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, 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 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, 917,180
shares outstanding on September 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
Consolidated Balance Sheets ................................ 3
Consolidated Statement of Operations ....................... 4
Consolidated Statement of Comprehensive Income ............. 5
Consolidated Statement of Cash Flows ....................... 6
Consolidated Statement of Changes in Shareholder Equity .... 7
Notes to Unaudited Consolidated Financial Statements ....... 8
Item 2. Management's Discussion and Analysis .................... 9-18
Part II - OTHER INFORMATION
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. AND SUBSIDIARY
Consolidated Balance Sheets
( $ amounts in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Sept. 30, Sept. 30, Dec. 31,
2000 1999 1999
---- ---- ----
Assets
<S> <C> <C> <C>
Cash & due from banks .................................................. $ 5,382 1,321 978
Due from banks - interest bearing ...................................... 5 13 12
Federal funds sold ..................................................... 10,100 5,490 2,850
Investment securities:
Securities held to maturity ................................... 3,375 375 375
Securities available for sale ................................. 10,072 10,074 9,972
Loans .................................................................. 77,102 47,924 57,001
Less, allowance for loan losses .................................. (1,010) (700) (800)
--------- --------- ---------
Loans - net ............................................................ 76,092 47,224 56,201
Property & equipment, net .............................................. 2,925 2,782 2,863
Other assets ........................................................... 2,410 2,510 1,804
--------- --------- ---------
Total assets ........................................................... $ 110,360 $ 69,789 $ 75,055
Liabilities
Deposits: Noninterest-bearing .......................................... $ 5,341 $ 3,272 $ 3,389
Interest-bearing .......................................... 90,330 52,885 55,326
--------- --------- ---------
Total deposits ......................................................... 95,671 56,157 58,715
Securities sold under repurchase agreements ............................ 1,678 1,808 1,723
Other borrowed funds ................................................... 0 0 2,500
Demand notes issued to the U.S. Treasury ............................... 175 248 234
Other liabilities ...................................................... 1,337 838 974
--------- --------- ---------
Total liabilities ................................... 98,861 59,051 64,146
Shareholders' equity
Common stock - no par value; 20,000,000 authorized, .................... 4,586 4,579 4,586
Outstanding 917,180, 915,861, 917,180, respectively
Additional paid-in capital ............................................. 6,504 6,488 6,504
Undivided profits / (loss) ............................................. 542 (198) 14
Accumulated other comprehensive income/(loss) .......................... (133) (131) (195)
--------- --------- ---------
Total shareholders' equity .................................. 11,499 10,738 10,909
Total liabilities and shareholders' equity .................. $ 110,360 $ 69,789 $ 75,055
</TABLE>
3
<PAGE>
FIRST SOUTH BANCORP, INC AND SUBSIDIARY
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Unaudited)
Period ended September 30,
Three Months Nine Months
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
<S> <C> <C> <C> <C>
Loans, including fees ................................. $ 2,048 $ 1,094 $ 5,345 $ 2,896
Investment securities ................................. 161 160 462 465
Federal funds sold .................................... 150 62 294 147
Other investments ..................................... 3 7 10 26
------- ------- ------- -------
Total interest income ................................. 2,362 1,323 6,111 3,534
Interest expense
Deposits and borrowings ............................... 1,331 677 3,318 1,744
Net interest income ............................................ 1,031 646 2,793 1,790
Provision for loan losses ............................. (80) (60) (210) (125)
------- ------- ------- -------
Net interest income after provision ............................ 951 586 2,583 1,665
Other income
Service charges on deposit accounts ................... 41 31 108 93
Other income .......................................... 69 142 257 239
------- ------- ------- -------
Total noninterest income .............................. 110 173 365 332
Other expenses
Salaries and benefits ................................. 451 329 1,298 893
Occupancy and equipment ............................... 128 90 344 259
Other expense ......................................... 163 174 511 402
------- ------- ------- -------
