-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fqh2993e6OuRFiKT1FLLVRlzc94T15MudsT3mKlCssyczIxAu4FksGKOMjUpoTKh WIk1Jzc9UGJ8QbR3yFPZag== 0001012709-02-001128.txt : 20020813 0001012709-02-001128.hdr.sgml : 20020813 20020813104931 ACCESSION NUMBER: 0001012709-02-001128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST SOUTH BANCORP INC /VA/ CENTRAL INDEX KEY: 0001027183 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561999749 STATE OF INCORPORATION: VA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22219 FILM NUMBER: 02728240 BUSINESS ADDRESS: STREET 1: 1311 CAROLINA AVE CITY: WASHINGTON STATE: NC ZIP: 27889 BUSINESS PHONE: 2529464178 MAIL ADDRESS: STREET 1: 1311 CAROLINA AVENUE CITY: WASHINGTON STATE: NC ZIP: 27889 FORMER COMPANY: FORMER CONFORMED NAME: NEWSOUTH BANCORP INC DATE OF NAME CHANGE: 19961115 10-Q 1 x10q-802.txt FIRST SOUTH BANCORP., INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________. Commission File Number: 0-22219 FIRST SOUTH BANCORP, INC. ------------------------- (Exact name of registrant as specified in its charter) VIRGINIA 56-1999749 ----------------------- ----------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1311 CAROLINA AVENUE, WASHINGTON, NORTH CAROLINA 27889 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (252) 946-4178 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock outstanding as of August 6, 2002: 4,343,943 CONTENTS PART I. FINANCIAL INFORMATION PAGE --------------------- ---- Item 1. Financial Statements Consolidated Statements of Financial Condition as of June 30, 2002 (unaudited) and December 31, 2001 1 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited) 2 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2002 (unaudited) 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 14 Exhibits 15 FIRST SOUTH BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30 DECEMBER 31 2002 2001 -------------- -------------- ASSETS (UNAUDITED) Cash and due from banks $ 23,067,061 $ 20,292,541 Interest-bearing deposits in financial institutions 7,897,214 1,390,541 Investment securities - available for sale 54,478,274 54,061,442 Mortgage-backed securities - available for sale 35,709,109 43,903,624 Loans and leases receivable, net: Held for sale 22,720,993 29,283,037 Held for investment 410,988,138 376,330,018 Premises and equipment, net 7,875,714 7,934,288 Deferred income taxes 382,807 652,566 Real estate owned 454,322 677,399 Federal Home Loan Bank of Atlanta stock, at cost which approximates market 2,712,500 2,712,500 Accrued interest receivable 3,302,377 3,465,523 Intangible assets 5,341,843 5,248,944 Other assets 1,845,425 2,000,783 Note receivable 1,350,622 1,364,383 -------------- -------------- Total assets $ 578,126,399 $ 549,317,589 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 179,116,889 $ 152,563,977 Savings 19,465,973 18,864,783 Large denomination certificates of deposit 74,910,582 63,318,050 Other time 233,335,751 240,841,695 -------------- -------------- Total deposits 506,829,195 475,588,505 Borrowed money 4,809,131 5,441,340 Other liabilities 13,492,527 17,256,363 -------------- -------------- Total liabilities 525,130,853 498,286,208 Common stock, $.01 par value, 8,000,000 shares authorized, 6,545,848 and 4,364,044 shares issued 65,458 43,640 Additional paid in capital 48,484,275 48,494,267 Retained earnings, substantially restricted 31,551,939 28,548,510 Treasury stock at cost, 2,148,371 and 2,099,560* shares (30,194,754) (28,703,532) Accumulated other comprehensive income, net 3,088,628 2,648,496 -------------- -------------- Total stockholders' equity 52,995,546 51,031,381 -------------- -------------- Total liabilities and stockholders' equity $ 578,126,399 $ 549,317,589 ============== ==============
*Adjusted for April 19, 2002 three-for-two stock split. See Notes to Consolidated Financial Statements. 1 FIRST SOUTH BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Interest income: Interest and fees on loans $ 7,673,884 $ 8,000,946 $ 15,141,300 $ 16,453,122 Interest and dividends on investments and deposits 1,511,202 2,230,161 3,091,196 4,640,850 ------------ ------------ ------------ ------------ Total interest income 9,185,086 10,231,107 18,232,496 21,093,972 ------------ ------------ ------------ ------------ Interest expense: Interest on deposits 3,180,154 5,259,811 6,532,085 10,864,507 Interest on borrowings 17,667 37,910 26,941 400,371 ------------ ------------ ------------ ------------ Total interest expense 3,197,821 5,297,721 6,559,026 11,264,878 ------------ ------------ ------------ ------------ Net interest income before provision for possible loan losses 5,987,265 4,933,386 11,673,470 9,829,094 Provision for possible loan losses 333,000 0 642,000 540,000 ------------ ------------ ------------ ------------ Net interest income 5,654,265 4,933,386 11,031,470 9,289,094 ------------ ------------ ------------ ------------ Other income: Loan fees and service charges 1,082,447 932,193 2,101,159 1,684,095 Loan servicing fees 180,009 172,985 358,276 368,868 Gain on sale of real estate, net (10,199) 0 74,948 22,816 Gain on