First South Bancorp, Inc. Reports Increase in March 31, 2013 Quarterly Operating Results

Apr 18, 2013, 08:15 ET from First South Bancorp, Inc.

WASHINGTON, North Carolina, April 18, 2013 /PRNewswire/ -- First South Bancorp, Inc. (NASDAQ: FSBK) (the "Company"), the parent holding company of First South Bank (the "Bank"), reports its unaudited operating results for the quarter ended March 31, 2013.

For the 2013 first quarter, net income increased 239.1% to $1.6 million, or $0.16 per diluted common share, compared to net income of $462,000, or $0.05 per diluted common share, earned for the comparative 2012 first quarter.

The improvement in earnings is primarily attributed to a $1.4 million reduction in the provision for credit losses, coupled with a $1.5 million decrease in non-interest expenses as costs associated with our other real estate owned portfolio (OREO) fell significantly.  These improvements were partially offset by net decreases in non-interest income and net interest income due to our lower level of earning assets.

Bruce Elder, President and CEO, commented, "As was previously disclosed, the Bank executed a bulk sale of problem loans and took a significant valuation adjustment on OREO reflected in our 2012 fourth quarter results.  The 2013 first quarter operating results begin to reflect the positive impact of those actions.  Although the lower average volume of earning assets resulted in a decline in net interest income when compared with the 2012 first quarter, improvement in provisions for loan losses, recurring non-interest income and non-interest expenses specifically related to the maintenance and valuation charges of OREO have driven earnings higher.  As we continue to shift our focus from asset remediation and disposition to activities which will grow earning assets, we anticipate further earnings enhancement."

Net Interest Income

Net interest income declined to $7.0 million for the 2013 first quarter, from $7.5 million earned for the comparative 2012 first quarter.  The net interest margin experienced a modest 5 basis points decline to 4.37% for the 2013 first quarter, from 4.42% for the first quarter of 2012.  The net interest margin decline for the 2013 first quarter is due to reductions in the level and yield on earning assets, which was partially offset by a reduction in the Company's cost of funds due to the maturity of longer-term, higher priced CD's.  While a portion of these funds left the Company, the residual renewed into lower priced CD's or migrated to non-maturity deposit products within the Bank.  We anticipate our margin to experience further reductions as our mix of earning assets continues to change and as we take steps to protect our balance sheet from exposure to rising interest rates.

Asset Quality and Provisions for Loan Losses

Total nonperforming assets, including all loans held for investment and for sale in non-accrual status and OREO, declined to $16.7 million or 2.41% of total assets at March 31, 2013, from $34.2 million or 4.84% of total assets at December 31, 2012.  All loans held for investment and for sale in non-accrual status totaled $5.3 million at March 31, 2013, versus $21.3 million at December 31, 2012, reflecting the net impact of the bulk sale transaction and management's efforts focused on improving asset quality.  Our level of OREO properties dropped to $11.3 million at March 31, 2013, from $12.9 million at December 31, 2012.  During the 2013 first quarter, the Bank had $341,000 of OREO additions and $1.9 million of OREO disposals. 

The allowance for loan and lease losses (ALLL) increased to $8.6 million at March 31, 2013, and represented 1.96% of loans held for investment, compared to $7.9 million at December 31, 2012, or 1.78% of loans held for investment.  The Bank recorded $400,000 of provision for credit losses in the 2013 first quarter, compared to $1.8 million in the 2012 first quarter.  The ALLL benefited from $308,000 of net recoveries during the first quarter of 2013, compared to $2.6 million of net charge offs experienced in the first quarter of 2012.  Management believes the ALLL remains adequate.

Non-Interest Income

Total non-interest income was $2.6 million for the 2013 first quarter, compared to $3.2 million for the first quarter of 2012.  The higher level of non-interest income in the first quarter of 2012 was primarily due to $1.0 million of gains recorded on the sale of available for sale securities.  Non-interest income in the first quarter of 2013 benefitted from increased gains on the sale of mortgage loans as well as services charges and fees on loan and deposit accounts.

