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 March 31, 2000.
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 April 30, 2000:
3,253,282
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2000 (unaudited) and September 30, 1999 1
Consolidated Statements of Operations for the Three and
Six Months Ended March 31, 2000 and 1999 (unaudited) 2
Consolidated Statements of Stockholders' Equity for the
Six Months Ended March 31, 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 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 13
SIGNATURES 13
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
2000 1999
------------- -------------
Assets (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 14,723,692 $ 5,375,856
Interest-bearing deposits in financial institutions 42,522,895 4,034,076
Investment securities - available for sale 14,513,101 3,024,531
Mortgage-backed securities - available for sale 107,572,683 56,325,868
Loans receivable, net:
Held for sale 28,140,619 13,481,714
Held for investment 298,385,124 198,572,216
Premises and equipment, net 7,817,738 3,575,974
Deferred income taxes 3,204,328 2,314,930
Real estate owned 120,412 591,144
Federal Home Loan Bank of Atlanta stock, at cost 2,651,300 1,460,200
Accrued interest receivable 2,783,904 2,022,055
Prepaid expenses and other assets 7,440,734 1,526,907
------------- -------------
Total assets $ 529,876,530 $ 292,305,471
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 119,128,721 $ 53,525,231
Savings 24,320,965 7,220,337
Large denomination certificates of deposit 47,546,283 31,399,212
Other time 275,138,082 142,473,215
------------- -------------
Total deposits 466,134,051 234,617,995
Borrowed money 4,884,970 1,318,340
Accrued interest payable 494,805 81,081
Income taxes payable -- 67,779
Advance payments by borrowers for property taxes and
insurance 563,498 89,067
Other liabilities 11,936,095 7,368,176
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Total liabilities 484,013,419 243,542,438
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 44,232,010 44,232,010
Retained earnings, substantially restricted 25,220,798 24,197,767
Treasury stock at cost, 977,608 and 813,503 shares (18,771,864) (15,770,962)
Unearned ESOP shares, 221,846 and 226,350 (2,218,457) (2,263,500)
Deferred stock awards (111,914) (783,392)
Accumulated other comprehensive (loss), net (2,531,102) (892,530)
------------- -------------
Total stockholders' equity 45,863,111 48,763,033
------------- -------------
Total liabilities and stockholders' equity $ 529,876,530 $ 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 SIX MONTHS ENDED
MARCH 31 MARCH 31
---------------------------- ----------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,333,781 $ 4,706,156 $12,927,833 $ 9,492,983
Interest and dividends on investments and deposits 1,844,446 922,959 3,055,670 1,783,197
----------- ----------- ----------- -----------
Total interest income 9,178,227 5,629,115 15,983,503 11,276,180
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 4,430,471 2,291,219 7,424,204 4,566,662
Interest on borrowings 249,940 158,632 426,697 302,648
----------- ----------- ----------- -----------
Total interest expense 4,680,411 2,449,851 7,850,901 4,869,310
----------- ----------- ----------- -----------
Net interest income before provision for possible
loan losses 4,497,816 3,179,264 8,132,602 6,406,870
Provision for possible loan losses 200,000 -- 427,000 50,000
----------- ----------- ----------- -----------
Net interest income 4,297,816 3,179,264 7,705,602 6,356,870
----------- ----------- ----------- -----------
Other income:
Loan fees and service charges 357,952 322,360 663,643 614,935
Loan servicing fees 179,192 160,145 346,332 377,971
Gain on sale of real estate, net 13,383 16,269 105,358 38,648
Gain on sale of mortgage loans and mortgage-
backed securities -- 180,363 -- 412,464
Other income 264,622 56,580 314,761 101,653
----------- ----------- ----------- -----------
Total other income 815,149 735,717 1,430,094 1,545,671
----------- ----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 2,253,538 1,745,118 4,046,729 3,488,286
Federal insurance premiums 17,734 31,298 49,959 60,247
Premises and equipment 376,443 112,279 586,809 228,328
Advertising 65,713 32,527 94,960 76,214
Payroll and other taxes 189,831 142,043 299,983 262,547
Other 727,831 490,082 1,195,647 1,020,028
----------- ----------- ----------- -----------
Total general and administrative expenses 3,631,090 2,553,347 6,274,087 5,135,650
----------- ----------- ----------- -----------
Income before income taxes 1,481,875 1,361,634 2,861,609 2,766,891
Income taxes 627,919 561,441 1,196,987 1,159,027
----------- ----------- ----------- -----------
NET INCOME $ 853,956 $ 800,193 $ 1,664,622 $ 1,607,864
----------- ----------- ----------- -----------
Basic earnings per share $ 0.27 $ 0.22 $ 0.52 $ 0.44
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.27 $ 0.22 $ 0.52 $ 0.44
----------- ----------- ----------- -----------
Dividends per share $ 0.10 $ 0.07 $ 0.20 $ 0.14
----------- ----------- ----------- -----------
Average number of common shares outstanding 3,195,141(1) 3,599,901(1) 3,229,019(1) 3,675,038(1)
</TABLE>
(1) Excludes ESOP and MRP benefit plan shares not committed to be released
or vested, and treasury stock.
