2000 Annual Report
First South Bancorp
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<PAGE>
TABLE OF CONTENTS
Letter to Stockholders 1
Selected Consolidated Financial Information and Other Data 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 3
Report of Independent Accountants 14
Consolidated Statements of Financial Condition 15
Consolidated Statements of Operations 16
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Board of Directors 40
Executive Officers 40
Regional Executives 40
First South Bank Office Locations 41
First South Bank ATM Locations 41
First South Bank Products and Services 42
Stockholder Information 43
MISSION STATEMENT
"Our mission is to become the premier community bank in eastern North
Carolina. We will enhance shareholder value by serving the personal
and business needs of our markets, providing superior customer
service, investing in the communities that we serve, and enriching the
lives of our employees."
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
It is a pleasure to present the 2000 operating results for First South Bancorp
("First South"). It was a landmark year. The company nearly doubled in asset
size to $559.7 million, adding nine offices while entering new markets in
eastern and southeastern North Carolina. This growth has come at a swift pace
and the company is well positioned to take advantage of the opportunities
presented.
For the year ended September 30, 2000, we reported record earnings of $3.5
million representing an 11.0% increase over the $3.2 million earned for the year
ended September 30, 1999. Diluted earnings per share increased 24.2% to $1.13
per share, compared to $0.91 per share for fiscal 1999. In addition, dividends
per share increased by 48.4% and we achieved continued excellent growth in
commercial lending.
First South completed two strategic acquisitions in 2000 by acquiring Home
Federal Savings and Loan in Fayetteville and Lumberton, North Carolina and
purchasing of six branch offices from Triangle Bank in Rocky Mount, Tarboro and
Dortches, North Carolina. These acquisitions, along with opening a full service
branch in Chocowinity, North Carolina contributed to the company's significant
growth.
Other initiatives undertaken in 2000 to position First South for continued
growth include the acquisition of land to support a new 11,000 square foot
operations center, allowing us to more effectively serve our growing customer
base. During this year, we made significant changes to our mortgage operations
by enhancing our mortgage origination hardware and software and adding a new
in-house FHA/VA processing center. In addition, we have a new web site at
www.firstsouthnc.com, featuring personal banking, business banking, a mortgage
center and a financial calculator. The company will continue to explore
additional services that can be offered over the Internet.
Many of our future strategies will focus on enhancing the franchise value of the
company. We will focus on the restructuring of our mortgage assets in order to
fund future growth in commercial and consumer lending, the opening of new full
service branches in existing and expanded markets and enhanced training of our
personnel in order to better serve existing and new customers. Through a new
business unit, we plan to offer our customers a broad range of investment,
insurance and financial planning services.
In addition, our governmental lending division that specializes in assisting
small business customers with government guaranteed loan programs is expected to
continue strong growth. We plan to continue expanding transaction accounts so
they become a larger percentage of the companies deposit base. By actively
restructuring the asset and liability sides of the company, we should achieve a
high net interest margin and increase fee income. The restructuring and
increased emphasis on training and performing basic services with excellence
should contribute greatly to enhancing the franchise value of First South.
As we continue our service, growth and success, it is apparent that our
employees are our greatest assets. Their hard work and dedication brought both
the Home Federal and Triangle acquisitions to a successful conclusion. Our
employees are held to high standards and they meet the challenges placed before
them. I want to thank them for their efforts and commitment in making First
South so successful.
Each member of your Board of Directors along with our officers and employees
join me in thanking you for supporting First South Bancorp. As always, your
comments or suggestions are welcomed and we look forward to your continued
support.
Sincerely,
/s/ Tom Vann
Tom Vann
President and
Chief Executive Officer
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Selected Financial Condition Data
---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $559,719 $292,305 $281,479 $249,281 $194,139
Loans receivable, net 366,210 212,054 224,999 197,785 155,681
Cash and investment securities 59,927 12,435 20,119 18,856 16,684
Mortgage-backed securities 108,519 56,326 27,017 24,818 14,797
Deposits 471,942 234,618 204,635 175,116 171,213
Borrowings 30,388 1,318 11,933 12,621 1,040
Stockholders' equity 44,835 48,763 56,714 57,856 18,347
Selected Operations Data
------------------------
Interest income $ 36,865 $ 23,129 $ 21,867 $ 18,515 $ 15,349
Interest expense 19,013 9,979 9,240 8,346 8,105
-------- -------- -------- -------- --------
Net interest income 17,852 13,150 12,627 10,169 7,244
Provision for loan losses 977 120 310 931 511
Noninterest income 3,432 2,874 2,646 1,685 1,833
Noninterest expenses 14,100 10,255 9,940 6,941 7,295
-------- -------- -------- -------- --------
Income before income taxes 6,207 5,649 5,023 3,982 1,271
Income taxes 2,658 2,453 1,900 1,719 451
-------- -------- -------- -------- --------
Net income $ 3,549 $ 3,196 $ 3,123 $ 2,263 $ 820
======== ======== ======== ======== ========
Earnings per share - basic (1)(2) $ 1.14 $ .91 $ .80 $ .35 $ --
======== ======== ======== ======== ========
Earnings per share - diluted (1)(2) $ 1.13 $ .91 $ .80 $ .35 $ --
======== ======== ======== ======== ========
Dividends per share (2) $ .46 $ .31 $ .27 $ .13 $ --
======== ======== ======== ======== ========
Selected Financial Ratios and Other Data
----------------------------------------
Performance Ratios:
Return on average assets .76% 1.09% 1.19% 1.00% .45%
Return on average equity 7.71 6.03 5.40 6.57 4.45
Interest rate spread 3.73 3.95 4.03 4.10 3.72
Net interest margin 4.05 4.69 5.05 4.67 4.12
Average earning assets to average
interest-bearing liabilities 107.47 121.04 127.57 115.00 108.52
Noninterest expense to average assets 3.03 3.50 3.80 3.06 3.97
Efficiency ratio 66.25 63.99 65.08 58.55 80.37
Dividend payout ratio 40.35 34.07 33.75 37.14 --
Quality Ratios:
Nonperforming assets to total assets .33% .40% .43% .65% .62%
Nonperforming loans to total loans .45 .27 .36 .64 .66
Loan loss reserves to total loans 1.39 1.53 1.50 1.64 1.51
Provision for loan losses to total loans .27 .06 .14 .47 .32
Capital Ratios:
Equity to total assets, end of period 8.02% 16.69% 19.95% 23.23% 9.45%
Average equity to average assets 9.89 18.09 22.14 15.17 10.05
Other Data:
Full service offices 17 9 8 8 8
Loans serviced for others $300,006 $275,255 $250,202 $253,647 $253,682
</TABLE>
---------------------------------
(1) Applies to net income of $1,395,900 earned for the period April 8, 1997 to
September 30, 1997.
(2) Adjusted for three-for-two stock split on August 19, 1998.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 through the Bank a commercial banking business. The
Company has engaged in no significant activities other than holding the stock of
the Bank, therefore, this discussion of consolidated financial condition and
results of operations relates principally to the Bank. The business of the Bank
consists principally of attracting deposits from the general public and using
them to originate secured and unsecured commercial and consumer loans, permanent
mortgage and construction loans secured by single-family residences, credit
cards and other loans. The Bank's earnings depend primarily on its net interest
income, which is the difference between interest earned on interest earning
assets and interest paid on interest-bearing liabilities. The level of its
noninterest income and expenses also affects the Bank's earnings.
Prevailing economic conditions as well as policies of federal and state
regulatory authorities affect the operations of the Bank. The Bank's cost of
funds is influenced by interest rates paid on competing investments, rates
offered on deposits by other financial institutions in the Bank's market area
and by general market interest rates. Lending activities are affected by the
demand for financing of real estate and various types of commercial and consumer
loans, which are influenced by interest rates at which such financing may be
offered.
The Bank's business emphasis is to operate as a well-capitalized,
profitable and independent community oriented financial institution dedicated to
providing quality customer service and meeting the financial needs of the
communities it serves. Management believes the Bank can be more effective in
serving its customers than many larger competitors, because of its ability to
respond quickly and effectively to customer needs and inquiries. The Bank's
ability to provide these services is enhanced by the stability of the Bank's
senior management team.
SIGNIFICANT ACTIVITIES AND EVENTS
On November 30, 1999, the Company consummated the acquisition of Green
Street Financial Corp ("Green Street"), the parent holding company of Home
Federal Savings and Loan Association of Fayetteville, North Carolina ("Home
Federal"), with full service offices located in Fayetteville and Lumberton,
North Carolina. The acquisition was accounted for using the purchase method of
accounting for a cash purchase price of $59.2 million, representing $15.25 per
share of Green Street common stock. Summary financial information related to
Green Street acquisition is as follows (unaudited): assets - $162.2 million;
loans receivable - $125.4 million; deposits - $101.7 million; and goodwill -
$288,000.
On February 18, 2000, the Bank completed the purchase of six Triangle Bank
("Triangle") branch offices located in Rocky Mount and Tarboro, North Carolina.
This acquisition was accounted for using the purchase method of accounting and
the Bank assumed the deposits of the six Triangle branch offices for a premium
of approximately 4.0% of the assumed deposits. 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.
Concurrently with the Green Street acquisition, the Bank changed its name
to First South Bank. These acquisitions have enabled the Company to leverage its
capital base, represent a significant growth in the Bank's branch office network
and are expected to benefit the Company's earnings in future periods.
LIQUIDITY AND CAPITAL RESOURCES
As a state chartered commercial bank, the Bank must meet certain liquidity
requirements established by the North Carolina Office of the Commissioner of
Banks (the "Commissioner"). Savings banks, which convert to commercial banks,
are required to maintain 15% liquidity pursuant to the conversion guidelines
adopted by the Commissioner. The Bank's liquidity ratio, as computed under these
guidelines, was 27.9% at September 30, 2000 compared to 22.9% at September 30,
1999.
3
<PAGE>
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, proceeds from loan sales and advances from the Federal Home
Loan Bank of Atlanta (the "FHLB"). While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by interest rates, economic conditions and
local competition. The Bank's primary investing activity is the origination of
commercial, consumer and mortgage loans. During the years ended September 30,
2000 and 1999, the Bank had loan originations of $176.5 million and $177.5
million, respectively. The Bank's primary financing activities are the
attraction of checking, certificate and savings deposits, and obtaining FHLB
advances.
The Bank's most liquid assets are cash and cash equivalents. The levels of
these assets are dependent on the Bank's operating, financing, lending and
investing activities during any given period. At September 30, 2000 and 1999,
cash and cash equivalents totaled $14.7 million and $9.4 million, respectively.
The Bank has other sources of liquidity if a need for additional funds arises.
During the years ended September 30, 2000 and 1999, the Bank sold or exchanged
real estate loans totaling $62.8 million and $86.1 million, respectively. The
Bank's outstanding FHLB advances and retail repurchase agreements totaled $30.4
million at September 30, 2000 compared to $1.3 million at September 30, 1999.
Other sources of liquidity include investment and mortgage-backed securities
designated as available for sale, which totaled $153.7 million at September 30,
2000 and $59.4 million at September 30, 1999.
At September 30, 2000 stockholders' equity was $44.8 million compared to
$48.8 million at September 30, 1999. At September 30, 2000 there were 3,160,475
shares of common stock outstanding, net of 1,203,569 treasury shares. Net income
for fiscal 2000 was $3.5 million, compared to $3.2 million for fiscal 1999.
As a North Carolina chartered commercial bank and a Federal Deposit
Insurance Corporation (the "FDIC") insured institution, the Bank is required to
meet various capital standards by its state and federal regulatory agencies. The
Bank's stand-alone equity was $43.7 million at September 30, 2000, compared to
$42.6 million at September 30, 1999, which is substantially in excess of all
such regulatory requirements. The Commissioner requires the Bank at all times to
maintain a capital surplus of not less than 50% of common capital stock. The
FDIC requires the Bank to meet a minimum leverage capital requirement of Tier I
capital (consisting of retained earnings and common stockholders' equity, less
any intangible assets) to assets ratio of at least 4% and a total capital to
risk-weighted assets ratio of 8%, of which 4% must be in the form of Tier I
capital. The Bank was in compliance with all capital requirements of both the
Commissioner and the FDIC at September 30, 2000 and September 30, 1999.
