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 JUNE 30, 2000
Commission File Number
000-28037
FIRST SOUTH BANCORP, INC.
(Exact Name of Small Business Issuer)
SOUTH CAROLINA 57-1086258
(State of Incorporation) (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 required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
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, 917,180
shares outstanding on June 30, 2000.
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [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
Statement of Changes in Shareholders' Equity.....................7
Notes to Unaudited Statements....................................8
Item 2. Management's Discussion and Analysis..........................9-18
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............19
Item 6. Exhibits and Reports on Form 8-K................................19
SIGNATURES ............................................................20
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FIRST SOUTH BANCORP, INC.
Consolidated Balance Sheets
( $ amounts in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
June 30, June 30, December 31,
2000 1999 1999
---- ---- ----
Assets
<S> <C> <C> <C>
Cash and due from banks ................................................... $ 1,661 $ 1,124 $ 978
Due from banks - interest bearing ......................................... 330 9 12
Federal funds sold ........................................................ 7,500 3,325 2,850
Investment securities:
Securities held to maturity .......................................... 375 375 375
Securities available for sale ........................................ 9,930 10,562 9,972
Loans ..................................................................... 72,220 43,716 57,001
Less allowance for loan losses ....................................... (903) (640) (800)
-------- -------- --------
Loans - net ............................................................... 71,290 43,076 56,201
Property and equipment, net ............................................... 3,018 2,815 2,863
Other assets .............................................................. 1,984 751 1,804
-------- -------- --------
Total assets ..................................................... $ 96,088 $ 62,037 $ 75,055
======== ======== ========
Liabilities
Deposits:
Noninterest-bearing .................................................. $ 5,624 $ 2,805 $ 3,389
Interest-bearing ..................................................... 76,436 46,470 55,326
-------- -------- --------
Total deposits ................................................... 82,060 49,275 58,715
Securities sold under repurchase agreements ............................... 1,497 1,361 1,723
Other borrowed funds ...................................................... 0 0 2,500
Demand notes issued to the U. S. Treasury ................................. 331 160 234
Other liabilities ......................................................... 986 610 974
-------- -------- --------
Total liabilities ................................................ 84,874 51,406 64,146
Shareholders' equity
Common - no par value; 20,000,000 shares authorized;
outstanding 917,180; 915,759; 917,180, respectively
4,586 4,579 4,586
Additional paid-in capital ................................................ 6,504 6,488 6,504
Undivided profits (loss) .................................................. 345 (297) 14
Accumulated other comprehensive income (loss) ............................. (221) (139) (195)
-------- -------- --------
Total shareholders' equity ....................................... 11,214 10,631 10,909
-------- -------- --------
Total liabilities and shareholders' equity ....................... $ 96,088 $ 62,037 $ 75,055
======== ======== ========
</TABLE>
3
<PAGE>
FIRST SOUTH BANCORP, INC
Statement of Operations
<TABLE>
<CAPTION>
(Unaudited)
Period ended June 30,
Three Months Six Months
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
<S> <C> <C> <C> <C>
Loans, including fees ................................. $ 1,793 $ 932 $ 3,297 $ 1,803
Investment securities ................................. 150 153 301 305
Federal funds sold .................................... 108 42 145 84
Other investments ..................................... 3 0 6 19
------- ------- ------- -------
Total interest income ................................. 2,054 1,127 3,749 2,211
Interest expense
Deposits and borrowings ............................... 1,120 548 1,987 1,067
Net interest income ............................................ 934 579 1,762 1,144
Provision for loan losses ............................. (95) (35) (130) (65)
------- ------- ------- -------
Net interest income after provision ............................ 839 544 1,632 1,079
Other income
Service charges on deposit accounts ................... 36 31 67 62
Other income .......................................... 94 52 188 98
------- ------- ------- -------
Total noninterest income .............................. 130 83 255 160
Other expenses
Salaries and benefits ................................. 438 294 848 564
Occupancy and equipment ............................... 117 83 215 170
Other expense ......................................... 166 106 348 228
------- ------- ------- -------
Total other expense ................................... 721 483 1,411 962
Income before income taxes ..................................... 248 144 476 277
Provision for income taxes ............................ 89 33 146 83
------- ------- ------- -------
Net Income ..................................................... $ 159 $ 111 $ 330 $ 194
Basic per share earnings .............................. $ .17 $ .12 $ .36 $ .21
</TABLE>
4
<PAGE>
FIRST SOUTH BANCORP, INC.
