UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File Number 000-28037
FIRST SOUTH BANCORP, INC.
(Exact Name of Small Business Issuer )
SOUTH CAROLINA
(State of Incorporation)
57-1086258
(IRS Employer Identification Number)
1450 Reidville Road
Spartanburg, South Carolina 29306
(Address of Principal Executive Office)
(864) 595-0455
(Issuer's Telephone Number)
Check whether the issuer (1) has filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for shorter period that
the issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] N0 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: Common Stock, no par value, 915, 861
shares outstanding on September 30, 1999.
Transitional Small Business Disclosure Format (Check one) YES [ ] N0 [X]
<PAGE>
FIRST SOUTH BANCORP, INC
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheet.......................................... 3
Statement of Operations................................ 4
Statement of Comprehensive Income...................... 5
Statement of Cash Flows................................ 6
Notes to Unaudited Statements.......................... 7
Item 2. Management's Discussion and Analysis................... 8-16
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............. 17
Item 6. Exhibits and Reports on Form 8-K....................... 17
SIGNATURE ....................................................... 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FIRST SOUTH BANCORP, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1999 1998
---- ----
Assets
<S> <C> <C>
Cash & due from banks .......................................................... $ 1,320,846 $ 870,340
Due from banks - interest bearing .............................................. 12,551 1,535,000
Federal funds sold ............................................................. 5,490,000 2,815,000
Investment securities .......................................................... 10,449,120 10,585,262
Loans .......................................................................... 49,357,675 35,859,212
Allowance for loan losses ................................................. (700,000) (575,000)
------------ ------------
Loans - net .................................................................... 48,657,675 35,284,212
Property & equipment, net ...................................................... 2,782,330 2,894,116
Other assets ................................................................... 1,143,874 486,883
------------ ------------
Total assets .......................................................... $ 69,856,396 $ 54,470,813
============ ============
Liabilities
Deposits
Noninterest-bearing ............................................................ $ 3,339,199 $ 3,213,126
Interest-bearing ............................................................... 52,885,083 38,733,974
------------ ------------
Total deposits ........................................................ 56,224,282 41,947,100
Other liabilities .............................................................. 2,894,130 1,958,878
------------ ------------
Total liabilities ..................................................... 59,118,412 43,905,978
Shareholders' equity
Common stock - no par value;
20,000,000 authorized - issued 915,861 ................................ 4,579,305 4,578,795
Additional paid-in capital ..................................................... 6,488,411 6,487,737
Accumulated deficit ............................................................ (198,138) (490,801)
Accumulated other comprehensive income/(loss) .................................. (131,594) (10,896)
------------ ------------
Total shareholders' equity ............................................ 10,737,984 10,564,835
Total liabilities and shareholders' equity ............................ $ 69,856,396 $ 54,470,813
============ ============
</TABLE>
3
<PAGE>
FIRST SOUTH BANCORP, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Unaudited)
Period ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
<S> <C> <C> <C> <C>
Loans, including fees ....................................... $1,110 $766 $2,913 $2,070
Investment securities ....................................... 160 140 484 364
Federal funds sold .......................................... 69 85 153 209
Total interest income ....................................... 1,339 991 3,550 2,643
Interest expense
Deposits and borrowings ..................................... 677 565 1,744 1,447
Net interest income .............................................. 662 426 1,806 1,196
Provision for loan losses ................................... 60 47 125 175
Net interest income after provision .............................. 602 379 1,681 1,021
Other income
Service charges on deposit accounts ......................... 32 27 94 70
Other income ................................................ 88 19 185 52
------ ---- ------ ------
Total other income .......................................... 120 46 279 122
Other expenses
Salaries and benefits ....................................... 329 225 893 634
Occupancy and equipment ..................................... 90 68 259 227
Other expense ............................................... 136 87 364 217
------ ---- ------ ------
Total other expense ......................................... 555 380 1,516 1,078
Income before income taxes ....................................... 167 45 444 65
Income taxes ................................................ 68 0 151 0
Net income ....................................................... $ 99 $ 45 $ 293 $ 65
Earnings per common share ........................................ $ .11 $.05 $ .32 $ .07
Diluted earnings per common share ................................ $ .11 $.05 $ .31 $ .07
</TABLE>
4
<PAGE>
FIRST SOUTH BANCORP, INC.
