UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000.
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 0-22219
FIRST SOUTH BANCORP, INC.
-------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 56-1999749
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 CAROLINA AVENUE, WASHINGTON, NORTH CAROLINA 27889
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(252) 946-4178
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of July 21, 2000: 3,195,374
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as
of June 30, 2000 (unaudited) and September 30, 1999 1
Consolidated Statements of Operations for the Three
and Nine Months Ended June 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Stockholders' Equity for
the Nine Months Ended June 30, 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2000 and 1999 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
2000 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 15,099,587 $ 5,375,856
Interest-bearing deposits in financial institutions 4,958,291 4,034,076
Investment securities - available for sale 31,123,730 3,024,531
Mortgage-backed securities - available for sale 105,851,786 56,325,868
Loans receivable, net:
Held for sale 32,155,597 13,481,714
Held for investment 318,526,233 198,572,216
Premises and equipment, net 7,945,642 3,575,974
Deferred income taxes 3,030,079 2,314,930
Real estate owned 361,151 591,144
Federal Home Loan Bank of Atlanta stock, at cost 2,651,300 1,460,200
Accrued interest receivable 3,199,686 2,022,055
Intangible assets 5,545,562 209,090
Other assets 1,827,526 1,317,817
------------ ------------
Total assets $532,276,170 $292,305,471
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $112,424,010 $ 53,525,231
Savings 22,829,690 7,220,337
Large denomination certificates of deposit 50,329,048 31,399,212
Other time 282,185,282 142,473,215
------------ ------------
Total deposits 467,768,030 234,617,995
Borrowed money 8,771,273 1,318,340
Accrued interest payable 459,024 81,081
Income taxes payable -- 67,779
Advance payments by borrowers for property taxes and
insurance 768,318 89,067
Other liabilities 11,260,648 7,368,176
------------ ------------
Total liabilities 489,027,293 243,542,438
Common stock, $.01 par value, 8,000,000 shares authorized,
4,364,044 shares issued and outstanding 43,640 43,640
Additional paid in capital 44,174,310 44,232,010
Retained earnings, substantially restricted 25,733,522 24,197,767
Treasury stock at cost, 1,163,570 and 813,503 shares (22,236,595) (15,770,962)
Unearned ESOP shares, 219,627 and 226,350 (2,196,270) (2,263,500)
Deferred stock awards -- (783,392)
Accumulated other comprehensive (loss), net (2,269,730) (892,530)
------------ ------------
Total stockholders' equity 43,248,877 48,763,033
------------ ------------
Total liabilities and stockholders' equity $532,276,170 $292,305,471
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,471,944 $ 4,966,334 $20,399,777 $14,459,317
Interest and dividends on investments and deposits 2,626,731 969,045 5,682,401 2,752,242
----------- ----------- ----------- -----------
Total interest income 10,098,675 5,935,379 26,082,178 17,211,559
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 5,195,299 2,316,870 12,619,502 6,883,531
Interest on borrowings 45,615 182,916 472,313 485,565
----------- ----------- ----------- -----------
Total interest expense 5,240,914 2,499,786 13,091,815 7,369,096
----------- ----------- ----------- -----------
Net interest income before provision for possible
loan losses 4,857,761 3,435,593 12,990,363 9,842,463
Provision for possible loan losses 250,000 -- 677,000 50,000
----------- ----------- ----------- -----------
Net interest income 4,607,761 3,435,593 12,313,363 9,792,463
----------- ----------- ----------- -----------
Other income:
Loan fees and service charges 603,717 314,786 1,267,359 929,721
Loan servicing fees 209,978 168,841 556,311 546,812
Gain on sale of real estate, net -- 2,772 105,358 41,420
Gain on sale of mortgage loans and mortgage-
backed securities 17 120,718 17 533,182
Other income 239,071 77,928 553,817 179,580
----------- ----------- ----------- -----------
Total other income 1,052,783 685,045 2,482,862 2,230,715
----------- ----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 2,352,401 1,698,507 6,399,130 5,186,793
Federal insurance premiums 21,502 30,734 71,461 90,981
Premises and equipment 394,050 121,156 980,859 349,484
Advertising 49,817 27,642 144,777 103,855
Payroll and other taxes 227,745 157,330 527,728 419,877
Other 1,012,858 539,138 2,208,490 1,559,166
----------- ----------- ----------- -----------