Statement of Comprehensive Income
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Net Income ............................................................................... $ 330,509 $ 194,418
Other comprehensive income (loss):
Change in unrealized holdings gains and losses on
available for sale securities ....................................................... (41,636) (207,177)
Income tax (expense) benefit on other comprehensive income (loss) ........................ 15,822 78,727
--------- ---------
Total other comprehensive income (loss) .................................................. (25,814) (128,450)
--------- ---------
Comprehensive income ..................................................................... $ 304,695 $ 65,968
========= =========
</TABLE>
5
<PAGE>
FIRST SOUTH BANCORP, INC.
Statement of Cash Flows
For the Six Months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30
2000 1999
---- ----
(Dollars in thousands)
Operating Activities
<S> <C> <C>
Net Income ................................................................................. $ 330 $ 194
Adjustment to reconcile net income to net cash provided by operating
activities
Provision for loan losses ......................................................... 130 65
Depreciation ...................................................................... 96 86
Director fees ..................................................................... 18 14
(Accretion) amortization, net ..................................................... 0 0
Deferred tax asset ................................................................ (48) 0
Increase in other assets .......................................................... (336) (264)
Increase (decrease) in accrued expenses and other liabilities ..................... (2,084) 236
-------- --------
Net cash provided (used) by operating activities ........................................... (1,894) 331
Investing Activities
Purchase of securities available for sale ......................................... 0 (1,000)
Purchase of securities held for investment ........................................ 0 0
Purchase of restricted FHLB stock ................................................. 0 (59)
Proceeds from call of available for sale securities ............................... 0 500
Proceeds from maturities of held to maturity securities ........................... 0 0
Origination of loans, net of principal collected .................................. (15,219) (7,857)
Purchase of premises and equipment ................................................ (356) (38)
-------- --------
Net cash used in investing activities ...................................................... (15,575) (8,454)
Financing Activities
Net increase in deposits .......................................................... 23,345 7,328
Net increase (decrease) in retail repurchase agreements ........................... (226) 34
-------- --------
Net cash provided by financing activities .................................................. 23,119 7,362
Net increase (decrease) in cash and cash equivalents ....................................... 5,650 (761)
Cash and cash equivalents, beginning ....................................................... 3,840 5,220
Cash and cash equivalents, ending .......................................................... 9,490 4,459
</TABLE>
6
<PAGE>
FIRST SOUTH BANCORP, INC.
Statement of Changes in Shareholders' Equity
Year-ended December 31, 1999 and Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Accumulated Other Total
Common Paid-In Earnings Comprehensive Stockholders'
Stock Capital (Deficit) Income (loss) Equity
----- ------- --------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ................ 4,578,795 6,487,737 (490,801) (10,896) 10,564,835
Exercised stock options ..................... 510 674 1,184
Stock in lieu of director fees .............. 6,595 15,828 22,423
Net income .................................. 505,012
Net change in unrealized gain
on available for sale
securities, net of tax .................. (184,122)
Comprehensive income ........................ 320,890
--------- --------- ------ -------- ----------
Balance at December 31, 1999 ................ 4,585,900 6,504,239 14,211 (195,018) 10,909,332
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Accumulated Other Total
Common Paid-In Earnings Comprehensive Stockholders'
Stock Capital (Deficit) Income (loss) Equity
----- ------- --------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ............... 4,585,900 6,504,239 14,211 (195,018) 10,909,332
Stock in lieu of director fees ............. - - - - -
Net income ................................. 330,509 - -
Net change in unrealized gain
on available for sale
securities, net of tax ................. (25,814)
Comprehensive income ....................... 304,695
--------- --------- ----------- ----------- -----------
Balance at June 30, 2000 ................... 4,585,900 6,504,239 344,720 (220,832) 11,214,027
</TABLE>
7
<PAGE>
FIRST SOUTH BANCORP, INC.
