REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Plan Administrator
First South Bank Employees’ Savings
& Profit Sharing Plan and Trust
Washington, North Carolina
We have audited the accompanying statements
of net assets available for benefits of the First South Bank Employees’ Savings & Profit Sharing Plan and Trust (the
“Plan”) as of December 31, 2016 and 2015, and the related statements of changes in net assets available for benefits
for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Plan is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements
of the Plan referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of
December 31, 2016 and 2015, and changes in net assets available for benefits for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The supplemental information in the accompanying
Schedule of Assets (Held at End of Year) as of December 31, 2016, has been subjected to audit procedures performed in conjunction
with the audit of the Plan’s financial statements. The supplemental information is the responsibility of the Plan’s
management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements
or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy
of the information presented in the supplemental information. In forming our opinion on the supplemental information in the accompanying
schedule, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Department
of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974.
In our opinion, the supplemental information in the accompanying schedule is fairly stated, in all material respects, in relation
to the financial statements as a whole.
/s/ CHERRY BEAKERT LLP
Raleigh, North Carolina
June 29, 2017
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended December
31, 2016 and 2015
The following description of
First South Bank Employees' Savings & Profit Sharing Plan and Trust (the “Plan”) provides only general information.
Participants should refer to the Plan agreement for a more complete description of the Plan's provisions.
General
The Plan is a defined-contribution
plan covering all employees of First South Bank (the “Plan Sponsor”) and First South Leasing, LLC, who are age 21
or older and have completed six months of service. The Plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA).
Contributions
Participants may contribute
between 1% and 100% of pretax compensation, as defined in the Plan. Participants direct the investment of their contributions
into various investment options offered by the Plan. Participants may make changes in their contribution percentage daily and
can terminate contributions at any time. Allocations among fund options offered by the Plan may be changed on a daily basis. Catch-up
contributions are allowed by the Plan if participant is age 50 by December 31 of the calendar year. In addition, participants
may also move funds from other qualified retirement plans or an IRA, without incurring any tax liability, by means of a rollover
contribution.
The Plan Sponsor matches 100%
of the first 3% and 50% of the amount between 3% and 5% of base contributions that a participant contributes to the Plan. Additional
profit sharing and discretionary match amounts may be contributed at the option of the Plan Sponsor's Board of Directors. Employer
contributions are allocated to the same investment options that the employee directs. Contributions are subject to certain limitations.
Participant Accounts
Each participant's account
is credited with the participant's contributions and allocations of (a) the Plan Sponsor's contribution and (b) Plan earnings,
and charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances,
as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account.
Vesting
Participants are immediately
vested in their contributions and in the Plan Sponsor's Safe Harbor matching contributions plus actual earnings thereon. Vesting
in the Plan Sponsor's discretionary matching and profit sharing contributions and the earnings thereon is based upon years of
continuous service. The employer's contributions shall be fully vested and nonforfeitable upon death, total and permanent disability,
upon discontinuance of employer contributions to the Plan, termination of the Plan, or upon reaching normal retirement age defined
as 65 years of age. If participant termination occurs prior to these events, the participant vests in the employer's contributions
as follows:
|
Completed Years of Service
|
|
Vested Percentage
|
|
|
Less than 1
|
|
|
0
|
%
|
|
1 but less than 2
|
|
|
25
|
%
|
|
2 but less than 3
|
|
|
50
|
%
|
|
3 but less than 4
|
|
|
75
|
%
|
|
4 or more
|
|
|
100
|
%
|
First
South Bank EmployeeS' Savings & Profit Sharing Plan and TrusT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
|
1.
|
Description of Plan (Continued):
|
Investment Options
During the years ended December
31, 2016 and 2015, participants could direct the investment of their contributions as well as employer matching contributions
between forty-two mutual funds and employer stock. Each investment offers differing degrees of risk and return.
Participant Loans
Participants may borrow from
their fund account an amount not to exceed the lesser of $50,000 or 50% of their vested account balance. The minimum loan amount
allowed by the Plan is $1,000. The loans are secured by the vested balance in the participant's account and bear interest at rates
commensurate with local prevailing rates as determined by the Plan administrator. Principal and interest is paid ratably through
payroll deductions.
