First South Credit Union Memphis Tn

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					100849.FirstSouth.AR.12.07           3/3/08     3:47 PM     Page 1

   2007 Independent Auditor’s Report                                                        Board of Directors
   We have been engaged to audit the balance sheet of First                    Lita Hilton                    Herb Stacy
   South Credit Union as of December 31, 2007, and the related                  Chairman                         Director
   statements of income, members’ equity, and cash flow for the
   year then ended. The objective of our audit is the expression of          James Phillips                    Gary Rick
   an opinion as to whether First South Credit Union’s financial              Vice Chairman                      Director
   statements are fairly presented, in all material respects, in
   conformity with generally accepted accounting principles. The                Ed Dean                       Rob Kamery
                                                                                Treasurer                   Associate Director
   audit complies with the examination requirement of the
   National Credit Union Administration (NCUA) Rules and                      Gaylon Hall                    Tom Dean Jr.
   Regulations and the State of Tennessee. As of March 20, 2008,                Secretary                   Associate Director
   the date of First South Credit Union’s annual meeting, our audit
   of the financial statements of 2007 will be in process. Upon             Robert Kennedy                  Gene Douglass
   completion of our audit, the reports will be issued to the audit              Director                   Associate Director
   committee of First South Credit Union.

   Reynolds, Bone & Griesbeck, PLC
   Certified Public Accountants
   Memphis, TN

   Balance Sheet                                                                                Locations
                                        2006                  2007
   Assets                                                             Bartlett                         Southaven
                                                                      6471 Stage Road                  185 Goodman Road East
   loans to members net        $ 148,383,444         $ 147,522,802
                                                                      Bartlett, TN 38134               Southaven, MS 38671
   cash (in bank, petty
    cash, change fund)            32,625,836           44,472,672     Cordova                          St. Jude Hospital
   investments                   112,276,055          119,597,815     1575 N. Germantown Parkway       332 N. Lauderdale
   all other assets               14,166,259           14,299,033     Cordova, TN 38018                Memphis, TN 38105

   Total Assets                $ 307,451,594        $ 325,892,322     Highland                         Tiger Banking Center
                                                                      633 S. Highland                  209 Rawlins Service Court
                                                                      Memphis, TN 38111                Memphis, TN 38152
   Liabilities and Capital
   Shares                      $ 240,342,827         $ 248,289,739    Midtown                          Whitehaven
   Dividends Payable                 398,267               413,943    1940 Madison Avenue              1250 Shelby Drive East
   Other Liabilities               6,094,422             7,416,959    Memphis, TN 38104                Memphis, TN 38116
   Regular Reserve                 7,697,091             7,697,091
   Undivided Earnings             52,918,987            62,074,591    Millington                       Winchester
                                                                      7792 Church Street               7166 Winchester Road
                                                                      Millington, TN 38053             Memphis, TN 38115
   Total Liabilities
   & Capital                   $ 307,451,594        $ 325,892,322     Naval Support Activity           Worldwide Sales and Service
                                                                      7645 Tarawa Avenue               Center
   Income and Expense                                                 Millington, TN 38054             6445 Stage Road               Annual Report
   Operating Income          $ 26,347,486             $ 30,835,772                                     Bartlett, TN 38134
   Operating Expenses          12,969,527               14,524,235    Raleigh
   Income Before Dividends     13,377,959               16,311,536    3731 Austin Peay Highway
   Dividend Expense             6,018,098                7,160,861    Memphis, TN 38128
   Other Nonoperating Income, net 7,245                      4,929

   Net Earnings
   (Contribution to Capital)     $ 7,367,107           $ 9,155,604                      First South Credit Union
                                                                               6445 Stage Road | Bartlett, Tennessee 38134

                                                                                   901.380.7400 |
100849.FirstSouth.AR.12.07           3/3/08     3:47 PM     Page 2