Net gains recorded from the sales of mortgage loan held for sale increased to $550,000 for the 2013 first quarter, from $305,000 for the comparative 2012 first quarter.  Fees and service charges on loans and deposits, as well as loan servicing fees totaled $1.8 million for first quarter of 2013, a $156,000 increase over the amount generated during the same three month period of 2012. 

Non-Interest Expense

Total non-interest expense for the first quarter of 2013 declined to $6.8 million from $8.2 million for the comparative quarter of 2012.  The decline was primarily attributable to a significant reduction in expenses related to our OREO portfolio and lower compensation and employee benefits expenses.

Expenses attributable to valuation adjustments, ongoing maintenance and property taxes for OREO properties for the first quarter of 2013 declined by $1.1 million from the $1.3 million incurred during the comparative 2012 first quarter.  There were no valuation adjustments recorded during the first quarter of 2013, compared to $903,000 of valuation adjustments recorded during the 2012 first quarter.  In addition the costs of maintenance and other related expenses associated with carrying OREO properties fell 54.1% to $172,000 for the first quarter of 2013, from $375,000 in the first quarter of 2012.

Compensation and benefit expenses, the largest component of non-interest expenses, fell to $3.6 million for the 2013 first quarter, from $4.2 million for the comparative 2012 first quarter.  The 2012 first quarter included a $470,000 accrual of retirement benefits for the previous CEO.  The Bank will continue to manage staffing levels to ensure we meet the ongoing needs of our customers and support the future growth of our institution.

Balance Sheet

Total assets were $691.0 million at March 31, 2013, compared to $707.7 million at December 31, 2012.  Our total assets were reduced and our asset mix changed as proceeds from the bulk loan transaction and the sale of mortgage loans held for sale were used to pay off maturing FHLB advances and to increase our level of interest-earning deposits and investment securities.  

Loans and leases held for investment decreased to $436.5 million at March 31, 2013, from $441.8 million at December 31, 2012.  This decrease is primarily attributable to the net impact of current quarter origination and repayment activity. 

Investment securities and interest-earning deposits in banks increased to $203.6 million at March 31, 2013, from $168.2 million at December 31, 2012, reflecting the investment of a portion of the proceeds of the bulk loan sale.  The quarter-over-quarter growth in the level of investments and interest-earning deposits reflects a strategy to diversify the portfolio.  The Bank utilized this opportunity to add defensive investments to the portfolio.  While these bonds have a lower current yield than our legacy portfolio, they will help insulate earnings in a rising rate environment.

The loss associated with the bulk sale of problem loans and the valuation adjustment on OREO reflected in our 2012 fourth quarter results created a $10.8 million tax net operating loss carryover for the Company.  The accounting entries to capture this change impacted our net income tax receivable and net deferred income tax accounts and have been reflected in our first quarter 2013 balance sheet.  Booking of these entries had no effect on net income, total assets, or shareholders' equity for the periods presented.

Total deposits decreased to $599.6 million at March 31, 2013, from $600.9 million at December 31, 2012.  The Bank's level of non-maturity deposits increased to $316.8 million at March 31, 2013, from $305.2 million at December 31, 2012; while certificates of deposit declined to $282.8 million, or 47.2% of total deposits, at March 31, 2013, from $295.7 million, or 49.2% of total deposits, at December 31, 2012. 

All of the $16.5 million of short-term FHLB advances outstanding at December 31, 2012, matured and were repaid during the first quarter of 2013.  These funds were used to fund the mortgage loans held for sale portfolio at year-end.  These borrowings were repaid as proceeds were received from the bulk loan transaction as well as the sale of mortgage loans. 

Stockholders' equity increased to $75.5 million at March 31, 2013, from $74.7 million at December 31, 2012, reflecting the net income earned for the 2013 first quarter, and changes in accumulated other comprehensive income.  The tangible equity to assets ratio increased to 10.31% at March 31, 2013, from 9.95% at December 31, 2012.  There were 9,751,271 common shares outstanding at March 31, 2013 and December 31, 2012, respectively.  Tangible book value per common share increased to $7.30 at March 31, 2013, from $7.22 at December 31, 2012.