See Notes to Consolidated Financial Statements.
2
<PAGE>
FIRST SOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 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) $48,763,033
Net income 1,664,622 1,664,622
Other comprehensive loss, net
of taxes (1,638,572) (1,638,572)
MRP amortization 671,478 671,478
Acquisition of treasury shares (3,000,902) (3,000,902)
Dividends ($.10 per share) (641,591) (641,591)
Release of ESOP shares 45,043 45,043
-------- ----------- ----------- ------------- ------------ ---------- ------------ -----------
Balance March 31, 2000 $ 43,640 $44,232,010 $25,220,798 $(18,771,864) $(2,218,457) $(111,914) $(2,531,102) $45,863,111
-------- ----------- ----------- ------------- ------------ ---------- ------------ -----------
</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 $ 1,664,622 $ 1,607,864
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 427,000 50,000
Depreciation 192,818 139,075
ESOP compensation 45,043 127,949
MRP compensation 671,478 671,437
Accretion of discounts on securities (4,345) 186
Gain on disposal of real estate acquired in settlement of loans (102,594) (36,688)
Gain on sale of loans and mortgage-backed securities -- (412,464)
Originations of loans held for sale, net (35,651,028) (44,053,003)
Proceeds from sale of loans held for sale -- 36,671,184
Other operating activities 3,718,143 (89,450)
------------- -------------
Net cash provided by (used in) operating activities (29,038,863) (5,323,910)
Investing activities:
Proceeds from maturities of securities available for sale 3,000,000 --
Purchases of investment securities (14,733,594) --
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 2,782,924 6,018,298
Loan originations, net of principal repayments of loans
held for investment 15,774,637 (11,113,034)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 675,191 640,573
Purchase FHLB stock (43,600) (96,400)
Purchases of premises and equipment (422,600) (183,347)
Net cash to purchase Home Federal Savings & Loan Association (26,530,907) --
Acquisition of Triangle branches 113,398,422 --
------------- -------------
Net cash provided (used) in investing activities 93,900,473 (4,733,910)
Financing activities:
Net increase in deposit accounts (14,268,623) 18,776,344
Proceeds from FHLB borrowings 82,700,000 59,000,000
Repayments of FHLB borrowings (82,700,000) (55,500,000)
Treasury stock purchased (3,000,902) (5,564,154)
Cash dividends paid (641,591) (515,484)
Net change in repurchase agreements 886,161 (517,709)
------------- -------------
Net cash provided by financing activities (17,024,955) 15,678,997
------------- -------------
Increase (decrease) in cash and cash equivalents 47,836,655 5,621,177
Cash and cash equivalents, beginning of period 9,409,932 17,011,841
------------- -------------
Cash and cash equivalents, end of period $ 57,246,587 $ 22,633,018
============= =============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 87,552 $ 645,989
Exchange of loans for mortgage-backed securities $ 56,511,323 $ 24,052,059
</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") (formerly NewSouth Bancorp, Inc.) was
formed for the purpose of issuing common stock and owning 100% of the stock of
First South Bank (the "Bank") and operating through the Bank 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 National Market 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 of the 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 six month periods ended March 31, 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 six month periods ended March
31, 2000 are based on weighted average shares of 3,195,141 and 3,229,019,
respectively, of common stock outstanding, excluding ESOP and deferred stock
award plan shares not committed to be released or vested, 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
Company's outstanding stock options and deferred stock awards plan shares did
not dilute earnings per share calculations for the three and six month periods
ended March 31, 2000, as their dilutive effect was less than one cent per share.
