounts 14,159 $298 2.10% 13,063 $271 2.07% Money markets 6,101 239 3.92% 4,898 181 3.70% Savings 10,047 295 2.94% 9,501 287 3.02% Time 101,131 5,904 5.84% 82,880 4,846 5.85% ------- ------- ------- ------- Total deposits 154,397 6,736 4.36% 129,775 5,585 4.30% Borrowing 5,301 310 5.85% 1,958 109 5.57% Other liabilities 1,993 1,716 ------- ------- ------- ------- Total liabilities 161,691 7,046 4.36% 133,449 5,694 4.27% ------- ------- ------- ------- Common stock 847 833 Surplus 5,060 4,755 Undivided profits 9,620 8,006 Unrealized loss on securities (32) (14) ------- -------- Total equity 15,495 13,580 -------- -------- Total liabilities and equity $177,186 $7,046 3.98% $147,029 $5,694 3.87% ======== ====== ======== ====== Total interest bearing liabilities $136,739 $7,046 5.15% $112,300 $ 5,694 5.07% ======== ====== ======== ====== Net interest margin: Total assets to total liabilities and equity 4.39% 4.46% Interest earning assets to interest bearing liabilities 3.80% 3.87% Net yield on interest earning assets $7,782 4.70% $6,555 4.79% ====== ======
(1) Not computed on a tax equivalent basis. (2) Includes non-accrual loans. (3) Does not give effect to changes in fair value reflected in equity. 8 Management's Discussion Changes in interest income and expense by category and rate/volume variances for the years ended December 31, 1997 and 1996. The changes due to rate and volume were allowed based by their absolute values.
1997 versus 1996 1996 versus 1995 ---------------- ---------------- total amount due to total amount due to (in thousands) increase change in: increase change in: (decrease) volume rate (decrease) volume rate ---------- ------ ---- ---------- ------ ---- Income: Loans $2,442 $2,646 $ (204) $1,723 $1,808 $ (85) Investments(1) 137 118 19 61 130 (69) ---------- ------ ---- ---------- ------ ---- Total interest income 2,579 2,764 (185) 1,784 1,938 (154) ---------- ------ ---- ---------- ------ ---- Expense: NOW accounts 27 22 5 29 27 2 Money market 58 45 13 28 14 14 Savings 8 16 (8) 13 13 Time 1,058 1,070 (12) 781 820 (39) ---------- ------ ---- ---------- ------ ---- Total paid on deposits 1,151 1,153 (2) 851 874 (23) Borrowings 201 186 15 57 63 (6) ---------- ------ ---- ---------- ------ ---- Total interest expense 1,352 1,339 (13) 908 937 (29) ---------- ------ ---- ---------- ------ ---- Net interest income $1,227 $1,425 $ (198) $ 876 $1,001 $ (125) ========== ====== ==== ========== ====== ====
(1) Includes federal funds sold and interest bearing bank balances. Investment Portfolio The valuations of investment securities at December 31, 1997 and 1996 were (in thousands, except ratios):
Available for sale: Available for sale: 1997 1996 ------------------------ --------------------------- amortized estimated amortized estimated cost fair value cost fair value ---------- ---------- --------- ---------- U.S. Treasury securities $ 5,496 $ 5,531 $ 9,992 $10,057 U.S. Government agency obligations: All other 23,771 23,815 20,181 20,151 Securities issued by states and political subdivisions in the U.S.: Tax exempt securities 4,550 4,706 5,841 5,991 Equity securities: Marketable equity securities: Investments in mutual funds - - 500 438 Other equity securities 1,030 1,030 455 455 ---------- ---------- --------- ---------- Total securities $34,847 $35,082 $36,969 $37,092 ========== ========== ========= ========== Pledged securities $ 7,747 $ 6,970 ========== ==========
1997 1996 Maturity and repricing data for debt securities: Weighted Weighted Average Average Fixed rate debt securities with a remaining maturity of: 1997 1996 Yield Yield ------- ------- --------- -------- Three months or less $ 1,310 $ 790 6.69% 5.86% Over three months through twelve months 2,504 4,322 5.80% 6.18% Over one year through five years 25,588 27,179 6.29% 6.13% Over five years 4,649 3,908 6.49% 7.49% ------- ------- Total fixed rate debt securities 34,051 36,199 6.30% 6.32% ------- ------- Total debt securities $34,051 $36,199 6.30% 6.32% ======= =======
9 Careful analysis of growth patterns in our neighboring counties, as well as our own, coupled with well planned expansion have placed our product in the right places at the right time. We are thus well positioned to address current, as well as, future growth. ADDRESSING THE FUTURE: New Opportunities As a community bank we are keenly aware of the advantages of good neighbors, and Wake County is one of the best. International, national and statewide publications continually hail the merits of Raleigh and North Carolina's Triangle Area for business and industry. The amazing growth in that area has spread rapidly into adjoining counties. I-40 and Highway 70 have provided ideal transportation routes for channeling that growth into Johnston County. Residential growth has spearheaded this phenomenon, followed closely by service oriented businesses and then by small businesses and industry - an ideal situation for the services of our bank. With two locations at the County's western gateways, Garner and Clayton, one at the intersection of I-40 and I-95, in Benson, two in the County seat, Smithfield, and two along I-95 and 301 in Four Oaks, we are strategically positioned with our products in the right place at the right time to take advantage of all the new opportunities which this situation affords. As reported in the 1997 Bank & Thrift Branch Office Data Book, published by the FDIC and the OTS, Four Oaks Bank & Trust held 20% of Johnston County's deposit market, the second highest held by all banks and thrifts in the county. Furthermore, our market share has increased every year in the past five years. Favorable conditions in our market as well as in our institution fuel our expectations of future success. 10 Management's Discussion LOAN PORTFOLIO Loans consisted of the following, in thousands, as extracted from the Call Reports of December 31, 1997 and 1996:
1997 1996 --------- --------- Loans Receivable Loans secured by real estate: Construction and land development $ 17,014 $ 15,118 Secured by farmland 6,175 6,914 Secured by 1-4 family residential properties: Revolving, open-end loans and lines of credit 8,308 6,775 All other 34,545 22,844 Secured by multifamily residential properties 2,106 1,636 Secured by nonfarm nonresidential properties 14,609 10,781 Loans to finance agricultural production and other loans to farmers 6,624 5,980 Commercial and industrial loans 25,711 19,956 Loans to individuals for household, family and other personal expenditures: Credit cards and related plans 1,413 926 Other 22,414 17,772 Obligations of states and political subdivisions in the U.S.: Tax exempt obligations 163 109 All other loans 677 764 Lease financing receivables 190 Less: Unearned income on loans (125) (99) --------- --------- Total loans $ 139,824 $ 109,476 ========= ========= Loans restructured None None Commitments and contingencies Commitments to make loans $ 23,808 $ 17,824 ========= ========= Standby letters of credit $ 1,444 $ 704 ========= =========
11 ADDRESSING THE FUTURE: New Technologies Touch Tone Teller - Four Oaks Bank & Trust's exclusive automated banking service - was implemented late in 1997 and is now getting a real workout as our customers learn they can dial anytime, from anywhere, and access their account information to do transfers between checking and savings, make loan payments from checking or savings accounts, do balance inquiries, verify the last deposit made, or see if a check has cleared. This innovation will not only be a convenience for our customers, but a very cost effective move for our bank. Centralized loan processing took form in 1997 and has contributed greatly to our efficiency. The imaging of our loan documents has made this information more readily available to all loan departments while eliminating the need to store these documents. Our computer network installed by Alphanumeric Systems, Inc. is fully operational. Internal e-mail saves a lot of paper and improves communications among the branches allowing memos to be prepared and sent electronically. Optical storage of bank records and electronic viewing of reports to be implemented in 1998 will continue to increase our efficiency and productivity. And last but not least we began development of a web site in 1997 which will provide our bank with greater and more diverse exposure as well as customer access. All of these innovations bring to our bank a very desirable blend of high-tech and high-touch. 1997 saw new technology come into play both in the areas of customer access and in the banks infrastructure. Both Touch-Tone Teller and our inter-branch computer network are operational and development of our web site is well under way. 12 Management's Discussion RISK ELEMENTS Past due and nonaccrual loans, in thousands, as extracted from the Call Reports of December 31, 1997 and 1996 were as follows:
past due 30 past due 90 through 89 days days or more and still accruing and still accruing nonaccrual ------------------ ------------------ --------------- 1997 1996 1997 1996 1997 1996 ------ ------ ------ ------ ------ ------ Real estate loans $ 201 $ 627 $ 280 $ 43 $ 501 $ 158 Installment loans 432 303 62 65 11 47 Credit cards and related plans 70 55 10 21 -- -- Commercial and all other loans 77 165 -- 57 -- 4 ------ ------ ------ ------ ------ ------ Total $ 780 $1,150 $ 352 $ 186 $ 512 $ 209 ====== ====== ====== ====== ====== ====== Agricultural loans included above $ 24 $ 168 -- $ 51 -- ====== ====== ====== ====== ====== ======
ALLOWANCE FOR LOAN LOSSES AND SUMMARY OF LOAN LOSS EXPERIENCE As a matter of policy, the Bank maintains an allowance for loan losses. The allowance for loan losses is created by direct charges to income, and losses on loans are charged against the allowance when realized. The amount of the allowance is based upon an evaluation of the portfolio, current economic conditions, historical loan loss experience, and other factors management deems appropriate. The Bank's management believes its allowance for loan losses is adequate under existing economic conditions. The following table summarizes the Bank's loan loss experience for the years ending of December 31, 1997 and 1996:
1997 1996 ---------- ---------- Balance at beginning of period $1,440,000 $1,220,000 Chargeoffs: Commercial, financial and agricultural 250,605 43,353 Real estate 109,668 23,089 Installment loans to individuals 133,852 106,664 Credit cards and related plans 42,879 27,546 ---------- ---------- 537,004 200,652 ---------- ---------- Recoveries: Commercial, financial and agricultural 922 2,161 Real estate -- -- Installment loans to individuals 34,213 21,607 Credit cards and related plans 2,018 112 ---------- ---------- 37,153 23,880 ---------- ---------- Net chargeoffs 499,851 176,772 ---------- ---------- Additions charged to operations 784,851 396,772 ---------- ---------- Balance at end of year $1,725,000 $1,440,000 ========== ========== Ratio of net chargeoffs during the year to average gross loans outstanding during the year 0.383% 0.171%
13 Management's Discussion DEPOSITS For each category of total deposits which has an average for the year in excess of 10 percent of average total deposits, the average balance and the average rates as of December 31, 1997 and 1996 are as follows: (in thousands) average average balance rate ----------------------- ------------------ 1997 1996 1997 1996 -------- -------- ----- ------ Demand $ 22,959 $ 19,433 -- -- NOW accounts $ 14,159 $ 13,063 2.10% 2.07% Time $101,131 $ 82,880 5.84% 5.85% Time certificates in amounts of $100,000 or more outstanding at December 31, 1997 by maturity are as follows: (in thousands) Three months or less $21,381 Over three months through twelve months 14,389 Over twelve months through three years 1,467 Over three years 596 ------- Total $37,833 ------- BORROWINGS The Bank borrows funds principally from the Federal Home Loan Bank of Atlanta. Information regarding such borrowings is as follows (in thousands): 1997 1996 ------- ------- Balance outstanding at December 31 $ 3,000 $ -- Weighted average rate at December 31 5.66% -- Maximum borrowings during the year $13,030 $ 6,750 Average amounts outstanding during year $ 5,301 $ 1,958 Weighted average rate during year 5.85% 5.57% Key Ratios The following schedule of key ratios is presented for the years ended December 31, 1997 and 1996: 1997 1996 ------ ------- Return on average assets 1.20% 1.24% Return on average equity 13.69% 13.41% Dividend payout ratio 22.31% 