ASSET/LIABILITY MANAGEMENT
The Bank strives to achieve consistent net interest income and reduce its
exposure to adverse changes in interest rates by matching the terms to repricing
of its interest-sensitive assets and liabilities. Factors beyond the Bank's
control, such as market interest rates and competition, may also have an impact
on the Bank's interest income and interest expense. In the absence of any other
factors, the overall yield on the Bank's earning assets generally will increase
from existing levels when interest rates rise over an extended period of time,
and conversely, interest income will decrease when interest rates decline. In
general, interest expense will increase when interest rates rise over an
extended period of time, and conversely interest expense will decrease when
interest rates decline. The Bank can significantly influence its net interest
income by controlling the increases and decreases in its interest income and
interest expense which are caused by changes in market interest rates.
The President of the Bank reports to the Board of Directors on a regular
basis on interest rate risk and trends, as well as liquidity and capital ratio
requirements. The Board of Directors reviews the maturities of the Bank's assets
and liabilities and establishes policies and strategies designed to regulate the
Bank's flow of funds and to coordinate the sources, uses and pricing of such
funds. The first priority in structuring and pricing the Bank's assets and
liabilities is to maintain an acceptable interest rate spread while reducing the
net effects of changes in interest rates. The Bank's management is responsible
for administering the policies and determinations of the Board of Directors with
respect to the Bank's asset and liability goals and strategies.
A principal strategy in managing the Bank's interest rate risk has been to
increase interest rate sensitive assets such as commercial and consumer loans.
At September 30, 2000, the Bank had $137.9 million of commercial loans and $75.0
million of consumer loans, or 57.2% of the Bank's gross loan portfolio, compared
to $88.8 million and $50.8 million, respectively, at September 30, 1999. The
Bank had $32.4 million of loans held for sale at September 30, 2000, compared to
$13.5 million at September 30, 1999. Depending on conditions existing at a given
time, as part of its interest rate risk management strategy, the Bank may sell
fixed-rate residential mortgage loans in the secondary market.
4
<PAGE>
In managing its portfolio of investment securities, the Bank has emphasized
that all purchases of securities are held as available for sale, allowing the
Bank to sell a security in a timely manner should an immediate liquidity need
arise. The Bank had $153.7 million of investment and mortgage-backed securities
classified as available for sale at September 30, 2000, compared to $59.4
million at September 30, 1999.
MARKET RISK
Market risk reflects the risk of economic loss resulting from changes in
market prices and interest rates. The risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods. The Bank's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. The Bank does not
maintain a trading account for any class of financial instruments, nor does it
engage in hedging activities or purchase high-risk derivative instruments.
Furthermore, the Bank is not subject to foreign currency exchange risk or
commodity price risk.
Management measures the Bank's interest rate risk by computing estimated
changes in net interest income and the net portfolio value ("NPV") of its cash
flows from assets, liabilities and off-balance sheet items in the event of a
range of assumed changes in market interest rates. The Bank's exposure to
interest rates is reviewed on a quarterly basis by senior management and the
Board of Directors. Exposure to interest rate risk is measured with the use of
interest rate sensitivity analysis to determine the change in NPV in the event
of hypothetical changes in interest rates, while interest rate sensitivity gap
analysis is used to determine the repricing characteristics of the Bank's assets
and liabilities. If estimated changes to NPV and net interest income are not
within the limits established by the Board, the Board may direct management to
adjust the Bank's asset and liability mix to bring interest rate risk within
Board approved limits.
NPV represents the market value of portfolio equity and is equal to the
market value of assets minus the market value of liabilities, with adjustments
made for off-balance sheet items. This analysis assesses the potential loss in
risk sensitive instruments in the event of sudden and sustained 1% to 3%
increases and decreases in market interest rates.
The Bank's Board of Directors has adopted an interest rate risk policy
which establishes maximum increases in NPV of 17%, 36% and 56% and decreases in
NPV of 15%, 36% and 61% in the event of sudden and sustained 1% to 3% increases
or decreases in market interest rates. Table 1 below presents the Bank's
projected change in NPV for the various rate shock levels at September 30, 2000.
TABLE 1 - PROJECTED CHANGE IN NPV AND NET INTEREST INCOME
Net Portfolio Value Net Interest Income
Change ------------------------------- ------------------------------
in Rates $ Amount $ Change % Change $ Amount $ Change % Change
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
+ 300 bp $ 30,022 $(28,069) (48.3)% $ 14,928 $ (2,873) (16.1)%
+ 200 bp 39,566 (18,525) (31.9) 15,956 (1,845) (10.4)
+ 100 bp 49,063 (9,028) (15.5) 16,963 (838) (4.7)
Base 58,091 -- -- 17,801 --
- 100 bp 65,129 7,038 12.1 18,441 640 3.6
- 200 bp 70,199 12,108 20.8 19,029 1,228 6.9
- 300 bp 74,973 16,882 29.1 19,727 1,926 10.8
Table 1 indicates that in the event of sudden and sustained increases in
market interest rates, the Bank's estimated net interest income and NPV would be
expected to decrease. In the event of sudden and sustained decreases in market
interest rates, estimated net interest income and NPV would be expected to
increase. At September 30, 2000, the Bank's estimated changes in NPV were within
the targets established by the Board of Directors.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Bank may undertake in response to changes in interest rates. The
NPV calculation is based on the net present value of discounted cash flows
utilizing market prepayment assumptions.
5
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
Table 1. For example, although certain assets and liabilities may have similar
maturities to repricing, they may react in differing degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates. Certain
assets such as adjustable-rate loans have features that restrict changes in
interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable-rate loans in the Bank's portfolio could
decrease in future periods if market interest rates remain at or decrease below
current levels due to refinance activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate from
those assumed in the table. Also, the ability of many borrowers to repay their
adjustable-rate debt may decrease in the event of an increase in interest rates.
In addition, the Bank uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread. Interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive when
the amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities, and is considered negative when the amount
of interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. The Bank's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings.
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on average interest-earning assets and average interest-bearing
liabilities and the changing volume or amount of these assets and liabilities.
Table 2 below represents the extent to which changes in interest rates and
changes in the volume of average interest-earning assets and average
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. For each category of average
interest-earning asset and average interest-bearing liability, information is
provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (change in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the changes
in volume); and (iv) net change (total of the previous columns).
TABLE 2 - RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
--------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............... $ 9,019 $ 143 $ 67 $ 9,229 $ 1,338 $ (902) $ (62) $ 374
Investment securities .......... 994 (7) (22) 965 5 3 -- 8
Mortgage-backed securities ..... 2,598 88 71 2,757 1,066 (89) (42) 935
Other interest-earning assets .. 215 342 228 785 30 (79) (6) (55)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 12,826 566 344 13,736 2,439 (1,067) (110) 1,262
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposits ....................... 7,584 744 601 8,929 1,207 (813) (110) 284
FHLB advances .................. 8 1 -- 9 587 (10) (92) 485
Other interest-bearing
liabilities ................. 46 26 24 96 (5) (27) 2 (30)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities .............. 7,638 771 625 9,034 1,789 (850) (200) 739
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income ..... $ 5,188 $ (205) $ (281) $ 4,702 $ 650 $ (217) $ 90 $ 523
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
TABLE 3 - YIELD/COST ANALYSIS
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $323,178 $ 28,491 8.81% $220,123 $ 19,262 8.75%
Investment securities 18,487 1,284 6.95 4,484 319 7.11
Mortgage-backed securities 83,535 5,982 7.16 46,279 3,225 6.97
Other Interest-earning assets 15,409 1,108 7.19 9,248 323 3.49
-------- -------- ------ -------- -------- ------
Total interest-earning assets 440,609 36,865 8.37 280,134 23,129 8.26
-------- ------ -------- ------
Non-interest-earning assets 25,194 13,026
-------- --------
Total assets $465,803 $293,160
======== ========
Interest-bearing liabilities:
Deposits $395,475 18,309 4.63 $218,742 9,380 4.29
FHLB advances 11,046 558 5.05 10,885 549 5.04
Other interest-bearing liabilities 3,471 146 4.21 1,815 50 2.75
-------- -------- ------ -------- -------- ------
Total interest-bearing liabilities 409,992 19,013 4.64 231,442 9,979 4.31
-------- ------ -------- ------
Non-interest-bearing liabilities 9,753 8,688
Total liabilities 419,745 240,130
Stockholders' equity 46,058 53,030
-------- --------
Total liabilities and retained income $465,803 $293,160
======== ========
Net interest income $ 17,852 $ 13,150
======== ========
Interest rate spread (2) 3.73% 3.95%
====== ======
Net yield on interest-earning assets (3) 4.05% 4.69%
====== ======
Ratio of average interest-earning assets
to average interest bearing liabilities 107.47% 121.04%
====== ======
<CAPTION>
Year Ended September 30,
--------------------------------
1998
--------------------------------
Average
Average Yield/
Balance Interest Cost
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $205,587 $ 18,888 9.19%
Investment securities 4,410 311 7.05
Mortgage-backed securities 31,565 2,290 7.25
Other Interest-earning assets 8,570 378 4.41
-------- -------- ------
Total interest-earning assets 250,132 21,867 8.74
-------- ------
Non-interest-earning assets 11,278
--------
Total assets $261,410
========
Interest-bearing liabilities:
Deposits $193,061 9,096 4.71
FHLB advances 1,071 64 5.98
Other interest-bearing liabilities 1,944 80 4.12
-------- -------- ------
Total interest-bearing liabilities 196,076 9,240 4.71
-------- ------
Non-interest-bearing liabilities 7,445
--------
Total liabilities 203,521
Stockholders' equity 57,889
--------
Total liabilities and retained income $261,410
========
Net interest income $ 12,627
========
Interest rate spread (2) 4.03%
======
Net yield on interest-earning assets (3) 5.05%
======
Ratio of average interest-earning assets
to average interest bearing liabilities 127.57%
======
</TABLE>
---------------------------------
(1) Includes classified loans.
(2) Represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
(3) Represents the net interest income divided by average interest-earning
assets.
7
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and the interest expense on interest-bearing
liabilities. Net interest income is affected by both the difference between
rates of interest earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and the relative volume of
interest-earning assets and interest-bearing liabilities.
Table 3 above sets forth certain information relating to the Bank's
statements of financial condition and statements of operations for the three
years ended September 30, 2000, 1999, and 1998 and reflects the yield on average
interest-earning assets and the cost of average interest-bearing liabilities for
the periods indicated. Average balances are derived from month end balances. The
Bank does not believe that the use of month end balances instead of average
daily balances has caused any material difference in the information presented.
RESULTS OF OPERATIONS
Comparison of Financial Condition at September 30, 2000 and 1999
Total assets increased to $559.7 million at September 30, 2000, from $292.3
million at September 30, 1999, reflecting the Green Street and Triangle
acquisitions.
Loans receivable (net of loan loss reserves and deferred loan fees)
increased 72.7% to $366.2 million at September 30, 2000, from $212.1 million at
September 30, 1999, reflecting the Green Street and Triangle acquisitions.
In recent years, the Bank has increased its emphasis on the origination of
both secured and unsecured commercial and consumer loans in order to take
advantage of generally higher yields as well as shorter terms to maturity. Prior
thereto, a majority of the loans originated by the Bank were mortgage loans
secured by single-family residences. From time to time, the Bank sells selected
mortgage loans in the secondary market in order to reduce interest rate and
credit risk, while retaining servicing to generate additional fee income.
Commercial loans increased 55.3% to $137.9 million at September 30, 2000,
from $88.8 million at September 30, 1999. Consumer loans increased 47.5% to
$75.0 million at September 30, 2000 from $50.8 million at September 30, 1999.
This growth reflects the Green Street and Triangle acquisitions and the Bank's
emphasis of structuring itself as a commercial banking entity. Residential real
estate mortgage loans increased 109.1% to $159.3 million at September 30, 2000,
from $76.2 million at September 30, 1999, reflecting the Green Street
acquisition and the Bank's origination volume. During fiscal 2000, the Bank
originated $54.1 million of residential real estate mortgage loans, compared to
$91.2 million during fiscal 1999. The Bank sold or exchanged $62.8 million of
real estate loans during fiscal 1999, compared to $86.1 million during fiscal
1999. Loans serviced for others were $300.0 million at September 30, 2000
compared to $275.3 million at September 30, 1999. Commercial and consumer loan
originations increased to $122.4 million during fiscal 2000, from $86.3 million
during fiscal 1999.