NOTE 4. DIVIDENDS DECLARED
On March 16, 2000, the Board of Directors declared a cash dividend of $0.10 per
share to stockholders of record as of April 4, 2000 and payable on April 21,
2000. This dividend payment represents a payout ratio of 37.0% of the earnings
for the quarter ended March 31, 2000, and is the Company's twelfth 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 and losses on available for sale securities.
Information concerning the Company's other comprehensive income for the three
and six month periods ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 853,956 $ 800,193 $ 1,664,622 $ 1,607,864
Reclassification of gains
recognized in net income 0 (18,163) 0 (18,163)
Gains (losses) unrealized,
net of income taxes (1,160,459) (163,864) (1,638,572) (149,190)
----------- ----------- ----------- -----------
Other comprehensive income (loss) (1,160,459) (181,847) (1,638,572) (167,353)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (306,503) $ 618,346 $ 26,050 $ 1,440,511
=========== =========== =========== ===========
</TABLE>
NOTE 6. SIGNIFICANT ACTIVITIES
On November 30, 1999, the Company consummated the acquisition of Green Street
Financial Corp ("Green Street"), pursuant to an Agreement and Plan of Merger
("Plan") signed on August 9, 1999. The Company acquired Green Street for a cash
purchase price of $59.2 million, representing $15.25 per share of Green Street
common stock. 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 - $346,000. See Form
10-Q for the quarterly period ended December 31, 1999 for additional
information.
On February 18, 2000, the Company completed its acquisition of five of Triangle
Bank's branch offices ("Triangle") located in Rocky Mount, North Carolina and
one office located in Tarboro, North Carolina, pursuant to a Purchase and
Assumption Agreement ("Agreement") signed on December 10, 1999. Five of the six
offices became branch offices of the Bank, while one office was closed with the
deposits and loans transferred to a nearby existing First South Bank office.
Under terms of the Agreement, the Bank assumed the deposits of these offices for
a premium of approximately 4% of the assumed deposits, and purchased loans,
fixed assets and certain other assets associated with the branch offices.
Summary financial information related to the branch purchase transaction as of
February 18, 2000 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.
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 through the Bank a commercial banking business. Therefore, the
discussion below focuses primarily on the Bank's results of operations.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND SEPTEMBER 30, 1999
Total assets increased to $529.9 million at March 31, 2000 from $292.3 million
at September 30, 1999. Earning assets increased to $493.6 million at March 31,
2000 from $276.9 million at September 30, 1999, reflecting the acquisition of
Green Street on November 30, 1999 and the Triangle branch purchases on February
18, 2000.
Interest-bearing overnight deposits in financial institutions was $42.5 million
at March 31, 2000, compared to $4.0 million at September 30, 1999. A portion of
these funds are a residual of the Triangle branch purchase funding and will be
invested into loans and securities going forward. Overnight funds are primarily
used to support the liquidity management activities and daily operations of the
Bank. The Bank has implemented various investment strategies to increase its
regulatory liquidity levels, including the securitization of certain mortgage
loans previously held for sale into mortgage-backed securities. As a result, the
mortgage-backed securities portfolio increased to $107.6 million at March 31,
2000, compared to $56.3 million at September 30, 1999.
Combined with the above referenced acquisitions and seasonal growth (net of
securitizations), loans held for sale increased to $28.1 million at March 31,
2000 from $13.5 million at September 30, 1999, while loans held for investment
increased to $298.4 million at March 31, 2000 from $198.6 million at September
30, 1999. To support the risk associated with its loan portfolio growth, the
Bank has increased its reserves for potential loan losses to $4.7 million at
March 31, 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 93.2% of total assets at March 31, 2000, compared to 94.7% at September 30,
1999.
Total interest-bearing liabilities increased to $471.0 million at March 31, 2000
from $235.9 million at September 30, 1999. Total deposits increased to $466.1
million at March 31, 2000 from $234.6 million at September 30, 1999, reflecting
both the Green Street and Triangle acquisitions. Borrowings, in the form of
repurchase agreements, increased to $4.9 million at March 31, 2000 from $1.3
million at September 30, 1999, representing growth in cash management accounts
for commercial banking customers.
Stockholders' equity was $45.9 million at March 31, 2000, compared to $48.8
million at September 30, 1999 (see "Consolidated Statements of Stockholders'
Equity"). At March 31, 2000, the Company's equity to assets ratio was 8.7%,
compared to 16.7% at September 30, 1999, reflecting the leveraging effect of the
Green Street and Triangle acquisitions. 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 $41.9 million at
March 31, 2000, substantially in excess of all regulatory capital requirements
(see "Liquidity and Capital Resources").