Notes to Unaudited 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 SB 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 six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. For further information, please refer to the financial
statements and footnotes thereto for the Company's fiscal year ended December
31, 1999, contained in the Company's annual report on Form 10-KSB.
8
<PAGE>
FIRST SOUTH BANCORP, INC.
Item 2. Management's Discussion and Analysis
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 the purpose of the safe harbor provided by Section 21E
of the Securities Exchange Act of 1934, as amended. The Corporation cautions
readers that forward looking statements, including without limitation, those
relating to the Corporation's 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 Corporation's reports filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS: SIX MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE SAME
PERIOD ENDED JUNE 30, 1999.
Net Income
For the first six months of 2000, First South Bancorp, Inc. earned a net profit
of $330,000, compared to $194,000 for the same period in 1999, an increase of
70.0 % or $136,000. Basic earnings per share were $.36 in the 2000 period,
compared to $ .21 for the 1999 period. The improvement in net income for the
period can be attributed primarily to one income component, net interest income.
Net interest income increased $617,500 or 54.0 %. That increase was supplemented
by a $95,000 increase in noninterest income for the period but was reduced by a
$449,000 increase in noninterest expense and a $65,000 increase in the loan loss
reserve provision amount.
Profitability
Earnings of financial institutions are most commonly measured through ROAA
(return on average assets) and ROAE (return on average equity). Return on
average assets is the income for the period, annualized, divided by the average
assets for the period. Return on average equity is the income for the period,
annualized, divided by the average equity for the period. As is shown in Table
One, ROAA and ROAE for the period increased by 14.7 % and 63.0 %, respectively.
Table One
Selected Earnings Ratios
at or for the Periods Ending June 30
2000 1999
---- ----
Return on Average Assets ...................... .78% .68%
Return on Average Equity ...................... 6.00% 3.68%
Dividend Payout Ratio ......................... N/A N/A
Average Stockholders Equity
as a Percentage of Average Assets ......... 13.03% 18.36%
9
<PAGE>
The improvement in ROAA and ROAE can be primarily attributed to changes in the
balance sheet, volume and composition, and the interest rate environment.
Details of these changes are provided in the following discussion of net
interest income.
Net Interest Income
Net interest income, the major component of First South Bancorp's income, is the
amount by which interest and fees on earning assets exceeds the interest paid on
interest bearing liabilities, primarily deposits. As was stated earlier, net
interest income for the first six months of 2000 increased over that of the same
period in 1999 by $617,500, or 54.0 %. As in most, if not all, instances of
comparing the net interest income performance between two different time
periods, a number of factors combined to provide the improvement First South
Bancorp experienced during the first six months of 2000.
Though growth in earning assets of $ 25.6 million, or 47.5 %, was certainly a
significant factor in the improvement of net interest income, the change in the
earning assets mix also contributed to the improvement experienced. The segment
of total earning assets with the highest interest yield, loans, increased as a
percentage of total earning assets from 72.2 % in 1999 to 80.7 % in 2000. The
growth in earning assets, coupled with the change in earning assets mix during a
period when interest rates were rising, combined to add 1.21% to the total
earning assets yield.
For the first six months of 2000, the cost of funds averaged 5.80 %, an increase
of 0.9% over the average cost of funds rate of 4.90 % in 1999. This increase in
the cost of funds partially offset the increase in the yield on earning assets.