Total general and administrative expenses 4,058,373 2,574,507 10,332,445 7,710,156
----------- ----------- ----------- -----------
Income before income taxes 1,602,171 1,546,131 4,463,780 4,313,022
Income taxes 699,322 761,618 1,896,309 1,920,645
----------- ----------- ----------- -----------
NET INCOME $ 902,849 $ 784,513 $ 2,567,471 $ 2,392,377
----------- ----------- ----------- -----------
Basic earnings per share $ 0.30 $ 0.23 $ 0.81 $ 0.67
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.30 $ 0.23 $ 0.81 $ 0.67
----------- ----------- ----------- -----------
Dividends per share $ 0.13 $ 0.07 $ 0.33 $ 0.21
----------- ----------- ----------- -----------
Average number of common shares outstanding Basic 3,035,340 3,439,285 3,164,459 3,595,206
Average number of common shares outstanding Diluted 3,056,067 3,439,285 3,165,716 3,595,206
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Additional Earnings, Unearned Deferred Comprehensive
Common Paid-in Substantially Treasury ESOP Stock Income (Loss),
Stock Capital Restricted Stock Shares Awards Net Total
-------- ----------- ----------- ------------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1999 $ 43,640 $44,232,010 $24,197,767 $(15,770,962) $(2,263,500) $(783,392) $ (892,530) $48,763,033
Net income 2,567,471 2,567,471
Other comprehensive loss, net
of taxes (1,377,200) (1,377,200)
MRP amortization (57,700) 783,392 725,692
Acquisition of treasury shares (6,465,633) (6,465,633)
Dividends ($.10 per share) (1,031,716) (1,031,716)
Release of ESOP shares 67,230 67,230
-------- ----------- ----------- ------------- ------------ ---------- ------------ -----------
Balance June 30, 2000 $ 43,640 $ 4,174,310 $25,733,522 $(22,236,595) $(2,196,270) $ 0 $(2,269,730) $43,248,877
-------- ----------- ----------- ------------- ------------ ---------- ------------ -----------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31
------------------------------
2000 1999
------------------------------
Operating activities:
<S> <C> <C>
Net Income $ 2,567,471 $ 2,392,377
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 677,000 50,000
Depreciation 299,534 212,617
ESOP compensation 67,230 146,496
MRP compensation 725,692 1,007,169
Accretion of discounts on securities (31,062) 279
Gain on disposal of real estate acquired in settlement of loans (102,594) (41,420)
Gain on sale of loans and mortgage-backed securities (17) (533,182)
Originations of loans held for sale, net (39,665,989) (54,221,698)
Proceeds from sale of loans held for sale -- 36,671,185
Other operating activities 2,863,598 (908,058)
------------- -------------
Net cash used in operating activities (32,599,137) (15,224,235)
Investing activities:
Proceeds from maturities of securities available for sale 3,000,000 --
Purchases of investment securities (31,471,312) --
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 5,093,249 12,604,820
Loan originations, net of principal repayments of loans
held for investment (4,857,211) (14,422,131)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 675,191 625,327
Purchase FHLB stock (43,600) (96,400)
Purchases of premises and equipment (657,220) (272,746)
Net cash to purchase Green Street Financial Corporation (26,530,907) --
Acquisition of Triangle branches 113,398,422 --
------------- -------------
Net cash provided (used) in investing activities 58,606,612 (1,561,130)
Financing activities:
Net increase in deposit accounts (12,634,644) 13,942,409
Proceeds from FHLB borrowings 87,700,000 61,000,000
Repayments of FHLB borrowings (82,700,000) (56,500,000)
Treasury stock purchased (6,465,633) (7,819,622)
Cash dividends paid (1,031,716) (757,502)
Net change in repurchase agreements (227,536) (1,111,623)
------------- -------------
Net cash provided (used) by financing activities (15,359,529) 8,753,662
------------- -------------
Increase (decrease) in cash and cash equivalents 10,647,946 (8,031,703)
Cash and cash equivalents, beginning of period 9,409,932 17,011,841
------------- -------------
Cash and cash equivalents, end of period $ 20,057,878 $ 8,980,138
============= =============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 328,291 $ 766,717
Exchange of loans for mortgage-backed securities $ 56,511,323 $ 40,125,838
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS
First South Bancorp, Inc. (the"Company") was formed for the purpose of issuing
common stock and owning 100% of the stock of First South Bank (the "Bank") and
operating the Bank as a commercial banking business. The Bank has determined
that it has one significant operating segment, the providing of general
commercial banking services to its markets located in eastern North Carolina.