sale of mortgage loans and mortgage- backed securities 384,855 390,893 748,453 1,162,059 Other income 273,496 193,530 431,951 305,571 ------------ ------------ ------------ ------------ Total other income 1,910,608 1,689,601 3,714,787 3,543,409 ------------ ------------ ------------ ------------ General and administrative expenses: Compensation and fringe benefits 2,321,958 2,424,492 4,389,027 4,795,496 Federal insurance premiums 20,897 21,908 42,236 44,930 Premises and equipment 303,220 230,347 612,452 481,743 Advertising 54,876 49,313 115,955 84,228 Payroll and other taxes 211,239 177,267 432,797 374,904 Data processing expense 443,134 367,913 869,637 722,028 Amortization of intangible assets 158,888 142,643 313,143 286,866 Other 478,696 535,006 958,599 1,057,061 ------------ ------------ ------------ ------------ Total general and administrative expenses 3,992,908 3,948,889 7,733,846 7,847,256 ------------ ------------ ------------ ------------ Income before income taxes 3,571,965 2,674,098 7,012,411 4,985,247 Income taxes 1,218,902 1,090,354 2,480,773 2,036,491 ------------ ------------ ------------ ------------ NET INCOME $ 2,353,063 $ 1,583,744 $ 4,531,638 $ 2,948,756 ------------ ------------ ------------ ------------ Per share data (*): Basic earnings per share $ 0.53 $ 0.37(*) $ 1.02 $ 0.68(*) Diluted earnings per share $ 0.50 $ 0.35(*) $ 0.97 $ 0.66(*) Dividends per share $ 0.17 $ 0.12(*) $ 0.34 $ 0.24(*) Weighted average shares Basic 4,417,346 4,332,960(*) 4,427,747 4,341,397(*) Weighted average shares Diluted 4,682,069 4,463,814(*) 4,661,549 4,461,109(*)
(*) Adjusted for April 19, 2002 three-for-two stock split. See Notes to Consolidated Financial Statements. 2 FIRST SOUTH BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Accumulated Retained Other Additional Earnings, Comprehensive Common Paid-in Substantially Treasury Income (Loss), Stock Capital Restricted Stock Net Total -------- ------------- ------------- ------------- ------------- ------------- Balance December 31, 2001 $ 43,640 $ 48,494,267 $ 28,548,510 $ (28,703,532) $ 2,648,496 $ 51,031,381 Net income 4,531,638 4,531,638 Three-for-two stock split paid in form of a 50% stock dividend * 21,818 (21,818) -- Fractional shares paid (5,812) (5,812) Other comprehensive income, net of taxes 440,132 440,132 Exercise of stock options (9,992) 87,555 77,563 Acquisition of treasury shares (1,578,777) (1,578,777) Dividends ($.34 per share) (1,500,579) (1,500,579) -------- ------------- ------------- ------------- ------------- ------------- Balance June 30, 2002 $ 65,458 $ 48,484,275 $ 31,551,939 $ (30,194,754) $ 3,088,628 $ 52,995,546 -------- ------------- ------------- ------------- ------------- -------------
* April 19, 2002 three-for-two stock split. See Notes to Consolidated Financial Statements. 3 FIRST SOUTH BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 ----------------------------- 2002 2001 ----------------------------- Operating activities: Net Income (Loss) $ 4,531,638 $ 2,948,756 Adjustments to reconcile net income to net cash provided in operating activities: Provision for loan losses 642,000 540,000 Depreciation 304,068 254,665 ESOP compensation -- 55,223 Accretion of discounts on securities (93,264) (93,265) Gain on disposal of premises and equipment and real estate acquired in settlement of loans (151,593) (24,087) Gain on sale of mortgage loans and mortgage-backed securities (748,453) (1,162,059) Originations of loans held for sale, net (32,472,893) (10,587,966) Proceeds from sale of loans held for sale 39,730,724 21,885,999 Other operating activities (3,538,230) 2,097,893 ------------ ------------ Net cash provided in operating activities 8,203,997 15,915,159 ------------ ------------ Investing activities: Proceeds from principal repayments and sales of mortgage-backed securities available for sale 8,633,503 59,596,422 Originations of loans held for investment, net of principal repayments (35,518,484) (15,067,071) Proceeds from disposal of premises and equipment and real estate acquired in settlement of loans 706,929 56,211 Purchases of FHLB Stock -- (61,200) Purchases of premises and equipment (359,389) (329,689) Repayment of note receivable 13,761 12,519 ------------ ------------ Net cash provided (used) in investing activities (26,523,680) 44,207,192 ------------ ------------ Financing activities: Net (decrease) increase in deposit accounts 31,240,690 2,856,692 Proceeds from FHLB borrowings 19,500,000 21,200,000 Repayments of FHLB borrowings (20,500,000) (66,900,000) Purchase of treasury shares (1,578,777) (1,183,728) Cash paid for fractional shares (5,812) Cash dividends paid (1,500,579) (1,039,100) Stock options exercised 77,563 267,364 Net change in repurchase agreements 367,791 (953,853) ------------ ------------ Net cash provided (used) by financing activities 27,600,876 (45,752,625) ------------ ------------ Increase in cash and cash equivalents 9,281,193 14,369,726 Cash and cash equivalents, beginning of period 21,683,082 17,093,762 ------------ ------------ Cash and cash equivalents, end of period $ 30,964,275 $ 31,463,488 ============ ============ Supplemental disclosures: Real estate acquired in settlement of loans $ 218,364 $ 38,994 Exchange of loans for mortgage-backed securities $ -- $ 10,200,223 Dividends declared, not paid $ 747,826 $ 518,759