23.29% Equity to assets (averages) 8.75% 9.24% Ending equity to ending assets 8.87% 9.03% Average interest earning assets to average total assets 93.47% 93.15% Average net loans to average total deposits 83.39% 78.78% Average interest bearing liabilities to average interest earning assets 82.57% 82.00% 14 Management's Discussion YEAR 2000 COMPLIANCE As the year 2000 approaches, an important business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. Many existing application software products, including the Company's, were designed to accommodate a two-digit year. For example, "98" is stored on the system and represents 1998 and "00" represents 1900. The Bank primarily utilizes a third-party vendor for processing its primary banking applications. In addition, the Bank also uses third-party vendor application software for all ancillary computer applications. The third-party vendor for the Company's banking applications is in the process of modifying, upgrading or replacing its computer applications to ensure Year 2000 compliance. To assist in this effort, the Company has been advised by such vendor that the vendor has hired the services of a consultant to review the plan and assist such vendor in achieving Year 2000 compliance by December 31, 1998. In addition, the Company has instituted a Year 2000 compliance program whereby the Bank is reviewing the Year 2000 issues that may be faced by its other third-party vendors. Under such program, the Company will examine the need for modifications or replacement of all non-Year 2000 compliance pieces of software. The Company does not currently expect that the cost of its Year 2000 compliance program will be material to its financial condition and expects that it will satisfy such compliance program without material disruption of its operations. In the event that the Bank's significant suppliers do not successfully and timely achieve Year 2000 compliance, the Bank's business, results of operations or financial condition could be adversely affected. FORWARD LOOKING INFORMATION Information set forth in this Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" contains various "forward looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which statements represent the company's judgement concerning the future and are subject to risks and uncertainties that could cause the Company's 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 the Company's actual operating results to differ materially from those in the forward looking statements, including without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, the failure of assumptions underlying the establishment of the allowance for possible loan losses, the low trading volume of the Common Stock and other considerations described in connection with specific forward looking statements. 15 Report of Independent Accountants The Board of Directors and Shareholders Four Oaks Fincorp, Inc. Four Oaks, North Carolina We have audited the accompanying consolidated balance sheets of Four Oaks Fincorp, Inc. as of December 31, 1997 and 1996, and the related statements of operations, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements for 1995, included herein, were audited by other accountants whose report, dated February 20, 1996, expressed an unqualified opinion on those financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Four Oaks Fincorp, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Raleigh, North Carolina February 20, 1998 16 Consolidated Balance Sheets
December 31, --------------------------- ASSETS 1997 1996 ---- ---- Cash and due from banks $ 6,454,065 $ 5,046,441 Interest bearing bank balances 2,114,378 1,561,868 Securities available for sale 35,081,851 37,092,216 Loans, net 138,098,776 108,036,023 Bank premises and equipment, net 5,091,883 4,450,294 Other assets 3,229,939 2,925,716 ------------ ------------ Total assets $190,070,892 $159,112,558 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 24,761,325 $ 21,212,139 Interest-bearing 143,226,612 121,630,836 ------------ ------------ Total deposits 167,987,937 142,842,975 Borrowed funds 3,000,000 -- Other liabilities 2,215,958 1,906,931 ------------ ------------ Total liabilities 173,203,895 144,749,906 ------------ ------------ Commitments and contingencies (Notes 5, 9, and 10) Shareholders' equity: Common stock; $1.00 par value, 5,000,000 shares authorized; 875,648 and 837,949 issued and outstanding at December 31, 1997 and 1996, respectively 875,648 837,949 Capital surplus 5,602,066 4,871,623 Retained earnings 10,249,413 8,604,138 Net unrealized gain on securities 139,870 48,942 ------------ ------------ Total shareholders' equity 16,866,997 14,362,652 ------------ ------------ Total liabilities and shareholders' equity $ 190,070,892 $159,112,558 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
17 Four Oaks Fincorp, Inc. Consolidated Statements of Operations For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ Interest income: Loans $ 12,650,703 $ 10,208,256 $ 8,486,005 Securities: Taxable U.S. Government and agency obligations 1,712,768 1,549,431 1,440,890 Tax-exempt obligations of states and political subdivisions 290,714 273,560 258,951 Other taxable securities 94,314 64,231 57,717 Overnight investments 78,856 153,238 221,388 ------------ ------------ ------------ Total interest income 14,827,355 12,248,716 10,464,951 ------------ ------------ ------------ Interest expense: Deposits 6,735,764 5,585,340 4,733,509 Short-term borrowings 263,401 108,634 52,051 Other borrowed funds 46,223 -- -- ------------ ------------ ------------ Total interest expense 7,045,388 5,693,974 4,785,560 ------------ ------------ ------------ Net interest income 7,781,967 6,554,742 5,679,391 Provision for loan losses 784,851 396,772 385,167 ------------ ------------ ------------ Net interest income after provision for loan losses 6,997,116 6,157,970 5,294,224 ------------ ------------ ------------ Noninterest income: Service charges on deposit accounts 802,908 619,834 535,450 Other service charges, commissions and fees 649,466 327,777 236,100 Securities net losses (3,910) (66,372) (42,403) ------------ ------------ ------------ Total noninterest income 1,448,464 881,239 729,147 ------------ ------------ ------------ Noninterest expense: Salaries 2,307,500 1,981,158 1,681,610 Employee benefits 408,752 331,269 299,716 Occupancy expenses 245,732 179,764 188,831 Equipment expenses 327,364 261,675 255,555 Other operating expense 1,958,970 1,621,493 1,392,802 ------------ ------------ ------------ Total noninterest expense 5,248,318 4,375,359 3,818,514 ------------ ------------ ------------ Income before income taxes 3,197,262 2,663,850 2,204,857 Provision for income taxes 1,075,700 843,000 680,500 ------------ ------------ ------------ Net income $ 2,121,562 $ 1,820,850 $ 1,524,357 ============ ============ ============ Net income per common share $ 2.50 $ 2.19 $ 1.85 ============ ============ ============ Diluted net income per common share $ 2.47 $ 2.15 $ 1.83 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