The common stock of the Company is traded on the Nasdaq Amex System under the
symbol "FSBK".
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (except for the
Statement of Financial Condition at September 30, 1999, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included, none of which were other than normal recurring
accruals. The financial statements of the Company are presented on a
consolidated basis with those of the Bank. The results of operations for the
three and nine month periods ended June 30, 2000 are not necessarily indicative
of the results of operations that may be expected for the year ended September
30, 2000.
NOTE 3. EARNINGS PER SHARE
The Company's earnings per share for the three and nine month periods ended June
30, 2000 are based on basic weighted average shares of 3,035,340 and 3,164,459,
respectively, and diluted weighted average shares of 3,056,067 and 3,165,716,
respectively, of common stock outstanding, excluding ESOP stock award plan
shares not committed to be released and treasury shares. Earnings per share have
been calculated in accordance with Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" and Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The dilutive effect
of the Company's outstanding stock option plan shares on earnings per share
calculations for the three and nine month periods ended June 30, 2000 was less
than one cent per share.
NOTE 4. DIVIDENDS DECLARED
On June 15, 2000, the Board of Directors declared a cash dividend of $0.13 per
share payable July 21, 2000 to stockholders of record as of July 5, 2000. This
dividend payment represents a 30% payment rate increase, a payout ratio of 43.3%
of the consolidated earnings for the quarter ended June 30, 2000 and is the
Company's thirteenth consecutive quarterly cash dividend.
5
<PAGE>
NOTE 5. COMPREHENSIVE INCOME.
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income". As required by SFAS No. 130, prior year
information has been modified to conform with the new presentation.
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only component of other comprehensive
income relates to unrealized gains on available for sale securities.
Information concerning the Company's other comprehensive income for the three
and nine month periods ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 902,849 $ 784,513 $ 2,567,471 $ 2,392,377
Reclassification of gains
recognized in net income (17) (120,718) (17) (138,881)
Gains (losses) unrealized,
net of income taxes 261,372 (707,302) (1,377,200) (856,492)
----------- ----------- ----------- -----------
Other comprehensive income (loss) 261,355 (828,020) (1,377,217) (995,373)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 1,164,204 $ (43,507) $ 1,190,254 $ 1,397,004
=========== =========== =========== ===========
</TABLE>
NOTE 6. FORWARD LOOKING STATEMENTS.
This Form 10-Q contains certain forward looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in general and local market
conditions, legislative and regulatory conditions, and an adverse interest rate
environment.
NOTE 7. SIGNIFICANT ACTIVITIES.
On November 30, 1999, the Company consummated the acquisition of Green Street
Financial Corp ("Green Street"). Summary financial information related to the
Green Street acquisition is as follows (unaudited): assets - $162.2 million;
loans receivable - $125.4 million; deposits - $101.7 million; and goodwill -
$288,000. See Form 10-Q for the quarterly period ended December 31, 1999 for
additional information.