Investment securities and mortgage-backed securities increased to $153.7
million at September 30, 2000, from $59.4 million at September 30, 1999. In
order to support its growth, the Bank has implemented various investment
strategies to increase its required regulatory levels. During the year ended
September 30, 2000, the Bank increased its investment securities portfolio
(primarily U. S. Government and Agency securities) to $45.2 million, compared to
$3.0 million at September 30, 1999. In conjunction with an investment strategy
to increase its regulatory liquidity levels, during this period the Bank
securitized certain mortgage loans previously held for sale into mortgage-backed
securities, resulting in a mortgage-backed securities portfolio of $108.5
million at September 30, 2000, compared to $56.3 million at September 30, 1999.
Deposits increased to $471.9 million at September 30, 2000, from $234.6
million at September 30, 1999, also reflecting the Green Street and Triangle
acquisitions and the Bank's annual internal growth. Certificates of deposit
increased 95.1% to $339.3 million at September 30, 2000, from $173.9 million at
September 30, 1999. The Bank continues to emphasize attracting lower cost core
deposits, as checking accounts increased 106.6% to $110.6 million at September
30, 2000, from $53.5 million at September 30, 1999. Total borrowings increased
to $30.4 million at September 30, 2000, from $1.3 million at September 30, 1999.
Due to the volatility of short-term interest rates during fiscal 2000, the Bank
relied more on FHLB advances as a funding source to help control its exposure to
interest rate risk, and to support its operations and liquidity requirements.
8
<PAGE>
Stockholders' equity was $44.8 million at September 30, 2000, compared to
$48.8 million at September 30, 1999. The ratio of equity to total assets
decreased to 8.0% at September 30, 2000, from 16.7% at September 30, 1999,
reflecting the leveraging effect of the Green Street and Triangle acquisitions.
During the years ended September 30, 2000 and 1999, the Company declared four
quarterly cash dividends each, totaling $0.46 and $0.31 per share respectively.
These cash dividend payments reflect dividend payout ratios of basic earnings of
40.4% and 34.1% respectively. Future quarterly dividends will be determined at
the discretion of the Board of Directors based upon earnings, the capital and
financial condition of the Company and general economic conditions.
The Company's note receivable from the Employee Stock Ownership Plan
("ESOP") declined to $1.8 million at September 30, 2000, from $2.3 million at
September 30, 1999, reflecting the release of 44,492 shares to ESOP
participants. The note is reported as a reduction of stockholders' equity and
requires an annual $349,000 principal payment plus interest at prime plus one
percent. Although shares of common stock of the Company secure the ESOP note,
the Bank expects to make discretionary contributions to the ESOP in amounts at
least equal to the required principal and interest payments. At September 30,
2000, 181,858 unallocated shares remained in the ESOP, compared to 226,350 at
September 30, 1999.
During fiscal 2000, the Management Recognition Plan ("MRP"), a deferred
stock awards plan established for the benefit of directors and officers of the
Company and the Bank, was terminated upon the distribution of all remaining plan
shares. On April 8, 2000, the remaining 58,187 of awarded plan shares were
vested and distributed to participants. At September 30, 1999, the 58,187 of
awarded shares were held in trust for future vesting, and reported as a
reduction in stockholders' equity as deferred stock awards.
Pursuant to stock repurchase programs adopted by the Company during fiscal
years 2000 and 1999, the Company acquired 390,066 and 595,301 shares of its
common stock, respectively, through open market and private purchases. Shares
acquired under the repurchase program are being held as treasury stock, at cost.
At September 30, 2000, treasury shares were 1,203,569 totaling $23.0 million,
compared to 813,503 shares totaling $15.8 million at September 30, 1999. The
Company believes the repurchase of its outstanding common stock will increase
per share earnings and book value, provide an attractive investment for the
Company's excess funds and decrease the potential dilutive effect caused by the
future exercise of stock options.
Comparison of Operating Results for the Years Ended September 30, 2000 and 1999
Net Income. Net income increased to $3.5 million for the year ended
September 30, 2000, from $3.2 million for the year ended September 30, 1999.
Basic and diluted earnings per share increased to $1.14 and $1.13 per share,
respectively, for the year ended September 30, 2000, compared to $0.91 per
share, respectively, for the year ended September 30, 1999. The average number
of basic shares outstanding (net of unearned ESOP, MRP and treasury shares) was
3,115,768 and 3,530,811, respectively, for the years ended September 30, 2000
and 1999, reflecting the impact of the stock repurchase program.
Interest Income. Interest income increased 59.4% to $36.9 million for
fiscal 2000, from $23.1 million for fiscal 1999. The increase in interest income
on loans and investments during 2000 results principally from the growth in
volume of average interest-earning assets attributable to the Green Street and
Triangle acquisitions. The average balance of interest-earning assets increased
57.2% to $440.6 million for fiscal 2000, from $280.1 million for fiscal 1999.
The yield on average interest-earning assets increased to 8.4% for 2000, from
8.3% for 1999, reflecting the general increase in short-term interest rates
during 2000.
Interest Expense. Interest expense increased 90.5% to $19.0 million for
fiscal 2000, from $10.0 million for fiscal 1999. The increase in interest
expense on deposits and borrowings during 2000 results principally from the
increased volume of average interest-bearing liabilities attributable to the
Green Street Triangle acquisitions and rising short-term interest rates. The
average balance of interest-bearing liabilities increased 77.1% to $410.0
million for fiscal 2000, from $231.4 million for fiscal 1999. The cost of
interest-bearing liabilities increased to 4.6% for 2000, from 4.3% for 1999,
reflecting the general increase in short-term interest rates during 2000.
Net Interest Income. Net interest income increased 35.8% to $17.9 million
for fiscal 2000, from $13.2 million for fiscal 1999. The increase in net
interest income is primarily due to the combination of the increases in both the
volume of average interest-earning assets and interest-bearing liabilities,
offset by the general increase in short-term interest rates during 2000, as
discussed above. The net yield on interest-earning assets declined to 4.1% for
fiscal 2000,
9
<PAGE>
from 4.7% for fiscal 1999. See Table 2 (Rate/Volume Analysis) and Table 3
(Yield/Cost Analysis) above for additional information on interest income,
interest expense, net interest income, average balances and yield/cost ratios.
Provision for Loan Losses. The Bank maintains an allowance for losses on
loans based upon management's evaluation of risks in the loan portfolio, the
Bank's past loan loss experience, and current and expected future economic
conditions. The Bank provided $977,000 for loan losses during fiscal 2000,
compared to $120,000 for fiscal 1999. These provisions were necessary to support
the volume of loans acquired in the Green Street and Triangle transactions, and
the risks associated with the emphasis placed upon commercial and consumer
lending. The allowance for loan losses was $5.2 million at September 30, 2000,
compared to $3.3 million at September 30, 1999, which the Bank believes is
adequate to absorb probable losses in its loan portfolio. The ratio of the
allowance for loan losses to total loans, net of loans-in-process and deferred
loan fees, was 1.4% at September 30, 2000, compared to 1.5% at September 30,
1999.
The Bank uses a systematic approach in determining the adequacy of its loan
loss allowance and the necessary provision for loan losses, through a
classification of assets program, whereby the loan portfolio is reviewed
generally, and delinquent loans are analyzed individually, on a quarterly basis.
Consideration is given to the loan status, payment history, repayment ability,
probability of repayment, and loan-to-value percentages. As a result of this
review and analysis, loans are classified in appropriate categories applicable
to their circumstances. After reviewing current economic conditions, changes in
delinquency status, and actual loan losses incurred by the Bank, management
establishes an appropriate reserve percentage applicable to each category of
assets, and provision for loan losses is recorded when necessary to bring the
allowance to a level consistent with this analysis. The ratio of classified
loans to total loans was 1.4% at September 30, 2000, compared to .3% at
September 30, 1999.
Other Income. Other income increased 19.4% to $3.4 million for fiscal 2000,
from $2.9 million for fiscal 1999. Other income consists of fees and service
charges earned on loans, service charges on deposit accounts, gains from sales
of loans, and other miscellaneous income. Loan fees and service charges
increased 48.8% to $1.9 million for fiscal 2000, from $1.3 million for fiscal
1999, reflecting the impact of the Green Street and Triangle acquisitions on the
growth of the commercial and consumer loan portfolios and checking accounts.
Gains from sales of loans and mortgage-backed securities declined to $2,000 for
fiscal 2000 from $566,000 for fiscal 1999. The volume of loans and
mortgage-backed securities sold or exchanged during 2000 was $62.8 million,
compared to $86.1 million for 1999, reflecting less sales or exchanges due to
the competitive pricing in the secondary mortgage market. Servicing fee income
on loans serviced for others increased to $771,000 for 2000 from $762,000 for
1999, as loans serviced for others increased to $300.0 million at September 30,
2000, from $275.3 million at September 30, 1999.
General and Administrative Expenses. General and administrative expenses
increased 37.5% to $14.1 million for fiscal 2000, from $10.3 million in fiscal
1999. The Company's efficiency ratio (noninterest expenses divided by net
interest income plus noninterest income) was 66.2% for fiscal 2000, compared to
63.9% for fiscal 1999. The largest single component of these expenses,
compensation and fringe benefits, increased 24.3% to $8.6 million for fiscal
2000, from $6.9 million for fiscal 1999. This increase is principally
attributable to a 50.0% growth in personnel resulting from the Green Street and
Triangle acquisitions, as full time equivalent employees increased to 198 at
September 30, 2000 from 132 at September 30, 1999.
Other noninterest expenses including deposit insurance premiums, premises
and equipment, repairs, printing, advertising and office expenses sustained
proportionate incremental increases from 1999 to 2000, supporting the 91.5%
growth in assets from September 30, 1999 to September 30, 2000. During fiscal
2000, the Bank recognized certain of these noninterest expenses in connection
with the completion of the Green Street and Triangle acquisitions, as well as
completing its name change to First South Bank.
Income Taxes. The provision for income taxes increased to $2.7 million for
fiscal 2000 from $2.5 million for fiscal 1999. The increase in provision for
income taxes is the result of the increased pretax earnings of $6.2 million for
fiscal 2000, from $5.6 million for fiscal 1999 and the effective income tax
rates for each period.
Comparison of Financial Condition at September 30, 1999 and 1998
Total assets increased 3.8% to $292.3 million at September 30, 1999, from
$281.5 million at September 30, 1998. Loans receivable (net of loans-in-process,
deferred fees and loan loss reserves) decreased 5.7%, to $212.1 million at
September 30, 1999 from $225.0 million at September 30, 1998. Investment and
mortgage-backed securities increased 97.0%, to $59.4 million at September 30,
1999, from $30.1 million at September 30, 1998.
10
<PAGE>
Commercial loans increased 21.1% to $88.8 million at September 30, 1999,
from $73.3 million at September 30, 1998, and consumer loans increased 5.1% to
$50.8 million at September 30, 1999, from $48.4 million at September 30, 1998.
Residential real estate mortgage loans decreased 28.9% to $76.2 million at
September 30, 1999, from $107.3 million at September 30, 1998. During fiscal
1999, the Bank originated $91.2 million of residential real estate mortgage
loans, compared to $95.7 million during fiscal 1998. The Bank sold and exchanged
$86.1 million of real estate loans during fiscal 1999, compared to $54.1 million
during fiscal 1998. Loans serviced for others were $275.3 million at September
30, 1999, compared to $250.2 million at September 30, 1998. Commercial and
consumer loan originations increased to $86.3 million during fiscal 1999, from
$77.4 million during fiscal 1998.
Deposits increased 14.7%, to $234.6 million at September 30, 1999, from
$204.6 million at September 30, 1998. Certificates of deposits increased 11.9%
to $173.9 million at September 30, 1999, from $155.4 million at September 30,
1998, and checking accounts increased 24.8% to $53.5 million at September 30,
1999, from $42.9 million at September 30, 1998. Total borrowings were $1.3
million at September 30, 1999, compared to $11.9 million at September 30, 1998,
supporting the Bank's liquidity requirements and banking operations during the
periods.