The effect of these changes was an improvement in the interest spread of 0.31%,
from 3.35 % in 1999 to 3.66 % in 2000. First South Bancorp's net interest margin
(net interest income divided by total average earning assets) improved to 4.45 %
in 2000 from 4.27 % in 1999.
Table Two includes a detailed comparison of the average balances, yields and
rates for the interest sensitive segments of the Corporation's balance sheets
for the six months ended June 30, 2000 and 1999.
10
<PAGE>
Table Two
Net interest Income and Average Balance Analysis
for the Six Months Ended June 30
2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Interest Average
Average Balance Income/Expense Yield/cost
--------------- -------------- ----------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Interest Earning Assets
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold ........................ $ 4,712 3,641 $ 145 84 6.19% 4.65%
Investments ............................... 10,661 11,363 307 324 5.76% 5,76%
Loans ..................................... 64,317 39,039 3,297 1,803 10.31% 9.31%
------- ------ ------- ----- ----- ----
Total Interest Earning Assets ............. $79,690 54,043 $ 3,749 2,211 9.46% 8.25%
Noninterest-Earning assets
Cash and Due From Banks ................... $ 1,591 1,306
Loan Loss Reserve ......................... (839) (597)
Investments: Fair value ................... (377) (50)
Premises and Equipment .................... 2,971 2,848
Interest Receivable and Other ............. 1,961 520
------- ------
Total Noninterest-Earning Assets .......... 5,315 4,027
TOTAL ASSETS .............................. $85,005 58,070
======= ======
Interest-Bearing Liabilities
NOW Accounts .............................. $17,499 14,391 $ 444 314 5.10% 4.40%
Money Market and Savings .................. 1,941 797 36 10 3.73% 2.53%
Time Deposits and IRA's ................... 47,055 27,178 1,433 714 6.17% 5.30%
Fed Funds Purchased and Repos ............. 1,655 1,404 43 27 5.22% 3.81%
Other borrowed funds ...................... 600 0 17 0 5.70% 0%
Demand Notes Issued to Treasury ........... 200 106 4 2 4.02% 3.80%
------- ------ ------ ----- ---- ----
Total Interest-Bearing Liabilities ........ $68,950 43,876 $1,987 1,067 5.80% 4.90%
Noninterest-Bearing Liabilities
Demand Deposits ........................... $ 4,148 3,006
Interest Payable .......................... 577 334
Other Liabilities ......................... 247 190
------- ------
Total Noninterest-Bearing Liabilities ..... $ 4,972 3,530
Stockholders' Equity ...................... $11,083 10,664
Total Liabilities and Equity .............. $85,005 58,070
======= ======
Net Interest Income ....................... $ 1,762 $ 1,144
Net Yield on Earning Assets ............... 4.45% 4.27%
Interest Rate Spread ...................... 3.66% 3.35%
</TABLE>
11
<PAGE>
Non-Interest Income
Non-interest income for the first six months of 2000 grew to $ 255,000 from $
160,000 in 1999. Most of this $95,000 increase was in the area of commissions
and fees, which increased by $73,000. Commissions and fees generated by the
bank's brokerage services subsidiary, First South Financial Services, Inc.,
accounted almost exclusively for this increase. Table Three provides a six month
2000 to 1999 performance comparative of categories of non-interest income.
Table Three
Summary of Total Noninterest Income
for the Six Months Ended June 30
2000 and 1999
(Dollars in thousands)
2000 1999
---- ----
Service Charges ............................ $ 67 $ 62
Commissions and Fees ....................... 138 65
Other Noninterest Income* .................. 49 32
------ -----
Total ...................................... $ 254 $ 160
* Premiums on government guaranteed loans sold in the secondary market continued
to account for most of the amount in this category of noninterest income in both
periods.