Total other expense ................................... 742 593 2,153 1,554
Income before income taxes ..................................... 319 166 795 443
Provision for income taxes ............................ 122 68 268 151
------- ------- ------- -------
Net income ..................................................... $ 197 $ 98 $ 527 $ 292
Basic per share earnings ....................................... $ .21 $ .11 $ .58 $ .32
</TABLE>
4
<PAGE>
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Comprehensive Income
(Unaudited)
Nine Months Ended September 30
2000 1999
---- ----
Net Income ....................................... $ 527,450 $ 292,663
Other comprehensive income (loss):
Change in unrealized holdings gains &
losses on available for sale securities ...... 100,272 (194,674)
Income tax (expense) benefit on other
comprehensive income (loss) ...... (38,103) 73,976
--------- ---------
Total other comprehensive income (loss) .......... 62,169 (120,698)
Comprehensive income (loss) ...................... 589,619 171,965
========= =========
5
<PAGE>
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
For the Nine Months ended September 30, 2000 and 1999
($ Amounts in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
(Dollars in thousands)
Operating Activities
<S> <C> <C>
Net income ................................................................................... 527 293
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ........................................................... 210 125
Depreciation ........................................................................ 149 129
Director fees ....................................................................... 29 20
Deferred tax asset .................................................................. (72) 0
Increase in other assets ............................................................ (582) (129)
Increase in accrued expenses and other liabilities .................................. 305 454
Net cash provided by operating activities .................................................... 566 892
Investing Activities
Purchase of securities available for sale ........................................... 0 (1,000)
Purchase of securities held for investment .......................................... (3,000) 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 ............................. 0 500
Origination of loans, net of principal collected .................................... (20,100) (13,943)
Purchase of premises and equipment .................................................. (223) (46)
Net cash used in investing activities ........................................................ (23,323) (14,048)
Financing Activities
Net increase in deposits ............................................................ 36,948 14,227
Net increase (decrease) in retail repurchase agreements ............................. (45) 482
Payment (decrease) of other borrowings .............................................. (2,500) 0
Net cash provided by financing activities .................................................... 34,403 14,759
Net increase in cash and cash equivalents .................................................... 11,646 1,603
Cash and cash equivalents, beginning ......................................................... 3,840 5,220
Cash and cash equivalents, ending ............................................................ 15,486 6,823
</TABLE>
6
<PAGE>
FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Changes in Shareholders' Equity
Year-ended December 31, 1999 and Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) INCOME/(LOSS) EQUITY
----- ------- --------- ------------- ------
Balance at
<S> <C> <C> <C> <C> <C>
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 OTHER TOTAL
COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME/(LOSS) EQUITY
----- ------- -------- ------------- ------
Balance at
<S> <C> <C> <C> <C> <C>
December 31, 1999 ......................... 4,585,900 6,504,239 14,211 (195,018) 10,909,332
Net income ................................ 527,450 - -
Net change in
unrealized gain on
available for sale
securities, net of tax .................... 62,169
Comprehensive income ...................... 589,619
--------- --------- ---------- ---------- ----------
Balance at
Sept 30, 2000 ............................. 4,585,900 6,504,239 541,661 (132,849) 11,498,951
</TABLE>
7
<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 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 nine months ended September 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 Bank's fiscal year ended December 31,
1999, contained in the Bank's registration statement on Form 10-SB.
8
<PAGE>
FIRST SOUTH BANCORP, INC.
Part I - Item 2
Management's Discussion and Analysis of Financial Results of Operations
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations 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: NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO
THE SAME PERIOD ENDED SEPTEMBER 30, 1999.