7
<PAGE>
During the three months ended March 31, 2000, the Company purchased 98,627
shares of its common stock through open market and private purchases, totaling
approximately $1.8 million, pursuant to a stock repurchase plan adopted by the
board of directors. These shares are being held as treasury stock, at cost. At
March 31, 2000, treasury shares were 977,608 totaling $18.8 million, compared to
813,503 shares totaling $15.8 million at September 30, 1999.
On March 16, 2000 the board of directors of the Company declared a quarterly
cash dividend of $0.10 per share, payable April 21, 2000 to stockholders of
record as of April 4, 2000. This dividend payment is the Company's twelfth
consecutive quarterly cash dividend and represents a payout ratio of 37.0% of
the consolidated earnings for the three months ended March 31, 2000.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2000 AND 1999
GENERAL. Net income for the three and six months ended March 31, 2000 was
$854,000 and $1.7 million, compared to $800,000 and $1.6 million for the three
and six months ended March 31, 1999. Earnings per share for the three and six
months ended March 31, 2000 was $0.27 and $0.52 per share, respectively,
compared to $0.22 and $0.44 per share for the three and six months ended March
31, 1999, reflecting the impact of the stock repurchase program discussed above.
INTEREST INCOME. Interest income increased to $9.2 million and $16.0 million for
the three and six months ended March 31, 2000, from $5.6 million and $11.3
million for the three and six months ended March 31, 1999. This increase is
primarily attributable to the growth of interest- earning assets from the Green
Street and Triangle acquisitions. Average interest-earning assets were $454.6
million and $388.6 million, respectively, for the three and six months ended
March 31, 2000, compared to $281.2 million and $277.5 million for the three and
six months ended March 31, 1999. The yield on average interest-earning assets
was 8.1% and 8.2% for the three and six months ended March 31, 2000, compared to
8.0% and 8.2% for the three and six months ended March 31, 1999.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $4.7
million and $7.9 million for the three and six months ended March 31, 2000, from
$2.5 million and $4.9 million for the three and six months ended March 31, 1999,
reflecting the growth in interest- bearing liabilities from the Green Street and
Triangle acquisitions. Average interest-bearing liabilities increased to $425.1
million and $350.6 million for the three and six months ended March 31, 2000,
from $230.0 million and $225.6 million for the three and six months ended March
31, 1999. The effective cost of average interest-bearing liabilities increased
to 4.4% and 4.5%, respectively, for the three and six months ended March 31,
2000, from 4.2% and 4.3% for the three and six months ended March 31, 1999. The
Bank's checking account base increased to $119.1 million at March 31, 2000, from
$53.5 million at September 30, 1999, reflecting lower costing core banking
deposits acquired in the Green Street and Triangle acquisitions.
NET INTEREST INCOME. Net interest income increased to $4.5 million and $8.1
million for the three and six months ended March 31, 2000, from $3.2 million and
$6.4 million for the three and six months ended March 31, 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%, respectively, for the three and six months ended
March 31, 2000, compared to 3.8%, respectively, for both the three and six
months ended March 31, 1999. The Bank's net yield on interest-earning assets
(net interest income divided by average interest-earning
8
<PAGE>
assets) was 4.0% and 4.2%, respectively, for the three and six months ended
March 31, 2000, compared to 4.5% and 4.6%, respectively, for the three and six
months ended March 31, 1999.
PROVISION FOR LOAN LOSSES. During the three and six months ended March 31, 2000,
the Bank recorded provisions for loan losses of $200,000 and $427,000,
respectively. During the three months ended March 31, 1999 the Bank recorded no
provisions for loan losses, but recorded $50,000 in the six months ended March
31, 1999. During the current periods, provisions were charged to operations to
absorb potential 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 March 31, 2000, the Bank had
$4.7 million of reserves for loan losses, representing 1.4% of total loans
outstanding. The Bank believes the current level of its reserves for loan losses
is adequate to provide for possible future losses; however, there are no
assurances that possible future losses, if any, will not exceed estimated
amounts.
NONINTEREST INCOME. Noninterest income was $815,000 and $1.4 million for the
three and six months ended March 31, 2000, compared $736,000 and $1.5 million
for the three and six months ended March 31, 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 sales of loans and
mortgage- backed securities during the three and six months ended March 31,
2000, compared to $180,000 and $412,000 during the three and six months ended
March 31, 1999.