Non-Interest Expense
Non-interest expense for the first six months of 2000 increased by $449,000, or
46.7 %, over the first six months total in 1999 of $961,000. While some of the
operational expense increase experienced in 2000 resulted from the growth the
bank experienced in the market area which existed in 1999, adding a branch
office in Columbia, S.C. in the first quarter of 2000 was the single most
significant factor associated with the growth in non-interest expense.
Non-interest expense for the Columbia office, $256,000, represented 56.8 % of
the total increase experienced in 2000.
Table Three provides a six month 2000 to 1999 performance comparative of various
categories of non-interest expense.
Table Three
Summary of Total Noninterest Expense
For the Six Months Ended June 30
2000 and 1999
(Dollars in thousands)
2000 1999
---- ----
Salaries and Employee Benefits ............ $ 847 $ 563
Occupancy and Equipment ................... 214 169
Other ..................................... 347 227
------ ------
Total ..................................... $1,410 $ 961
12
<PAGE>
Income Taxes
Through June 30, 2000, $48,000 had been accrued as a deferred tax benefit
resulting from a deferred tax asset created by income transferred to the
provision for loan losses above the amount deductible for income tax purposes in
the current year. The non-deductibility for federal income tax purposes of the
$130,000 year-to-date charge to earnings as a provision for potential future
loan losses created a significant increase in 2000 over 1999 of the percentage
of income being accrued for income tax payments, 40.7 % and 29.9 %,
respectively.
CHANGES IN FINANCIAL POSITION
Investment portfolio
During the first six months of 2000, there have been no purchases, maturities,
or calls of investment securities. As is shown in Table Four, the only changes
which have occurred in the investment portfolio during this six month have been
in the market value of the securities.
Table Four
Analysis of Investment Securities
(Dollars in thousands)
<TABLE>
<CAPTION>
Available for Sale Held for Investment
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
June 30, 2000
<S> <C> <C> <C> <C>
Due in one year or less ............................ $ 0 $ 0 $ 0 $ 0
Due from one to five years ......................... 9,163 8,860 0 0
Due from five to ten years ......................... 1,000 958 0 0
Due After ten years ................................ 123 112 375 354
======= ====== ======= =======
$10,286 $9,930 $ 375 $ 354
</TABLE>
<TABLE>
<CAPTION>
Available for Sale Held for Investment
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
December 31, 1999
<S> <C> <C> <C> <C>
Due in one year or less ............................ $ 0 $ 0 $ 0 $ 0
Due from one to five years ......................... 9,163 8,900 0 0
Due from five to ten years ......................... 1,000 962 0 0
Due after ten years ................................ 123 109 375 383
======= ====== ======= =======
$10,286 $9,971 $ 375 $ 383
</TABLE>
Loan portfolio
From June 30, 1999 to June 30, 2000, loans increased by $28.5 million, or 65.2
%. As is shown in Table Five, however, the composition of the loan portfolio
remained approximately the same.
13
<PAGE>
The bank's loan portfolio on June 30, 2000, as shown in Table Six, continued to
be comprised of a significant percentage, 88.0 %, of variable rate loans as
compared to 91.3% at June 30, 1999.
On June 30, 2000, there was one loan in the amount of $352,000 which was 30 days
past due. This loan is secured by real estate. Also on June 30, 2000, the bank
had one loan on nonaccrual status. This loan, in the amount of $678,000, is
secured by real estate and also has a government guarantee of 80 % of the amount
outstanding.