Key Performance Ratios

Key performance ratios are the return on average assets (ROA), the return on average equity (ROE) and the efficiency ratio.  The ROA increased to 0.91% for the 2013 first quarter, from 0.25% for the 2012 first quarter.  The ROE increased to 8.02% for the 2013 first quarter, from 2.18% for the comparative 2012 first quarter.  The efficiency ratio (noninterest expenses as a percentage of net interest income plus noninterest income) measures the proportion of net operating revenues that are absorbed by overhead expenses.  The efficiency ratio improved to 70.34% for the 2013 first quarter, from 76.63% for the comparative 2012 first quarter, reflecting the improvement in OREO related and other expenses noted above. 

First South Bank has been serving the citizens of eastern North Carolina since 1902 and offers a variety of financial products and services, including a leasing company.  Securities brokerage services are made available through an affiliation with an independent broker/dealer. The Bank operates through its main office headquartered in Washington, North Carolina, and has 26 full service branch offices located throughout central and eastern North Carolina.

First South Bancorp, Inc. may be accessed on its website at www.firstsouthnc.com.  The Company's common stock symbol as traded on the NASDAQ Global Select Market is "FSBK".

Statements contained in this release, which are not historical facts, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors which include the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates, the effects of competition, and including without limitation to other factors that could cause actual results to differ materially as discussed in documents filed by the Company with the Securities and Exchange Commission from time to time.

 

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

March 31,

December 31,

2013

2012

Assets

(unaudited)

(*)

Cash and due from banks

$

8,057,695

$

8,983,819

Interest-earning deposits with banks

27,326,622

3,382,570

Investment securities available for sale, at fair value

176,320,346

164,838,012

Loans held for sale:

   Mortgage loans

3,292,030

20,287,343

   Other loans

-

24,438,107

           Total loans held for sale

3,292,030

44,725,450

Loans and leases held for investment

436,524,355

441,847,019

   Allowance for loan and lease losses

(8,567,261)

(7,860,195)

           Net loans and leases held for investment

427,957,094

433,986,824

Premises and equipment, net

12,003,175

12,233,153

Other real estate owned

11,327,672

12,892,519

Federal Home Loan Bank stock, at cost

848,800

1,859,200

Accrued interest receivable

2,277,099

2,408,979

Goodwill

4,218,576

4,218,576

Mortgage servicing rights

1,356,593

1,261,355

Identifiable intangible assets

31,440

39,300

Income tax receivable

3,662,725

10,785,272

Prepaid expenses and other assets

12,278,082

6,098,423

          Total assets

$

690,957,949

$

707,713,452

Liabilities and Stockholders' Equity

Deposits:

  Demand

$

278,899,358

$

274,662,867

  Savings

37,870,494

30,570,259

  Large denomination certificates of deposit

141,430,028

148,838,963

  Other time

141,416,140

146,828,942

          Total deposits

599,616,020

600,901,031

Borrowed money

-

16,500,000

Junior subordinated debentures

10,310,000

10,310,000

Other liabilities

5,563,911

5,349,368

          Total liabilities

615,489,931

633,060,399

Common stock, $.01 par value, 25,000,000 shares authorized;

   11,254,222 shares issued; 9,751,271 shares outstanding

97,513

97,513

Additional paid-in capital

35,821,078

35,811,804

Retained earnings, substantially restricted

67,099,370

65,532,960

Treasury stock, at cost

(31,967,269)

(31,967,269)

Accumulated other comprehensive income

4,417,326

5,178,045

           Total stockholders' equity

75,468,018

74,653,053

           Total liabilities and stockholders' equity

$

690,957,949

$

707,713,452

(*) Derived from audited consolidated financial statements

First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(unaudited)

Three Months Ended

March 31,

2013

2012

Interest income:

  Interest and fees on loans

$

6,377,720

$

7,666,575

  Interest and dividends on investments and deposits

1,351,446

1,246,961

           Total interest income

7,729,166

8,913,536

Interest expense:

  Interest on deposits

670,725

1,321,195

  Interest on borrowings

6,176

1,116

  Interest on junior subordinated notes

87,215

92,193

           Total interest expense

764,116

1,414,504

Net interest income

6,965,050

7,499,032

Provision for credit losses

400,000

1,840,000

           Net interest income after provision for credit losses

6,565,050

5,659,032

Non-interest income:

  Fees and service charges

1,658,745

1,480,136

  Loan servicing fees

190,516

212,801

  Gain (loss) on sale of other real estate, net

48,242

(28,964)

  Gain on sale of mortgage loans 

550,367

304,608

  Gain on sale of investment securities

-

1,033,857

  Other  income

193,177

240,311

           Total non-interest income

2,641,047

3,242,749

Non-interest expense:

  Compensation and fringe benefits

3,563,817

4,157,612

  Federal deposit insurance premiums

235,950

252,400

  Premises and equipment

527,437

428,468

  Advertising

42,946

66,034

  Payroll and other taxes

390,480

405,795

  Data processing

606,417

598,149

  Amortization of intangible assets

118,065

100,556

  Other real estate owned expense

172,295

1,278,300

  Other

1,099,611

951,631

           Total non-interest expense

6,757,018

8,238,945

Income before income tax expense

2,449,079

662,836

Income tax expense

882,669

200,940

NET INCOME 

$

1,566,410

$

461,896

Per share data: 

Basic earnings per share

$

0.16

$

0.05

Diluted earnings per share

$

0.16

$

0.05

Average basic shares outstanding

9,751,271

9,751,271

Average diluted shares outstanding

9,751,972

9,751,271

First South Bancorp, Inc.

Supplemental Financial Data (Unaudited)

Quarterly

3/31/2013

12/31/2012

9/30/2012

6/30/2012

3/31/2012

           (dollars in thousands except per share data)

Consolidated balance sheet data:

Total assets

$

690,958

$

707,713

$

717,162

$

741,965

$

750,350

Loans held for sale:

$

3,292

$

44,725

$

700

$

4,398

$

9,362

Loans held for investment:

Mortgage

$

74,162

$

75,544

$

73,853

$

70,221

$

72,198

Commercial

288,715

292,146

341,432

350,112

361,327

Consumer

67,723

68,444

69,313

74,012

75,231

Leases

5,924

5,713

6,186

6,722

7,663

    Total loans held for investment

436,524

441,847

490,784

501,067

516,419

Allowance for loan and lease losses

(8,567)

(7,860)

(15,007)

(14,004)

(14,396)

Net loans held for investment

$

445,091

$

449,707

$

505,791

$

515,071

$

530,815

Cash & interest bearing deposits

$

35,384

$

12,366

$

17,511

$

34,759

$

64,662

Investment securities

176,320

164,838

172,715

164,977

123,036

Premises and equipment

12,003

12,233

12,428

12,621

12,985

Goodwill

4,219

4,219

4,219

4,219

4,219

Mortgage servicing rights

1,357

1,261

1,340

1,333

1,268

Deposits:

Savings

$

37,871

$

30,570

$

30,611

$

30,347

$

31,068

Checking

278,899

274,663

268,244

261,295

262,500

Certificates

282,846

295,668

310,646

342,988

354,780

Total deposits

$

599,616

$

600,901

$

609,501

$

634,630

$

648,348

Borrowings

$

0

$

16,500

$

1,974

$

1,758

$

1,681

Junior subordinated debentures

10,310

10,310

10,310

10,310

10,310

Stockholders' equity

75,468

74,653

88,122

86,168

84,343

Consolidated earnings summary:

Interest income

$

7,729

$

8,081

$

8,345

$

8,818

$

8,914

Interest expense

764

848

1,096

1,342

1,415

Net interest income

6,965

7,233

7,249

7,476

7,499

Provision for credit losses

400

18,675

1,962

775

1,840

Noninterest income

2,641

2,703

2,655

2,653

3,243

Noninterest expense

6,757

12,310

6,424

8,601

8,239

Income tax expense 

883

(8,163)