See Notes to Consolidated Financial Statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. NATURE OF BUSINESS First South Bancorp, Inc. (the "Company") was formed for the purpose of issuing common stock and owning 100% of the stock of First South Bank (the "Bank") and operating through the Bank a commercial banking business. The Bank has one significant operating segment, the providing of general commercial banking services to its markets located in eastern North Carolina. The common stock of the Company is traded on the Nasdaq National Market System under the symbol "FSBK". NOTE 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements (except for the audited Statement of Financial Condition at December 31, 2001) have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, none of which were other than normal recurring accruals. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2002. NOTE 3. STOCK SPLIT On March 28, 2002 the Company declared a three-for-two stock split, in the form of a 50% stock dividend, payable April 19, 2002 to stockholders of record as of April 8, 2002. Stockholders received one additional share of common stock for every two shares held on the record date. All current and prior period share and per share data has been adjusted to reflect the stock split. NOTE 4. EARNINGS PER SHARE Basic and diluted earnings per share for the three and six month periods ended June 30, 2002 are based on weighted average shares of common stock outstanding, excluding treasury shares. Basic and diluted earnings per share for the three and six month periods ended June 30, 2001 are based on weighted average shares of common stock outstanding, excluding ESOP plan shares not committed to be released, and treasury shares. Earnings per share have been calculated in accordance with Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" and Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". NOTE 5. DIVIDENDS DECLARED On June 20, 2002, the Company declared a cash dividend of $0.17 per share, payable on July 19, 2002 to stockholders of record as of July 3, 2002. This dividend payment represents a payout ratio of 32.1% of the basic earnings for the quarter ended June 30, 2002, and is the Company's twenty-first consecutive quarterly cash dividend. 5 NOTE 6. COMPREHENSIVE INCOME. The Company applies the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive income includes net income and all other changes to the Company's equity, with the exception of transactions with shareholders ("other comprehensive income"). The Company's only component of other comprehensive income relates to unrealized gains and losses on available for sale securities. Information concerning the Company's other comprehensive income for the three and six month periods ended June 30, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net income $ 2,353,063 $ 1,583,744 $ 4,531,638 $ 2,948,756 Reclassification of (gains) losses recognized in net income 5,622 (111,352) (52,666) (185,292) Gains (losses) unrealized, net of income taxes 1,118,948 (616,725) 492,798 682,115 ------------ ------------ ------------ ------------ Other comprehensive income (loss) 1,124,570 (728,077) 440,132 496,823 ------------ ------------ ------------ ------------ Comprehensive income $ 3,477,633 $ 855,667 $ 4,971,770 $ 3,445,579 ============ ============ ============ ============
NOTE 7. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations and other business of the Company that are subject to various factors which could cause actual results to differ materially from those estimates. Factors that could influence the estimates include changes in general and local market conditions, legislative and regulatory conditions, and an adverse interest rate environment. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has engaged in no activity other than holding the stock of the Bank and operating through the Bank a commercial banking business. Therefore, the discussion below focuses primarily on the Bank's results of operations. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND DECEMBER 31, 2001 Total assets increased to $578.1 million at June 30, 2002 from $549.3 million at December 31, 2001, reflecting a 10.5% annualized internal growth rate. Earning assets increased to $534.5 million at June 30, 2002 from $507.7 million at December 31, 2001, reflecting net growth of the commercial and consumer loan portfolio, as discussed below. Earning assets were 92.5% of total assets at June 30, 2002 compared to 92.4% at December 31, 2001. Interest-bearing overnight deposits in financial institutions were $7.9 million at June 30, 2002, compared to $1.4 million at December 31, 2001. Overnight funds are available to fund loan originations, liquidity management activities and daily operations of the Bank. Investment securities available for sale were $54.5 million at June 30, 2002 and $54.1 