2014

First South Bancorp, Inc. Reports March 31, 2014 Quarterly Operating Results

WASHINGTON, N.C., April 21, 2014 /PRNewswire/ -- First South Bancorp, Inc. (NASDAQ: FSBK) (the "Company"), parent holding company of First South Bank (the "Bank"), reports its unaudited operating results for the quarter ended March 31, 2014.

For the 2014 first quarter, net income was $1.10 million, or $0.11 per diluted common share, compared to $1.14 million, or $0.12 per diluted common share for the linked 2013 fourth quarter, and $1.57 million, or $0.16 per diluted common share, earned for the 2013 first quarter.  

Net income on a linked quarter basis was relatively flat as increases in non-interest expenses and decreases in non-interest income were offset by lower loan loss provision expenses and a lower effective tax rate.  When compared to the prior year quarter, net income for the quarter ended March 31, 2014 was impacted by decreases in both net interest income and non-interest income and were partially offset by decreases in loan loss provision expense and non-interest expenses.  The decreases in net interest income and non-interest income were primarily attributed to lower average yields on a smaller average volume of earning assets and a decline in mortgage origination activity, respectively.

Net Interest Income

Net interest income for the 2014 first quarter was $6.44 million, compared to $6.45 million for the linked 2013 fourth quarter and $7.13 million for the 2013 first quarter.  The tax equivalent net interest margin increased 4 basis points to 4.24% for the 2014 first quarter, from 4.20% for the linked 2013 fourth quarter, and fell 33 basis points when compared to the 4.57% for the 2013 first quarter.  The decline from the 2013 first quarter is due primarily to reductions in the 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 Bank, the residual renewed into lower priced CD's or migrated to non-maturity deposit products within the Bank.  Although we experienced a slight increase in net interest margin on a linked quarter basis, we anticipate our margin may experience contraction pressure as we grow our earning asset base in this historically low interest rate environment and as we take steps to protect our balance sheet from exposure to rising interest rates.

Asset Quality and Provisions for Loan Losses

Asset quality metrics continue to improve.  Total nonperforming assets declined to $14.56 million, or 2.1% of total assets at March 31, 2014, from $15.35 million or 2.3% of total assets at December 31, 2013, and $16.91 million or 2.5% of total assets at March 31, 2013.  Total loans in non-accrual status declined to $5.48 million at March 31, 2014, from $5.57 million at December 31, 2013, and compared favorably to the $5.34 million at March 31, 2013.  Our level of OREO declined to $9.01 million at March 31, 2014, from $9.35 million at December 31, 2013 and $11.33 million at March 31, 2013.  

The allowance for loan and lease losses (ALLL) was $7.80 million at March 31, 2014, representing 1.69% of loans and leases held for investment, compared to $7.61 million at December 31, 2013, also 1.69% of loans and leases held for investment, and $8.57 million at March 31, 2013, or 1.96% of loans and leases held for investment.  The Bank recorded $56,000 of net charge offs during the 2014 first quarter, compared to $782,000 in the linked 2013 fourth quarter and a net recovery of $308,000 for the 2013 first quarter.  During the 2014 first quarter, the Bank recorded $250,000 of provision for credit losses, compared to $685,000 for the linked 2013 fourth quarter, and $400,000 for the 2013 first quarter.  Management believes the ALLL remains adequate.

Non-Interest Income

Total non-interest income was $1.92 million for the 2014 first quarter, compared to $2.31 million for the linked 2013 fourth quarter and $2.48 million for the 2013 first quarter. 

Deposit fees and service charges totaled $927,000 for the 2014 first quarter and represented 48.3% of total non-interest income.  These results were below the $1.05 million generated for the 2013 fourth quarter and the $1.02 million earned in the first quarter of 2013 due to a reduction in fees generated from overdraft charges.  However, we anticipate additional service charge revenue from deposits going forward as we focus on growing our deposit base through new product offerings and customer acquisition.

The non-interest income generated from the sale and servicing of mortgage loans during the first three months of 2014 totaled $461,000 and represented 24.0% of our total non-interest income.  The Company generated $546,000 and $1.06 million of mortgage loan related fee income during the quarters ended December 31, 2013 and March 31, 2013, respectively.  The Company, as has the mortgage industry overall, has experienced a slowdown in mortgage activity due to the current economic conditions and increases in mortgage rates from their recent historic low levels.  As a result, net gains recognized from the sale of mortgage loans was $235,000 for the 2014 first quarter, down from $275,000 for the linked 2013 fourth quarter and $661,000 for the comparative 2013 first quarter.  The Company generated $226,000 of revenue from the servicing of mortgage loans during the first quarter of 2014.  This is down from the $270,000 produced during the linked 2013 fourth quarter and the $396,000 produced for the comparative 2013 first quarter.  The large decline in servicing revenue for the comparative first quarter periods is due to the value of servicing rights on loans sold in the respective quarters. 