Table Five
Analysis of Loans
June 30 Balances
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
Real Estate:
<S> <C> <C> <C> <C>
Construction / Land Development ........ $ 9,428 13.0% $ 4,880 11.2%
1-4 Family Residential Properties ...... 15,408 21.3% 9,606 22.0%
Multifamily Residential Properties ..... 1,102 1.5% 749 1.7%
Nonfarm Nonresidential Properties ...... 24,479 33.9% 16,423 37.5%
Other Real Estate Loans ................ 549 .8% 381 .9%
Commercial & Industrial ................... 20,696 28.7% 11,043 25.3%
Consumer .................................. 558 .8% 634 1.4%
---------- ----------
TOTAL ..................................... $ 72,220 100.0% $ 43,716 100.0%
</TABLE>
Table Six
Analysis of Loan Maturities and Repricing Frequency
as of June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Within >3 Months >1 Year >3 Years Over
3 Months 12 Months 3 Years 5 Years 5 years Total
-------- --------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Variable Rate Loans .............. $62,983 $62,983*
Fixed Rate Loans ................. 2,693 $1,572 $1,427 $1,449 $1,418 8,559
------- ------ ------ ------ ------ -------
Total Loans ...................... $65,676 $1,572 $1,427 $1,449 $1,418 $71,542
</TABLE>
* Excludes nonaccrual loan amount
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 each individual loan and considers the loss risks associated
with 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. Table Seven provides
the results of the year-to-date analysis for the periods ending June 30, 2000
and 1999, as well as the amounts charged to this reserve as a loss and credited
to this reserve as a recovery.
14
<PAGE>
Table Seven
Analysis of the Allowance for Loan Losses
for the Six Months Ended June 30
2000 1999
---- ----
Balance at Beginning of Year ............. $800,000 $575,000
Provision Charged to Operations .......... 130,000 65,320
Loans Charged-off ........................ 0 (400)
Loan Recoveries .......................... 0 80
-------- --------
Balance At End Of Period ................. $930,000 $640,000
Interest rate risk
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 June 30,
2000, the cumulative one-year gap for the Bank was a positive or asset sensitive
$ 14.3 million. At June 30, 1999, the cumulative five-year gap for the Bank was
a positive $ 8.5 million or 8.8 % of total assets. These positive positions are
the results of management's efforts to reposition the balance sheet to improve
earnings in a rising interest rate environment. A positive gap means that assets
would reprice faster than liabilities 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 pressure quality loan rates downward while conversely
pressuring deposit rates upward. Table Eight demonstrates how the relationship
between interest-bearing assets and interest-bearing liabilities was calculated
for June 30, 2000.
15
<PAGE>
Table Eight
Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
Repricing Schedule as of June 30, 2000
(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 .......................................... $ 7,500 $ 0 $ 0 $ 7,500
Investment Securities ....................................... 0 9,000 1,498 10,498
FHLB Stock .................................................. 163 0 0 163
Loans ** .................................................... 67,248 2,876 1,418 71,542
-------- -------- -------- --------
Total ....................................................... $ 74,911 $ 11,876 $ 2,916 $ 89,703
**Excludes $678 loan on nonaccrual status
Interest-Bearing Liabilities
NOW Accounts ................................................ $ 18,213 $ 0 $ 0 $ 18,213
Savings and MMIA ............................................ 1,411 0 0 1,411
Time Deposits: $100,000 and over ............................ 12,266 3,268 0 15,534
Time Deposits <$100,000 ..................................... 26,919 14,359 0 41,278
Repurchase Agreements ....................................... 1,497 0 0 1,497
TT&L Demand Note Funds ...................................... 331 0 0 331
-------- -------- -------- --------
Total ....................................................... $ 60,637 $ 17,627 $ 0 $ 78,264
Period Gap .................................................. 14,274 (5,751) 2,916 14,355
Cumulative Gap .............................................. 14,274 8,523 11,439
Period Gap Ratios
Interest Sensitive Assets to Interest
Sensitive Liabilities ................................... 123.5% 67.4%
Cumulative Gap Ratios:
Interest Sensitive Assets to Interest
Sensitive Liabilities ................................... 123.5% 110.9%
</TABLE>
<TABLE>
<CAPTION>
3 Months Over 3 Months Over One
and Less To 12 Months Year Total
-------- ------------ ---- -----
<S> <C> <C> <C> <C>
Time Deposits $100,000 and Greater ......................... $ 397 $11,869 $ 3,268 $15,534
</TABLE>
16
<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 on 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 69.2 % of total assets at June 30, 2000. 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 $5.1 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 Company increased $ 583,000 between the June 30
periods ending 2000 and 1999, and $305,000 from December 31, 1999, to June 30,
2000. These increases resulted from the earnings retained during these periods.
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. For regulatory purposes, the adequacy of the Company's
capital is measured by the adequacy of the Bank's capital.