million at December 31, 2001. The Bank may sell certain securities during favorable interest rate windows and securitize certain mortgage loans previously held for sale into mortgage-backed securities. During the three and six months ended June 30, 2002, the Bank sold $1.5 million of mortgage-backed securities, respectively. The Bank had no mortgage loans securitized into mortgage-backed securities during the three and six months ended June 30, 2002. As a net result, the mortgage-backed securities portfolio was $35.7 million at June 30, 2002, compared to $43.9 million at December 31, 2001 (net of principal repayments). Loans held for sale declined to $22.7 million at June 30, 2002 from $29.3 million at December 31, 2001. The Bank sold $15.4 million and $39.7 million of mortgage loans during the three and six months ended June 30, 2002, taking advantage of improved market prices due to the current lower interest rate environment. Loans and leases held for investment increased to $411.0 million at June 30, 2002 from $376.3 million at December 31, 2001, reflecting an 18.4% annualized growth rate during the period. To support the risk associated with its loan portfolio, the Bank maintained reserves for potential loan losses of $5.9 million at June 30, 2002, compared to $5.4 million at December 31, 2001. The ratio of reserves for loan losses to loans outstanding, net of loans in process and deferred loan fees, was 1.3%, respectively, at June 30, 2002 and December 31, 2001. Total deposits and borrowings increased to $511.6 million at June 30, 2002 from $481.0 million at December 31, 2001. Deposits increased to $506.8 million at June 30, 2002 from $475.6 million at December 31, 2001. Checking accounts increased 17.4% to $179.1 million at June 30, 2002 from $152.6 million at September 30, 2000, reflecting the Bank's efforts to attract more lower costing core funds. Time deposits increased to $308.2 million at June 30, 2002 from $304.2 million at December 31, 2001, while repricing them at lower rates, and collectively with checking account growth, allowed the Bank to achieve increased net interest income. See Net Interest Income below. Borrowings, in the form of repurchase agreements, amounted to $4.8 million at June 30, 2002 and $4.4 million at December 31, 2001, representing funds held in cash management accounts for commercial banking customers. 7 Stockholders' equity was $53.0 million at June 30, 2002, compared to $51.0 million at December 31, 2001, reflecting current period earnings and an increase in unrealized gains on available for sale securities, due primarily to the recent decline in market rates. Accumulated other comprehensive income was $3.1 million at June 30, 2002, compared to $2.6 million at December 31, 2001. At June 30, 2002, the Company's equity to assets ratio was 9.2%, compared to 9.3% at December 31, 2001. See "Consolidated Statements of Stockholders' Equity" for additional information. As a North Carolina chartered commercial bank, the Bank must meet various capital standards required by federal and state banking regulatory agencies. The Bank's stand-alone capital was $50.2 million at June 30, 2002, substantially in excess of all regulatory capital requirements. See "Liquidity and Capital Resources" below for additional information. On March 28, 2002, the Company declared a three-for-two stock split, in the form of a 50% stock dividend, payable April 19, 2002 to stockholders of record as of April 8, 2002. All current and prior period share and per share data has been adjusted to reflect the stock split. Issued shares (adjusted for the stock split) increased to 6,545,848 at June 30, 2002 from 4,364,044 at December 31, 2001. During the quarter ended June 30, 2002, the Company purchased 31,981 shares of its common stock through open market and private purchases, totaling approximately $1.0 million, pursuant to a stock repurchase plan adopted by the board of directors. These shares are being held as treasury stock, at cost. At June 30, 2002, treasury shares held were 2,148,371 totaling $30.2 million, compared to 2,099,560 shares totaling $28.7 million at December 31, 2001. On June 20, 2002 the Company declared a quarterly cash dividend of $0.17 per share, payable July 19, 2002 to stockholders of record as of July 3, 2002. This dividend payment represents a payout ratio of 32.1% of the basic earnings for the quarter ended June 30, 2002, and is the Company's twenty-first consecutive quarterly cash dividend. COMPARISON OF OPERATING RESULTS - THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 GENERAL. Net income for the three and six months ended June 30, 2002 was $2.4 million and $4.5 million, compared to $1.6 million and $2.9 million for the three and six months ended June 30, 2001. Basic earnings per share was $0.53 and $1.02 per share for the three and six months ended June 30, 2002, compared to $0.37 and $0.68 per share for the three and six months ended June 30, 2001, adjusted for the stock split. Diluted earnings per share was $0.50 and $0.97 per share for the three and six months ended June 30, 2002, compared to $0.35 and $0.66 per share for the three and six months ended June 30, 2001, adjusted for the stock split. INTEREST INCOME. Interest income was $9.2 million and $18.2 million for the three and six months ended June 30, 2002, compared to $10.2 million and $21.1 million for the three and six months ended June 30, 2001. This decrease is primarily attributable to the general decline in interest rates, which resulted in a decline in average yield on interest-earning assets between the respective periods. During 2001, the Federal Reserve made a series of interest rate reductions, which has the affect of reducing interest income. Average interest-earning assets were $526.2 million and $518.7 million for the three and six months ended June 30, 2002, compared to $505.6 million and $512.8 million for the three and six months ended June 30, 2001, reflecting the net portfolio growth during the current periods. The yield on average interest-earning assets was 7.0% for both the three and six months ended June 30, 2002, compared to 8.1% and 8.2% for the three and six months ended June 30, 2001. 8 INTEREST EXPENSE. Interest expense on deposits and borrowings was $3.2 million and $6.6 million for the three and six months ended June 30, 2002, compared to $5.3 million and $11.3 million for the three and six months ended June 30, 2001. The decline in interest expense reflects the Bank's efforts of attracting lower costing core checking accounts and repricing new and maturing certificates of deposit, reflecting the current lower interest rate environment. Average deposits and borrowings were $503.7 million and $494.1 million for the three and six months ended June 30, 2002, compared to $478.7 million and $486.1 million for the three and six months ended June 30, 2001. The effective cost of average deposits and borrowings was 2.5% and 2.7% for the three and six months ended June 30, 2002, compared to 4.4% and 4.6% for the three and six months ended June 30, 2001. NET INTEREST INCOME. Net interest income was $6.0 million and $11.7 million for the three and six months ended June 30, 2002, compared to $4.9 million and $9.8 million for the three and six months ended June 30, 2001. The interest rate spread (the difference between the effective yield on average earning assets and the effective cost of average deposits and borrowings) was 4.4% for both the three and six months ended June 30, 2002, compared to 3.7% and 3.6% for the three and six months ended June 30, 2001. The net yield on interest-earning assets (net interest income divided by average interest assets) was 4.6% and 4.5% for the three and six months ended June 30, 2002, compared to 3.9% and 3.8% for the three and six months ended June 30, 2001. The current period increases in net interest income reflect the Bank's success in restructuring its deposit cost combined with the net growth of its commercial and consumer loan portfolio. PROVISION FOR LOAN LOSSES. The Bank recorded $333,000 and $642,000 of provisions for loan losses during the three and six months ended June 30, 2002, compared to none recorded during the three months ended June 30, 2001 and $540,000 recorded in the six months ended June 30, 2001. These provisions were necessary to support the risk associated with the growth in the Bank's loan portfolio. Provisions are charged to current operations and the Bank believes the resulting allowance for loan losses is adequate to absorb probable losses on loans that may become uncollectible. Additions to the allowance for loan losses are based on a review and classification of the loan portfolio and other factors, such as past collection experience, changes in the nature and volume of the loan portfolio, risk characteristics of individual loans or groups of similar loans and underlying collateral, overall portfolio quality and current and prospective economic conditions. The Bank believes the current level of its reserves for loan losses is adequate to provide for probable future losses, however, there are no assurances that future losses, if any, will not exceed estimated amounts. NONINTEREST INCOME. Noninterest income was $1.9 million and $3.7 million for the three and six months ended June 30, 2002, compared $1.7 million and $3.5 million for the three and six months ended June 30, 2001. Noninterest income consists of fees and service charges earned on loans, service charges on deposit accounts, gains from sales of loans and mortgage-backed securities and other miscellaneous income. Fees and service charges were $1.3 million and $2.5 million for the three and six months ended June 30, 2002, compared to $1.1 million and $2.1 million for the three and six months ended June 30, 2001. The increase in fees and services charges during the current periods is attributable to a greater volume of loans and checking deposits discussed above. In addition, the Bank recorded $385,000 and $748,000 of gains from sales of loans and mortgage-backed securities during the three and six months ended June 30, 2002, compared to $391,000 and $1.2 million during the three and six months ended June 30, 2001. NONINTEREST