Stockholders' equity was $48.8 million at September 30, 1999, compared to
$56.7 million at September 30, 1998. The ratio of equity to total assets at
September 30, 1999 declined to 16.7% from 19.9% at September 30, 1998. During
the year ended September 30, 1999, the Company declared four quarterly cash
dividends totaling $1.1 million, reflecting a dividend payout ratio of 34.1%.
The Company's note receivable from the ESOP declined to $2.3 million at
September 30, 1999, from $2.7 million at September 30, 1998, reflecting the
release of 42,359 shares to ESOP participants. At September 30, 1999, 226,350
unallocated shares remained in the ESOP. During the year ended September 30,
1999, 58,197 of the shares awarded to MRP participants were vested, and the
remaining 58,187 of the awarded shares are being held in trust for future
vesting.
Pursuant to the stock repurchase program, during fiscal years 1999 and 1998
the Company acquired 595,301 and 218,202 shares of its common stock,
respectively, and are held as treasury stock. At September 30, 1999, treasury
shares were 813,503 totaling $15.8 million, compared to 218,202 shares totaling
$4.9 million at September 30, 1998.
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
Net Income. Net income increased to $3.2 million for the year ended
September 30, 1999, from $3.1 million for the year ended September 30, 1998.
Basic and diluted earnings per share increased 13.8% to $0.91 per share for the
year ended September 30, 1999, compared to $0.80 per share for the year ended
September 30, 1998. The average shares outstanding (net unearned ESOP, MRP and
treasury shares) was 3,530,811 and 3,876,813, respectively, for the years ended
September 30, 1999 and 1998.
Interest Income. Interest income increased 5.8% to $23.1 million for fiscal
1999, from $21.9 million for fiscal 1998. The increase in interest income on
loans and investments during 1999 results principally from the increased volume
of average interest-earning assets. The average balance of interest-earning
assets increased 12.0% to $280.1 million for fiscal 1999, from $250.1 million
for fiscal 1998. The yield on average interest-earning assets declined to 8.3%
for 1999, from 8.7% for 1998, reflecting the general decline in interest rates
during 1999.
Interest Expense. Interest expense increased 8.0% to $9.9 million for
fiscal 1999, from $9.2 million for fiscal 1998. This also resulted principally
from the increased volume of average interest-bearing liabilities. The average
balance of interest-bearing liabilities increased 18.0% to $231.4 million for
fiscal 1999, from $196.1 million for fiscal 1998. The cost of interest-bearing
liabilities declined to 4.3% for 1999, from 4.7% for 1998, also reflecting the
general decline in interest rates during 1999.
Net Interest Income. Net interest income increased 4.1% to $13.2 million
for the year ended September 30, 1999, from $12.6 million for the year ended
September 30, 1998.
Provision for Loan Losses. The Bank provided $120,000 and $310,000 for loan
losses during the years ended September 30, 1999 and 1998, respectively. The
allowance for loan losses was $3.3 million at September 30, 1999, compared to
$3.4 million at September 30, 1998. The ratio of the allowance for loan losses
to total loans was 1.5% at September 30, 1999 and 1998. The ratio of classified
loans to total loans was 0.4% at September 30, 1999 and 1998.
11
<PAGE>
Other Income. Other income increased 8.6% to $2.9 million for fiscal 1999,
from $2.6 million for fiscal 1998. Other income consists of fees and service
charges earned on loans, service charges on deposit accounts, gains from sales
of loans, and other miscellaneous income. Loan fees and service charges
increased 28.5% to $1.3 million for fiscal 1999 from $985,000 for fiscal 1998,
reflecting the growth in the loan portfolio and checking accounts during 1999.
Gains from sales of loans and mortgage-backed securities declined to $560,000
for fiscal 1999, from $796,000 for fiscal 1998. The volume of loans and
mortgage-backed securities sold or exchanged during 1999 was $86.1 million,
compared to $54.1 million for 1998. Servicing fee income on loans serviced for
others was $762,000 for 1999, compared to $637,000 for 1998, as loans serviced
for others increased 9.2% to $275.3 million at September 30, 1999 from $250.2
million at September 30, 1998.
General and Administrative Expenses. General and administrative expenses
increased 3.2% to $10.3 million for fiscal 1999, from $9.9 million in fiscal
1997. The Company's efficiency ratio improved to 63.9% for fiscal 1999, from
65.1% for fiscal 1998.
The largest single component of these expenses, compensation and fringe
benefits, declined 4.4% to $6.9 million for fiscal 1999, from $7.2 million for
fiscal 1998. During fiscal 1998, the benefits expense for the MRP plan declined
29.4% to $1.3 million, from $1.9million for fiscal 1998. The Bank recorded
$854,000 in benefits expense for the ESOP in fiscal 1999, compared to $1.9
million for fiscal 1998. Other noninterest expenses including deposit insurance
premiums, premises and equipment, advertising and office expenses sustained
marginal incremental increases from 1998 to 1999, supporting a 17.3% growth in
assets from September 30, 1997 to September 30, 1999.
Income Taxes. The provision for income taxes increased to $2.5 million for
fiscal 1999 from $1.9 million for fiscal 1998. The increase in provision for
income taxes is the result of increased pretax earnings to $5.6 million for
fiscal 1999, from $5.0 million for fiscal 1998 and the effective income tax
rates then in effect.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles. They
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary. As a
result, interest rates have a greater impact on the Bank'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.
YEAR 2000
Neither the Company nor the Bank 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 review the effects the century date change could have on all current
operating systems and to assess the potential risks associated with the Y2K
issue. A formal Y2K strategic plan and contingency plan were developed to insure
those problems and disruptions related to the Y2K issue were minimized.
A national third party service bureau, Bisys, Inc. ("Bisys") provides all
material data processing functions of the Bank that could have been impacted by
Y2K. Bisys dedicated significant resources in assuring its systems are 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 and
business resumption contingency plans, 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 resulted in
uninterrupted operations related to Y2K.
12
<PAGE>
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 and no major system or software needs replacing due to
Y2K. 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
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 states that the
disclosure of forward looking information is desirable for investors and
encourages such disclosure by providing a safe harbor for forward looking
statements by corporate management. This Annual Report, including the Letter to
Stockholders and Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward looking statements that involve risk and
uncertainty. In order to comply with the terms of the safe harbor, the Company
notes that a variety of risks and uncertainties could cause its actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. There are
risks and uncertainties that may affect the operations, performance,
development, growth projections and results of the Company's business. They
include, but are not limited to, economic growth, interest rate movements,
timely development of technology enhancements for products, services and
operating systems, the impact of competitive products, services and pricing,
customer requirements, regulatory changes and similar matters. Readers of this
report are cautioned not to place undue reliance on forward looking statements
that are subject to influence by these risk factors and unanticipated events.
Accordingly, actual results may differ materially from management's
expectations.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
First South Bancorp, Inc.
Washington, North Carolina
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of First South Bancorp, Inc. and Subsidiary (the "Company") at
September 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
October 27, 2000
Raleigh, North Carolina
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 2000 AND 1999
-------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 13,124,356 $ 5,375,856
Interest-bearing deposits in financial institutions 1,617,084 4,034,076
Investment securities - available for sale 45,186,391 3,024,531
Mortgage-backed securities - available for sale 108,518,700 56,325,868
Loans receivable, net:
Held for sale 32,443,106 13,481,714
Held for investment 333,766,510 198,572,216
Premises and equipment, net 7,022,819 3,575,974
Deferred income taxes 2,882,886 2,314,930
Real estate owned 220,004 591,144
Federal Home Loan Bank of Atlanta stock, at cost
which approximates market 2,651,300 1,460,200
Accrued interest receivable 3,784,177 2,022,055
Intangible assets 5,044,421 209,090
Other assets 2,060,842 1,317,817
Note receivable 1,396,051 --
------------- -------------
Total assets $ 559,718,647 $ 292,305,471
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 110,592,166 $ 53,525,231
Savings 22,069,124 7,220,337
Large denomination certificates of deposit 56,336,303 31,399,212
Other time 282,944,074 142,473,215
------------- -------------
Total deposits 471,941,667 234,617,995
Borrowed money 30,387,551 1,318,340
Other liabilities 12,554,694 7,606,103
------------- -------------
Total liabilities 514,883,912 243,542,438
Commitments and contingencies (Notes 10 and 14)
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 44,583,318 44,232,010
Retained earnings, substantially restricted 26,327,863 24,197,767
Treasury stock at cost, 1,203,569 and 813,503 shares at September 30,
2000 and 1999, respectively (23,039,101) (15,770,962)
Unearned ESOP shares, 181,858 and 226,350 shares at September 30,
2000 and 1999, respectively (1,818,578) (2,263,500)
Deferred stock awards -- (783,392)
Accumulated other comprehensive (loss), net (1,262,407) (892,530)
------------- -------------
Total stockholders' equity 44,834,735 48,763,033
------------- -------------
Total liabilities and stockholders' equity $ 559,718,647 $ 292,305,471
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
----------------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 28,491,128 $ 19,261,766 $ 18,888,253
Interest and dividends on investments and deposits 8,373,756 3,867,259 2,978,655
------------ ------------ ------------
Total interest income 36,864,884 23,129,025 21,866,908
------------ ------------ ------------
Interest expense:
Interest on deposits 18,309,033 9,379,641 9,096,290
Interest on borrowings 703,647 599,422 143,342
------------ ------------ ------------
Total interest expense 19,012,680 9,979,063 9,239,632
------------ ------------ ------------
Net interest income before provision for loan losses 17,852,204 13,149,962 12,627,276
Provision for loan losses 977,000 120,000 310,000
------------ ------------ ------------
Net interest income 16,875,204 13,029,962 12,317,276
------------ ------------ ------------
Other income:
Loan fees and service charges 1,883,646 1,265,974 985,439
Loan servicing fees 771,093 762,125 637,480
Gain on sale of real estate, net 119,331 61,027 28,478
Gain on sale of mortgage loans and mortgage-backed
securities 1,706 560,469 796,004
Other income 656,363 224,118 198,647
------------ ------------ ------------
Total other income 3,432,139 2,873,713 2,646,048
------------ ------------ ------------
General and administrative expenses:
Compensation and fringe benefits 8,602,946 6,924,085 7,239,911
Federal insurance premiums 95,382 123,431 113,646
Premises and equipment 1,299,158 501,270 356,550
Advertising 204,735 137,806 134,978
Payroll and other taxes 709,909 520,656 417,140
Other 3,188,355 2,047,568 1,677,841
------------ ------------ ------------
Total general and administrative expenses 14,100,485 10,254,816 9,940,066
------------ ------------ ------------
Income before income taxes 6,206,858 5,648,859 5,023,258
Income taxes 2,657,826 2,452,713 1,899,900
------------ ------------ ------------
NET INCOME 3,549,032 3,196,146 3,123,358
Other comprehensive (loss) income, net (369,877) (1,378,776) 185,928
------------ ------------ ------------
Comprehensive income $ 3,179,155 $ 1,817,370 $ 3,309,286
============ ============ ============
Net income per common share:
Basic $ 1.14 $ .91 $ .80
============ ============ ============
Diluted $ 1.13 $ .91 $ .80
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
------------------------------------------------------------------------------------------------------------------------
RETAINED
ADDITIONAL EARNINGS, UNEARNED
COMMON PAID-IN SUBSTANTIALLY TREASURY ESOP
STOCK CAPITAL RESTRICTED STOCK SHARES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1997 $ 29,095 $ 42,654,054 $ 20,041,635 $ -- $ (3,118,984)
Three for two stock split effected in the
form of a 50% stock dividend 14,545 -- (14,545) -- --
Net income -- -- 3,123,358 -- --
Fractional shares paid -- -- (4,652) -- --
Other comprehensive income, net of taxes -- -- -- -- --
Acquisition of shares for MRP -- -- -- -- --
Change in market value of deferred stock -- 753,959 -- -- --
MRP amortization -- -- -- -- --
Acquisition of treasury shares -- -- -- (4,895,754) --
Dividends ($.27 per share) -- -- (1,054,553) -- --
Release of ESOP shares -- 393,974 -- -- 431,891
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 43,640 43,801,987 22,091,243 (4,895,754) (2,687,093)
Net income -- -- 3,196,146 -- --