Statement of Comprehensive Income
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30
------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Income ...................................................................... $ 292,663 $ 65,878
Other comprehensive income (loss):
Change in unrealized holdings gains &
losses on available for sale securities ................................... (194,674) 33,237
Income tax (expense) benefit on other
comprehensive income (loss) ............................................... 73,976 (12,630)
--------- --------
Total other comprehensive income (loss) ......................................... (120,698) 20,607
Comprehensive income ............................................................ 171,965 86,485
========= ========
</TABLE>
5
<PAGE>
FIRST SOUTH BANCORP, INC.
Consolidated Statement of Cash Flows
For the Nine Months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
1999 1998
---- ----
(Dollars in thousands)
Operating Activities
<S> <C> <C>
Net income ............................................................................... 293 66
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses .......................................................... 125 175
Depreciation ....................................................................... 129 122
Director fees ...................................................................... 20 12
(Accretion) amortization, net ...................................................... 0 0
Increase in other assets ........................................................... (129) (228)
Increase in accrued expenses
and other liabilities ......................................................... 454 33
Net cash provided by operating activities ................................................ 892 180
Investing Activities
Purchase of securities available for sale .......................................... (1,000) (6,623)
Purchase of restricted FHLB stock .................................................. (59) (105)
Proceeds from call of available for sale securities ................................ 500 4,200
Proceeds from maturities of held to maturity securities ............................ 500 1,000
Origination of loans, net of principal collected ................................... (13,943) (10,784)
Purchase of premises and equipment ................................................. (46) (19)
Net cash used in investing activities .................................................... (14,048) (12,331)
Financing Activities
Net increase in deposits ........................................................... 14,277 16,075
Net increase in retail repurchase agreements ....................................... 482 262
Net cash provided by financing activities ................................................ 14,759 16,337
Net increase in cash and cash equivalents ................................................ 1,603 4,186
Cash and cash equivalents, beginning ..................................................... 5,220 4,206
Cash and cash equivalents, ending ........................................................ 6,823 8,392
</TABLE>
6
<PAGE>
FIRST SOUTH BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Item 310(b) of Regulation
S-B of the Securities and Exchange Commission. Accordingly, they do not contain
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, please refer to the financial
statements and footnotes thereto for First South Bank's fiscal year ended
December 31, 1998, contained in First South Bank's registration statement on
Form 10-SB.
Note 2. Organization
First South Bancorp, Inc. (the "Company") is a South Carolina corporation
organized in 1999 for the purpose of being a holding company for First South
Bank (the "Bank"). On September 30, 1999, pursuant to a Plan of Exchange
approved by the shareholders, all of the outstanding shares of capital stock of
the Bank were exchanged for shares of common stock of the Company. The company
presently engages in no business other than that of owning the Bank and has no
employees.
7
<PAGE>
FIRST SOUTH BANCORP, INC.
Part I - Item 2
Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
Statements included in Management's Discussion and Analysis which are
not historical in nature are intended to be, and are hereby identified as
"forward looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. The Company cautions
readers that forward looking statements, including without limitation, those
relating to the Company's new office, its response to the Year 2000 problem,
future business prospects, revenues, working capital, liquidity, capital needs,
interest costs, and income, are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission.
General
The following discussion should be read in conjunction with the financial
statements and related notes and more detailed information provided in First
South Bank's Annual Report on Form 10-KSB. On September 30, 1999, pursuant to a
Plan of Exchange approved by the shareholders, all of the outstanding shares of
common stock of First South Bank were exchanged for shares of common stock of
First South Bancorp, Inc. First South Bancorp, Inc., presently engages in no
business other than that of owning the Bank and has no employees. Accordingly,
the following discussion and analysis makes reference only to the Bank.
Results of Operations
The Bank's primary source of income is net interest income, which is the
difference between interest earned and interest paid. The net interest margin is
net interest income as a percentage of average earning assets. Net interest
margin for the nine months period ended September 30, 1999, was 4.21 %, up from
3.95 % for the same period in 1998. Interest income, primarily interest received
from loans and, to a lesser degree, the interest earned on the Bank's investment
portfolio, for the nine-month period ending September 30, 1999, increased by
34.3% over the same period of 1998 while total interest income for the third
quarter of 1999 was 35.1% greater than the third quarter of 1998. Although rates
of return on the various categories of earning assets were slightly less in the
1999 periods compared to 1998, increases in the amount of earning assets and an
increase in the percentage of earning assets in loans, which generally have a
greater yield than other categories, resulted in the increases in total interest
income. Interest expense, which is primarily the amount of interest paid to
depositors, also increased in the nine and three month periods ended September
30, 1999, as compared to the same periods of 1998. The increases were 20.5% and
19.8%, respectively, and were primarily the result of increases in the amounts
of deposits. The rates earned on interest-earning assets and the rates paid on
interest-bearing liabilities are expected to continue to be influenced by
competition for quality loan customers as well as government fiscal and monetary
policies.