552

272

201

Net income 

$

1,566

$

(12,886)

$

966

$

481

$

462

Per Share Data: 

Basic earnings per share

$

0.16

$

(1.32)

$

0.10

$

0.05

$

0.05

Diluted earnings per share

$

0.16

$

(1.32)

$

0.10

$

0.05

$

0.05

Book value per share

$

7.74

$

7.66

$

9.04

$

8.84

$

8.65

Average basic shares

9,751,271

9,751,271

9,751,271

9,751,271

9,751,271

Average diluted shares

9,751,972

9,751,271

9,754,794

9,751,271

9,751,271

3/31/2013

12/31/2012

9/30/2012

6/30/2012

3/31/2012

           (dollars in thousands except per share data)

Performance ratios:

Yield on average earning assets

4.84%

4.96%

5.02%

5.22%

5.26%

Cost of funds

0.59%

0.54%

0.69%

0.83%

0.87%

Net interest spread

4.25%

4.42%

4.33%

4.39%

4.39%

Net interest margin

4.37%

4.44%

4.36%

4.42%

4.42%

Avg earning assets to total avg assets

92.19%

91.50%

91.24%

90.94%

90.90%

Return on average assets (annualized)

0.91%

(7.22%)

0.53%

0.26%

0.25%

Return on average equity (annualized)

8.02%

(60.76%)

4.42%

2.26%

2.18%

Efficiency ratio 

70.34%

123.81%

64.78%

84.84%

76.63%

Average assets

$

701,880

$

714,377

$

730,204

$

742,690

$

744,395

Average earning assets

$

647,061

$

652,106

$

664,609

$

676,041

$

678,043

Average equity

$

79,178

$

84,830

$

87,437

$

85,018

$

84,582

Equity/Assets

10.92%

10.55%

12.29%

11.61%

11.24%

Tangible Equity/Assets

10.31%

9.95%

11.69%

11.04%

10.67%

Asset quality data and ratios:

Loans on nonaccrual status:

Nonaccrual loans 

  Earning

$

1,658

$

2,972

$

1,984

$

1,494

$

2,255

  Non-Earning

2,629

6,686

12,319

11,151

8,757

     Total Non-Accrual Loans

$

4,287

$

9,658

$

14,303

$

12,645

$

11,012

Nonaccrual restructured loans

   Past Due TDRs

$

221

$

4,231

$

7,649

$

9,100

$

6,029

   Current TDRs

832

7,451

12,849

16,065

20,456

      Total TDRs

$

1,053

$

11,682

$

20,498

$

25,165

$

26,485

Total loans on nonaccrual status

$

5,340

$

21,340

$

34,801

$

37,810

$

37,497

Other real estate owned 

11,328

12,893

18,003

17,845

17,324

Total nonperforming assets

$

16,668

$

34,233

$

52,804

$

55,655

$

54,821

Allowance for loan and lease losses

$

8,567

$

7,860

$

15,007

$

14,004

$

14,396

Allowance for loan and lease losses to 

loans held for investment

1.96%

1.78%

3.06%

2.79%

2.79%

Net charge-offs (recoveries)

$

(308)

$

25,822

$

959

$

1,167

$

2,638

Net charge-offs (recoveries) to total loans 

(0.07%)

5.39%

0.20%

0.24%

0.52%

Nonaccrual loans to total loans

1.24%

4.46%

7.30%

7.69%

7.33%

Nonperforming assets to assets

2.41%

4.84%

7.36%

7.50%

7.31%

Total loans to deposits

73.35%

81.15%

80.80%

79.80%

81.25%

Total loans to assets

63.65%

68.90%

68.67%

68.26%

70.21%

Loans serviced for others

$

330,280

$

313,823

$

328,976

$

326,021

$

316,297

 

For more information contact: Bruce Elder (CEO) (252)-940-4936 Scott McLean (CFO) (252)-940-5016 Website: www.firstsouthnc.com

SOURCE First South Bancorp, Inc.



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