In May of 2013, the Bank made an additional $10.0 million investment in Bank-owned life insurance (BOLI).  Included in the $389,000 of other non-interest income for the 2014 first quarter is $132,000 of revenue from BOLI investments.  This is an increase from the $105,000 of BOLI earnings for the linked 2013 fourth quarter and $35,000 for the comparative 2013 first quarter. 

Net gains from sales of OREO were $39,000 for the 2014 first quarter, compared to $206,000 for the linked 2013 fourth quarter and $48,000 for the 2013 first quarter, as the Bank continues in its efforts of disposing of nonperforming assets. 

Total core non-interest income, excluding net gains from securities and OREO sales, declined to $1.87 million for the 2014 first quarter, compared to $2.10 million for the linked 2013 fourth quarter and $2.43 million for the 2013 first quarter, primarily due to the decline in mortgage loan originations and sales.

Non-Interest Expense

Total non-interest expense was $6.58 million for the 2014 first quarter, compared to $6.44 million for the linked 2013 fourth quarter and $6.76 million for the 2013 first quarter.  

Compensation and benefit expenses, the largest component of non-interest expenses, were relatively consistent at $3.80 million for the 2014 first quarter, compared to $3.58 million for the linked 2013 fourth quarter and $3.83 million 2013 first quarter.  First quarter expenses typically reflect higher payroll taxes than other quarters throughout a given year. The Bank will continue to manage staffing levels to ensure we meet the ongoing needs of our customers and to support our future growth.

FDIC insurance premiums declined to $145,000 for the 2014 first quarter, from $150,000 for the linked 2013 fourth quarter and $236,000 for the comparative 2013 first quarter, reflecting a reduction in the deposit insurance assessment calculation base. 

Data processing costs were also relatively consistent at $586,000 for the 2014 first quarter, compared to $563,000 for the linked 2013 fourth quarter and $606,000 for the 2013 first quarter.  Data processing costs fluctuate due to changes in account and transaction volumes.

Expenses attributable to ongoing maintenance, property taxes and insurance, and valuation adjustments for OREO properties declined to $121,000 for the 2014 first quarter, from $162,000 for the linked 2013 fourth quarter and $172,000 for the comparative 2013 first quarter.  Valuation adjustments were $11,000 for the 2014 first quarter, compared to $62,000 for the linked 2013 fourth quarter and none for the 2013 first quarter.

Premises and equipment, advertising, amortization of intangibles and other expense in aggregate was also relatively consistent during the respective reporting periods.

Balance Sheet 

Total assets increased to $700.76 million at March 31, 2014, from $674.72 million at December 31, 2013.  The increase is the result of growth in earning assets, primarily through growth in loans and leases held for investment and securities available for sale.  

Loans and leases held for investment grew by $11.12 million during the 2014 first quarter.  This reflects the third consecutive quarterly growth in loans and leases held for investment.  As a result of this increase, total loans and leases held for investment were $462.08 million at March 31, 2014 compared to $450.96 million at December 31, 2013. 

The investment securities portfolio increased to $166.07 million at March 31, 2014, from $150.81 million at December 31, 2013.  Toward the end of this quarter, the Bank implemented a leverage strategy for the investment portfolio.  This strategy adds bonds of similar quality, structure and duration to our portfolio that will enhance our income generation capabilities.  

The Bank's investment in BOLI was $11.23 million at March 31, 2014, compared to $11.09 million at December 31, 2013. The investment returns from the BOLI will be utilized to recover a portion of the cost of providing benefit plans to our employees.

Total deposits increased to $592.40 million at March 31, 2014, from $585.70 million at December 31, 2013.  Total non-maturity deposits increased by $15.47 million to $353.01 million at March 31, 2014, from $337.54 million at December 31, 2013, partially offsetting an $8.77 million decline in certificates of deposits.  Certificates of deposit declined to $239.39 million or 40.4% of total deposits at March 31, 2014, from $248.17 million, or 42.4% of total deposits at December 31, 2013. 

Short-term FHLB advances increased to $17.00 million at March 31, 2014, compared to none at December 31, 2013.  These short-term borrowings were used as a supplemental funding source for the growth in earning assets.