The Bank's allowance for loan losses is analyzed monthly in accordance with a
board approved plan. This judgmental analysis is based upon a model that
assigns a risk rating on individual loans and considers the loss risks
associated with the various risk categories in relationship to the current and
forecasted economic environment. The Bank also monitors the overall portfolio as
well as the level of reserves maintained by peer banks. The monthly provision
for loan losses may fluctuate based on the results of this analysis.
For the nine and three month periods ending September 30, 1999, noninterest
income increased 127.8% and 160.8%, respectively, over the amounts received
during the same periods in 1998. The most substantial component of these
increases was the additional commission and fee income generated in 1999 with
the inauguration of operations of First South Financial Services, Inc., a
brokerage services subsidiary of the Bank. In addition, amortized premiums
received from the sale of government guaranteed loans and increased service
charges received from a growing deposit customer base contributed to noninterest
income growth.
8
<PAGE>
Though September 30th year-to-date operating expenses as a percentage of average
assets increased only slightly in 1999 from that of 1998, 2.46 % and 2.42 %,
respectively, total operating expenses for the nine-month period ending
September 30 increased in 1999 by $438,000, or 40.6%. While a portion of this
increase can be attributed to the growth the Bank experienced in 1999, the
$131,635 cost of establishing and operating a brokerage subsidiary in 1999,
accounted for 30.1 % of this increase. Management will continue to be challenged
to maintain operating expenses at a level adequate to support growth while
achieving favorable operating efficiency ratios. Expenses associated with
technology are included in operating expense and include the Bank's cost of
assessing the possible effects of the Year 2000 problem.
Financial institutions are subject to interest rate risk to the degree that
their interest bearing liabilities (consisting principally of customer deposits)
mature or reprice more or less frequently, or on a different basis, than their
interest earning assets (generally consisting of intermediate or long-term loans
and investment securities). The match between the scheduled repricing and
maturities of the Bank's earning assets and interest bearing liabilities within
defined time periods is referred to as "gap" analysis. The Bank's
Asset/Liability Management Committee is responsible for managing the risks
associated with changing interest rates and their impact on earnings. The
regular evaluation of the sensitivity of net interest income to changes in
interest rates is an integral part of interest rate risk management. At
September 30, 1999, the cumulative one-year gap for the Bank was a negative or
liability sensitive $1,349,000, or 1.9 % of total assets. At September 30, 1999,
the cumulative three-year gap for the Bank was a negative $73,000, or .1 % of
total assets. A negative gap means that liabilities would reprice faster than
assets if interest rates changed. The Bank's gap is within policy limits which
were established to reduce the adverse impact on earnings which movements in
interest rates can cause. Intense competition in the Bank's market continues to
create downward pressure on quality loan rates while conversely creating upward
pressure on deposit rates.
For the nine-month period ending September 30, 1999, as compared to the same
period in 1998, the Bank's average assets increased by 38.1 %. Asset growth is
directly related to deposit growth and the funds available to the Bank for
investment. The growth in average deposits for the first three quarters of 1999
of $ 12.7 million, or 35.5 % over the average deposits for the same period in
1998, would not have been allowed to occur, however, had there not been a strong
quality loan demand during the same period. Average loans outstanding through
September 30, 1999 increased $13.9 million or 50.7% over the same period in
1998. The availability of local deposits in 1999 has allowed the Bank to take
advantage of the lending opportunities created by the strength of the local
economy without funding loan growth with other borrowed funds.
From September 30, 1998, to September 30, 1999, the Bank's nonpersonal loan
portfolio grew by $13.7 million, or 54.2 %, as the seasoned commercial lenders
employed by the Bank have developed growth opportunities in commercial and
commercial real estate related business loans. While average balances of loans
secured by real estate have increased significantly, the Bank believes prudent
real estate lending has provided excellent collateral for loans with a variety
of purposes. Management believes the Bank is not dependent on any single group
of customers concentrated in any particular industry whose decline in
performance would have a material adverse effect on operations.