On February 18, 2000, the Bank completed the purchase of six Triangle Bank
("Triangle") branch offices. Summary financial information related to the
Triangle branches purchase is as follows (unaudited): deposits - $147.5 million;
cash and other assets - $113.4 million; loans receivable - $26.3 million;
deposit premium - $5.0 million; and premises and equipment - $2.8 million. See
Form 10-Q for the quarterly period ended March 31, 2000 for additional
information.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has engaged in no activity other than holding the stock of the Bank
and operating the Bank as a commercial banking business. Therefore, this
discussion focuses primarily on the Bank's results of operations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND SEPTEMBER 30, 1999
Total assets were $532.3 million at June 30, 2000, compared to $292.3 million at
September 30, 1999. Total earning assets increased 78.9% to $495.3 million at
June 30, 2000, from $276.9 million at September 30, 1999, reflecting the Green
Street acquisition and the Triangle branches purchase. Interest-bearing
overnight deposits in financial institutions were $5.0 million at June 30, 2000,
compared to $4.0 million at September 30, 1999. Overnight funds are primarily
used to support the Bank's daily liquidity management activities and operations.
In order to support its growth, the Bank has implemented various investment
strategies to increase its regulatory liquidity levels. During the nine month
period ended June 30, 2000, the Bank increased its investment securities
portfolio to $31.1 million at June 30, 2000, from $3.0 million at September 30,
1999. During this period, the Bank also securitized certain mortgage loans
previously held for sale into mortgage-backed securities, resulting in a
mortgage-backed securities portfolio of $105.9 million at June 30, 2000,
compared to $56.3 million at September 30, 1999.
Combined with the above referenced acquisitions and internal growth (net of
securitizations), loans held for sale increased to $32.2 million at June 30,
2000, from $13.5 million at September 30, 1999. The above acquisitions and
favorable retail consumer and commercial loan demand have resulted in an
increase in loans held for investment to $318.5 million at June 30, 2000, from
$198.6 million at September 30, 1999. To support the risk associated with loan
portfolio growth, the Bank has increased its reserves for probable loan losses
to $4.9 million at June 30, 2000, from $3.3 million at September 30, 1999, or
1.4% and 1.5% of loans outstanding at the end of each respective period. Earning
assets amounted to 92.9% of total assets at June 30, 2000, compared to 94.7% at
September 30, 1999.
Total interest-bearing liabilities increased to $476.5 million at June 30, 2000,
from $235.9 million at September 30, 1999. Total deposits increased 99.4% to
$467.8 million at June 30, 2000, from $234.6 million at September 30, 1999,
reflecting the Green Street acquisition and the Triangle branches purchase.
Borrowings increased to $8.8 million at June 30, 2000, from $1.3 million at
September 30, 1999, supporting the growth in earning assets and banking
operations during the period.
Stockholders' equity was $43.2 million at June 30, 2000, compared to $48.8
million at September 30, 1999. See "Consolidated Statements of Stockholders'
Equity". At June 30, 2000, the Company's equity to assets ratio was 8.1%
compared to 16.7% at September 30, 1999, reflecting the leveraging effect of the
Green Street acquisition and the Triangle branches purchase. As a North Carolina
chartered commercial bank, the Bank must meet various capital standards required
by federal and state banking regulatory agencies. The Bank's stand-alone capital
was $42.6 million at June 30, 2000, substantially in excess of all regulatory
capital requirements. See "Liquidity and Capital Resources" below.
7
<PAGE>
During the nine months ended June 30, 2000, the Company purchased 350,067 shares
of its common stock through open market and private purchases, totaling
approximately $6.5 million, pursuant to stock repurchase plans adopted by the
board of directors. These shares are being held as treasury stock, at cost. At
June 30, 2000, treasury shares were 1,163,570 totaling $22.2 million, compared
to 813,503 shares totaling $15.8 million at September 30, 1999.