Other comprehensive loss, net of taxes -- -- -- -- --
MRP amortization -- -- -- -- --
Acquisition of treasury shares -- -- -- (10,875,208) --
Dividends ($.31 per share) -- -- (1,089,622) -- --
Release of ESOP shares -- 430,023 -- -- 423,593
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 43,640 44,232,010 24,197,767 (15,770,962) (2,263,500)
Net income -- -- 3,549,032 -- --
Other comprehensive loss, net of taxes -- -- -- -- --
MRP amortization -- (57,700) -- -- --
Acquisition of treasury shares -- -- -- (7,268,139) --
Dividends ($.46 per share) -- -- (1,418,936) -- --
Release of ESOP shares -- 409,008 -- -- 444,922
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $ 43,640 $ 44,583,318 $ 26,327,863 $(23,039,101) $ (1,818,578)
============ ============ ============ ============ ============
<CAPTION>
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE
STOCK INCOME (LOSS),
AWARDS NET TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1997 $ (2,050,531) $ 300,318 $ 57,855,587
Three for two stock split effected in the
form of a 50% stock dividend -- -- --
Net income -- -- 3,123,358
Fractional shares paid -- -- (4,652)
Other comprehensive income, net of taxes -- 185,928 185,928
Acquisition of shares for MRP (1,224,768) -- (1,224,768)
Change in market value of deferred stock (753,959) -- --
MRP amortization 1,902,959 -- 1,902,959
Acquisition of treasury shares -- -- (4,895,754)
Dividends ($.27 per share) -- -- (1,054,553)
Release of ESOP shares -- -- 825,865
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 (2,126,299) 486,246 56,713,970
Net income -- -- 3,196,146
Other comprehensive loss, net of taxes -- (1,378,776) (1,378,776)
MRP amortization 1,342,907 -- 1,342,907
Acquisition of treasury shares -- -- (10,875,208)
Dividends ($.31 per share) -- -- (1,089,622)
Release of ESOP shares -- -- 853,616
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 (783,392) (892,530) 48,763,033
Net income -- -- 3,549,032
Other comprehensive loss, net of taxes -- (369,877) (369,877)
MRP amortization 783,392 -- 725,692
Acquisition of treasury shares -- -- (7,268,139)
Dividends ($.46 per share) -- -- (1,418,936)
Release of ESOP shares -- -- 853,930
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $ -- $ (1,262,407) $ 44,834,735
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Operating activities:
Net income $ 3,549,032 $ 3,196,146 $ 3,123,358
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for loan losses 977,000 120,000 310,000
Depreciation 421,233 289,150 172,844
ESOP compensation 853,930 853,616 825,865
MRP compensation 725,692 1,342,907 1,902,959
Accretion of discounts on securities 692,235 371 372
Provision for (benefit from) deferred income taxes (321,370) (825,748) 132,438
Gain on disposal of premises and equipment and
real estate acquired in settlement of loans (119,331) (64,373) (34,259)
Gain on sale of mortgage loans and mortgage-
backed securities (1,706) (560,469) (796,004)
Originations of loans held for sale, net (46,229,695) (60,777,625) (66,892,933)
Proceeds from sale of loans held for sale -- 40,597,010 36,106,871
Other operating activities 2,415,094 (337,366) 3,327,998
------------- ------------- -------------
Net cash used in operating activities (37,037,886) (16,166,381) (21,820,491)
------------- ------------- -------------
Investing activities:
Proceeds from maturities of investment securities
available for sale 3,000,000 -- --
Purchases of investment securities (46,050,000) -- --
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 10,175,821 14,141,098 16,314,270
Originations of loans held for investment, net
of principal repayments (20,480,237) (12,863,836) (14,631,404)
Proceeds from disposal of premises and equipment
and real estate acquired in settlement of loans 911,869 655,821 441,237
Purchases of FHLB stock (43,600) (96,400) (76,300)
Purchases of premises and equipment (1,614,712) (312,919) (916,865)
Repayment of note receivable 3,949 -- --
Net cash to purchase Green Street Financial Corp. (26,530,907) -- --
Acquisition of Triangle Bancorp, Inc. branches 113,760,993 -- --
------------- ------------- -------------
Net cash provided by investing activities 33,133,176 1,523,764 1,130,938
------------- ------------- -------------
Financing activities:
Net (decrease) increase in deposit accounts (8,461,007) 29,982,910 29,519,297
Proceeds from FHLB borrowings 125,200,000 61,000,000 46,000,000
Repayments of FHLB borrowings (101,200,000) (70,500,000) (47,500,000)
Purchase of treasury shares (7,268,139) (10,875,208) (4,895,754)
MRP funding -- -- (1,224,768)
Cash paid for fractional shares -- -- (4,652)
Cash dividends paid (1,418,936) (1,089,622) (1,045,908)
Net change in escrow accounts (4,442) (362,793) 269,129
Net change in repurchase agreements 2,388,742 (1,114,579) 811,799
------------- ------------- -------------
Net cash provided by financing activities 9,236,218 7,040,708 21,929,143
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 5,331,508 (7,601,909) 1,239,590
Cash and cash equivalents, beginning of year 9,409,932 17,011,841 15,772,251
------------- ------------- -------------
Cash and cash equivalents, end of year $ 14,741,440 $ 9,409,932 $ 17,011,841
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
First South Bancorp, Inc. (the "Company") is a bank holding company
incorporated under the laws of the State of Virginia. First South Bank (the
"Bank"), the wholly owned subsidiary of the Company, is organized and
incorporated under the laws of the state of North Carolina. The Bank is
regulated by the Federal Deposit Insurance Corporation and the North
Carolina Office of the Commissioner of Banks.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company and the Bank follow
accounting principles generally accepted in the United States of America
and general practices within the financial services industry as summarized
below.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits (with remaining
maturities of ninety days or less at time of purchase) at other financial
institutions and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments in certain securities are classified into three categories and
accounted for as follows: (1) debt securities that the entity has the
positive intent and the ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) 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; (3) debt
and equity securities not classified as either held-to-maturity securities
or trading securities are classified as available for sale securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as accumulated other comprehensive income, a separate
component of equity. As of September 30, 2000, the Bank has classified all
investments as available for sale.
Premiums and discounts on debt securities are recognized in interest income
using the interest method over the period to maturity.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans. Premiums and discounts are amortized using
the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.
Gains and losses on the sale of securities are determined by using the
specific identification method.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable held for investment are stated at the amount of unpaid
principal, reduced by an allowance for loan losses and net deferred
origination fees. Interest on loans is accrued based on the principal
amount outstanding and is recognized using the interest method. The accrual
of interest is discontinued, and accrued but unpaid interest is reversed
when, in management's judgment, it is determined that the collectibility of
interest, but not necessarily principal, is doubtful. Generally, this
occurs when payment is delinquent in excess of ninety days.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
Loan origination fees, as well as certain direct loan origination costs,
are deferred. Such costs and fees are recognized as an adjustment to yield
over the contractual lives of the related loans utilizing the interest
method.
Commitment fees to originate or purchase loans are deferred, and if the
commitment is exercised, recognized over the life of the loan as an
adjustment of yield. If the commitment expires unexercised, commitment fees
are recognized in income upon expiration of the commitment. Fees for
originating loans for other financial institutions are recognized as loan
fee income.
A loan is considered impaired, based on current information and events, if
it is probable that the Bank will be unable to collect the scheduled
payments of principal or 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 September 30, 2000 and 1999, and during the
three years ended September 30, 2000, there were no individual loans
material to the consolidated financial statements which were defined as
impaired.
The Bank uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include 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 increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions. While
management believes that it has established the allowance in accordance
with accounting principles generally accepted in the United States of
America and has taken into account the views of its regulators and the
current economic environment, there can be no assurance that in the future
the Bank's regulators or risks in its portfolio will not require further
increases in the allowance.
LOANS HELD FOR SALE
Loans originated and intended for sale are carried at the lower of cost or
aggregate estimated market value. Net unrealized losses are recognized in a
valuation allowance by charges to income. Gains and losses on sales of
whole or participating interests in real estate loans are recognized at the
time of sale and are determined by the difference between net sales
proceeds and the Bank's basis of the loans sold, adjusted for the
recognition of any servicing assets retained.
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
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
there is a sustained period of repayment performance (generally a minimum
of six months) by the borrower, in accordance with the contractual terms of
interest and principal.
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 principal outstanding,
except in the case of loans with scheduled amortization 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 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.
MORTGAGE SERVICING RIGHTS
The Company accounts for its mortgage servicing assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Impairments of servicing assets are evaluated through an
assessment of the fair value of those assets using a disaggregated,
discounted cash flows method under which the assets are disaggregated into
various strata, based on predominant risk characteristics. The net carrying
value of each stratum, based on predominant risk characteristics, is
compared to its discounted estimated future net cash flows to determine
whether adjustments should be made to carrying values or amortization
schedules. Impairment of a servicing asset is recognized through a
valuation allowance and a charge to current-period earnings if it is
considered to be temporary, or, through a direct write-down of the asset
and a charge to current-period earnings if it is considered other than
temporary. The predominant risk characteristics of the underlying loan that
are used to satisfy the servicing assets and liabilities for measurement
purposes generally include the (1) loan origination date, (2) loan rate,
(3) loan type and size and (4) loan maturity date.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the
straight-line and accelerated methods based on estimated service lives of
assets. Useful lives range from 10 to 40 years for substantially all
premises and from 3 to 20 years for equipment and fixtures.
REAL ESTATE OWNED
Assets acquired through loan foreclosure are recorded as real estate owned
("REO") at the lower of the estimated fair value of the property less
estimated costs to sell at the date of foreclosure or the carrying amount
of the loan plus unpaid accrued interest. The carrying amount is
subsequently reduced by additional allowances which are charged to earnings
if the estimated fair value declines below its initial value plus any
capitalized costs. Costs related to the improvement of the property are
capitalized, whereas costs related to holding the property are expensed.
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is required to invest in stock of the Federal Home Loan Bank of
Atlanta ("FHLB") in the amount of 1% of its outstanding home loans or 5% of
its outstanding advances from the FHLB, whichever is greater. At September
30, 2000 and 1999, respectively, the Bank owned 26,513 and 14,602 shares of
the FHLB's $100 par value capital stock.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and are being amortized
over ten years using the straight-line method.
INCOME TAXES
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes
will become payable or receivable. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts
in the financial statements that will result in taxable or deductible
amounts in future years. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
STOCK SPLIT
On July 16, 1998, the Company declared a three-for-two stock split, in the
form of a 50% stock dividend, payable August 19, 1998, to stockholders of
record on July 31, 1998. Stockholders received one additional share of
common stock for every two shares held on the record date. All prior period
share and per share data have been adjusted for the split.
RECLASSIFICATIONS
Certain items included in the 1999 financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications
have no effect on the net income or stockholders' equity previously
reported.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
October 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements.
