First South Bancorp, Inc. Reports June 30, 2010 Quarterly and Six Months Earnings

WASHINGTON, N.C., July 13 /PRNewswire-FirstCall/ -- First South Bancorp, Inc. (Nasdaq: FSBK) (the "Company"), the parent holding company of First South Bank (the "Bank"), reports its unaudited earnings for the quarter ended June 30, 2010 and for the six months ended June 30, 2010.

Net income was $1.6 million ($0.16 per share diluted) for the 2010 second quarter, compared to net income of $1.5 million ($0.16 per share diluted) for the linked 2010 first quarter, and $1.8 million ($0.18 per share diluted) for the comparative 2009 second quarter.  Net income for the first six months of 2010 was $3.1 million ($0.32 per share diluted), compared to net income of $3.8 million ($0.39 per share diluted) for the first six months of 2009.

The Bank recorded provisions for credit losses of $2.1 million in the 2010 second quarter compared to $2.4 million in the linked 2010 first quarter and $1.7 million in the comparative 2009 second quarter. Credit loss provisions were necessary to replenish net charge-offs and to maintain the allowance for credit losses at levels the Bank believes is adequate to absorb probable losses in the loan portfolio.

Bill Wall, executive vice president and chief financial officer stated, "We continue to take a conservative posture in our provisioning for credit losses as we are aggressively managing our problem assets.  We believe the current level of our allowance for credit losses is adequate, however, there is no assurance in the future that regulators, increased risks in the loan portfolio, or changes in economic conditions will not require additional adjustments to the allowance for credit losses."

"The current economy continues to present a challenging credit environment for the Bank, for our customers and for the banking industry.  As we address and manage through these challenges, we remain focused on long-term strategies.  These strategies include remediating problem assets, maintaining adequate levels of capital and liquidity, improving efficiency in our operations, building core customer relationships and improving our franchise value along with shareholder value.  The Company remains profitable, continues to maintain a strong capital position in excess of the well-capitalized regulatory guidelines, and combined with volume of the allowance for credit losses should enhance our operating performance when the current recessionary economic conditions substantially improve," stated Wall.

Net interest income remained consistent at $8.6 million for the 2010 second quarter, compared to $8.8 million for the linked 2010 first quarter and $7.9 million for the comparative 2009 second quarter. Net interest income in the current quarter has been influenced by a combination of the net volume of loan originations, principal repayments and sales; and repricing new deposits and the rollover of maturing deposits in the current lower interest rate environment. The net interest margin was 4.64% for the 2010 second quarter, compared to 4.72% for the linked 2010 first quarter and 3.87% for the comparative 2009 second quarter.

Total non-interest income also remained consistent at $2.8 million for the 2010 second quarter, compared to $2.7 million for the linked 2010 first quarter and $3.2 million for the comparative 2009 second quarter.  Revenue from loan and deposit service offerings (loan fees, deposit fees and service charges and servicing fee income) was $2.0 million in the 2010 second quarter, compared to $1.8 million in the linked 2010 first quarter and $2.1 in the comparative 2009 second quarter.

Net gains recognized from the sale of mortgage loans was $173,000 in the 2010 second quarter, compared to $192,000 in the linked 2010 first quarter and $430,000 in the comparative 2009 second quarter. Net gains recognized from the sale of investments and mortgage-backed securities was $458,000 in the 2010 second quarter, compared to $480,000 in the linked 2010 first quarter and $452,000 in the comparative 2009 second quarter.

Total non-interest expense was $6.7 million for the 2010 second quarter, compared to $6.5 million for both the linked 2010 first quarter and the comparative 2009 second quarter.  Compensation and fringe benefits, the largest component of non-interest expense, was $4.1 million for the 2010 second quarter, compared to $3.7 million for the linked 2010 first quarter and $3.6 million for the comparative 2009 second quarter. FDIC insurance premiums were $287,000 for the 2010 second quarter, compared to $297,000 for the linked 2010 first quarter and $540,000 for the comparative 2009 second quarter, reflecting risk based assessment rates imposed by the FDIC.

Total assets declined to $812.8 million at June 30, 2010 from $829.9 million at December 31, 2009. Total loans declined to $644.9 million at June 30, 2010 from $658.7 million at December 31, 2009, reflecting a combination of principal repayments, sales and a decline in the volume of loans originated for investment during the current quarter.  Mortgage-backed securities were $92.6 million at June 30, 2010, compared to $97.2 million at December 31, 2009, reflecting the securitization of certain mortgage loans originated for sale, net of principal repayments and sales during the current quarter.  Cash and interest bearing deposits increased to $34.7 million at June 30, 2010 from $29.6 million at December 31, 2009, as the Bank used a portion of the proceeds from loan and mortgage-backed securities sales to support its liquidity position.