The Bank's June 30, 2000 capital ratios are presented in the following table,
compared with the "well capitalized" and minimum ratios under the FDIC
regulatory definitions and guidelines:
17
<PAGE>
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
------ ----------------- -----------------
Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2000
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) .............. $ 12,365 16.4% $6,022 8.0% $ 7,528 10.0%
Tier 1 Capital (to risk
weighted assets) .............. $11,435 15.2% $ 3,011 4.0% $ 4,517 6.0%
Tier 1 Capital (to average
assets) (leverage) ............ $11,435 12.4% $ 3,681 4.0% $4,602 5.0%
</TABLE>
RESULTS OF OPERATIONS: THREE MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE
SAME PERIOD ENDED JUNE 30, 1999.
Net income for the second quarter of 2000 increased by $ 48,000, or 43.2 %, over
the same period in 1999. Noninterest expense was $ 721,000 during the second
quarter 2000 period and exceeded noninterest expense for the same period in 1999
by $238,000, reflecting the cost of operating the new branch, while noninterest
income of $ 130,000 exceeded that of 1999 by only $ 47,000. However, net
interest income in the three months ended June 30, 2000 was $295,000 greater
than net interest income for the same period of 1999.
Net interest income improved due to growth of earning assets, actual and
relative to the growth in interest-bearing liabilities, and the increased
interest spread between the yield on earning assets and the funds cost of
interest-bearing liabilities. This improvement is demonstrated below.
Three months ended June 30,
(Dollars in thousands)
Average Balances 2000 1999 Increase
---------------- ---- ---- --------
Earning assets ....................... $ 86,209 $ 55,894 $ 30,315
Earning assets yield ($) ............. 2,054 1,127 934
Earning assets yield (%) ............. 9.56% 8.09% 1.47%
Interest-bearing liabilities ......... $ 75,276 $ 45,789 $ 29,487
Cost of funds ($) .................... 1,120 548 572
Cost of funds (%) .................... 5.97% 4.80% 1.17%
Interest Spread ($) .................. $ 934 579 355
Interest Spread (%) .................. 3.59% 3.29% .30%
18
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Corporation held its annual meeting of shareholders on April
26, 2000.
(b) The following persons were elected as directors of the
Corporation.
Name Shares Voted
---- ------------
FOR WITHHOLD
--- --------
Harold E. Fleming, MD 688,106 1,200
Joel C. Griffin 688,106 1,200
Barry L. Slider 688,106 1,200
Richard H. Brooks 688,106 1,200
Herman E. Ratchford 688,106 1,200
David G. White 688,106 1,200
Roger A. F. Habisreutinger 688,106 1,200
Chandrakant V. Shanhbag 688,106 1,200
Ashley F. Houser 688,106 1,200
(c) The shareholders also approved an amendment to the Stock Option
Plan of First South Bancorp., Inc., to increase the number of
shares which may be issued under the plan from 75,000 to 150,000.
The vote was:
FOR - 615,315 shares
AGAINST - 8,250 shares
ABSTAIN - 3,641 shares
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits included with this report:
27 - Financial Data Schedule
(b) Reports on Form 8-K : None
19
<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.
August 11, 2000 s/ Barry L. Slider
------------------------------------
Barry L. Slider, President and Chief
Executive Officer
s/V. Lewis Shuler
-----------------------------------
V. Lewis Shuler, Executive Vice President
(Principal Accounting Officer)