As required by SFAS No. 130, prior year information has been modified to
conform with the new presentation. The Company's only components of other
comprehensive income relate to unrealized gains (losses) on available for
sale securities. Information concerning the Company's other comprehensive
income (loss) for the years ended September 30, 2000, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Unrealized (losses) gains on securities
available for sale $ (616,463) $(2,159,473) $ 578,471
Reclassification of net gains
recognized in net income -- (138,881) (272,724)
Income tax benefit (expense) relating to
unrealized gains (losses) on available
for sale securities 246,586 919,578 (119,819)
----------- ----------- -----------
Other comprehensive (loss) income, net $ (369,877) $(1,378,776) $ 185,928
=========== =========== ===========
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," on October 1, 1998. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be disclosed. The
adoption of SFAS No. 131 did not have a material effect on the Company's
financial statements, as management has determined that the Bank operates
in one business segment.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, effective with
the fiscal quarter beginning July 1, 2000. This statement 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 the 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying accounting principles generally accepted in the United States of
America to revenue recognition in financial statements. The SEC has
indicated that they intend to issue additional written guidance to further
supplement SAB 101. Based on the SEC's latest timeline for implementing SAB
101, the Company would be required to comply with the guidelines in the
fourth quarter of fiscal 2001. Adoption of SAB 101 is not expected to have
any material impact on the recognition, presentation, and disclosure of
revenue.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"),
providing new accounting rules for stock-based compensation under APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). FIN
44 does not change FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The new rules are significant and could result
in compensation expense in several situations in which no expense is
typically recorded under current practice. FIN 44 is generally effective
for transactions occurring after July 1, 2000; however, the accounting must
be applied prospectively to certain transactions consummated after December
15, 1998. The Company does not expect that FIN 44 will have a material
effect on its financial condition or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of
SFAS No. 125 without reconsideration. SFAS 140 requires a debtor to
reclassify financial assets pledged as collateral and report these assets
separately in the statement of financial position. It also requires a
secured party to disclose information, including fair value, about
collateral that it has accepted and is permitted by contract or custom to
sell or repledge. SFAS 140 includes specific disclosure requirements for
entities with securitized financial assets and entities that securitize
assets. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2000,
and is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The Company does not expect
that SFAS 140 will have a material effect on financial condition or results
of operation.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. SIGNIFICANT ACTIVITIES
On November 30, 1999, the Company consummated the acquisition of Green
Street Financial Corp. ("Green Street"), the parent holding company of Home
Federal Savings and Loan Association of Fayetteville, North Carolina ("Home
Federal"), with full service offices located in Fayetteville and Lumberton,
North Carolina. The acquisition was accounted for using the purchase method
of accounting for a cash purchase price of $59.2 million, representing
$15.25 per share of Green Street common stock.
Concurrently with the Green Street acquisition, the Company changed its
name to First South Bancorp, Inc.
The following table reflects the unaudited pro forma combined results of
operations, assuming the acquisition had occurred at the beginning of
fiscal 2000, 1999, and 1998:
2000 1999 1998
Net interest income $17,409,204 $16,235,962 $15,523,276
Net income 3,580,032 3,384,146 3,311,358
Net earnings per diluted share 1.14 .96 .85
In management's opinion, these unaudited pro forma amounts are not
necessarily indicative of what the actual combined results of operations
might have been if the acquisitions had been effective at the beginning of
fiscal 1998.
On February 18, 2000, the Bank completed the acquisition of six Triangle
Bank ("Triangle") branch offices located in Rocky Mount and Tarboro, North
Carolina. This acquisition was accounted for using the purchase method of
accounting and the Bank assumed the deposits of the six Triangle branch
offices for a premium of approximately 4.0% of the assumed deposits.
The fair value of assets, including goodwill, and liabilities assumed were
as follows (in thousands):
GREEN STREET TRIANGLE
Loans receivable $ 125,459,235 $ 26,162,062
Premises and equipment 1,245,957 2,407,409
Goodwill 287,832 4,898,652
Other assets 4,548,219 277,790
Deposits (101,648,952) (144,135,727)
Other liabilities (3,361,384) (3,371,179)
------------- -------------
Net cash paid (received) for acquisitions $ 26,530,907 $(113,760,993)
============= =============
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
Investment securities at September 30, 2000 and 1999, are classified as
available for sale according to management's intent and summarized as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------- MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
2000:
U.S. Treasury and Agency Notes $45,357,920 $ 230,003 $ 401,532 $45,186,391
=========== =========== =========== ===========
1999:
U.S. Treasury and Agency Notes $ 3,000,155 $ 24,376 $ -- $ 3,024,531
=========== =========== =========== ===========
</TABLE>
U.S. Treasury and Agency notes at September 30, 2000, are contractually
scheduled to mature as follows:
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
Due after one year through five years $30,678,308 $30,690,478
Due after five years through ten years 14,679,612 14,495,913
----------- -----------
$45,357,920 $45,186,391
=========== ===========
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 2000 and 1999, are classified
as available for sale according to management's intent and summarized as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED --------------------------- MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
2000:
FHLMC participation certificates,
maturing from years 2003 to 2030 $110,462,189 $ 166,593 $ (2,110,082) $108,518,700
============ ============ ============ ============
1999:
FHLMC participation certificates,
maturing from years 2003 to 2028 $ 57,848,801 $ 47,194 $ (1,570,127) $ 56,325,868
============ ============ ============ ============
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
Mortgage-backed securities at September 30, 2000, are contractually
scheduled to mature as follows:
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
Due after one year through five years $ 1,059,460 $ 1,050,783
Due after five years through ten years 3,510,053 3,463,869
Due after ten years 105,892,675 104,004,048
------------ ------------
$110,462,188 $108,518,700
============ ============
Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
Mortgage-backed securities with a carrying value of $0, $5,520,194 and
$9,016,982 were sold during the years ended September 30, 2000, 1999 and
1998, respectively. Gross realized gains on the sales of mortgage-backed
securities were $0, $138,881 and $272,724 during 2000, 1999 and 1998,
respectively. There were no gross realized losses during 2000, 1999 and
1998.
Mortgage-backed securities with an amortized cost of approximately
$5,437,740 and $2,119,192 were pledged as collateral for deposits from
public entities at September 30, 2000 and 1999, respectively.
5. LOANS RECEIVABLE
Loans receivable at September 30, 2000 and 1999, are summarized as follows:
2000 1999
Mortgage loans $ 159,328,698 $ 76,207,905
Consumer loans 75,001,720 50,848,210
Commercial loans 137,941,182 88,809,547
------------- -------------
Total 372,271,600 215,865,662
Less:
Allowance for loan losses (5,159,353) (3,297,256)
Deferred loan fees (902,631) (514,476)
------------- -------------
Loans receivable, net $ 366,209,616 $ 212,053,930
============= =============
The Bank has pledged its eligible real estate loans to collateralize actual
or potential borrowings from the Federal Home Loan Bank of Atlanta (See
Note 10).
During 2000, 1999 and 1998, the Bank exchanged loans with outstanding
principal balances of $62,789,209, $45,527,117 and $17,958,559,
respectively, with the Federal Home Loan Mortgage Corporation ("FHLMC") for
mortgage-backed securities of equal value.
The Bank originates mortgage loans for portfolio investment or sale in the
secondary market. During the period of origination, mortgage loans are
designated as either held for sale or for investment
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
purposes. Transfers of loans held for sale to the investment portfolio are
recorded at the lower of cost or market value on the transfer date. Loans
receivable held for sale at September 30, 2000 and 1999, are fixed rate
mortgage loans with an estimated market value of approximately $32,800,000
and $13,500,000, respectively.
Net gains on sales of loans receivable held for sale amounted to $1,706,
$303,324 and $523,280 during the years ended September 30, 2000, 1999 and
1998, respectively.
The changes in the allowance for loan losses for the years ended September
30, 2000, 1999 and 1998, are as follows:
2000 1999 1998
Balance at beginning of year $ 3,297,256 $ 3,364,588 $ 3,249,352
Provisions for loan losses 977,000 120,000 310,000
Balance transferred in acquisition 962,999 -- --
Loans charged off (157,092) (265,384) (202,543)
Recoveries 79,190 78,052 7,779
----------- ----------- -----------
Balance at end of year $ 5,159,353 $ 3,297,256 $ 3,364,588
=========== =========== ===========
The following is a summary of the principal balances of loans on nonaccrual
status and loans past due ninety days or more:
2000 1999
Loans contractually past due 90 days or more
and/or on nonaccrual status:
Residential $1,365,949 $ 486,714
Consumer and commercial 279,826 80,631
---------- ----------
$1,645,775 $ 567,345
========== ==========
During the years ended September 30, 2000, 1999 and 1998, interest income
of approximately $40,000, $9,000 and $18,000, respectively, was not
recorded related to loans accounted for on a nonaccrual basis.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
Premises and equipment at September 30, 2000 and 1999, consist of the
following:
2000 1999
Land $ 2,566,219 $ 1,081,952
Office buildings 5,009,762 2,499,579
Furniture, fixtures and equipment 2,566,530 1,840,334
Vehicles 290,031 241,061
----------- -----------
10,432,542 5,662,926
Less accumulated depreciation 3,409,723 2,086,952
----------- -----------
Total $ 7,022,819 $ 3,575,974
=========== ===========
7. EMPLOYEE BENEFIT PLANS
The Company participates in a multi-employer defined benefit pension plan
which covers substantially all employees. Expenses of the plan for the
years ended September 30, 2000, 1999 and 1998, were $258,600, $133,000 and
$168,500, respectively.
The Company participates in a multi-employer defined contribution plan
which covers substantially all employees. Under the plan, employees may
contribute from 1% to 15% of compensation, subject to an annual maximum as
determined by the Internal Revenue Code. The Company makes matching
contributions of 50% of employees' contributions up to 6% of the employees'
salaries. The plan provides that employees' contributions are 100% vested
at all times and the Bank's contributions vest 25% for each year of
service. The expenses related to the Company's contributions to this plan
for the years ended September 30, 2000, 1999 and 1998, were $84,924,
$76,985 and $76,386, respectively.
Directors and certain officers participate in deferred compensation plans.
These plans generally provide for fixed payments beginning at retirement.
These payments are earned over service periods of up to ten years, and can
include provisions for deferral of current payments. The expense related to
these plans during the years ended September 30, 2000, 1999 and 1998,
aggregated $544,327, $516,985 and $562,478, respectively. The plans
generally include provisions for forfeitures of unvested portions of
payments, and vesting in the event of death or disability.
On April 8, 1998, the Company's Stockholders approved a Management
Recognition Plan ("MRP") for directors and key employees. The Company was
authorized to fund the acquisition of and award up to 174,570 shares (4% of
shares issued in the stock conversion) to be awarded by a committee of the
Board of Directors. The Company completed the acquisition of MRP shares
during fiscal 1998. On April 8, 1998, 174,570 shares (market value of
$4,029,258 and aggregate cost of $3,275,299) were awarded to certain
officers and employees. The vesting schedule provided that 33-1/3% of the
shares were earned and became non-forfeitable on April 8, 1998, 1999 and
2000.
The shares issued to the MRP plan have been recorded as outstanding shares,
and the unvested portion has been recorded as unearned compensation through
a contra equity account. The consolidated statements of operations for the
years ended September 30, 2000, 1999 and 1998, include compensation expense
of $725,692, $1,342,907 and $1,902,959, respectively, relating to the
scheduled vesting of MRP shares.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
8. EMPLOYEE STOCK OWNERSHIP PLAN
The Company's Board of Directors adopted an Employee Stock Ownership Plan
("ESOP"), effective October 1, 1996. Employees of the Company and its
subsidiaries who have attained age 21 and completed one year of service are
eligible to participate in the ESOP, provided that any employee who was
employed full-time on the closing date of the Stock Conversion
automatically became a participant on October 1, 1996. The ESOP is to be
funded by contributions made by the Company or the Bank in cash or shares
of Common Stock. Allocations to participants' accounts occur annually on
September 30. Shares are committed to be released for financial statement
purposes when the Bank makes scheduled payments on the ESOP note payable
and will be allocated to employees for services rendered in the current
accounting period. Employees vest in their allocated ESOP shares over three
years. The number of shares legally released and allocated is based on the
ratio of the actual principal payments amount to the remaining total
principal payments for the ESOP note payable. The Bank expects to
contribute sufficient funds to the ESOP to repay the note payable over a
ten-year period, plus such other amounts as the Company's Board of
Directors may determine in its discretion.
Initially, the ESOP acquired 349,140 shares of the Company's common stock
financed by $3,491,400 in borrowings by the ESOP from the Company. This
loan is secured by the shares of Common Stock purchased and earnings
thereon. At September 30, 2000 and 1999, 167,282 and 122,790 shares,
respectively, have been allocated to participants' accounts and 181,858 and
226,350 shares, with an estimated market value of $4,182,734 and
$4,031,973, respectively, remain unallocated. All allocated shares are
considered outstanding for earning per share purposes, while the
unallocated shares are not included in the calculation.
The principal balance of the ESOP loan was $1,818,578 and $2,263,500 at
September 30, 2000 and 1999, respectively. The Bank is using the dividends
declared on shares held by the ESOP to reduce the outstanding debt.