9
<PAGE>
The following tables are provided to assist the reader in understanding the
results of operations and financial condition.
Table One
Net interest Income and Average Balance Analysis
for the Nine Months Ended September 30
1999 and 1998
<TABLE>
<CAPTION>
Interest Average
Interest-Earning Assets (Dollars in thousands) Average Balance Income/Expense Yield/Cost
------- ------- -------------- ----------
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold ............................... $ 4,282 $ 5,144 $ 147 209 4.59% 5.43%
Investments ...................................... 11,252 7,859 491 364 5.84% 6.19%
Loans ............................................ 41,362 27,467 2,896 2,070 9.36% 10.01%
-------- ------- ------ ------ ---- -----
Total Interest Earning Assets .................... $ 56,896 40,470 $3,534 2,643 8.30% 8.73%
Noninterest-Earning Assets
Cash & Due From Banks ............................ $ 1,299 1,265
Loan Loss Reserve ................................ (620) (435)
Premises & Equipment ............................. 2,833 2,937
Interest Receivable & Other ...................... 1,184 356
Total Noninterest-Earning Assets ................. $ 4,696 4,123
-------- -------
TOTAL ASSETS ..................................... $ 61,592 44,593
======= =======
Interest-Bearing Liabilities
NOW Accounts ..................................... $ 14,987 9,592 $ 500 355 4.46% 4.95%
Money Market & Savings ........................... 951 529 19 12 2.67% 3.03%
Time Deposits & IRA's ............................ 29,539 23,227 1,175 1,028 5.32% 5.92%
Fed Funds Purchased & Repos ...................... 1,553 1,420 47 47 4.04% 4.42%
Demand Notes Issued to Treasury .................. 108 139 3 5 3.71% 4.81%
-------- ------- ------ ------ ---- -----
Total Interest-Bearing Liabilities ............... $ 47,138 34,907 $1,744 1,447 4.95% 5.54%
Noninterest-Bearing Liabilities
Demand Deposits .................................. $ 3,122 2,531
Interest Payable ................................. 358 259
Other Liabilities ................................ 220 192
-------- -------
Total Noninterest-Bearing Liabilities ............ $ 3,700 2,982
Stockholders' Equity ............................. $ 10,754 6,704
Total Liabilities & Equity ....................... $ 61,592 44,593
======== =======
Net Interest Income .............................. $1,790 $1,196
Net Yield on Earning Assets ...................... 4.21% 3.95%
Interest Rate Spread ............................. 3.35% 3.19%
</TABLE>
10
<PAGE>
Numerous factors contributed to an improved net interest margin from the first
three quarters of 1998 to the first three quarters of 1999. Most significant of
these were:
(1) The category of earning assets with the highest yield, loans, increased as a
percentage of total earning assets from 67.9 % to 72.7 %;
(2) Earning assets were funded by a lower percentage of interest-bearing
liabilities, 82.8 % in 1999 versus 86.3 % in 1998;
(3) The category of interest-bearing liabilities with the highest cost of funds
rate, time deposits, decreased as a percentage of total interest-bearing
liabilities from 66.5 % to 62.7%.
Balance sheet changes were not, however, the only factors which contributed to
the change in net interest margin during the period ending September 30, 1998,
compared to that of 1999, nor were all of the changes positive influences on net
interest margin. The 75 basis points decrease in the Bank's prime rate during
the fourth quarter of 1998 coupled with the Bank's positive interest sensitivity
gap during that period served to temper the positive results of the balance
sheet changes which took place in the first three quarters of 1999.
Table Two
Summary of Total Noninterest Income
for the Nine Months Ended September 30
1999 and 1998
(Dollars in thousands)
1999 1998
---- ----
Service Charges ............................. $93 $70
Commissions & Fees* ......................... 139 17
Other Noninterest Income** .................. 46 35
---- ----
Total ....................................... $279 $122
*82% of this $122,000 increase resulted from operations of the First South
Financial Services subsidiary.
** Premiums on government guaranteed loans sold in the secondary market
accounted for most of this category of noninterest income in both periods.