18
Consolidated Changes in Shareholders' Equity For the years ended December 31, 1997, 1996 and 1995 Net Unrealized Common Stock Capital Retained Gain (Loss) Shares Amount Surplus Earnings on Securities ------- ------------ ------------ ------------ -------------- Balance, January 1, 1995 822,690 $ 822,690 $ 4,585,921 $ 6,076,828 $ (363,239) Cash dividends of $.47 per share -- -- -- (389,513) -- Cash paid for fractional shares created by 4 for 3 stock split (221) (221) 221 (3,647) -- Change in net unrealized gain (loss) on securities available for sale -- -- -- -- 577,857 Sale of common stock 5,810 5,810 82,144 -- -- Net income -- -- -- 1,524,357 -- ------- ------------ ------------ ------------ -------------- Balance December 31, 1995 828,279 828,279 4,668,286 7,208,025 214,618 Cash dividends of $.51 per share (424,737) Change in net unrealized -- -- -- -- -- gain (loss) on securities available for sale -- -- (165,676) Sale of common stock 9,670 9,670 203,337 -- -- Net income -- -- -- 1,820,850 -- ------- ------------ ------------ ------------ -------------- Balance, December 31, 1996 837,949 837,949 4,871,623 8,604,138 48,942 Cash dividends of $.56 per share -- -- -- (476,287) -- Change in net unrealized gain (loss) on securities available for sale -- -- -- -- 90,928 Sale of common stock 37,699 37,699 730,443 -- -- Net income -- -- -- 2,121,562 -- ------- ------------ ------------ ------------ -------------- Balance, December 31, 1997 875,648 $ 875,648 $ 5,602,066 $ 10,249,413 $ 139,870 ======= ============ ============ ============ ============== The accompanying notes are an integral part of the consolidated financial statements.
19 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 Cash flows from operating activities: ------------ ------------ ------------ Net income $ 2,121,562 $ 1,820,850 $ 1,524,357 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses 784,851 396,772 385,167 Provision for depreciation 310,539 220,978 207,935 Loans originated for sale (1,678,200) (1,930,989) (1,388,981) Proceeds from loan sales 1,678,200 1,930,989 1,534,881 Deferred income tax benefit (24,800) (62,000) (89,000) Net amortization of bond premiums and discounts (7,164) 3,459 49,975 Loss on sale of securities 3,910 66,372 42,403 Loss on sale of repossessed assets 35,516 79,010 6,456 Gain on sale of fixed assets (13,178) (5,124) -- Changes in assets and liabilities: Prepaid and other assets (101,370) 74,674 (293,571) Interest receivable 45,240 (128,592) (448,974) Income taxes and other liabilities (107,776) 183,075 50,045 Interest payable 416,804 187,486 413,414 ------------ ------------ ------------ Net cash provided by operating activities 3,464,134 2,836,960 1,994,107 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of investment securities - available for sale 12,131,908 12,749,693 6,283,834 Proceeds from maturities of investment securities - available for sale 8,080,000 3,415,000 6,001,125 Purchase of securities available for sale (18,088,468) (20,854,230) (16,331,313) Net increase in loans (30,967,952) (20,214,870) (15,288,064) Capital expenditures (1,010,873) (1,443,746) (773,805) Proceeds from sale of fixed assets 71,923 6,000 -- Acquisition of real estate (46,200) -- -- Proceeds from sale of real estate -- 85,529 98,796 Proceeds from sale of other assets acquired in settlement of loans 162,866 316,844 62,206 ------------ ------------ ------------ Net cash used in investing activities (29,666,796) (25,939,780) (19,947,221) ------------ ------------ ------------ Cash flows from financing activities: Net decrease in short-term borrowings -- -- (2,500,000) Proceeds from Federal Home Loan Bank of Atlanta advances 13,000,000 -- -- Repayment of Federal Home Loan Bank of Atlanta advances (10,000,000) -- -- Net increase in deposit accounts 25,144,962 23,877,612 16,987,086 Deferral of organizational costs (99,181) -- -- Proceeds from issuance of common stock 593,302 213,007 87,954 Cash dividends paid (476,287) (424,737) (393,160) ------------ ------------ ------------ Net cash provided by financing activities 28,162,796 23,665,882 14,181,880 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,960,134 563,062 (3,771,234) Cash and cash equivalents at beginning of year 6,608,309 6,045,247 9,816,481 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 8,568,443 $ 6,608,309 $ 6,045,247 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 6,628,589 $ 5,506,488 $ 4,372,146 ============ ============ ============ Cash paid during the year for income taxes $ 1,057,975 $ 886,264 $ 761,518 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The 1997 consolidated financial statements include the accounts and transactions of Four Oaks Fincorp, Inc. (the "Company"), a bank holding company incorporated under the laws of the State of North Carolina, and its wholly-owned subsidiary, Four Oaks Bank & Trust Company (the "Bank"). All significant intercompany transactions have been eliminated. The 1996 and 1995 financial statements are those of the Bank only. Nature of Operations The Company was incorporated under the laws of the State of North Carolina on February 5, 1997 (see Note 2). The Company's primary function is to serve as the Holding Company for its wholly-owned subsidiary, the Bank. The Bank operates seven offices in eastern and central North Carolina, and its primary source of revenue is derived from loans to customers and from