Nonperforming loans increased to $18.0 million at June 30, 2010, from $10.2 million at December 31, 2009, reflecting the continuing challenging credit environment.  Management believes it has thoroughly evaluated its nonperforming loans and they are either well collateralized or adequately reserved.

During the 2010 second quarter, the Bank refined its allowance for loan and lease losses (ALLL) methodology taking into account current generally accepted accounting principles and regulatory guidance.  The refined ALLL methodology is focused on current borrower analysis and loss factors that are more indicative of actual historical loss experience in recent years pursuant to FAS 5.  Previously, the Bank established specific reserves for certain impaired loans per FAS 114.  The Bank has elected to write down substantially all previously calculated specific reserves.  Going forward, when impairment can be reasonably calculated, the Bank will write down the affected loan by the level of that impairment.  As a result of these changes, this leaves the ALLL with a distinctly different balance than in previous reporting periods, which contained a mixed balance between FAS 5 and FAS 114.  Now essentially all of the Bank's calculated ALLL is under FAS 5.  Where previous ALLL balances carried specific reserves under FAS 114, the Bank anticipates future reports to more closely approximate this one. The ALLL was $8.1 million at June 30, 2010, representing 1.24% of total loans and leases.

Other real estate owned declined to $8.5 million at June 30, 2010 from $10.6 million at December 31, 2009, reflecting foreclosure activity net of sales of certain real estate properties during the current quarter. Based on fair value analysis, the Bank believes the adjusted carrying values of these real estate properties are representative of their fair market values, although there are no assurances that the ultimate sales prices will be equal to or greater than the carrying values.

Total deposits increased to $694.5 million at June 30, 2010 from $688.5 million at December 31, 2009. Borrowings declined to $12.7 million at June 30, 2010 from $37.4 million at December 31, 2009.  During the 2010 first quarter, the Bank repaid a $25.0 million 3.0% fixed-rate FHLB advance. The cost of funds for the 2010 second quarter improved to 1.26% from 1.31% for the linked 2010 first quarter and 2.32% for the comparative 2009 second quarter. The Bank has been able to improve its cost of funds by the combination of pricing new deposits, the renewal of maturing time deposits, and the repositioning of borrowings within the current lower interest rate environment.

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".

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 28 full service branch offices and one loan production office located throughout central, eastern, northeastern and southeastern North Carolina.

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










June 30



December 31




2010



2009

*

Assets


(unaudited)



















Cash and due from banks

$

17,374,290


$

17,758,370


Interest-bearing deposits in financial institutions


17,363,166



11,879,794


Investment securities - available for sale


0



407,317


Mortgage-backed securities - available for sale


92,180,716



96,725,468


Mortgage-backed securities - held for investment


377,886



513,882


Loans and leases receivable, net:







 Held for sale


5,489,717



6,548,980


 Held for investment


639,367,915



652,106,538


Premises and equipment, net


9,239,594



8,539,759


Other real estate owned


8,451,905



10,561,071


Federal Home Loan Bank of Atlanta stock, at cost







    which approximates market


3,889,500



3,889,500


Accrued interest receivable


2,936,167



3,318,141


Goodwill


4,218,576



4,218,576


Mortgage servicing rights


1,267,915



1,278,688


Identifiable intangible assets


117,900



133,620


Income tax receivable


2,057,614



1,831,598


Prepaid expenses and other assets


8,437,655



10,179,333









         Total assets

$

812,770,516


$

829,890,635









Liabilities and Stockholders' Equity














Deposits:







 Demand

$

224,949,564


$

224,507,362


 Savings


25,155,189



23,137,391


 Large denomination certificates of deposit


227,899,105



224,198,974


 Other time


216,536,319



216,667,331


         Total deposits


694,540,177



688,511,058


Borrowed money


12,665,012



37,380,388


Junior subordinated debentures


10,310,000



10,310,000


Other liabilities


8,145,185



7,475,085


         Total liabilities


725,660,374



743,676,531
















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







 11,254,222 issued; 9,743,971 and 9,742,296







 shares outstanding, respectively


97,440



97,423


Additional paid-in capital


35,858,430



35,841,364


Retained earnings, substantially restricted


81,321,585



82,111,114


Treasury stock at cost


(32,122,465)



(32,158,074)


Accumulated other comprehensive income, net


1,955,152



322,277


          Total stockholders' equity


87,110,142



86,214,104
















          Total liabilities and stockholders' equity

$

812,770,516


$

829,890,635









*Derived from audited consolidated financial statements



First South Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(unaudited)