Net Income
For the first nine months of 2000, First South Bancorp, Inc. earned a net profit
of approximately $527.5 thousand, or $ .57 per share, compared to approximately
$292.7 thousand, or $ .32 per share, for the same period in 1999. This 80.2 %
increase in net income occurred despite (i) a 38.5 % increase in noninterest
expense from $ $1.55 million to $ 2.15 million, (ii) an increase in the
provision for loan losses related to loan growth from $125 thousand to $210
thousand, and (iii) only a slight, $ 32 thousand, increase in noninterest
income. Though the effective tax rate for 2000 was slightly less than that of
1999, 33.7 % versus 34.0 %, the primary source of the improved earnings was net
interest income. Net interest income increased slightly more than $1.0 million
during the first nine months of 2000, or 56.0 %, over the same period in 1999.
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 21.9 % and 72.8 %, respectively.
9
<PAGE>
Table One Selected Earnings Ratios
at or for the Periods Ending September 30
2000 1999
---- ----
Return on Average Assets .78% .64%
Return on Average Equity 6.29% 3.64%
Dividend Payout Ratio N/A N/A
Average Stockholders' Equity
as a Percentage of Average Assets 12.36% 17.46%
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 stated above, net interest
income for the first nine months of 2000 increased over that of the same period
in 1999 by $1.003 million, or 56.0%. A number of factors combined to produce the
change in net interest income during the first nine months of 2000.
Though growth in earning assets of $ 28.2 million, or 49.5 %, was a major factor
in the growth of interest income, the change in the earning assets mix also
contributed significantly to the improvement in the earning assets yield. The
segment of total earning assets with the highest interest yield, loans,
increased as a percentage of total earning assets from 72.7 % in 1999 to 80.0 %
in 2000. This change in earning assets mix, when coupled with the change in the
interest rate environment (the average prime rate for the first nine months of
2000 was 125 basis points over the average prime rate for the same period in
1999), accounted for 95 % of the increase in interest income.
For the first nine months of 2000, the cost of funds averaged 5.97 %, an
increase of 102 basis points over the average cost of funds rate of 4.95 % in
1999. Declining liquidity created by the loan demand in 2000 necessitated a
growth in deposits. This growth could only be accomplished by acquiring time
deposits at rates near or at the top of the market. The result of this increase
in high cost interest-bearing liabilities was a significant increase in the
Corporation's cost of funds. This increase in the cost of funds partially offset
the increase in the yield on earning assets. The overall effect of these changes
was an improvement in the interest spread of 28 basis points, from 3.35 % in
1999 to 3.63 % in 2000. First South Bancorp's net interest margin (net interest
income divided by total average earning assets) improved to 4.38 % in 2000 from
4.21 % in 1999.
10
<PAGE>
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 nine months ended September 30, 2000 and 1999.
Table Two Net interest Income and Average Balance Analysis
for the Nine Months Ended September 30
2000 and 1999
<TABLE>
<CAPTION>
Interest Average
Interest-Earning Assets (000) Average Balance Income/Expense Yield / Cost
--------------- -------------- ------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold .......................... $ 6,156 4,282 $ 294 147 6.38% 4.59%
Investments ................................. 10,844 11,252 472 491 5.81% 5.84%
Loans ....................................... 68,062 41,362 5,345 2,896 10.49% 9.36%
------- ------- ------- ------- ----- ----
Total Interest Earning Assets ............... $85,062 56,896 $ 6,111 3,534 9.60% 8.30%
Noninterest-Earning Assets
Cash & Due From Banks ....................... $ 1,666 1,299
Loan Loss Reserve ........................... (880) (620)
Investments: Fair value ..................... (349) (40)
Premises & Equipment ........................ 2,979 2,833