EXPENSE. Noninterest expenses were $4.0 million and $7.7 million for the three and six months ended June 30, 2002, compared to $3.9 million and $7.8 million for the three and six months ended June 30, 2001. The largest component of these expenses, compensation and fringe benefits, was $2.3 million and $4.4 million for the three and six months ended June 30, 2002, compared to 9 $2.4 million and $4.8 million for the three and six months ended June 30, 2001. The termination of the Employee Stock Ownership Plan ("ESOP") in December 2001 had a positive impact, as no ESOP expense was incurred in the quarter ended June 30, 2002, compared to $312,601 recorded during the quarter ended June 30, 2001. A portion of the cost savings recognized from the ESOP termination has been offset by a 6.2% growth in fulltime equivalent employees from 209 at June 30, 2001 to 222 at June 30, 2002. Since June 30, 2001, the Bank has opened four new full-service banking offices and created a new leasing division. Data processing expense has grown proportionately with the growth in the number of customer accounts and transaction activity, primarily attributable to both internal growth and the four new full-service banking offices opened since June 30, 2001. The amortization of intangible assets relates to the amortization of deposit premiums associated with previously reported branch purchases. Other noninterest expenses including premises and equipment, repairs, printing, advertising, and office supplies have also grown proportionately from period to period with the growth in assets, deposits and full-service banking office locations. INCOME TAXES. Income tax expense was $1.2 million and $2.5 million for the three and six months ended June 30, 2002, compared to $1.1 million and $2.0 million for the three and six months ended June 30, 2001. The change in the amounts of income tax provisions reflects the changes in pretax income and the estimated income tax rates in effect during the respective periods. LIQUIDITY AND CAPITAL RESOURCES As a state chartered commercial bank, the Bank must meet certain liquidity requirements established by the State of North Carolina Office of the Commissioner of Banks (the "Commissioner"). The Bank's liquidity ratio at June 30, 2002, as calculated under such requirements, exceeded the requirements. Liquidity generally refers to the Bank's ability to generate adequate amounts of funds to meet its cash needs. Adequate liquidity guarantees that sufficient funds are available to meet deposit withdrawals, fund future loan commitments, maintain adequate reserve requirements, pay operating expenses, provide funds for debt service, pay dividends to stockholders, and meet other general commitments. At June 30, 2002, the Bank had cash, deposits in banks, investment securities, mortgage-backed securities, FHLB stock and loans held for sale totaling $146.6 million, or 25.4% of total assets, compared to $151.6 million at December 31, 2001 or 27.6% of total assets. The Bank believes it can meet future liquidity needs with existing funding sources. The Bank's primary source of funds are deposits, payments on loans and mortgage-backed securities, maturities of investment securities, earnings and funds provided from operations, the ability to borrow from the FHLB of Atlanta and the availability of loans held for sale. While scheduled repayments of loans and mortgage-backed securities are relatively predictable sources of funds, deposit flows and general market interest rates, economic conditions and competition substantially influence loan prepayments. The Bank also attempts to manage its deposit pricing in order to maintain a desired deposit mix. The FDIC requires the Bank to meet a minimum leverage capital requirement of Tier I capital (consisting of retained earnings and common stockholder's equity, less any intangible assets) to assets ratio of 4%. The FDIC also requires the Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier I capital. The Commissioner requires the Bank at all times to maintain a capital surplus of not less than 50% of common capital stock. The Bank was in compliance with all capital requirements of the FDIC and the Commissioner at June 30, 2002 and December 31, 2001. 10 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in relative purchasing power of money over time and due to inflation. Unlike most industrial companies, nearly all assets and liabilities of the Company are monetary. As a result, interest rates have greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. The impact of inflation upon the Company is reflected in the cost and prices it pays for goods and services. CRITICAL ACCOUNTING POLICIES The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Estimates affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LOANS IMPAIRMENT AND ALLOWANCE FOR LOAN LOSSES. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The Bank uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss, etc. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management believes that it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or risks in its portfolio will not require further increases in the allowance. 