On June 15, 2000, the board of directors of the Company declared a quarterly
cash dividend of $0.13 per share, payable July 21, 2000 to stockholders of
record of July 5, 2000. This dividend payment is the Company's thirteenth
consecutive quarterly cash dividend, represents a 30% payment rate increase and
a payout ratio of 43.3% of the consolidated earnings for the three months ended
June 30, 2000.
COMPARISON OF OPERATING RESULTS - THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND
1999
GENERAL. Net income for the three and nine months ended June 30, 2000 was
$903,000 and $2.6 million, compared to $785,000 and $2.4 million for the three
and nine months ended June 30, 1999. Earnings per share for the three and nine
months ended June 30, 2000 was $0.30 and $0.81 per share, compared to $0.23 and
$0.67 per share for the three and nine months ended June 30, 1999, reflecting
the Company's growth and the impact of the above stock repurchases.
INTEREST INCOME. Interest income increased to $10.1 million and $26.1 million
for the three and nine months ended June 30, 2000, from $5.9 million and $17.2
million for the three and nine months ended June 30, 1999. This increase is
primarily attributable to the Bank's internal growth and the Green Street
acquisition and Triangle branches purchase. Average interest-earning assets were
$490.3 million and $418.8 million for the three and nine months ended June 30,
2000, compared to $283.2 million and $278.8 million for the three and nine
months ended June 30, 1999. The yield on average interest-earning assets was
8.2% and 8.3% for the three and nine months ended June 30, 2000 , compared to
8.4% and 8.2% for the three and nine months ended June 30, 1999.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $5.2
million and $13.1 million for the three and nine months ended June 30, 2000,
from $2.5 million and $7.4 million for the three and nine months ended June 30,
1999, reflecting the growth in interest-bearing liabilities from the Green
Street acquisition and the Triangle branches purchase. Average interest-bearing
liabilities increased to $468.2 million and $385.6 million for the three and
nine months ended June 30, 2000, from $235.8 million and $228.4 million for the
three and nine months ended June 30, 1999. The effective cost of average
interest-bearing liabilities increased to 4.5% for both the three and nine
months ended June 30, 2000, from 4.2% and 4.3% for the three and nine months
ended June 30, 1999. The Bank's checking account base increased to $112.4
million at June 30, 2000, from $53.5 million at September 30, 1999, reflecting
core banking deposits acquired in the Green Street acquisition and the Triangle
branches purchase.
8
<PAGE>
NET INTEREST INCOME. Net interest income increased to $4.9 million and $13.0
million for the three and nine months ended June 30, 2000, from $3.4 million and
$9.8 million for the three and nine months ended June 30, 1999. The Bank's
interest rate spread (the difference between the effective yield on average
interest-earning assets and the effective cost of average interest-bearing
liabilities) was 3.7% and 3.8%for the three and nine months ended June 30, 2000,
compared to 4.2% and 3.9% for the three and nine months ended June 30, 1999. The
decline in the interest rate spread during the current periods has been
pressured by the raising of interest rates by the Federal Reserve, which has the
effect of reducing the Bank's interest rate spread as the cost of deposits rises
faster than the yield on loans. The Bank's net yield on interest-earning assets
(net interest income divided by average interest-earning assets) was 4.0% and
4.1% for the three and nine months ended June 30, 2000, compared to 4.9% and
4.7% for the three and nine months ended June 30, 1999.
PROVISION FOR LOAN LOSSES. During the three months ended June 30, 2000, the Bank
recorded provisions for loan losses of $250,000, compared to no provisions
during the three months ended June 30, 1999. During the nine months ended June
30, 2000 and 1999, the Bank recorded provisions for loan losses of $677,000 and
$50,000, respectively. During the current period, provisions were charged to
operations to absorb probable losses on loans acquired from Green Street and
Triangle that may become uncollectible. Increases or decreases in the provision
and resulting reserves are based upon a review and classification of the Bank's
loan portfolio and other factors, such as past collection experience, changes in
the nature and volume of the loan portfolio, risk characteristics of individual
loans or groups of similar loans and underlying collateral, overall portfolio
quality and current and prospective economic conditions. At June 30, 2000, the
Bank had $4.9 million of loan loss reserves, representing 1.4% of total loans
outstanding. The Bank believes the current level of its loan loss reserves is
adequate to provide for probable future losses, although there are no assurances
that probable future losses, if any, will not exceed estimated amounts.