Interest Receivable & Other ................. 2,040 1,224
-------- --------
Total Noninterest-Earning Assets ............ $ 5,456 4,696
TOTAL ASSETS ................................ $ 90,518 61,592
======== ========
Interest-Bearing Liabilities
NOW Accounts ................................ $18,191 14,987 $ 712 500 5.23% 4.46%
Money Market & Savings ...................... 1,953 951 58 19 3.97% 2.67%
Time Deposits & IRA's ....................... 51,831 29,539 2,459 1,175 6.34% 5.32%
Fed Funds Purchased & Repos ................. 1,643 1,553 65 47 5.28% 4.04%
Other borrowed funds ........................ 398 0 17 0 5.70% 0%
Demand Notes Issued to Treasury ............. 179 108 7 3 5.22% 3.71%
------- ------- ------- ------- ---- ----
Total Interest-Bearing Liabilities .......... $74,195 47,138 $ 3,318 1,744 5.97% 4.95%
Noninterest-Bearing Liabilities
Demand Deposits ............................. $ 4,206 3,122
Interest Payable ............................ 660 358
Other Liabilities ........................... 264 220
------- -------
Total Noninterest-Bearing Liabilities ....... $ 5,130 3,700
Stockholders' Equity ........................ $11,193 10,754
Total Liabilities & Equity .................. $90,518 61,592
======= =======
Net Interest Income ......................... $ 2,793 $ 1,790
Net Yield on Earning Assets ....... 4.38% 4.21%
Interest Rate Spread .............. 3.63% 3.35%
</TABLE>
11
<PAGE>
Non-Interest Income
Non-interest income for the first nine months of 2000 grew by $ 33,000, or 9.9
%, over the 1999 amount of $332,000. Commissions and fees declined due primarily
to the reduction in commissions and fees generated by the bank's brokerage
services subsidiary, First South Financial Services, Inc. Table Three provides a
nine month 2000 to 1999 performance comparison of categories of non-interest
income.
Table Three Summary of Total Noninterest Income
for the Nine Months Ended September 30
2000 and 1999
(Dollars in thousands)
2000 1999
---- ----
Service Charges .................................. $108 $ 93
Commissions & Fees ............................... 185 193
Other Noninterest Income* ........................ 72 46
---- ----
Total ............................................ $365 $332
* 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 nine months of 2000 increased by $599,000, or
38.5 %, over the first nine months total in 1999 of $1,554,000. Some of the
operational expense increase in 2000 resulted from the growth the bank
experienced in the market area which existed in 1999. However, opening of a
branch office in Columbia, SC in the first quarter of 2000 was the single most
significant factor associated with the growth in non-interest expense.
Non-interest expense during the first nine months of 2000 for the Columbia
office, $381,000, represented 63.6 % of the total non-interest expense increase
experienced as of September 30, 2000.
Table Four provides a nine month 2000 to 1999 performance comparison of various
categories of non-interest expense.
Table Four For the Nine Months Ended September 30
2000 and 1999
(Dollars in thousands)
2000 1999
---- ----
Salaries & Employee Benefits ................... $1,298 $ 893
Occupancy & Equipment .......................... 344 259
Other .......................................... 511 402
------ ------
Total .......................................... $2,153 $1,554
12
<PAGE>
Income Taxes
Through September 30, 2000, $72,000 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 federal income tax
purposes in the current year. As a result, the amount accrued for income tax
payments in the first nine months of 2000 was 42.7% of income before taxes as
compared to 33.9% for the same period of 1999.
CHANGES IN FINANCIAL POSITION
Investment portfolio
During the first nine months of 2000, there were no maturities or calls of
investment securities. In September, three different $1,000,000 purchases of
government agency securities were made. Beyond the addition of these securities
to the Held-for-Investment category, the only change occurring in the investment
portfolio since December 31, 1999, as shown in Table Five, was in the market
value of available for sale investments.