Table Three
Summary of Total Noninterest Expense
For the Nine Months Ended September 30
1999 and 1998
(Dollars in thousands)
1999 1998
---- ----
Salaries & Employee Benefits * ................ $893 $634
Occupancy & Equipment ......................... 259 227
Other ......................................... 364 217
--- ---
Total ......................................... $1,516 $1,078
* $55,000 of the total $259,000 increase in salaries and employee benefits
expense resulted from the operations of the First South Financial Services
subsidiary.
11
<PAGE>
Table Four
Analysis of Loans
September 30 Balances (Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
Real Estate:
<S> <C> <C> <C> <C>
Construction & Land Development .......................... $ 5,494 11.1% $ 672 2.1%
1-4 Family Residential Properties ........................ 10,904 22.1% 6,021 18.8%
Multifamily Residential Properties ....................... 742 1.5% 643 2.0%
Nonfarm Nonresidential Properties ........................ 17,322 35.1% 13,827 43.2%
Other Real Estate Loans .................................. 575 1.2% 300 .9%
Commercial & Industrial .................................. 13,173 26.7% 9,572 29.9%
Consumer ................................................. 590 1.2% 1,000 3.1%
Other .................................................... 558 1.1% 0 0%
======= ===== ======= =====
TOTAL .................................................... $49,358 100.0% $32,035 100.0%
</TABLE>
Table Five
Analysis of Loan Maturities and Repricing Frequency
as of September 30, 1999 (Dollars in thousands)
<TABLE>
<CAPTION>
>3 Months > 1 Year >3 Years
Within to to to Over
3 Months 2 Months 3 Years 5 Years 5 Years Total
-------- --------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Variable Rate Loans .................... $42,353 $ $ $ $ $42,353
Fixed Rate Loans ....................... 2,428 1,865 921 1,529 262 7,005
Total Loans ............................ $44,781 $1,865 $921 $1,529 $262 $49,358
</TABLE>
Table Six
Analysis of the Allowance for Loan Losses
for the Nine Months Ended September 30
1999 1998
---- ----
Balance at Beginning of Year .................. $575,000 $350,000
Provision Charged to Operations ............... 125,290 174,507
Loans Charged-off ............................. (400) (2,507)
Loan Recoveries ............................... 110 0
Balance at End of Year ........................ $700,000 $522,000
There was one loan past due between 30 to 89 days on September 30, 1999, in the
amount of $683,000. This loan has an 80% ($546,000) government guarantee by the
USDA. There were no past due loans on September 30, 1998.
12
<PAGE>
Table Seven
Analysis of Investment Securities
as of September 30, 1999
<TABLE>
<CAPTION>
Available for Sale Held for Investment
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $ 0 $ 0
Due from one to five years 9,000,000 8,826,563 0 0
Due from five to ten years 1,000,000 970,938 0 0
Due After ten years 122,868 113,119 375,000 355,634
=========== ========== ======== ========
10,122,868 9,910,620 375,000 355,634
</TABLE>
At September 30, 1999, securities with a carrying value of approximately
$2,912,346 were pledged to secure retail repurchase agreements, Treasury, tax
and loan deposits, and public funds. The securities portfolio at 9/30/99 had a
weighted average yield of 5.76 %.