NONINTEREST INCOME. Noninterest income was $1.1 million and $2.5 million for the
three and nine months ended June 30, 2000, compared to $685,000 and $2.2 million
for the three and nine months ended June 30, 1999. Noninterest income consists
of fees and service charges earned on loans, service charges on deposit
accounts, gains from sales of loans and mortgage-backed securities and other
miscellaneous income. The Bank recorded no gains from the sale of loans and
mortgage-backed securities during the three and nine months ended June 30, 2000,
compared to $121,000 and $533,000 during the three and nine months ended June
30, 1999.
NONINTEREST EXPENSE. Noninterest expenses were $4.0 million and $10.3 million
for the three and nine months ended June 30, 2000, compared to $2.6 million and
$7.7 million for the three and nine months ended June 30, 1999. The largest
single component of these expenses, compensation and fringe benefits, was $2.4
million and $6.4 million for the three and nine months ended June 30, 2000,
compared to $1.7 million and $5.2 million for the three and nine months ended
June 30, 1999. This increase is primarily attributable to a 52.3% increase in
personnel resulting from the Green Street acquisition and the Triangle branches
purchase, as full-time equivalent employees increased to 201 at June 30, 2000
from 132 at September 30, 1999.
Other noninterest expenses including premises and equipment, repairs, printing,
advertising and office supplies have also grown proportionately with the growth
in assets and deposits. In addition, the Bank recognized certain of these
noninterest expenses during the three and nine months ended June 30, 2000, as it
continued to integrate the Green Street and Triangle branch offices into its
branch operating system.
9
<PAGE>
INCOME TAXES. Income tax expense was $699,000 and $1.9 million for the three and
nine months ended June 30, 2000, compared to $762,000 and $1.9 million for the
three and nine months ended June 30, 1999. The changes in the amounts of income
tax provisions reflects the changes in pretax income, the application of
permanent and temporary differences, and the estimated income tax rates in
effect during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must meet certain liquidity requirements established by the State of
North Carolina Office of the Commissioner of Banks (the "Commissioner"). At June
30, 2000, the Bank's liquidity ratio exceeded such requirements. Liquidity
generally refers to the Bank's ability to generate adequate amounts of funds to
meet its cash needs. Adequate liquidity guarantees that sufficient funds are
available to meet deposit withdrawals, fund future loan commitments, maintain
adequate reserve requirements, pay operating expenses, provide funds for debt
service, pay dividends to stockholders, and meet other general commitments. At
June 30, 2000, the Bank had cash, deposits in banks, investment securities,
mortgage-backed securities, FHLB stock and loans held for sale totaling $191.8
million, or 36.0% of total assets, compared to $83.7 million at September 30,
1999, or 28.6% of total assets.
The Bank believes it can meet future liquidity needs with existing funding
sources. The Bank's primary source of funds are deposits, payments on loans and
mortgage-backed securities, maturities of investment securities, earnings and
funds provided from operations, the ability to borrow from the Federal Home Loan
Bank of Atlanta and the availability of loans held for sale. While scheduled
repayments of loans and mortgage-backed securities are relatively predictable
sources of funds, deposit flows and loan prepayments are substantially
influenced by general market interest rates, economic conditions and
competition. In addition, the Bank attempts to manage its deposit pricing in
order to maintain a desired deposit mix.
