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.
<PAGE>
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.
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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
<PAGE>
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
<PAGE>
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
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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
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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
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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
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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:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
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
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<CAPTION>
<S> <C>
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
</TABLE>
- ---------------------
(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
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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
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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
<PAGE>
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.
<PAGE>
EXHIBIT 13.1 TO FORM 10-K
Portions of the Annual Report to Shareholders for the Fiscal Year Ended December
31, 1997
<PAGE>
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.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- -------- ------- --------
<S><C>
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
</TABLE>
(1) Includes federal funds sold and interest bearing bank balances.
5
<PAGE>
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
<PAGE>
Management's Discussion
AVERAGE DAILY BALANCES, INTEREST INCOME/EXPENSES, AVERAGE YIELD/RATE
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
average interest average average interest average
(Dollars in thousands) daily income/ yield/ daily income/ yield/
balance expense rate balance expense rate
------- -------- ------- ------- -------- ------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
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%
====== ======
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
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
---------- ------ ---- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
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)
========== ====== ==== ========== ====== ====
</TABLE>
(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):
<TABLE>
<CAPTION>
Available for sale: Available for sale:
1997 1996
------------------------ ---------------------------
amortized estimated amortized estimated
cost fair value cost fair value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
<TABLE>
<CAPTION>
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
------- ------- --------- --------
<S> <C> <C> <C> <C>
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%
======= =======
</TABLE>
9
<PAGE>
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
<PAGE>
Management's Discussion
LOAN PORTFOLIO
Loans consisted of the following, in thousands, as extracted from the Call
Reports of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
11
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 --
====== ====== ====== ====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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%
</TABLE>
13
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1997 1996
---- ----
<S><C>
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.
</TABLE>
17
<PAGE>
Four Oaks Fincorp, Inc.
Consolidated Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
Interest income:
<S> <C> <C> <C>
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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
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
------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
19
<PAGE>
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities: ------------ ------------ ------------
<S> <C> <C> <C>
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.
</TABLE>
20
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
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
============= ============= ============ ============
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
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
======== =========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
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
<PAGE>
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).
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Amount End of
of Year Additions Collected Year
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Aggregate of certain related party loans:
1997 $ 411,000 $ 714,000 $ 280,000 $ 845,000
=========== ========= ========== ==========
1996 $ 356,000 $ 188,000 $ 133,000 $ 411,000
=========== ========= ========== ==========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C>
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
=========== ========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------- ---------- ---------- ----------
<S> <C> <C>
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
========== ======== ======= ========
</TABLE>
30
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
<PAGE>
EXHIBIT 21 TO FORM 10-K
Subsidiaries of the Registrant
Name State of Incorporation
- ---- ----------------------
Four Oaks Bank & Trust Company North Carolina
<PAGE>
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
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
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,454,000
<INT-BEARING-DEPOSITS> 2,114,000
<FED-FUNDS-SOLD> 000
<TRADING-ASSETS> 000
<INVESTMENTS-HELD-FOR-SALE> 35,082,000
<INVESTMENTS-CARRYING> 000
<INVESTMENTS-MARKET> 000
<LOANS> 139,824,000
<ALLOWANCE> 1,725,000
<TOTAL-ASSETS> 190,071,000
<DEPOSITS> 167,988,000
<SHORT-TERM> 000
<LIABILITIES-OTHER> 2,216,000
<LONG-TERM> 3,000,000
000
000
<COMMON> 876,000
<OTHER-SE> 5,602,000
<TOTAL-LIABILITIES-AND-EQUITY> 190,071,000
<INTEREST-LOAN> 12,650,000
<INTEREST-INVEST> 2,098,000
<INTEREST-OTHER> 79,000
<INTEREST-TOTAL> 14,827,000
<INTEREST-DEPOSIT> 6,736,000
<INTEREST-EXPENSE> 7,045,000
<INTEREST-INCOME-NET> 7,782,000
<LOAN-LOSSES> 785,000
<SECURITIES-GAINS> (4,000)
<EXPENSE-OTHER> 5,248,000
<INCOME-PRETAX> 3,197,000
<INCOME-PRE-EXTRAORDINARY> 3,197,000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 2,122,000
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.47
<YIELD-ACTUAL> 4.70
<LOANS-NON> 512,000
<LOANS-PAST> 352,000
<LOANS-TROUBLED> 000
<LOANS-PROBLEM> 000
<ALLOWANCE-OPEN> 1,440,000
<CHARGE-OFFS> 537,000
<RECOVERIES> 37,000
<ALLOWANCE-CLOSE> 1,725,000
<ALLOWANCE-DOMESTIC> 000
<ALLOWANCE-FOREIGN> 000
<ALLOWANCE-UNALLOCATED> 1,725,000
</TABLE>