Payment of Benefits
On termination of service due
to death, disability, retirement, or other reasons, a participant may elect to receive either a lump-sum amount equal to the value
of the participant's vested interest in his or her account, or annual installments over a period not to exceed twenty years, or
maintain his or her vested account balance in the Plan. When a participant terminates employment and the vested benefit is between
$1,000 and $5,000 and the participant does not consent to a distribution of the vested balance, the vested benefit automatically
will be rolled over to an IRA selected by the Plan Administrator. A participant with a vested account balance in excess of $5,000
may elect to receive a distribution from the Plan as soon as administratively possible following termination of employment. If
the participant does not consent to a distribution of the vested balance, the balance will remain in the Plan.
Participants may withdraw vested
amounts from the Plan while still employed by meeting the requirements for in-service distributions. No in-service withdrawal
may be made prior to age 59 ½ other than a distribution made on account of hardship. The Plan does allow for distribution
on account of hardship, if one of the hardship events are met as described in the Plan.
Required minimum payments will
begin no later than the 1st of April following the year in which the retired participant reaches age 70½.
Forfeitures
Forfeitures represent nonvested
employer matching contributions of participants that have terminated their employment with the Plan Sponsor. During the year ended
December 31, 2016, $5,401 of forfeitures were used to pay administrative expenses. During the year ended December 31, 2015, no
forfeitures were used to pay administrative expenses. At December 31, 2016 and 2015, forfeited nonvested accounts totaled $50,436
and $46,621, respectively.
First
South Bank EmployeeS' Savings & Profit Sharing Plan and TrusT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
|
2.
|
Summary of Significant Accounting Policies:
|
Basis of Accounting
The accompanying
financial statements of the Plan are prepared under the accrual method of accounting.
Administrative
Expenses
The Plan Sponsor may elect,
but is not required, to pay record keeping and other administrative expenses incurred by the Plan. For the years ended December
31, 2016 and 2015, the Plan Sponsor has elected to pay all of the administrative fees related to the professional services provided
to the Plan. Fees related to the administration of notes receivable from participants are charged directly to the participant's
account and are included in administrative expenses. Expenses for the trustee were paid by the Plan Sponsor for the years ended
December 31, 2016 and 2015.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of net assets available for benefits at the date of the financial
statements, reported changes in net assets available for benefits, and disclosures during the reporting period. Actual results
could differ from those estimates.
Valuation of Investments
Investments are reported at
fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Plan’s Investment Committee determines the Plan’s valuation
policies utilizing information provided by the investment advisors and the custodian. See Note 3 for discussion of fair value
measurements.
Purchases and sales of securities
are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend
date. Net appreciation includes the Plan's gains and losses on investments bought and sold as well as held during the years.
Payment of Benefits
Benefit payments to participants
are recorded upon distribution.
Notes Receivable from Participants
Notes receivable from participants
are measured at their unpaid principal balance plus any accrued but unpaid interest. No allowance for credit losses has been recorded
as of December 31, 2016 and 2015. Delinquent notes receivable from participants are reclassified as distributions based on the
terms of the Plan document.
Financial Accounting Standards
Board (FASB)
Accounting Standards Codification
(
ASC
)
820
,
Fair Value Measurements and Disclosures
,
provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB
ASC 820
are described as follows:
First
South Bank EmployeeS' Savings & Profit Sharing Plan and TrusT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
|
|
3.
|
Investments (Continued):
|
|
Level 1
|
-
|
Inputs
to the valuation methodology are quoted prices available in active
markets for identical investments as of the reporting date.
|
|
|
|
|
|
Level 2
|
-
|
Inputs
to the valuation methodology are quoted prices for similar assets or
liabilities; quoted prices in inactive markets or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
|
|
|
|
|
|
Level 3
|
-
|
Inputs
to the valuation methodology are unobservable inputs where there is
little or no market activity and the reporting entity makes estimates
and assumptions that are significant to the fair value of the asset or
liability.
|
Registered Investment Companies
- These investments are valued at the closing price reported on the active market on which the individual securities are traded.