   2007 Chairman’s Report                                               Safety of our members’ financial data was another key focus
                                                                        last year. To that end, we took the following steps:
                                                                                                                                            2007 Treasurer’s Report
   2007 was truly a spectacular year of accomplishments for First       • Undertaking extensive BSA (Bank Secrecy Act) and Information      Once again we experienced a good year of growth without any
   South Credit Union. We forged ahead in several areas, providing        Technology audits and made any necessary policies and             negative impact on our financial strength and stability. Even in
   new products and services to our members.                              procedures changes                                                a year that saw great economic turbulence, we were able
                                                                        • Installing a co-location that will function as “mirror” of our    to achieve the following.
   One of our biggest accomplishments for 2007 was the                    current systems should something happen to our computer           • Our independent Net Economic Value Risk Analysis found that
   conversion of our core processing software platform from FiServ        systems, allowing us to access member information in the event      the credit union has an excellent investment mix and that
   Galaxy to Symitar’s Episys platform. The conversion occurred in        of a major disaster                                                 our balance sheet is very well planned. It was noted that
   July 2007 with no negative impact on member service. The new         • Ensuring all staff were up to date on BSA and flu pandemic          there is very little risk related to our balance sheet.
   system affords us great levels of automation which allows us to        procedures                                                        • The latest IDC score ranks First South a perfect 300 for all
   provide even higher levels of service to our members. In             • Reviewing and revising our Business Resumption Plan to              of 2007, making us the strongest financial institution in
   preparation for the conversion, teams of staff members carefully       ensure we are as prepared as possible for any major                 Tennessee and among the strongest in the country. This
   examined all aspects of our daily routines and processes in order      interruption in service                                             marks the 16th consecutive quarter in which we have
   to determine how best to apply the new software to them. We                                                                                attained a perfect score.
   are carrying forward the idea of continual process improvement       Plans for two new locations were put into motion in 2007 as well.   • Additionally, First South has received 55 consecutive
   into 2008 and beyond.                                                First South will be opening a branch in the Munford/Atoka area        quarters of Bauer’s five star ratings; a truly significant
                                                                        and in Collierville in 2008. These new banking centers will           accomplishment.
   Our lending area saw several major improvements this year,           provide even more convenience to our current and future
   such as:                                                             members. Additionally, we have approved the placement of            Capital increased 14% in 2007, reaching more than $75
   • Revising our pricing structure to further reward our most credit   additional ATMs inside some of our larger member companies.         million. Assets grew to over $325 million; a 6.00% gain over
     worthy members with even better rates                                                                                                  2006. Deposits saw an increase of 3.31%, reaching $248
   • Implementing a completely paperless lending application with       Our two wholly-owned subsidiaries, First South Investment           million. Loans remained virtually unchanged for 2007 and

     automated decision criteria to improve our already fast answer     Services, Inc. and First South Real Estate Services continue to     loan income increased 6.98%, ending the year at just over
     time for loan approvals                                            do well and serve our members with the expertise and efficiency     $11 million. The Delinquency Ratio and the Charge-Off
   • Introducing a home equity balloon product to help members in       members have come to expect from First South.                       Ratio remained steady, demonstrating sound lending and
     high-rate home equity loans and lines refinance to a lower rate                                                                        collection efforts.
     without a significant payment increase                             Member satisfaction remained high for 2007; 3.96 on a 4.0
   • Saving our members money by using our loan cross-sell team         scale. Staff training and product knowledge helped to increase      Our capital to assets ratio climbed to 23.31% up 1.63%
     to refinance approximately $400,000 more in loans in 2007 than     our scores.                                                         over 2006. Our ROA was 3.16%, a truly exceptional
     in 2006                                                                                                                                figure when compared to the rest of the credit union industry,
                                                                        First South’s Overdraft Privilege program still receives high       which will average approximately 0.6% ROA for 2007. The
   • Selecting a new business lending partner for our business loans
                                                                        praise from members. The program pays non-sufficient fund           Investment Return was 6.81% for 2007, versus 5.71% for
   • Adding several secondary market mortgage lenders to assist
                                                                        items instead of returning them, saving the member the              the same time last year. Net income increased by 24.28% for
     members who do not meet our lending criteria
                                                                        additional costs and embarrassment associated with returned         2007. Our operating expense remained reasonable at 4.64%,
   • Partnering with the Tennessee Housing Development Agency           checks or debit card transactions.                                  only up 0.14% from 2006.
     to provide mortgage loans to our most impoverished members
                                                                        Additionally, First South continued to break records for its        The 2007 figures denote another year of financial successes
   Other areas of the credit union also made major strides in           financial strength and stability. Both IDC and Bauer’s              which benefit all members of First South.
   2007. Some of our most successful programs include:                  recognized our long history of receiving high marks for
   • Using a third party vendor to provide remote deposit capture       our outstanding financial performance.
     to our business members
   • Reconfiguring our debit card point of sale limit to equal the      As we move into 2008, we look forward to another year of
     total available balance of the member’s checking account – a       success through service of our members and our community.
     great convenience
   • Partnering with PSCU to provide reloadable pre-paid VISA
     cards to our members
   • Implementing a new mover mail program to attract potential
     members to First South once they move into a zip code near
     one of our banking centers
   • Establishing Flexible Spending Accounts for our staff

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