13
<PAGE>
Table Eight
Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
Repricing Schedule as of September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less to Five Years Five Years Total
------- ------------- ---------- -----
Interest Earning Assets
<S> <C> <C> <C> <C>
Federal Funds Sold ......................................... $ 5,490 $ 0 $ 0 $ 5,490
Due From Banks: Int.-bearing ............................... 13 0 0 13
Investment Securities ...................................... 0 8,333 1,953 10,286
FHLB Stock ................................................. 164 0 0 164
Loans ...................................................... 46,646 2,450 262 49,358
======= ======= ====== =======
Total ...................................................... 52,313 10,783 2,215 65,311
Interest-Bearing Liabilities
NOW Accounts ............................................... 14,267 0 0 14,267
Savings & MMIA ............................................. 1,387 0 0 1,387
Time Deposits: $100m & > ................................... 10,095 100 0 10,195
Time Deposits: <$100m ...................................... 25,857 1,179 0 27,036
Repurchase Agreements ...................................... 1,808 0 0 1,808
TT&L Demand Note Funds ..................................... 248 0 0 248
======= ====== ====== ======
Total ...................................................... 53,662 1,279 0 54,941
Period Gap ................................................ (1,349) 9,504 2,215 10,370
Cumulative Gap ............................................. (1,349) 8,155 10,370
Period Gap Ratios:
Interest Sensitive Assets to
Interest Sensitive Liabilities ....................... 97.5% 8.43%
Cumulative Gap Ratios:
Interest Sensitive Assets to
Interest Sensitive Liabilities ....................... 97.5% 1.15%
</TABLE>
<TABLE>
<CAPTION>
3 Months Over 3 Months Over One
& Less to 12 Months Year Total
Time Deposits ------ ------------ ---- -----
<S> <C> <C> <C> <C>
$100,000 and Greater ..................... $3,289 $6,806 $100 $10,195
</TABLE>
14
<PAGE>
Table Nine
Selected Ratios
for the Periods Ending September 30
1999 1998
---- ----
Return on Average Assets ......................... .64 % .20 %
Return on Average Equity ......................... 3.64 % 1.32 %
Dividend Payout Ratio ............................ N/A N/A
Average Stockholders Equity
as a Percentage of Average Assets ................ 17.46 % 15.03 %
Year 2000 Readiness Disclosure
A critical issue affecting companies that rely on computer systems and other
electronic control devices is the Year 2000 (Y2K) issue. The Bank relies,
internally and almost exclusively, on its computer hardware and software systems
in the operation and monitoring of all major aspects of its business. The Bank
also relies, externally both directly and indirectly, on the computer systems of
other companies and organizations, such as deposit and loan customers of the
Bank, third-party service providers, creditors, and suppliers. Because of the
unprecedented nature of the issues inherent in computer operations related to
the upcoming century date change, the Bank instituted a formal Year 2000
Compliance Plan early in 1998 to identify, assess, and eliminate the risks to
mission critical operations with Year 2000 dating issues. As of September 30,
1999, this plan was approximately 99 % completed. All hardware and software
systems which were internally tested and found to be noncompliant have been
either upgraded or replaced. Substantially all external hardware and software
systems upon which mission critical operations are performed by a third-party
vendor have been tested by proxy and determined to be Year 2000 compliant.
Included in the Bank's planned process to eliminate the risks associated with
Year 2000 issues, the Bank's Year 2000 Compliance Plan includes a contingency
plan which, in the event of some unforeseen emergency, provides for alternate
means of completing operations defined as mission critical. As of September 30,
1999, the only remaining portion of the Plan to be completed is the "live"
testing of the Business Resumption Contingency Plan. These tests were
successfully completed in October. Through September 30, 1999, the Bank had
spent $16,300 in connection with Y2K. No substantial additional expenditures are
expected to be required. As part of its assessment, the Bank has been evaluating
Year 2000 compliance by those with whom it does business, and to date has not
discovered any Year 2000 problems with significant counter-parties that it
believes are reasonably likely to have a material adverse effect on the Bank.
However, no assurance can be given that potential Year 2000 problems of those
with whom the Bank does business will not occur, and if they occur, what
consequence to the Bank would result.
Although management believes that the most likely problems to be encountered at
the New Year will not amount to more than an inconvenience, because the results
of the Bank's remediation efforts will not be fully determined until the year
2000 and thereafter, management cannot give assurances that the Bank is or will
be immune from Year 2000 problems.
15
<PAGE>
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or the maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus of liquidity management being the ability to
obtain deposits within the Bank's service area. Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 65.9 % of total assets at September 30, 1999. Asset liquidity is
provided from several sources, including amounts due from banks and federal
funds sold, and funds from maturing loans. The Bank is a member of the FHLB of
Atlanta and, as such, has the ability to borrow against the security of its 1-4
family residential mortgage loans. The Bank also has $ 3.6 million available
through lines of credit with other banks as an additional source of liquidity
funding. Management believes that the Bank's overall liquidity sources are
adequate to meet its operating needs.
Capital Resources
The equity capital of the Bank increased $3,886,597 during 1998 as a result of
profit and the sale of $3,781,349 of common stock. For the nine months ended
September 30, 1999, equity capital of the Bank increased $293,846 as the result
of profitable operations, $292,663, and the exercising of stock options, $1,183.
The Bank is subject to regulatory capital adequacy standards. Under these
standards, financial institutions are required to maintain certain minimum
capital ratios of capital to risk-weighted assets and average total assets.