Three Months Ended
June 30



Six Months Ended
June 30



2010



2009



2010



2009













Interest income:












 Interest and fees on loans

$

9,792,800


$

11,564,315


$

19,901,754


$

23,265,950

 Interest and dividends on investments and deposits


1,036,289



877,624



2,078,562



1,746,709

          Total interest income


10,829,089



12,441,939



21,980,316



25,012,659













Interest expense:












 Interest on deposits


2,094,488



4,098,542



4,248,126



8,277,479

 Interest on borrowings


81,071



340,951



220,167



680,751

 Interest on junior subordinated notes


82,768



106,870



162,784



217,308

          Total interest expense


2,258,327



4,546,363



4,631,077



9,175,538

























Net interest income


8,570,762



7,895,576



17,349,239



15,837,121

Provision for credit losses


2,070,000



1,700,000



4,490,000



3,220,000

          Net interest income after provision for credit losses


6,500,762



6,195,576



12,859,239



12,617,121













Non-interest income:












 Fees and service charges


1,795,404



1,891,452



3,425,920



3,641,937

 Loan servicing fees


187,046



164,164



366,780



322,828

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


21,223



5,285



33,720



(74,448)

 Gain on sale of mortgage loans


173,428



430,218



365,525



688,102

 Gain on sale of mortgage-backed securities


455,399



-



935,481



-

 Gain on sale of investment securities


2,406



452,344



2,406



917,866

 Other  income


195,717



269,067



394,963



536,768

          Total non-interest income


2,830,623



3,212,530



5,524,795



6,033,053

























Non-interest expense:












 Compensation and fringe benefits


4,115,034



3,591,503



7,806,236



6,999,175

 Federal insurance premiums


286,614



540,046



583,879



680,209

 Premises and equipment


438,565



455,940



897,750



919,855

 Advertising


33,851



40,176



65,414



63,017

 Payroll and other taxes


340,096



335,373



716,710



687,094

 Data processing


644,671



604,654



1,263,068



1,203,669

 Amortization of intangible assets


107,475



135,460



224,960



249,330

 Other


774,633



810,192



1,683,096



1,712,910

          Total non-interest expense


6,740,939



6,513,344



13,241,113



12,515,259













Income before income taxes


2,590,446



2,894,762



5,142,921



6,134,915













Income taxes


1,032,084



1,134,884



2,034,862



2,370,519













Net income

$

1,558,362


$

1,759,878


$

3,108,059


$

3,764,396













Per share data:












Basic earnings per share

$

0.16


$

0.18


$

0.32


$

0.39

Diluted earnings per share

$

0.16


$

0.18


$

0.32


$

0.39

Dividends per share

$

0.20


$

0.20


$

0.40


$

0.40

Weighted average shares-Basic


9,743,971



9,738,096



9,743,244



9,738,096

Weighted average shares-Diluted


9,744,679



9,738,096



9,743,598



9,738,096



First South Bancorp, Inc.

Supplemental Quarterly Financial Data
(Unaudited)




6/30/2010


3/31/2010


12/31/2009


9/30/2009


6/30/2009

Consolidated balance sheet data:

(dollars in thousands except per share data)

Total assets

$

812,771

$

800,608

$

829,891

$

855,933

$

886,192

Loans receivable (net):











Mortgage

$

49,470

$

48,379

$

51,820

$

49,944

$

53,537

Commercial


502,425


498,525


508,279


528,216


547,904

Consumer


83,550


85,502


88,893


92,809


94,749

Leases


9,413


9,877


9,664


10,727


9,717


Total

$

644,858

$

642,283

$

658,656

$

681,696

$

705,907













Cash and investments

$

34,737

$

22,690

$

30,045

$

46,741

$

57,342

Mortgage-backed securities


92,559


94,735


97,239


86,275


81,596

Premises and equipment


9,240


9,034


8,540


8,608


8,714

Goodwill


4,219


4,219


4,219


4,219


4,219

Mortgage servicing rights


1,268


1,281


1,279


1,247


1,230













Deposits:











Savings

$

25,155

$

24,709

$

23,138

$

23,407

$

24,730

Checking


224,950


225,997


224,507


220,018


225,647

Certificates


444,435


433,734


440,866


466,426


480,634


Total

$

694,540

$

684,440

$

688,511

$

709,851

$

731,011













Borrowings

$

12,665

$

12,441

$

37,380

$

39,040

$

49,695

Junior subordinated debentures


10,310


10,310


10,310


10,310


10,310

Stockholders' equity


87,110


85,962


86,214


87,281


86,708













Consolidated earnings summary:











Interest income

$

10,829

$

11,151

$

11,851

$

12,196

$

12,442

Interest expense


2,258


2,372


2,996


3,922


4,546

Net interest income


8,571


8,779


8,855


8,274


7,896

Provision for credit losses


2,070


2,420


2,700


1,260


1,700

Noninterest income


2,830


2,694


2,527


2,401


3,212

Noninterest expense


6,741


6,500


6,300


6,530


6,513

Income taxes


1,032


1,003


872


1,123


1,135

Net income

$

1,558

$

1,550

$

1,510

$

1,762

$

1,760













Per Share Data:











Earnings per share-Basic

$

0.16

$

0.16

$

0.16

$

0.18

$

0.18

Earnings per share-Diluted

$

0.16

$

0.16

$

0.16

$

0.18

$

0.18

Dividends per share

$

0.20

$

0.20

$

0.20

$

0.20

$

0.20

Book value per share

$

8.94

$

8.82

$

8.85

$

8.96

$

8.90













Average shares-Basic


9,743,971


9,742,505


9,738,475


9,738,475


9,738,096

Average shares-Diluted


9,744,679


9,742,505


9,738,550


9,738,550


9,738,096





6/30/2010


3/31/2010


12/31/2009


9/30/2009


6/30/2009



(dollars in thousands except per share data)

Performance ratios:











Yield on earning assets


5.86%


5.99%


6.09%


6.09%


6.10%

Cost of funds


1.26%


1.32%


1.61%


2.03%


2.32%

Net interest spread


4.60%


4.67%


4.48%


4.06%


3.78%

Net interest margin on earning assets


4.64%


4.72%


4.55%


4.13%


3.87%

Earning assets to total assets


91.13%


91.66%


91.81%


92.38%


92.43%













Return on average assets


0.77%


0.76%


0.72%


0.81%


0.80%

Return on average equity


7.17%


7.13%


6.88%


8.06%


7.98%

Efficiency ratio


59.05%


56.59%


55.28%


61.10%


58.57%

Dividend payout ratio


125.00%


125.00%


125.00%


111.11%


111.11%













Average assets

$

808,266

$

811,859

$

842,556

$

867,976

$

881,307

Average earning assets

$

738,645

$

744,415

$

777,896

$

801,625

$

816,210

Average equity

$

86,957

$

86,897

$

87,762

$

87,418

$

88,240













Equity/Assets


10.72%


10.74%


10.39%


10.20%


9.78%

Tangible Equity/Assets


10.18%


10.19%


9.86%


9.69%


9.29%













Asset quality data and ratios:











Nonaccrual loans

$

12,308

$

8,578

$

5,838

$

7,132

$

7,609

Restructured loans

$

5,647

$

4,377

$

4,343

$

4,304

$

4,304

Total nonperforming loans

$

17,955

$

12,955

$

10,181

$

11,436

$

11,913

Other real estate owned

$

8,452

$

8,383

$

10,561

$

12,474

$

10,408

Total nonperforming assets

$

26,407

$

21,338

$

20,742

$

23,910

$

22,321













Allowance for loan and lease losses

$

7,951

$

13,221

$

13,504

$

12,318

$

11,726

Allowance for unfunded loan commitments

$

171

$

178

$

240

$

269

$

269

Allowance for credit losses

$

8,122

$

13,399

$

13,744

$

12,587

$

11,995













Allowance for loan and lease losses to loans


1.21%


2.01%


2.00%


1.77%


1.63%

Allowance for unfunded loan commitments












to unfunded commitments


0.20%


0.20%


0.27%


0.29%


0.28%

Allowance for credit losses to loans


1.24%


2.04%


2.04%


1.81%


1.67%













Net charge-offs (recoveries)

$

7,347

$

2,765

$

1,543

$

668

$

894

Net charge-offs (recoveries) to loans


1.14%


0.43%


0.23%


0.10%


0.13%

Nonperforming loans to loans


2.78%


2.02%


1.55%


1.68%


1.69%

Nonperforming assets to assets


3.25%


2.67%


2.50%


2.79%


2.52%

Loans to deposits


92.85%


93.84%


95.66%


96.03%


96.57%

Loans to assets


79.34%


80.22%


79.37%


79.64%


79.66%

Loans serviced for others

$

299,361

$

296,452

$

289,324

$

281,935

$

268,266



For more information contact:

Bill Wall (CFO)

First South Bancorp, Inc.

Phone: (252) 940-5017

Website: www.firstsouthnc.com

SOURCE First South Bancorp, Inc.



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