its securities portfolio. The loan portfolio is comprised mainly of real estate, commercial, consumer, and equity line of credit loans. These loans are primarily collateralized by residential and commercial properties, commercial equipment, and personal property. Use of Estimates in the Preparation of Financial Statements and Certain Significant Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at December 31, 1997 and 1996 and the reported amounts of revenues and expenses during the years ended December 31, 1997, 1996 and 1995. Actual results could differ from those estimates. Significant Accounting Policies The accounting and reporting policies of the Company follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies. Securities Securities are classified into three categories: (1) Securities Held to Maturity - Debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; (2) Trading Securities - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (3) Securities Available for Sale - Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. The Company classifies all securities as available for sale and unless otherwise noted all securities purchased by the Company will be classified available for sale. Gains and losses on sales of securities, computed based on specific identification of adjusted cost of each security, are included in other income at the time of the sale. Premiums and discounts are amortized into interest income using the level yield method. Loans and Allowance for Loan Losses Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The Company evaluates its loan portfolio in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure". Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. At December 31, 1997 and 1996, there were no loans material to the financial statements that were impaired under the provisions of SFAS No. 114. The Company uses several factors in determining if a loan is impaired under SFAS No. 114. The internal asset classification procedures include a thorough review of significant loans and lending relationships and the accumulation of related data. This data includes loan payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss, etc. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collection of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers' ability to pay. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Recognition on Impaired and Nonaccrual Loans Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Foreclosed Assets Assets acquired as a result of foreclosure are valued at the lower of the recorded investment in the loan or fair value less estimated costs to sell. The recorded investment is the sum of the outstanding principal loan balance and foreclosure costs associated with the loan. Losses from the acquisition of property in full or partial satisfaction of debt are treated as credit losses. Routine holding costs, subsequent declines in value and gains or losses on disposition are included in other expense. Company Premises and Equipment Company premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets. Useful lives range from 5 to 10 years for furniture and equipment and is 35 years for premises. Expenditures for repairs and maintenance are charged to expense as incurred. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" on January 1, 1997. The adoption of this pronouncement had no material effect on the Company's financial statements. Intangible Assets Intangible assets are amortized using the straight-line method over 15 years. The Company evaluates intangible assets for potential impairment by analyzing the operating results, trends and prospects for the Company, as well as by comparing them to their competitors. The Company also takes into consideration recent acquisition patterns within the banking industry and any other events or circumstances which might indicate potential impairment. The Company has included a core deposit premium in other assets at December 31, 1997 and 1996 with a carrying value of $169,039 and $183,424, respectively. Amortization included in the Company's other operating expense for 1997, 1996 and 1995 is $14,386, $14,388 and $37,779, respectively. Income Taxes Provisions for income taxes include amounts currently payable and deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax asset and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes in the year of change. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and overnight interest bearing bank balances. New Accounting Pronouncements The Company will adopt SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The Company will adopt SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" on January 1, 1998. SFAS No. 131 establishes standards for determining an entity's operating segments and the type and level of financial information to be disclosed in both annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. FORMATION OF HOLDING COMPANY The Company was incorporated on February 5, 1997 under the laws of the State of North Carolina for the purpose of serving as the holding company for the Bank. On July 1, 1997, pursuant to the reorganization of the Bank into a holding company structure, the common stock of the Bank was converted on a share-for-share basis into common stock in the Company that have rights, privileges and preferences identical to the common stock of the Bank. 3. SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated market values of securities available for sale as of December 31, 1997 and 1996 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- ------------ ------------ 1997: U.S. Government and agency securities $ 29,267,069 $ 94,157 $ 15,769 $ 29,345,457 State and municipal securities 4,550,304 155,482 - 4,705,786 Other securities 1,030,608 - - 1,030,608 ------------- ------------- ------------ ------------ $ 34,847,981 $ 249,639 $ 15,769 $ 35,081,851 ============= ============= ============ ============ 1996: U.S. Government and agency securities $ 30,173,017 $ 81,914 $ 46,809 $ 30,208,122 State and municipal securities 5,841,404 153,230 3,309 5,991,325 Other securities 954,853 - 62,084 892,769 ------------- ------------- ------------ ------------ $ 36,969,274 $ 235,144 $ 112,202 $ 37,092,216 ============= ============= ============ ============