11 INCOME TAXES. Deferred tax asset and liability balances are determined by application to temporary differences of the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUES OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates with respect to future economic conditions. Different assumptions could significantly affect these estimates, accordingly, the net realizable value could be materially different from the estimates. In addition, the estimates are only indicative of individual financial instruments' values and should not be considered an indication of the fair value of the Company taken as a whole. Fair values have been estimated using data which management considers as the best available, and estimation methodologies deemed suitable for the pertinent category of financial instrument. OFF-BALANCE SHEET RISK. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", on October 1, 1998. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. The adoption of SFAS No. 131 did not have a material effect on the Company's financial statements, as management has determined that the Bank operates in only one business segment. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS Nos. 141 and 142 changed the accounting for business combinations and goodwill in two significant ways. First, SFAS No. 141 requires that the purchase method of accounting be used in all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. Second, SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment only approach. Upon the adoption of SFAS No. 142, the Company ceased amortization of goodwill 12 recorded in past business combinations. Goodwill of $225,055 was recorded on the books of the Company at June 30, 2002 and December 31, 2001, respectively. The goodwill was assigned to the related reporting units in the Company and will be tested for impairment at least annually. The tests will involve the comparison if the reporting units fair value to its carrying value, including goodwill. If necessary, the implied fair value of the goodwill will be compared to the carrying value to determine if an allowance is necessary. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The Company's adoption of the provisions of SFAS No. 142 for its fiscal year ending December 31, 2002 and did not have a material effect on its financial condition or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS 143 requires that obligations associated with the retirement of tangible long-lived assets be recorded as a liability when those obligations are incurred, with the amount of liability initially measured at fair value. SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002, though early adoption is encouraged. The application of this statement is not expected to have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". SFAS No. 144 applies to all long-lived assets including discontinued operations, and amends Accounting Principles Board Opinion No. 30, "Reporting the Effect of Disposal of a Segment of a Business, Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book or fair value, less cost to sell. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and its provisions are expected to be applied prospectively. The application of this statement is not expected to have a material impact on the Company's financial statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently not engaged in any material legal proceedings. From time to time, the Bank is a party to legal proceedings within the ordinary course of business wherein it enforces its security interest in loans, and other matters of similar nature. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 13 ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: Exhibit 99.1 Certification B. Reports on Form 8-K: A Form 8-K was filed on June 28, 2005 under Item 5: Other Events, reporting the Company had completed a previously announced 5% stock repurchase program and had adopted a new program to repurchase and additional 5% of its issued and outstanding shares of common stock, representing 219,874 shares. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST SOUTH BANCORP, INC. Date: August 13, 2002 /s/ William L. Wall ---------------------------------- William L. Wall Executive Vice President Chief Financial Officer (Principal Financial Officer) Date: August 13, 2002 /s/ Kristie W. Hawkins ---------------------------------- Kristie W. Hawkins Controller Treasurer (Principal Accounting Officer) 14 EX-99.1 3 ex991-802.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION To my knowledge, this Report on Form 10-Q for the quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of First South Bancorp, Inc. By: /s/ Thomas A. Vann ------------------------------- Thomas A. Vann President and Chief Executive Officer (Principal Executive Officer) By: /s/ William L. Wall ------------------------------- William L. Wall Executive Vice President Chief Financial Officer (Principal Financial Officer) Date: August 13, 2002 15 -----END PRIVACY-ENHANCED MESSAGE-----