Under the provisions of the Federal Deposit Insurance Corporation Improvement
Act of 1991, federal financial institutions regulatory authorities are required
to implement prescribed "prompt corrective action" upon the deterioration of the
capital position of a bank. If the capital position of an affected institution
were to fall below certain levels, increasingly stringent regulatory corrective
actions are mandated.
The Bank's September 30, 1999 capital ratios are presented in the following
table, compared with the "well capitalized" and minimum ratios under the FDIC
regulatory definitions and guidelines:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
As of September 30, 1999 Actual adequacy purposes action provisions
(Dollars in thousands) ------ ----------------- -----------------
Minimum Minimum
------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) ........................ $ 11,534 21.7% $ 4,247 8.0% $ 5,309 10.0%
Tier 1 Capital (to risk
weighted assets) ........................ $ 10,870 20.5% $ 2,123 4.0% $ 3,185 6.0%
Tier 1 Capital (to
average assets) (leverage) .............. $ 10,870 15.9% $ 2,730 4.0% $ 3,413 5.0%
</TABLE>
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On September 30, 1999 the issuer issued 915,861 shares of its common
stock, no par value, in exchange for all of the outstanding, 915,861
shares of common stock of First South Bank, pursuant to a Plan of
Exchange approved by the shareholders. The transaction was exempt from
registration pursuant to Section 3(a)(12) of the Securities Act of
1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
from Item 601 of
Regulation S-B Description
-------------- -----------
3.1* Articles of Incorporation
3.2* By-laws
10.1 Plan of Exchange
27 Financial Data Schedule
(b) Reports on Form 8-K: None
_______________
*Incorporated by reference to Form 8-A filed November 12, 1999.
17
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First South Bancorp, Inc.
s/Barry L. Slider
November 15, 1999 ------------------------------------------------------
Barry L. Slider, President and Chief Executive Officer
s/V. Lewis Shuler
-------------------------------------------------------
V. Lewis Shuler, Executive Vice President
(Principal Accounting Officer)
18
APPENDIX A
PLAN OF EXCHANGE
This Plan of Exchange has been adopted as of the 11th day of March,
1999, by and between First South Bancorp, Inc., (the "Holding Company") and
First South Bank (the "Bank").
1. The name of the corporation whose shares will be acquired is First
South Bank.
2. The name of the acquiring corporation is First South Bancorp, Inc.
3. At the Effective Time, as hereinafter defined, every outstanding
share of the common stock of the Bank shall be exchanged for and one share of
the common stock of the Holding Company without any further action by the
holders of shares of common stock of the Bank. At the Effective Time, the
Holding Company shall, without any further action, become the owner and holder
of all of the issued and outstanding shares of the common stock of the Company.
4. The Effective Time shall be the time stated in, or, if no time is
stated, the time of the filing of, the Articles of Merger or Share Exchange
filed with the South Carolina Secretary of State.
5. After the Effective Time, persons who were holders of the common
stock of the Bank at and before the Effective Time shall have no further rights
as shareholders of the Bank.
6. After the Effective time, certificates representing shares of the
common stock of the Bank shall evidence only the right of the holders to
surrender such certificates to the Holding Company and receive certificates for
an equivalent number of shares of common stock of the Holding Company.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited Consolidated Balance Sheet at September 30, 1999 and the unaudited
Consolidated statement of Operations for the nine months ended September 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,321
<INT-BEARING-DEPOSITS> 13
<FED-FUNDS-SOLD> 5,490
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,449
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 49,358
<ALLOWANCE> 700
<TOTAL-ASSETS> 69,856
<DEPOSITS> 56,224
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,894
<LONG-TERM> 0
0
0
<COMMON> 4,579
<OTHER-SE> 6,159
<TOTAL-LIABILITIES-AND-EQUITY> 69,856
<INTEREST-LOAN> 2,913
<INTEREST-INVEST> 484
<INTEREST-OTHER> 153
<INTEREST-TOTAL> 3,550
<INTEREST-DEPOSIT> 1,694
<INTEREST-EXPENSE> 1,744
<INTEREST-INCOME-NET> 1,806
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,516
<INCOME-PRETAX> 444
<INCOME-PRE-EXTRAORDINARY> 293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293
<EPS-BASIC> .32
<EPS-DILUTED> .31
<YIELD-ACTUAL> 3.95
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 575
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 700
<ALLOWANCE-DOMESTIC> 700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