Dividends on allocated shares are treated as a reduction of retained
earnings. Dividends on unallocated shares are treated only as debt service,
and there is no reduction of retained earnings. Compensation expense
related to the ESOP is based on the average fair market value of shares
during the period since the prior allocation date through the dates shares
are committed to be released. The financial statements for the years ended
September 30, 2000, 1999 and 1998, include compensation expense of
$853,930, $853,616, and $825,865, respectively, related to the ESOP.
9. STOCK OPTION PLAN
On April 8, 1998, the Shareholders of the Company approved the First South
Bancorp, Inc. 1997 Stock Option Plan (the "Plan"). The purpose of this Plan
is to advance the interests of the Company through providing selected key
employees and Directors of the Bank and the Company with the opportunity to
purchase shares. The Plan reserves 436,425 shares for grant within ten
years of the effective date. The option price is required to be 100% of the
stock's fair market value as defined, with an exception for any shareholder
with more than a 10% ownership interest in the Company. The exercise price
is required to be 110% of the stock's fair market value for these options
holders. Vesting is determined on the date of the grant. Options have a
10-year life; however, there are additional limitations for shareholders
with more than a 10% ownership interest in the Company. The Plan also has a
change of control provision under which all shares immediately vest if a
change of control, as defined, occurs.
The Company has adopted SFAS No. 123, "Accounting for Stock Based
Compensation." As permitted by SFAS No. 123, the Company has chosen to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation cost has been
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
recognized for options granted under the Option Plan. Had compensation cost
for the Company's Option Plan been determined based on the fair value at
the grant dates for awards under the Option Plan consistent with the method
of SFAS No. 123, the Plan's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
----------------------------- ----------------------------- -----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Net income $ 3,549,032 $ 3,464,965 $ 3,196,146 $ 3,138,174 $ 3,123,358 $ 1,829,801
Earnings per common
share - basic 1.14 1.11 .91 .89 .80 .47
Earnings per common
share - diluted 1.13 1.11 .91 .89 .80 .47
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend
growth rate of 17%, 15% and 0%; expected volatility of 18.6%, 20.8% and
6.1%; risk-free interest rates of 6.0%, 7.1% and 5.3%; and expected lives
of 7 years.
A summary of the status of the Plan as of September 30, 2000, 1999 and
1998, and changes during the years then ended, including weighted-average
exercise price ("Price"), is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 404,303 $ 18.24 398,303 $ 18.25 -- $ --
Granted 21,000 18.26 6,000 17.75 398,303 18.25
Cancellations (12,000) 18.25 -- --
------- ------- -------
Outstanding at year end 413,303 18.25 404,303 18.24 398,303 18.25
======= ======= =======
Weighted-average fair value of
options granted during the year $ 4.02 $ 5.04 $ 5.59
======= ======= =======
</TABLE>
The following table summarizes additional information about the Option Plan
at September 30, 2000, including weighted-average remaining contractual
life ("Life") and Price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------
SHARES LIFE PRICE SHARES PRICE
$17.75 - 18.56 413,303 8.7 years $ 18.25 388,428 $ 18.24
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
10. BORROWED MONEY
Borrowed money represents advances from the FHLB and repurchase agreements.
Advances from the FHLB had a weighed average rate of 6.94% and totaled
$24,000,000 at September 30, 2000. There were no advances outstanding from
the FHLB at September 30, 1999.
At September 30, 2000 and 1999, repurchase agreements outstanding had
average rates of 4.38% and 3.13%, and totaled $6,387,552 and $1,318,340,
respectively.
At September 30, 2000, repurchase agreements were collateralized by U.S.
government agency obligations with a principal balance of $7,000,000. The
Company has pledged all of its stock in the FHLB and certain loans secured
by one to four family residential mortgages as collateral for actual or
potential borrowings from the FHLB. At September 30, 2000, the Company had
an additional $41,000,000 of credit available with the FHLB.
11. INCOME TAXES
The components of income tax expense for the years ended September 30,
2000, 1999 and 1998, are as follows:
2000 1999 1998
Current:
Federal $ 2,665,596 $ 2,712,909 $ 1,422,845
State 313,600 565,552 344,617
----------- ----------- -----------
2,979,196 3,278,461 1,767,462
----------- ----------- -----------
Deferred:
Federal (287,542) (719,993) 115,458
State (33,828) (105,755) 16,980
----------- ----------- -----------
(321,370) (825,748) 132,438
----------- ----------- -----------
Total $ 2,657,826 $ 2,452,713 $ 1,899,900
=========== =========== ===========
A reconciliation of the expected income tax expense at statutory tax rates,
with income tax expense reported in the statements of operations for the
years ended September 30, 2000, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Expected income tax expense at 34% $ 2,110,332 $ 1,920,612 $ 1,707,908
State income taxes, net of federal income tax 296,998 270,298 239,220
Non-deductible ESOP, other expenses and
other adjustments 250,496 261,803 (47,228)
----------- ----------- -----------
$ 2,657,826 $ 2,452,713 $ 1,899,900
=========== =========== ===========
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
The components of deferred income tax assets and liabilities are as
follows:
2000 1999
Deferred income tax assets:
Deferred directors' fees $ 548,288 $ 379,283
Allowance for loan losses 1,490,452 1,000,686
Employee benefits 747,790 878,390
Unrealized losses on securities
available for sale 852,611 606,025
Loans mark-to-market 123,823 --
Other 109,005 79,602
---------- ----------
3,871,969 2,943,986
---------- ----------
Deferred income tax liabilities:
Loans mark-to-market -- 266,793
Depreciation and amortization 315,426 173,055
Carrying value - land 386,200 --
Deferred loan origination fees and costs 91,656 90,696
FHLB stock 195,801 98,512
---------- ----------
989,083 629,056
---------- ----------
Net deferred income tax asset $2,882,886 $2,314,930
========== ==========
Retained earnings at September 30, 2000, include approximately $1,850,000
for which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for income tax
purposes only. Reductions of the amount so allocated for purposes other
than for tax bad debt losses or adjustments arising from carryback of net
operating losses could create taxable income, in certain remote instances,
which would be subject to the then current corporate income tax rate.
12. REGULATORY CAPITAL REQUIREMENTS
Dividend payments made by the Company are subject to regulatory
restrictions under Federal Reserve Board policy as well as to limitations
under applicable provisions of Virginia corporate law. The Federal Reserve
Board may prohibit a bank holding company from paying any dividends if the
holding company's bank subsidiary is classified as "undercapitalized."
Under Virginia law, dividends may be paid out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and for the preceding fiscal year. Furthermore, under FDIC
regulations, the Bank is prohibited from making any capital distributions
if, after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than
4.0%.
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 September 30, 2000, that the Bank meets
all capital adequacy requirements to which it is subject.
As of September 30, 2000, 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.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
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 as of September 30, 2000 and
1999, are presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
2000:
Total Capital (to Risk Weighted Assets) $45,655 13.0% $28,214 8.0% $35,268 10.0%
Tier I Capital (to Risk Weighted Assets) 41,237 11.7% 14,107 4.0% 21,161 6.0%
Tier I Capital (to Average Assets) 41,237 7.7% 21,523 4.0% 26,904 5.0%
1999:
Total Capital (to Risk Weighted Assets) $51,989 24.8% $16,750 8.0% $20,938 10.0%
Tier I Capital (to Risk Weighted Assets) 48,691 23.3% 8,375 4.0% 12,563 6.0%
Tier I Capital (to Average Assets) 48,691 16.2% 12,041 4.0% 15,052 5.0%
</TABLE>
13. EARNINGS PER SHARE
The following table provides a reconciliation of income available to common
stockholders and the average number of shares outstanding (less unearned
ESOP shares, unearned deferred stock awards and treasury shares) for the
years ended September 30, 2000, 1999 and 1998. Options to purchase 413,303,
404,303, and 398,303 shares of common stock were outstanding during the
years ended September 30, 2000, 1999, and 1998, respectively. For the years
ended September 30, 1999 and 1998, none of these options were included in
the computation of diluted EPS because the options' exercise price was
greater than the average market price of common shares for each of the
years.
2000 1999 1998
Net income (numerator) $3,549,042 $3,196,146 $3,123,358
========== ========== ==========
Weighted average shares outstanding
for basic EPS (denominator) 3,115,768 3,530,811 3,876,813
Dilutive effect of stock options 11,104 -- --
---------- ---------- ----------
Adjusted shares for diluted EPS 3,126,872 3,530,811 3,876,813
========== ========== ==========
14. MORTGAGE BANKING ACTIVITIES
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of mortgage loans serviced for others were $286,238,000 and
$275,255,000 at September 30, 2000 and 1999, respectively. Servicing loans
for others generally consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payment to investors and foreclosure
processing. Loan servicing income is recorded on the accrual
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees.
At September 30, 2000 and 1999, mortgage servicing rights reported in the
consolidated statements of financial condition, net of amortization, were
$184,228 and $209,090, respectively.
15. FINANCIAL INSTRUMENT WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK:
The Company 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 and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
A summary of the contractual amounts of the Company's exposure to
off-balance sheet risk as of September 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Commitments to extend credit:
Commitments to originate loans $44,052,960 $33,769,607
Undrawn balances on lines of credit and undrawn
balances on credit reserves (overdraft protection) 43,864,361 28,341,602
----------- -----------
$87,917,321 $62,111,209
=========== ===========
</TABLE>
Included in the commitments to originate loans as of September 30, 2000 and
1999, are fixed interest rate loan commitments of $16,262,511 and
$9,118,636, respectively. The shorter duration of interest-sensitive
liabilities, to the extent they are used to fund these fixed-rate loans,
indicates that the Company is exposed to interest rate risk because, in a
rising rate environment, liabilities will be repricing faster at higher
interest rates, thereby reducing the market value of fixed-rate long-term
assets and net interest income.
The Company's lending is concentrated primarily in Beaufort, Craven,
Cumberland, Edgecombe, Fayetteville, Lenoir, Lumberton, Nash, Pasquotank,
Pitt, Robeson, Tarboro and surrounding counties in North Carolina. Credit
has been extended to certain of the Company's customers through multiple
lending transactions.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
Since many of the commitments are expected to expire without being drawn
upon, amounts reported do not necessarily represent future cash
requirements.
16. PARENT COMPANY FINANCIAL INFORMATION
The Company's principal asset is its investment in the Bank. Condensed
financial statements of the parent company as of September 30, 2000 and
1999, and for the three years ended September 30, 2000, are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
CONDENSED BALANCE SHEETS
Cash $ 1,055,374 $ 1,151,744
Due from subsidiary 477,287 5,368,089
Investment in wholly-owned subsidiary 43,692,079 42,563,204
Other assets 8,747 12,115
------------ ------------
Total assets $ 45,233,487 $ 49,095,152
============ ============
Other liabilities $ 398,752 $ 332,119
Stockholders' equity 44,834,735 48,763,033
------------ ------------
Total liabilities and stockholders' equity $ 45,233,487 $ 49,095,152
============ ============
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Interest income, net $ 204,090 $ 234,242 $ 291,950
Equity in earnings of subsidiary 3,471,752 3,121,370 3,007,978
Miscellaneous expenses 126,810 159,466 176,570
------------ ------------ ------------
Net income $ 3,549,032 $ 3,196,146 $ 3,123,358
============ ============ ============
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998
CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Operating activities:
Net income $ 3,549,032 $ 3,196,146 $ 3,123,358
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,471,752) (3,121,370) (3,007,978)
Deferred income taxes -- -- (57,800)
ESOP compensation 853,930 853,616 825,865
MRP compensation 725,692 1,342,907 1,902,959
Other operating activities 70,001 628,213 (589,308)
------------ ------------ ------------
Net cash provided by operating activities 1,726,903 2,899,512 2,197,096
------------ ------------ ------------
Investing activities:
Repayments of advances to subsidiary 6,863,802 9,257,445 5,910,220
------------ ------------ ------------
Net cash provided by investing activities 6,863,802 9,257,445 5,910,220
------------ ------------ ------------
Financing activities:
MRP funding -- -- (1,224,768)
Purchase of treasury shares (7,268,139) (10,875,208) (4,895,754)
Cash paid for fractional shares -- -- (4,652)
Dividends paid (1,418,936) (1,089,622) (1,045,908)
------------ ------------ ------------
Net cash used in financing activities (8,687,075) (11,964,830) (7,171,082)
------------ ------------ ------------
Net (decrease) increase in cash (96,370) 192,127 936,234
Cash at beginning of year 1,151,744 959,617 23,383
------------ ------------ ------------
Cash at end of year $ 1,055,374 $ 1,151,744 $ 959,617
============ ============ ============
</TABLE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended September
30, 2000 and 1999, is as follows (in thousands):
FOURTH THIRD SECOND FIRST
------- ------- ------- -------
2000:
Interest income $10,783 $10,099 $ 9,178 $ 6,805
Interest expense 5,921 5,241 4,680 3,171
Provision for loan losses 300 250 200 227
Noninterest income 950 1,052 815 615
Noninterest expense 3,768 4,058 3,631 2,643
Income tax expense 762 699 628 569
------- ------- ------- -------
Net income $ 982 $ 903 $ 854 $ 810
======= ======= ======= =======
Net income per common share:
Basic and diluted $ .32 $ .30 $ .27 $ .25
======= ======= ======= =======
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
------- ------- ------- -------
1999:
Interest income $ 5,918 $ 5,935 $ 5,629 $ 5,647
Interest expense 2,610 2,500 2,450 2,419
Provision for loan losses 70 -- -- 50
Noninterest income 644 685 735 810
Noninterest expense 2,546 2,574 2,553 2,582
Income tax expense 532 762 561 598
------- ------- ------- -------
Net income $ 804 $ 784 $ 800 $ 808
======= ======= ======= =======
Net income per common share:
Basic and diluted $ .24 $ .23 $ .22 $ .22
======= ======= ======= =======
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), 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 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.