The amortized cost and estimated market value of debt securities at December 31, 1997 by contractual maturities are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value ----------- ----------- Due in one year or less $ 3,807,260 $ 3,813,967 Due after one year through five years 25,436,386 25,587,794 Due after five years through ten years 4,443,562 4,516,536 Due after ten years 130,165 132,946 ----------- ----------- $33,817,373 $34,051,243 =========== =========== Assets, principally securities, with a carrying value of approximately $7,747,000 and $6,970,000 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Sales of investment securities available for sale during 1997, 1996 and 1995 generated realized gains of $57,862, $44,456 and $2,647 and realized losses of $61,772, $110,828 and $45,050, respectively. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LOANS AND ALLOWANCE FOR LOAN LOSSES Major classifications of loans as of December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 1996 --------- ---------- Real estate - residential and other $ 76,582 $ 57,154 Real estate - agricultural 6,175 6,914 Other agricultural 6,624 5,980 Consumer loans 23,827 18,698 Business loans 25,711 19,956 Other loans 1,030 873 -------- ------- 139,949 109,575 Less: Unearned income (125) (99) Allowance for loan losses (1,725) (1,440) -------- ------- $ 138,099 $ 108,036 ======== =========
The maturities and carrying amounts of certain loans as of December 31, 1997 are summarized as follows ( in thousands): Real Estate Commercial Construction Financial and Land Agricultural Development Total ------------ ----------- ------ Due within one year $24,620 $13,499 $38,119 ------- ------- -------- Due after one year to five years: Fixed rate 19,273 2,221 21,494 Variable rate 7,781 1,034 8,815 ------ ------ ------ 27,054 3,255 30,309 ------ ----- ------ Due after five to ten years: Fixed rate 895 68 963 Variable rate 458 -- 458 ----- ----- ----- 1,353 68 1,421 ----- ---- ----- Total $53,027 $16,822 $69,849 ======= ======= ====== Nonperforming assets at December 31, 1997 and 1996 consist of the following (in thousands): 1997 1996 ---- ---- Loans past due ninety days or more $ 352 $ 186 Nonaccrual loans 512 209 Foreclosed assets (included in other assets) 193 147 ------ ------ $1,057 $ 542 ======= ====== A summary of the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is as follows: 1997 1996 1995 ---- ---- ---- Balance, beginning $ 1,440,000 $ 1,220,000 $ 955,000 Provision charged against income 784,851 396,772 385,167 Recoveries of amounts charged-off 37,153 23,880 85,883 Amounts charged-off (537,004) (200,652) (206,050) ----------- ----------- ----------- Balance, ending $ 1,725,000 $ 1,440,000 $ 1,220,000 =========== =========== =========== 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Land $ 1,031,502 $ 1,001,961 Building 3,161,787 2,738,651 Furniture and equipment 2,739,338 2,277,066 ----------- ---------- 6,932,627 6,017,678 Less accumulated depreciation (1,840,744) (1,567,384) $ 5,091,883 $ 4,450,294 =========== =========== 6. BORROWED FUNDS The Company has an established line of credit with the Federal Home Loan Bank of Atlanta in the amount of $25,000,000. This line is secured by a blanket floating lien covering the Company's loan portfolio of qualifying residential (1-4 units) first mortgage loans. At December 31, 1997, the Company had an advance of $3,000,000 outstanding. The interest rate on this advance is 5.66% and it matures on September 24, 2002. There were no advances outstanding at December 31,1996. 7. INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 ---- ---- ---- Current: Federal $ 985,000 $ 840,000 $ 729,500 State 115,500 65,000 40,000 ----------- ----------- ----------- 1,100,500 905,000 769,500 =========== =========== =========== Deferred: (24,800) (62,000) (89,000) ----------- ----------- ----------- Total $ 1,075,700 $ 843,000 $ 680,500 =========== =========== =========== The reconciliation of expected income tax at the statutory Federal rate with income tax expense for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ---- ---- ---- Expected income tax expense at statutory rate (34%) $ 1,087,000 $ 906,000 $ 750,000 Increase (decrease) in income tax expense resulting from: State taxes (net of federal benefit) 70,000 35,000 13,000 Tax exempt income (99,000) (93,000) (88,000) Other, net 17,700 (5,000) 5,500 ----------- ----------- ----------- Income tax expense $ 1,075,700 $ 843,000 $ 680,500 =========== ========== ===========
A summary of the deferred tax assets (liabilities) at December 31, 1997 and 1996, included in other assets, is as follows: 1997 1996 ---- ---- Allowance for loan losses $ 628,000 $ 518,000 Depreciation (298,000) (230,000) Bond accretion (45,800) (20,000) Unamortized loan costs and fees 48,600 40,000 --------- -------- 332,800 308,000 Unrealized gains on available for sale securities (94,000) 74,000) --------- --------- Net deferred tax asset $ 238,800 $ 234,000 ========= ========= 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. EMPLOYEE BENEFIT PLAN The Bank has a defined contribution pension plan in effect for substantially all full-time employees. Employee benefits expense includes $94,808, $83,082 and $76,124 in 1997, 1996 and 1995, respectively, for this plan. Contributions under the plan are made at the discretion of the Board of Directors, but have amounted to 5% of eligible employees' gross salary for the past three years. 9. REGULATORY RESTRICTIONS The Bank, as a North Carolina banking corporation, may pay dividends to the Company only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the bank. Current Federal regulations require that the Bank maintain a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Bank must maintain a leverage ratio of 4%. As of December 31, 1997, the Bank's capital exceeded the current capital requirements. The Bank currently expects to continue to exceed these minimums without altering current operations or strategy. The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum amounts and ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table below (dollars in thousands).