Stockholders' equity increased to $77.17 million at March 31, 2014, from $74.86 million at December 31, 2013.  This increase reflects the $1.10 million of net income earned for the quarter ended March 31, 2014, net of a $241,000 dividend payment, a $1.45 million increase in accumulated other comprehensive income resulting from the mark-to-market adjustment of the available-for-sale securities portfolio and $16,000 used to acquire 2,000 shares of the Company's common stock pursuant to a previously announced repurchase plan. 

The tangible equity to assets ratio was 10.41% at March 31, 2014, compared to 10.47% at December 31, 2013.  There were 9,651,883 common shares outstanding at March 31, 2014, compared to 9,653,883 shares outstanding at December 31, 2013, reflecting the net effect of shares purchased through the stock repurchase program.  The tangible book value per common share increased to $7.56 at March 31, 2014, from $7.32 at December 31, 2013.

Key Performance Ratios 

Some of our key performance ratios are the return on average assets (ROA), the return on average equity (ROE) and the efficiency ratio.  ROA was 0.66% for the 2014 first quarter, compared to 0.67% for the linked 2013 fourth quarter and 0.91% for the 2013 first quarter.  ROE was 5.89% for the 2014 first quarter, compared to 5.96% for the linked 2013 fourth quarter and 8.02% for the 2013 first quarter.  The efficiency ratio (noninterest expenses as a percentage of net interest income plus noninterest income) was 77.68% for the 2014 first quarter, compared to 73.56% for the linked 2013 fourth quarter and 70.34% for the 2013 first quarter.  The efficiency ratio measures the proportion of net operating revenues that are absorbed by overhead expenses and has elevated over the course of the last twelve months due to the slowdown in mortgage originations.

Bruce Elder, President and CEO, commented, "Our diverse footprint has allowed us to expand our overall volume of loans and leases held for investment despite the fact that some of our key markets are still recovering from the economic downturn.  We have shown quality net growth in our loan and lease portfolio for three consecutive quarters.  The employees of First South Bank are committed to developing core customer relationships, providing the right financial solutions and being vested in the communities we serve."

Mr. Elder commented further, "In January 2014, we launched our new website at www.firstsouthnc.com.  You will find a more user friendly website with easier navigation and an enhanced Investor Relations section located within the Corporate link. Additionally, during the 2014 first quarter, we announced the reinstatement of a quarterly dividend which was paid on February 14, 2014.  The reinstatement of a quarterly dividend reflects the Company's strong capital position, improved financial performance and our confidence in the future."

First South Bank has been serving the citizens of eastern and central 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 eastern and central North Carolina. 

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. Certain amounts in the unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2013 have been reclassified to conform with the presentation as of and for the Three Months Ended March 31, 2014.  The reclassifications had no effect on previously reported net income.

                                                                         (More)
(NASDAQ: FSBK)

First South Bancorp, Inc. and Subsidiary







Consolidated Statements of Financial Condition

















March 31,



December 31,




2014



2013

Assets



(unaudited)



(*)








Cash and due from banks


$

17,375,545


$

11,816,071

Interest-bearing deposits with banks



5,327,431



12,419,244

Investment securities available for sale, at fair value



165,565,324



150,300,079

Investment securities held to maturity



506,459



506,176

Loans held for sale:







   Mortgage loans



5,648,519



2,992,017

           Total loans held for sale



5,648,519



2,992,017








Loans and leases held for investment



462,084,529



450,960,277

   Allowance for loan and lease losses



(7,803,625)



(7,609,467)

           Net loans and leases held for investment



454,280,904



443,350,810








Premises and equipment, net



11,560,955



11,759,521

Other real estate owned



9,013,007



9,353,835

Federal Home Loan Bank stock, at cost



1,371,500



848,800

Accrued interest receivable



2,357,634



2,334,944

Goodwill



4,218,576



4,218,576

Mortgage servicing rights



1,118,828



1,219,623

Identifiable intangible assets



-



7,860

Income tax receivable



2,631,320



2,901,062

Bank-owned life insurance



11,226,515



11,094,182

Prepaid expenses and other assets



8,561,632



9,599,143








          Total assets


$

700,764,149


$

674,721,943








Liabilities and Stockholders' Equity














Deposits:







  Non-interest bearing demand


$

98,419,360


$

96,445,049

  Interest bearing demand



175,569,071



171,548,658

  Savings



79,017,549



69,542,654

  Large denomination certificates of deposit



118,747,916



123,492,907

  Other time



120,646,501



124,674,588

          Total deposits



592,400,397



585,703,856








Borrowed money



17,000,000



-

Junior subordinated debentures



10,310,000



10,310,000

Other liabilities



3,887,563



3,849,944

          Total liabilities



623,597,960



599,863,800















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







   9,651,883 and 9,653,883 shares outstanding, respectively



96,519



96,539

Additional paid-in capital



35,822,493



35,809,397

Retained earnings



39,693,760



38,849,326

Accumulated other comprehensive income



1,553,417



102,881

           Total stockholders' equity



77,166,189



74,858,143








           Total liabilities and stockholders' equity


$

700,764,149


$

674,721,943








(*) Derived from audited consolidated financial statements







First South Bancorp, Inc. and Subsidiary







Consolidated Statements of Operations







Three Months Ended March 31, 2014 and 2013







(unaudited)












Three Months Ended





March 31





2014



2013









Interest income:








  Interest and fees on loans



$

5,929,234


$

6,552,689

  Interest on investments and deposits



1,145,811



1,341,598

           Total interest income



7,075,045



7,894,287









Interest expense:








  Interest on deposits




559,709



670,725

  Interest on borrowings




684



6,176

  Interest on junior subordinated notes



79,921



87,215

           Total interest expense



640,314



764,116









Net interest income




6,434,731



7,130,171

Provision for credit losses




250,000



400,000

           Net interest income after provision for credit losses



6,184,731



6,730,171









Non-interest income:








  Deposit fees and service charges



926,947



1,018,693

  Loan fees and charges




88,677



148,809

  Mortgage loan servicing fees



226,321



395,700

  Gain on sale of mortgage loans 



234,509



661,312

  Gain on sale of other real estate, net



39,420



48,242

  Gain on sale of investment securities



13,509



-

  Other  income




388,551



203,025

           Total non-interest income



1,917,934



2,475,781









Non-interest expense:








  Compensation and fringe benefits



3,803,998



3,833,474

  Federal deposit insurance premiums



144,599



235,950

  Premises and equipment




826,145



736,397

  Advertising




63,433



42,946

  Data processing




585,593



606,417

  Amortization of intangible assets



122,804



118,065

  Other real estate owned expense



121,305



172,295

  Other




914,923



1,011,329

           Total non-interest expense



6,582,800



6,756,873









Income before income tax expense



1,519,865



2,449,079

Income tax expense




417,863



882,669









NET INCOME



$

1,102,002


$

1,566,410

















Per share data: 








Basic earnings per share



$

0.11


$

0.16

Diluted earnings per share



$

0.11


$

0.16

Average basic shares outstanding



9,652,804



9,751,271

Average diluted shares outstanding



9,671,557



9,751,972

 

First South Bancorp, Inc.

Supplemental Financial Data (Unaudited)


















Quarter to Date





3/31/2014


12/31/2013


9/30/2013


6/30/2013


3/31/2013




           (dollars in thousands except per share data)

Consolidated balance sheet data:











Total assets


$

700,764

$

674,722

$

682,015

$

680,082

$

690,958














Loans held for sale:

$

5,649

$

2,992

$

9,183

$

13,746

$

3,292














Loans held for investment:












Mortgage


$

66,630

$

69,006

$

68,125

$

76,751

$

74,162


Commercial


317,711


305,160


296,218


283,936


288,715


Consumer


67,621


68,615


68,537


66,637


67,723


Leases



10,123


8,179


7,467


6,722


5,924


    Total loans held for investment


462,085


450,960


440,347


434,046


436,524

Allowance for loan and lease losses


(7,804)


(7,609)


(7,707)


(8,604)


(8,567)

Net loans held for investment

$

454,281

$

443,351

$

432,640

$

425,442

$

427,957














Cash & interest bearing deposits

$

22,703

$

24,235

$

37,617

$

23,148

$

35,384

Investment securities


166,072


150,806


149,337


162,336


176,320

Premises and equipment


11,561


11,760


11,759


11,879


12,003

Goodwill



4,219


4,219


4,219


4,219


4,219

Mortgage servicing rights


1,119


1,220


1,268


1,271


1,357














Deposits:












Non-interest checking

$

98,419

$

96,445

$

99,350

$

92,540

$

92,228

Interest checking


129,798


128,161


129,675


133,470


142,202

Money market



45,771


43,388


43,457


44,496


44,469

Savings



79,018


69,543


60,576


49,173


37,871

Certificates



239,394


248,167


258,573


270,149


282,846


Total deposits

$

592,400

$

585,704

$

591,631

$

589,828

$

599,616














Borrowings


$

17,000

$

0

$

0

$

0

$

0

Junior subordinated debentures


10,310


10,310


10,310


10,310


10,310

Stockholders' equity


77,166


74,858


75,028


73,888


75,468














Consolidated earnings summary:











Interest income

$

7,075

$

7,123

$

7,220

$

7,435

$

7,894

Interest expense


640


672


694


716


764

Net interest income


6,435


6,451


6,526


6,719


7,130

Provision for credit losses


250


685


0


0


400

Noninterest income


1,918


2,306


2,706


2,920


2,476

Noninterest expense


6,583


6,442


6,928


6,910


6,757

Income before taxes


1,520


1,630


2,304


2,729


2,449

Income tax expense 


418


486


767


964


883

Net income 


$

1,102

$

1,144

$

1,537

$

1,765

$

1,566














Per Share Data: 











Basic earnings per share

$

0.11

$

0.12

$

0.16

$

0.18

$

0.16

Diluted earnings per share

$

0.11

$

0.12

$

0.16

$

0.18

$

0.16

Book value per share

$

7.99

$

7.75

$

7.69

$

7.58

$

7.74

Tangible book value per share

$

7.56

$

7.32

$

7.26

$

7.14

$

7.30














Average basic shares


9,652,804


9,727,175


9,751,271


9,751,271


9,751,271

Average diluted shares


9,671,557


9,737,495


9,757,881


9,757,338


9,751,972

 

First South Bancorp, Inc.


Supplemental Financial Data (Unaudited)










Quarter to Date





3/31/2014


12/31/2013


9/30/2013


6/30/2013


3/31/2013




           (dollars in thousands except per share data)

Performance ratios (tax equivalent):











Yield on average earning assets


4.66%


4.63%


4.69%


4.80%


5.05%

Cost of interest bearing liabilities


0.52%


0.53%


0.54%


0.56%


0.59%

Net interest spread


4.14%


4.10%


4.15%


4.24%


4.46%

Net interest margin


4.24%


4.20%


4.25%


4.34%


4.57%

Avg earning assets to total avg assets


91.76%


91.84%


91.66%


92.40%


92.19%














Return on average assets (annualized)


0.66%


0.67%


0.90%


1.03%


0.91%

Return on average equity (annualized)


5.89%


5.96%


8.18%


9.22%


8.02%

Efficiency ratio 


77.68%


73.56%


75.05%


71.69%


70.34%














Average assets

$

679,608

$

681,690

$

680,741

$

688,897

$

701,880

Average earning assets

$

623,617

$

626,050

$

623,953

$

636,511

$

647,061

Average equity

$

76,682

$

76,231

$

74,569

$

76,754

$

79,178














Equity/Assets



11.01%


11.09%


11.00%


10.86%


10.92%

Tangible Equity/Assets


10.41%


10.47%


10.38%


10.24%


10.31%














Asset quality data and ratios:











Nonaccrual loans:












Non-TDR nonaccrual loans 












  Earning


$

463

$

683

$

1,459

$

1,429

$

1,658


  Non-Earning


1,248


1,331


2,649


4,130


2,629


     Total Non-TDR nonaccrual loans

$

1,711

$

2,014

$

4,108

$

5,559

$

4,287


TDR nonaccrual loans












   Past Due TDRs

$

2,188

$

1,821

$

1,336

$

990

$

221


   Current TDRs


1,583


1,739


1,677


818


832


      Total TDR nonaccrual loans

$

3,771

$

3,560

$

3,013

$

1,808

$

1,053

Total nonaccrual loans

$

5,482

$

5,574

$

7,121

$

7,367

$

5,340

Loans >90 days past due, still accruing


61


420


544


762


237

Other real estate owned 


9,013


9,354


8,996


9,069


11,328

Total nonperforming assets

$

14,556

$

15,348

$

16,661

$

17,198

$

16,905














Allowance for loan and lease losses

$

7,804

$

7,609

$

7,707

$

8,604

$

8,567

Allowance for loan and lease losses to 












loans held for investment


1.69%


1.69%


1.75%


1.98%


1.96%














Net charge-offs (recoveries)

$

56

$

782

$

898

$

(37)

$

(308)

Net charge-offs (recoveries) to total loans 


0.01%


0.17%


0.20%


(0.01%)


(0.07%)

Total nonaccrual loans to total loans


1.17%


1.23%


1.58%


1.65%


1.21%

Total nonperforming assets to total assets


2.08%


2.27%


2.44%


2.53%


2.45%

Total loans to total deposits


78.96%


77.51%


75.98%


75.92%


73.35%

Total loans to total assets


66.75%


67.28%


65.91%


65.84%


63.65%

Loans serviced for others

$

318,670

$

325,441

$

325,833

$

319,124

$

330,280

 

 

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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