Fair values have been estimated using data which management considers as
the best available, and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies,
resulting fair values, and recorded carrying amounts at September 30, 2000
and 1999, were as follows:
Cash and cash equivalents are by definition short-term and do not prevent
any unanticipated credit issues. Therefore, the carrying amount is a
reasonable estimate of fair value. The estimated fair values of investment
securities and mortgage backed securities are provided in Notes 3 and 4 to
the financial statements. These are based on quoted market prices, when
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
The fair value of the net loan portfolio has been estimated using the
present value of expected cash flows, discounted at an interest rate
adjusted for servicing costs and giving consideration to estimated
prepayment risk and credit loss factors, as follows:
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1 - 4 family mortgages $157,985,659 $157,650,137 $ 74,868,715 $ 74,822,333
Consumer 73,079,204 74,100,552 49,641,554 50,263,344
Non-residential 134,458,927 134,458,927 86,968,253 86,968,253
------------ ------------ ------------ ------------
$365,523,790 $366,209,616 $211,478,522 $212,053,930
============ ============ ============ ============
</TABLE>
The fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand),
totaling $132,661,290 and $60,745,568 at September 30, 2000 and 1999,
respectively. The fair value estimates for these products do not reflect
the benefits that the Bank receives from the low-cost, long-term funding
they provide. These benefits are considered significant.
The fair value of certificates of deposits and advances from the FHLB is
estimated by discounting the future cash flows using the current rates
offered for similar deposits and advances with the same remaining
maturities. The carrying value and estimated fair values of certificates of
deposit and FHLB advances at September 30, 2000 and 1999, are as follows:
2000 1999
Certificates of deposits:
Carrying amount $339,280,377 $173,872,427
Estimated fair value 340,318,757 174,479,131
Advances for Federal Home Loan Bank:
Carrying amount $ 24,000,000 $ --
Estimated fair value 24,000,000 --
The carrying amount of repurchase agreements approximates the fair value.
The interest rate on these agreements is a floating rate based on the
federal fund's daily rate.
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $87,917,321 in 2000 and
$62,111,209 in 1999, which are primarily comprised of unfunded loan
commitments.
The Company's remaining assets and liabilities are not considered financial
instruments.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
19. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended September 30, 2000,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Real estate acquired in settlement of loans $ 411,040 $ 764,023 $ 458,061
Exchange of loans for mortgage-backed
securities 62,789,209 45,527,117 17,958,559
Cash paid for interest 19,012,680 9,960,689 9,268,840
Cash paid for income taxes 2,769,000 2,787,000 2,637,000
Dividends declared, not paid 387,220 332,119 271,102
</TABLE>
39
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
DR. FREDERICK H. HOWDY LINLEY H. GIBBS, JR. EDMUND T. BUCKMAN, JR.
CHAIRMAN VICE CHAIRMAN Retired
President Retired Washington, NC
Drs. Freshwater and Howdy, P.A. Washington, NC
Washington, NC
FREDERICK N. HOLSCHER CHARLES E. PARKER, JR. H. D. REAVES, JR.
Partner Vice President Former President and
Rodman, Holscher, Francisco & Robinson Insurance Agency Chief Executive Officer
Peck, P.A. New Bern, NC Home Federal Savings & Loan
Washington, NC Fayetteville, NC
MARSHALL T. SINGLETON THOMAS A. VANN
Co-Owner President and Chief
B. E. Singleton & Sons Executive Officer
Washington, NC First South Bank
Washington, NC
EXECUTIVE OFFICERS
THOMAS A. VANN JACK L. ASHLEY JOSEPH C. DUNN
President and Executive Vice President Executive Vice President
Chief Executive Officer Branch Administration and Credit Administration
Operations
WALTER P. HOUSE WILLIAM L. WALL MARY R. BOYD
Executive Vice President Executive Vice President Senior Vice President
Mortgage Operations Chief Financial Officer and Loan Servicing
Secretary
SHERRY L. CORRELL KRISTIE W. HAWKINS WILLIAM R. OUTLAND
Senior Vice President Treasurer Senior Vice President
Deposit Administration Controller Consumer Lending
REGIONAL EXECUTIVES
JAMES F. BUCKMAN, IV D. NICHOLSON GUY, JR. GEORGE R. HAMILTON
Senior Vice President Senior Vice President Senior Vice President
Washington Fayetteville Rocky Mount
Chocowinity Lumberton Tarboro
RUSSELL A. LAY JAMES R. ROSE, JR.
Senior Vice President Senior Vice President
Elizabeth City Greenville
Kinston
New Bern
40
<PAGE>
<CAPTION>
FIRST SOUTH BANK OFFICE LOCATIONS
BANKING OFFICES
<S> <C> <C>
CHOCOWINITY ELIZABETH CITY FAYETTEVILLE
2999 Highway 17 South 604 East Ehringhaus Street 241 Green Street
252-946-4178 252-335-0848 910-483-3681
GREENVILLE KINSTON 3107 Raeford Road
301 East Arlington Blvd 827 Hardee Road 910-484-2116
252-321-2600 252-522-9466
LUMBERTON NEW BERN TARBORO
600 North Chestnut Street 202 Craven Street 100 East Hope Lodge Street
910-739-3274 252-636-2997 252-823-0157
ROCKY MOUNT 1725 Glenburnie Road WASHINGTON
300 Sunset Avenue 252-636-2997 1311 Carolina Avenue
252-972-9661 252-946-4178
2901 Sunset Avenue 300 North Market Street
252-451-1259 252-946-4178
1378 Benvenue Road Corporate Office
252-442-8375 1311 Carolina Avenue
252-946-4178
450 North Winstead Avenue
252-937-1900 Loan Administration
239 West Main Street
3635 North Halifax Road 252-946-4178
252-451-8700
(located in Smith's Red & White/ Dortches)
FIRST SOUTH BANK ATM* LOCATIONS
CHOCOWINITY ELIZABETH CITY FAYETTEVILLE
2999 Highway 17 South 604 East Ehringhaus Street 241 Green Street
3107 Raeford Road
GREENVILLE LUMBERTON NEW BERN
301 East Arlington Blvd 3551 Fayetteville Road 1725 Glenburnie Road
(located at Turner Carpet Center)
TARBORO ROCKY MOUNT WASHINGTON
1202 Western Blvd 300 Sunset Avenue 1311 Carolina Avenue
(located at Amoco Food Shop) 2901 Sunset Avenue 300 North Market Street
1378 Benvenue Road
450 North Winstead Avenue
3635 North Halifax Road
(located at Smith's Red & White)
</TABLE>
----------
* Member of Star and Cirrus ATM networks.
Member FDIC
"ALL THE BANK YOU'LL EVER NEED"
41
<PAGE>
FIRST SOUTH BANK PRODUCTS AND SERVICES
PERSONAL BANKING SERVICES
CHECKING ACCOUNTS:
Free Basic Checking
Free Senior Checking (age 50 and over)
Preferred Checking
Money Market Checking
LENDING SERVICES:
Consumer Loans
Home Equity Loans
Mortgage Loans
FHA/VA Financing
Reserve Lines
VISA and MasterCard Credit Cards
SAVINGS ACCOUNTS:
Regular Savings
Custodial Savings
OTHER PERSONAL BANKING SERVICES:
AccessLine 24 Hour Telephone Banking
Automated Teller Machines (ATMs)
24 Hour Banking Cards (ATM)
Certificates of Deposit
Individual Retirement Accounts
VISA CheckCards
Drive-Thru Windows
Night Depository
Safe Deposit Boxes
Wire Transfers
COMMERCIAL BANKING SERVICES
CHECKING ACCOUNTS:
Commercial Checking
Commercial Money Market Checking
Business Interest Checking
Simple Business Checking
Simple Business Plus Checking
LENDING SERVICES:
Commercial Real Estate Loans
Commercial Business Loans
SBA Loans
Lines-of-Credit
OTHER COMMERCIAL BANKING SERVICES
Cash Management Sweep Products
VISA and MasterCard Merchant Services
Night Depository
Wire Transfers
Cash Services (Coin and Currency)
42
<PAGE>
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS
First South Bancorp, Inc. Telephone: 252-946-4178
1311 Carolina Avenue Fax: 252-946-3873
Washington, NC 27889 E-mail: [email protected]
Website: www.firstsouthnc.com
STOCK LISTING INFORMATION
The Company's common stock trades on the Nasdaq Stock Market under the symbol
FSBK.
STOCK PRICE INFORMATION
The following table sets forth the high and low trade price information and
dividends declared per share for the periods indicated.
Quarter Ended High Low Dividends
------------- ---- --- ---------
December 31, 1998 $ 22.00 $ 16.50 $ .07
March 31, 1999 18.25 17.00 .07
June 30, 1999 18.50 17.00 .07
September 30, 1999 18.625 16.00 .10
December 31, 1999 18.875 17.125 .10
March 31, 2000 18.875 17.375 .10
June 30, 2000 20.00 18.375 .13
September 30, 2000 23.25 19.25 .13
REGISTRAR AND TRANSFER AGENT
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock registrar and transfer
agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 866-1340
FORM 10-K
The Company's annual report on Form 10-K, filed with the Securities and Exchange
Commission, is available to shareholders without charge by writing: William L.
Wall, Chief Financial Officer, First South Bancorp, Inc., P. O. Box 2047,
Washington, NC 27889.
INVESTOR INFORMATION
Shareholders, investors, and analysts interested in additional information may
contact William L. Wall, Chief Financial Officer, First South Bancorp, Inc.
ANNUAL MEETING
The Annual Meeting of Stockholders of First South Bancorp, Inc. will be held
Thursday, February 15, 2001 at 11:00 a.m., at the main office of First South
Bank, 1311 Carolina Avenue, Washington, North Carolina.
<TABLE>
<CAPTION>
<S> <C> <C>
GENERAL COUNSEL SPECIAL COUNSEL INDEPENDENT ACCOUNTANTS
Rodman, Holscher, Francisco & Stradley Ronon Housley PricewaterhouseCoopers LLP
Peck, P.A. Kantarian & Bronstein, LLP Suite 2300
320 North Market Street Suite 700 150 Fayetteville Street Mall
Washington, NC 27889 1220 19th Street, N.W. Raleigh, NC 27601
Washington, DC 20036
</TABLE>
43
<PAGE>
First South Bancorp
=====================================
-------------------------------------
1311 Carolina Avenue
P.O. Box 2047
Washington, North Carolina 27889
(252) 946-4178 Fax (252) 946-3873