The FDIC requires the Bank to meet a minimum leverage capital requirement of
Tier I capital (consisting of retained earnings and common stockholders's
equity, less any intangible assets) to assets ratio of 4%. The FDIC also
requires the Bank to meet a ratio of total capital to risk-weighted assets of
8%, of which at least 4% must be in the form of Tier I capital. The Commissioner
requires the Bank at all times to maintain a capital surplus of not less than
50% of common capital stock. The Bank was in compliance with all capital
requirements of the FDIC and the Commissioner at June 30, 2000 and September 30,
1999.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in relative purchasing power of money
over time and due to inflation. The assets and liabilities of the Company are
primarily monetary in nature and changes in market interest rates have greater
impact on the Company's performance than do the effects of general levels of
inflation. The impact of inflation upon the Company is reflected in the cost and
prices it pays for goods and services.
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IMPACT OF RECENT ACCOUNTING STANDARDS
The Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, effective with the fiscal quarter beginning
July 1, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized as either assets or liabilities in the statement of financial
position and be measured at fair value. The accounting for changes in fair value
of a derivative depends on the intended use of the derivative and whether or not
the derivative is designated as a hedging instrument. SFAS 133 is not expected
to have a material impact on the Company's financial statements.
YEAR 2000 COMPLIANCE
Neither the Company nor the Bank have experienced any problems related to the
Year 2000 ("Y2K") issue. Much information was published about the global
computer problems that could occur in the year 2000. Many computer programs that
only distinguish two digits of the year entered were expected to read entries
for the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date, or were expected to be unable to compute payment,
interest or delinquency. In compliance with regulatory guidelines, the Bank
formed a Y2K committee to evaluate the effects the century date change could
have on all current systems and to assess the potential risks associated with
the Y2K issue. A formal Y2K strategic plan and contingency plan were developed
to insure that problems and disruptions related to the Y2K issue were minimized.
All material data processing functions of the Bank that could have been impacted
by Y2K are provided by a national third party service bureau, Bisys, Inc.
("Bisys"). Bisys dedicated significant resources in assuring its systems were
Y2K compliant and in developing a comprehensive testing and verification
program. The Bisys client test facility provided the Bank with end-to-end
testing capabilities of all its hardware, software and related interfaces. All
Bank user departments successfully completed testing their system applications,
assuring validation of the century date change and system readiness. Additional
testing also took place with all other external mission critical information
systems and relationships with which the Bank exchanges data or information. The
Bank believes this readiness is the direct result of no uninterrupted operations
related to Y2K.
In addressing Y2K, the Bank used its current internal staff with limited
reliance on outside resources. Bisys provided remediated host system software at
no expense to the Bank. No major system or software needs replacing due to Y2K.
As a result, no additional Y2K related costs were recorded during the three
months ended June 30, 2000. The Bank believes the cost of addressing the Y2K
issue had no material impact on its results of operations, liquidity, capital
resources, or uncertainty that would cause its reported financial condition not
to be necessarily indicative of future operating results or financial condition.
In addition, the Bank believes it will incur no additional costs relating to the
Y2K issue. The Bank will continue to monitor its data processing systems and its
customers and vendors to insure preparedness for any unprecedented delayed Y2K
related problems.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not engaged in any material legal proceedings at the present
time. From time to time, the Bank is a party to legal proceedings within the
ordinary course of business wherein it enforces its security interest in loans,
and other matters of similar nature.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
1. A Form 8-K/A was filed on May 3, 2000 under Item 7: Financial
Statements and Exhibits, amending a Form 8-K filed on February
18, 2000, to include pro forma financial information for the
Triangle branches purchase.
2. A Form 8-K was filed on June 20, 1999 under Item 5: Other
Events, reporting the Company had completed a previously
announced 5% stock repurchase program and had adopted a program
to repurchase an additional 5% (160,400 shares) of its issued and
outstanding shares of common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SOUTH BANCORP, INC.
Date: July 26, 2000 /s/ William L. Wall
-------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: July 26, 2000 /s/ Kristie W. Hawkins
----------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
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