Table Five Analysis of Investment Securities
($ amounts in thousands)
<TABLE>
<CAPTION>
September 30, 2000 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 ......................... 10,163 9,958 0 0
Due from five to ten years ......................... 0 0 1,000 988
Due After ten years ................................ 123 114 2,375 2,325
====== ====== ====== ======
10,286 10,072 3,375 3,313
<CAPTION>
December 31, 1999 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 ......................... 9,163 8,901 0 0
Due from five to ten years ......................... 1,000 962 0 0
Due After ten years ................................ 123 109 375 383
====== ===== ==== ====
10,286 9,972 375 383
</TABLE>
13
<PAGE>
Loan portfolio
For the twelve month period between September 30, 1999 and September 30, 2000,
loans increased by $29 million, or 60.9%. As shown in Table Six, however, the
composition of the loan portfolio on a percentage of the total basis remained
relatively stable. The greatest percentage changes took place in the categories
of Nonfarm Nonresidential Properties, which declined 3.5 % of the total, and
Commercial & Industrial, which increased 4.1% of the total.
As shown in Table Seven, during the period from September 30, 1999, to September
30, 2000, variable rate loans increased as a percentage of total loans from
88.0% to 91.7%.
On September 30, 2000, there was one loan, secured by real estate, for $353,000
which was 30 days past due, and one loan for $478,000 on nonaccrual status. The
loan on nonaccrual was secured by real estate and had an 80% government
guarantee.
Table Six Analysis of Loans
September 30 Balances
($ amounts in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
Real Estate:
<S> <C> <C> <C> <C>
Construction/Land Development ............................. $ 9,385 12.2% $ 5,494 11.5%
1-4 Family Residential Properties ......................... 17,816 23.1% 10,904 22.8%
Multifamily Residential Properties ........................ 1,091 1.4% 742 1.6%
Nonfarm Nonresidential Properties ......................... 25,245 32.7% 17,322 36.1%
Other Real Estate Loans ................................... 547 .7% 575 1.2%
Commercial & Industrial ...................................... 22,064 28.6% 11,739 24.5%
Consumer ..................................................... 502 .7% 590 1.2%
Other ........................................................ 452 .6% 558 1.1%
======= =======
TOTAL ........................................................ $77,102 100.0% $47,924 100.0%
</TABLE>
Table Seven Analysis of Loan Maturities and Repricing Frequency
as of September 30, 2000
($ amounts 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 ........................... $70,692 - - - - $70,692
Fixed Rate Loans .............................. $ 749 1,140 1,445 1,290 1,308 $ 5,932
------- ----- ----- ----- ----- -------
Total Loans ................................... $71,441 1,140 1,445 1,290 1,308 $76,624
</TABLE>
* Excludes nonaccrual loan amount
14
<PAGE>
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 to each individual loan and considers the risks of loss 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 Eight provides
the results of the year-to-date analysis for the periods ending September 30,
2000 and 1999, as well as the amounts charged to this reserve as a loss and
credited to this reserve as a recovery.
Table Eight
Analysis of the Allowance for Loan Losses
for the Nine Months Ended September 30
2000 1999
---- ----
Balance at Beginning of Year 800,000 575,000
Provision Charged to Operations 209,900 125,290
Loans Charged-off 0 (400)
Loan Recoveries 100 110
Balance At End Of Period 1,010,000 700,000
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
September 30, 2000, the cumulative one-year gap for the Bank was a positive, or
asset sensitive, $ 11.1 million. At September 30, 2000, the cumulative five-year
gap for the Bank was a positive $ 3.4 million, or 3.1 % 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 Nine
demonstrates how the relationship between interest-bearing assets and
interest-bearing liabilities was calculated for September 30, 2000.
15
<PAGE>
Table Nine
Distribution of Interest-Earning Assets and Interest-Bearing Liabilities
Repricing Schedule as of September 30, 2000
($ amounts in thousands)