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- -------- ------ -------- ------- As of December 31, 1997: - ------------------------ Total Capital (to Risk Weighted Assets) $17,837 12.7% $11,235 8.0% $14,045 10.0% Tier I Capital (to Risk Weighted Assets) 16,112 11.5 5,618 4.0 8,427 6.0 Tier I Capital (to Average Assets) 16,112 8.5 7,582 4.0 9,478 5.0 As of December 31, 1996: - ------------------------ Total Capital (to Risk Weighted Assets) $15,509 12.7% $ 9,738 8.0% $12,172 10.0% Tier I Capital (to Risk Weighted Assets) 14,069 11.6 4,869 4.0 7,303 6.0 Tier I Capital (to Average Assets) 14,069 8.9 6,347 4.0 7,933 5.0
The Company is also subject to these capital requirements. At December 31, 1997 the Company's total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 12.9%, 11.7% and 8.5%, respectively. 10. COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements. The Bank's risk of loss in the event of nonperformance by the other party to the commitment to extend credit, line of credit or standby letter of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. As of December 31, 1997 and 1996, outstanding financial instruments whose contract amounts represent credit risk were as follows:
1997 1996 ---- ---- Outstanding commitments to lend, unfunded loans and lines of credit $23,808,000 $17,824,000 =========== =========== Standby and commercial letters of credit $ 1,444,000 $ 704,000 =========== ===========
The Bank's lending is concentrated primarily in eastern and central North Carolina and the surrounding communities in which it operates. Credit has been extended to certain of the Bank's customers through multiple lending transactions. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. RELATED PARTY TRANSACTIONS Certain parties (principally directors and executive officers of the Bank, including their affiliates, families, and companies in which they hold ten percent or more ownership) were customers of, and had loans and other transactions with the Bank in the ordinary course of business. An analysis of activity with respect to such loans for the years ended December 31, 1997 and 1996 is as follows:
Balance at Balance at Beginning Amount End of of Year Additions Collected Year ----------- --------- ---------- ---------- Aggregate of certain related party loans: 1997 $ 411,000 $ 714,000 $ 280,000 $ 845,000 =========== ========= ========== ========== 1996 $ 356,000 $ 188,000 $ 133,000 $ 411,000 =========== ========= ========== ==========
The Bank leased a building from one of its directors for $780, $755, and $736 per month in 1997, 1996 and 1995, respectively. The term of the lease has historically been on a year to year basis, but was changed to a five year lease as of January 1, 1995 with annual increases based on the Consumer Price Index. 12. STOCK OPTION PURCHASE PLAN The Bank has a non-qualified stock option plan (the "Plan") for certain key employees. On July 1, 1997 the Plan was amended in conjunction with the formation of the Company. This amendment increased the number of shares authorized for the Plan to 100,000. Options will continue to be granted at the discretion of the Board at a price approximating market, as determined by a committee of Board members. All options granted subsequent to this amendment will be 100% vested one year from the grant date and will expire ten years from the grant date. Options granted prior to the amendment have ten year lives and a five year level vesting provision. A summary of the status of the Bank's stock options, after giving retroactive effect to stock splits, as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below: Options Option Price Outstanding Per Share ----------- ------------ Balance January 1, 1994 44,167 $ 10.80 - 12.00 Granted 1,333 $ 13.31 Exercised 1,500 $ 10.80 ------ Balance December 31, 1995 44,000 $ 10.80 to 13.31 Exercised 2,333 $ 10.80 ------ Balance December 31, 1996 41,667 $ 10.80 - 13.31 Granted 2,500 $ 26.00 Exercised 28,533 $ 12.00 - 13.31 ------ Balance December 31, 1997 15,634 $ 10.80 - 26.00 ====== The weighted average exercise price of all outstanding options at December 31, 1997 is $14.28. There are 52,000 shares reserved for future issuance at December 31, 1997. Additional information concerning the Company's stock options is as follows: Number Remaining Number Outstanding Contractual Exercisable EXERCISE PRICE at 12/31/97 Life at 12/31/97 ------------ ----------- ------------ $ 10.80 334 4.2 years 334 $ 12.00 12,000 1.1 years 12,000 $ 13.31 800 7.2 years - $ 26.00 2,500 9.3 years - ------ ------ 15,634 12,334 ====== ====== 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTION PURCHASE PLAN (Continued) On January 1, 1996 the Bank adopted SFAS No. 123, "Accounting for Stock Based Compensation". As permitted by SFAS No. 123,the Bank has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for the Plan. Accordingly, no compensation cost will be recognized for future options granted under any plan. The proforma effect of applying SFAS No. 123 to the current year grants is not considered material. 13. EARNINGS PER SHARE The Company adopted SFAS No. 128 "Earnings Per Share" on December 31, 1997. As required, all prior period earnings per share have been restated to conform with the provisions of the statement. The only effect of this restatement is that the Company is presenting diluted earnings per share for the first time for the years ended December 31, 1996 and 1995. The following table provides a reconciliation of income available to common stockholders and the average number of shares outstanding for the years ended December 31, 1997, 1996, and 1995.