Common Stock
- These
investments are valued at the closing price reported on the active market on which the stock is traded.
|
|
|
Assets at Fair Value as of December 31, 2016
|
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Shares of registered investment companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
8,071,861
|
|
|
$
|
8,071,861
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cash equivalents and money market
|
|
|
304,877
|
|
|
|
304,877
|
|
|
|
-
|
|
|
|
-
|
|
|
First South Bancorp, Inc. common stock
|
|
|
1,726,404
|
|
|
|
1,726,404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
10,103,142
|
|
|
$
|
10,103,142
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Assets at Fair Value as of December 31, 2015
|
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Shares of registered investment companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
7,262,864
|
|
|
$
|
7,262,864
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cash equivalents and money market
|
|
|
256,659
|
|
|
|
256,659
|
|
|
|
-
|
|
|
|
-
|
|
|
First South Bancorp, Inc. common stock
|
|
|
1,134,406
|
|
|
|
1,134,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
8,653,929
|
|
|
$
|
8,653,929
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
4.
|
Related Party and Party-in-Interest Transactions:
|
As of December 31, 2016 and
2015, the Plan's investments included $1,726,404 and $1,134,406, respectively, in common stock of First South Bancorp, Inc. These
investments represent approximately 17% and 13% of total Plan assets at December 31, 2016 and 2015, respectively.
Certain Plan investments are
shares of mutual funds managed by Charles Schwab Trust Company. Charles Schwab Trust Company is the custodian of the Plan and,
therefore, transactions with Charles Schwab Trust Company qualify as party-in-interest transactions. Fees paid by the Plan for
administrative expenses totaled $12,451 and $5,016 for the years ended December 31, 2016 and 2015, respectively.
First
South Bank EmployeeS' Savings & Profit Sharing Plan and TrusT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Plan is a nonstandardized
prototype plan sponsored by MVP Plan Administrators, Inc. The Internal Revenue Service (IRS) has determined and informed MVP Plan
Administrators, Inc. by letter dated March 31, 2014 that the Plan was in compliance with the applicable requirements of the Internal
Revenue Code. The Plan has been amended since receiving the determination letter. However, the Plan administrator believes that
the Plan is designed and is currently being operated in accordance with applicable requirements of the Internal Revenue Code.
Accounting principles generally
accepted in the United States of America require Plan management to evaluate tax positions taken by the Plan and recognize a tax
liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination
by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31,
2016 and 2015, there were no uncertain positions taken or expected to be taken that would require recognition of a liability (or
asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there
are currently no audits for any tax periods in progress.
Although it has not expressed
any intent to do so, the Plan Sponsor has the right under the Plan to discontinue its contributions at any time and to terminate
the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.
|
|
7.
|
Risks and Uncertainties:
|
The Plan invests in various
investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due
to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values
of investment securities will occur in the near term and that such changes could materially affect the participants' account balances
and the amounts reported in the statements of net assets available for benefits.
On June 9, 2017, the First
South Bancorp, Inc. (the “Company”), parent holding company of the Plan Sponsor entered into an Agreement and Plan
of Merger and Reorganization (the “Merger Agreement”) with Carolina Financial Corporation (“CARO”). The
Merger Agreement provides that, upon the terms and conditions set forth therein, the Company will merge with and into CARO (the
“Merger”), with CARO continuing as the surviving corporation. As soon as practicable following consummation of the
Merger, the Plan Sponsor will merge with and into CARO’s wholly-owned subsidiary, CresCom Bank ("CresCom"), with
CresCom continuing as the surviving entity. Subject to the terms and conditions of the Merger Agreement, at the effective time
of the Merger, the Company’s stockholders will have the right to receive 0.52 shares of CARO common stock for each share
of the Company’s common stock. The transaction is expected to close in the fourth quarter of 2017, subject to shareholder
and regulatory approval and other customary closing conditions. As of the report date, the Plan Sponsor is uncertain as to how
the proposed merger will impact the operations of the Plan.