NONINTEREST EXPENSE. Noninterest expenses were $3.6 million and $6.3 million for
the three and six months ended March 31, 2000, compared to $2.6 million and $5.1
million for the three and six months ended March 31, 1999. The largest component
of these expenses, compensation and fringe benefits, was $2.3 million and $4.0
million for the three and six months ended March 31, 2000, compared to $1.7
million and $3.5 million for the three and six months ended March 31, 1999. This
increase is primarily attributable to a 46.2% increase in personnel resulting
from the Green Street and Triangle acquisitions, as full-time equivalent
employees increased to 193 at March 31, 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 earning assets and deposits. In addition, the Bank has recognized certain of
these noninterest expenses primarily resulting from the consummation of the
Green Street and Triangle acquisitions, as well as completing the name change to
First South Bank.
INCOME TAXES. Income tax expense was $628,000 and $1.2 million for the three and
six months ended March 31, 2000, compared to $561,000 and $1.2 million for the
three and six months ended March 31, 1999. The changes in the amounts of income
tax provisions reflects the changes in pretax income and the estimated income
tax rates in effect during the respective periods.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a state chartered commercial bank, the Bank must meet certain liquidity
requirements established by the State of North Carolina Office of the
Commissioner of Banks (the "Commissioner"). The Bank's liquidity ratio at March
31, 2000, as calculated under such requirements, exceeded the 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 March 31, 2000, the Bank had cash, deposits in banks, investment
securities, mortgage-backed securities, FHLB stock and loans held for sale
totaling $210.1 million, or 39.7% 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 March 31, 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. Unlike most industrial companies, nearly all
assets and liabilities of the Company are monetary. As a result, interest rates
have greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services. The impact
of inflation upon the Company is reflected in the cost and prices it pays for
goods and services.
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
10
<PAGE>
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").
Much information was published about the global computer crash 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 an extensive Y2K testing program
for all applications to assure validation of the century date changes and
testing of the century date rollover from December 31, 1999 to January 3, 2000.
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 a 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 software at no expense
to the Bank and 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 March 31, 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.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not engaged in any material legal proceedings. 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
At the Company's Annual Meeting of Stockholders held on February 17, 2000, the
following matters were submitted to a vote of stockholders with the following
results:
A. The election of directors:
Name For Withheld
---- --------- --------
Three-Year Terms:
Edmund T. Buckman, Jr. 3,052,736 11,517
Frederick N. Holscher 3,051,214 13,039
Frederick H. Howdy 3,055,736 8,517
Two-Year Term:
H. D. Reaves, Jr. 3,048,425 15,828
B. Amendment of the Company's Articles of Incorporation to change the
corporate name from NewSouth Bancorp, Inc. to First South Bancorp,
Inc.:
For Against Abstain
--- ------- -------
3,051,504 4,179 8,570
C. Amendment to the NewSouth Bancorp, Inc. 1997 Stock Option Plan to
increase the number of shares available for option grants from 436,425
to 787,348:
For Against Abstain Non-Voting
--- ------- ------- ----------
2,200,791 168,111 16,106 679,245
ITEM 5. OTHER INFORMATION
Not applicable
12
<PAGE>
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 February 11, 2000 under Item 7: Financial
Statements and Exhibits, amending a Form 8-K filed on December 1, 1999, to
include pro forma financial information for the Green Street acquisition.
2. A Form 8-K was filed on February 25, 2000 under Item 2: Acquisition or
Disposition of Assets, reporting the Company had completed the purchase of
branch offices from Triangle Bank.
3. A Form 8-K was filed on March 21, 2000 under Item 5: Other Events,
reporting the Company had amended its Articles of Incorporation to change its
name from NewSouth Bancorp, Inc. to First South Bancorp, Inc.
4. A Form 8-K was filed on March 30, 2000 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% (168,840
shares) of its issued and outstanding shares of common stock.
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: May 10, 2000 /s/ William L. Wall
-------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2000 /s/ Kristie W. Hawkins
----------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
13
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 14,723,692
<INT-BEARING-DEPOSITS> 42,522,895
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0
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<INCOME-PRETAX> 2,861,609
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<NET-INCOME> 1,664,622
<EPS-BASIC> 0.52
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<YIELD-ACTUAL> 8.22
<LOANS-NON> 1,193,531
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