1997 1996 1995 ---- ---- ---- Net income (numerator) $ 2,121,562 $1,820,850 $1,524,357 =========== ========== ========== Shares for basic EPS (denominator) 847,047 832,621 824,405 Dilutive effect of stock options 12,307 13,440 9,524 ----------- ---------- ---------- Adjusted shares for diluted EPS 859,354 846,061 833,929 =========== ========== ==========
14. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information of Four Oaks Fincorp, Inc., the parent company, at December 31, 1997 and for the period from February 5, 1997 to December 31, 1997 is presented below: Condensed Balance Sheets Assets: Cash $ 60,791 Equity investment in subsidiary 16,420,787 Deferred organization costs, net 89,328 Other assets 296,091 ----------- $16,866,997 =========== Liabilities and shareholders' equity: Shareholders' equity $16,866,997 =========== 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. PARENT COMPANY FINANCIAL INFORMATION (Continued) Condensed Statements of Operations Dividends from wholly-owned subsidiary $ 241,187 Equity in earnings of subsidiary 1,890,228 Miscellaneous expenses (9,853) ------------ Net income $ 2,121,562 ============ Condensed Statements of Cash Flows Operating Activities: Net income $ 2,121,562 Equity in undistributed earnings of subsidiary (1,890,228) Amortization of deferred organization costs 9,853 Increase in other assets (296,091) ----------- Cash flows used in operating activities (54,904) ----------- Financing activities: Proceeds from issuance of common stock 456,063 Dividends paid (241,187) Deferral of organization costs (99,181) ----------- Cash flows provided by financing activities 115,695 ----------- Net increase in cash and cash equivalents 60,791 Cash and cash equivalents, beginning of period - ----------- Cash and cash equivalents, end of period $ 60,791 =========== 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instruments' values and should not be considered an indication of the fair value of the Company taken as a whole. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Due from Banks Cash and due from banks are equal to the fair value due to the liquid nature of the financial instruments. Securities Fair values of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable Fair values have been estimated by type of loan: residential real estate loans, consumer loans, and commercial and other loans. For variable-rate loans that reprice frequently and with no significant credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated by discounting the future cash flows using the current rates at which loans with similar terms would be made to borrowers with similar credit ratings and for the same remaining maturities. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing. Deposits The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at year end. Fair value of certificates of deposit is estimated by discounting the future cash flows using the current rate offered for similar deposits with the same maturities. Accrued Interest Receivable and Payable The carrying amount of accrued interest approximates market. The following table presents information for financial assets and liabilities as of December 31, 1997 and 1996 (in thousands):
1997 1996 ------------------------------------ ----------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------- ---------- ---------- ---------- Financial assets: Cash and due from banks $ 8,556 $ 8,556 $ 6,608 $ 6,608 Securities available for sale 35,082 35,082 37,092 37,092 Residential real estate loans 76,582 76,312 46,270 46,718 Consumer loans 23,827 23,881 19,036 19,064 Commercial and other loans 39,540 39,201 44,267 44,328 Accrued interest receivable 2,007 2,007 2,052 2,052 --------- --------- ---------- -------- Total financial assets $185,594 $ 185,039 $155,325 $155,862 ========= ========= ======== ======== Financial liabilities: Federal Home Loan Bank of Atlanta advances $ 3,000 $ 3,000 $ - $ - Deposits: Certificates of deposit 110,843 111,482 91,336 $ 91,333 Other 57,145 57,145 51,578 51,508 Accrued interest payable 1,914 1,914 1,499 1,498 ---------- -------- ------- -------- Total financial liabilities $ 172,902 $ 173,541 $144,413 $ 144,339 ========== ======== ======= ========
30 EX-13 3 EXHIBIT 13.2 EXHIBIT 13.2 TO FORM 10-K Report of Daniel G. Matthews & Associates, Inc. concerning financial statements for 1995 presented in the 1997 Annual Report to Shareholders DANIEL G. MATTHEWS & ASSOCIATES, INC. CERTIFIED PUBLIC ACCOUNTANTS 210 EAST WELLONS STREET SMITHFIELD, NORTH CAROLINA 27577 919-934-7116 INDEPENDENT AUDITOR'S REPORT Board of Directors Four Oaks Bank & Trust Company Post Office Box 309 Four Oaks, North Carolina 27524 We have audited the accompanying balance sheets of the Four Oaks Bank & Trust Company as of December 31, 1995 and 1994, and the related statements of income, changes in shareholders' equity, cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Four Oaks Bank & Trust Company at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Daniel G. Matthews & Associates, Inc. DANIEL G. MATTHEWS & ASSOCIATES, INC. February 20, 1996 EX-21 4 EXHIBIT 21 EXHIBIT 21 TO FORM 10-K Subsidiaries of the Registrant Name State of Incorporation - ---- ---------------------- Four Oaks Bank & Trust Company North Carolina EX-23 5 EXHIBIT 23.1 EXHIBIT 23.1 TO FORM 10-K Consent of Coopers & Lybrand L.L.P. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Four Oaks Fincorp, Inc. on Form S-8 (File No. 333-30677) and Form S-3 (File No. 333-33527) of our report dated February 20, 1998, on our audits of the consolidated financial statements of Four Oaks Fincorp, Inc. as of December 31, 1997 and 1996, and for the years then ended, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Raleigh, North Carolina March 27, 1998 EX-23 6 EXHIBIT 23.2 EXHIBIT 23.2 TO FORM 10-K Consent of Daniel G. Matthews & Associates, Inc. DANIEL G. MATTHEWS & ASSOCIATES, INC. CERTIFIED PUBLIC ACCOUNTANTS 210 EAST WELLONS STREET SMITHFIELD, NORTH CAROLINA 27577 919-934-7116 March 27, 1998 Four Oaks Bank & Trust Company P.O. Box 309 Four Oaks, NC 27524 RE: Consent of Daniel G. Matthews & Associates, Inc. We consent to the incorporation by reference in the Registration Statement (Form S-3, File No. 333-33527) pertaining to the Four Oaks Fincorp, Inc. Dividend Reinvestment Plan and in the Registration Statement (Form S-8, File No. 333-30677) pertaining to the Four Oaks Fincorp, Inc. Employee Stock Purchase and Bonus Plan and Nonqualified Stock Option Plan, of our report dated February 20, 1996, with respect to the consolidated financial statement of Four Oaks Bank & Trust Company (predecessor to Four Oaks Fincorp, Inc.) incorporated by reference in the Four Oaks Fincorp, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission. /s/ Daniel G. Matthews & Associates, Inc. DANIEL G. MATTHEWS & ASSOCIATES, INC. Smithfield, North Carolina EX-27 7 FDS FOUR OAKS
9 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 6,454,000 2,114,000 000 000 35,082,000 000 000 139,824,000 1,725,000 190,071,000 167,988,000 000 2,216,000 3,000,000 000 000 876,000 5,602,000 190,071,000 12,650,000 2,098,000 79,000 14,827,000 6,736,000 7,045,000 7,782,000 785,000 (4,000) 5,248,000 3,197,000 3,197,000 000 000 2,122,000 2.50 2.47 4.70 512,000 352,000 000 000 1,440,000 537,000 37,000 1,725,000 000 000 1,725,000
-----END PRIVACY-ENHANCED MESSAGE-----