<TABLE>
<CAPTION>
One Year Over One Year Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
Interest-Earning Assets
<S> <C> <C> <C> <C>
Federal Funds Sold ................................. 10,100 0 0 10,100
Investment Securities .............................. 0 10,000 3,498 13,498
FHLB Stock ......................................... 163 0 0 163
Loans** ............................................ 72,581 2,735 1,308 76,624
====== ====== ===== =======
Total .............................................. 82,844 12,735 4,806 100,385
</TABLE>
** Excludes $478 loan on nonaccrual status.
<TABLE>
<CAPTION>
Interest-Bearing Liabilities
<S> <C> <C> <C> <C>
NOW Accounts ........................................ 21,794 0 0 21,794
Savings & MMIA ...................................... 2,642 0 0 2,642
Time Deposits:$100m & > ............................. 15,038 3,894 0 18,932
Time Deposits: < $100m .............................. 30,443 16,519 0 46,962
Repurchase Agreements ............................... 1,678 0 0 1,678
TT&L Demand Note Funds .............................. 175 0 0 175
====== ====== ===== ======
Total ............................................... 71,770 20,413 0 92,183
Period Gap ......................................... 11,074 (7,678) 4,806 8,202
Cumulative Gap ...................................... 11,074 3,396 8,202
Period Gap Ratios:
Interest Sensitive Assets to
Interest Sensitive Liabilities ..................... 115.4% 62.4%
Cumulative Gap Ratios:
Interest Sensitive Assets to
Interest Sensitive Liabilities .................... 115.4% 103.7%
</TABLE>
<TABLE>
<CAPTION>
3 Months Over 3 Months Over One
Time Deposits & Less to 12 Months Year Total
------ ------------ ---- -----
<S> <C> <C> <C> <C>
$100,000 and Greater ................................ 875 14,163 3,894 18,932
</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 69.5 % of total assets at September 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 $5.5 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 $761,000 between the September 30
periods ending 2000 and 1999, and $590,000 from December 31, 1999, to September
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.
The Bank's September 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:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
As of Sept. 30, 2000 Actual adequacy purposes action provisions
------ ----------------- -----------------
Minimum Minimum
------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk .................... $12,637 15.7% $ 6,429 8.0% $ 8,037 10.0%
weighted assets)
Tier 1 Capital (to risk ................... $11,632 14.5% $ 3,215 4.0% $ 4,822 6.0%
weighted assets)
Tier 1 Capital (to ........................ $11,632 10.5% $ 4,414 4.0% $ 5,518 5.0%
average assets) (leverage)
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS: THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999.
Net income for the third quarter of 2000 increased by $ 98,000, or 99.4 %, over
the same period in 1999. Net noninterest expense (noninterest expense less
noninterest income) in the third quarter of 2000 exceeded that for the 1999
period by $212,000, or 50.4 %, and the provision for loan losses and the
provision for income taxes increased in the 2000 period by $20,000 and $54,000,
respectively.
Improved earnings were derived solely from the improvement in net interest
income, which improved due to growth of earning assets, actual and relative to
the growth in interest-bearing liabilities, and the increased interest spread
between the yield on earning assets and the funds cost of interest-bearing
liabilities. This improvement is reflected below.
<TABLE>
<CAPTION>
Third Quarter
($ amounts in thousands)
Average Balances 2000 1999 Increase
---- ---- --------
<S> <C> <C> <C>
Earning assets ................................................ $95,622 $62,487 $33,135
Earning assets yield($) ....................................... 2,362 1,323 1,039
Earning assets yield(%) ....................................... 9.80% 8.40% 1.40%
Interest-bearing liabilities .................................. $84,571 $53,529 $31,042
Cost of funds($) .............................................. 1,331 677 654
Cost of funds(%) .............................................. 6.24% 5.02% 1.22%
Interest Spread($) ............................................ $ 1,031 $ 646 $ 385
Interest Spread(%) ............................................ 3.56% 3.38% .18%
</TABLE>
18
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Exhibits and Reports on Form 8-K
(a) Exhibit No. From
Item 601 of
Regulation S-B Description
-------------- -----------
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 caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First South Bancorp, Inc.
November 13, 2000 /s/V. Lewis Shuler
-----------------------------------------
V. Lewis Shuler, Executive Vice President
(Principal Accounting Officer)
