First South Bancorp, Inc. Reports December 31, 2009 Quarterly and Year End Earnings

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Jan 15, 2010, 09:30 ET

WASHINGTON, N.C., Jan. 15 /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 both the quarter and year ended December 31, 2009.

Net income was $1.5 million ($0.16 per share diluted) for the 2009 fourth quarter compared to net income of $1.8 million ($0.18 per share diluted) for the linked 2009 third quarter, and $2.0 million ($0.21 per share diluted) for the comparative 2008 fourth quarter.

Net income for the year ended December 31, 2009 was $7.0 million ($0.72 per share diluted) compared to net income of $11.0 million ($1.12 per share diluted) for the year ended December 31, 2008.

The Bank recorded provisions for credit losses of $2.7 million in the 2009 fourth quarter compared to $1.3 million in the linked 2009 third quarter and $1.2 million in the comparative 2008 fourth quarter. Credit loss provisions were necessary to replenish net charge-offs and strengthen the allowance for credit losses at levels the Bank believes is adequate to absorb probable losses in the loan portfolio. The current level of the allowance for credit losses results from an internal risk grading analysis and is primarily attributable to the commercial real estate portfolio. The allowance for credit losses was $13.7 million at December 31, 2009, representing 2.04% of total loans and leases.

Bill Wall, executive vice president and chief financial officer, stated, "We have taken a conservative posture in our provisioning for credit losses as we continue to aggressively manage 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."

"We welcome news from economists that the current recession may begin easing. However, the current economic environment continues to be a challenging credit environment for both our customers and 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 strengthening of the allowance for credit losses should enhance our future earnings as the current recessionary economic conditions substantially improve," stated Wall.

Net interest income increased to $8.9 million for the 2009 fourth quarter from $8.3 for both the linked 2009 third quarter and the comparative 2008 fourth quarter. The increase in net interest income in the current quarter has been influenced by deposit repricing and the rollover of maturing time deposits at lower interest rates. The net interest margin improved to 4.55% for the 2009 fourth quarter from 4.13% for the linked 2009 third quarter and 4.08% for the comparative 2008 fourth quarter.

Total non-interest income improved to $2.5 million for the 2009 fourth quarter from $2.4 million for the linked 2009 third quarter and $2.1 million for the comparative 2008 fourth quarter. The Bank maintained a consistent level of revenue across both loan and deposit service offerings as loan fees, deposit fees and service charges and servicing fee income was $2.1 million in the 2009 fourth quarter and $2.0 million in both the linked 2009 third quarter and the comparative 2008 fourth quarter.

Net gains recognized from the sale of mortgage loans was $262,000 in the 2009 fourth quarter, $247,000 in the linked 2009 third quarter and $74,000 in the comparative 2008 fourth quarter.

Total non-interest expense declined to $6.3 million for the 2009 fourth quarter from $6.5 million for the linked 2009 third quarter, compared to $6.0 million for 2008 fourth quarter. Compensation and fringe benefits, the largest component of non-interest expense, has remained relatively consistent at $3.6 million for the 2009 fourth quarter, $3.5 million for the linked 2009 third quarter, and $3.3 million for the comparative 2008 fourth quarter, reflecting the Bank's efforts of managing its human resources cost. FDIC insurance premiums increased to $298,000 for the 2009 fourth quarter from $275,000 for the linked 2009 third quarter and $127,000 for the comparative 2008 fourth quarter, reflecting increased risk based assessment rates imposed by the FDIC.

Total assets declined to $829.9 million at December 31, 2009 from $875.9 million at December 31, 2008. Total loans declined to $658.7 million at December 31, 2009 from $744.7 million at December 31, 2008, reflecting a combination of principal repayments and a decline in the volume of loans originated for investment during the current year. Mortgage-backed securities increased to $97.2 million at December 31, 2009 from $32.8 million at December 31, 2008, reflecting the securitization of certain mortgage loans originated for sale during 2009. Cash, interest bearing deposits and investment securities declined to $30.0 million at December 31, 2009 from $63.3 million at December 31, 2008, as the Bank has focused efforts on reducing lower yielding assets.

Nonaccrual and restructured loans declined to $10.2 million at December 31, 2009 from $15.0 million at December 31, 2008, reflecting management's efforts of remediating problem assets and managing credit quality. Management believes it has thoroughly evaluated its nonaccrual loans and they are either well collateralized or adequately reserved.

Other real estate owned increased to $10.6 million at December 31, 2009 from $7.7 million at December 31, 2008, reflecting an increase in foreclosure activity of certain real estate properties during 2009. 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 declined to $688.5 million at December 31, 2009 from $716.4 million at December 31, 2008. Borrowings declined during 2009 to $37.4 million at December 31, 2009 from $52.6 million at December 31, 2008. During 2009, the Bank chose to not match higher time deposit rates being offered by certain competitive financial institutions in its market area, in order to control its time deposit cost and to reduce its lower yielding liquid assets. The cost of funds for the 2009 fourth quarter improved to 1.61% from 2.03% for the linked 2009 third quarter and 2.59% for the comparative 2008 fourth 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 29 full service branch offices and one loan production offices 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

		December 31		December 31
		2009		2008	*
Assets		(unaudited)


Cash and due from banks	$	17,758,370	$	20,888,676
Interest-bearing deposits in financial institutions		11,879,794		5,831,683
Investment securities - available for sale		407,317		36,563,646
Mortgage-backed securities - available for sale		96,725,468		31,995,157
Mortgage-backed securities - held for investment		513,882		832,221
Loans and leases receivable, net:
Held for sale		6,548,980		5,566,262
Held for investment		652,106,538		739,165,035
Premises and equipment, net		8,539,759		9,049,929
Other real estate owned		10,561,071		7,710,560
Federal Home Loan Bank of Atlanta stock, at cost
which approximates market		3,889,500		3,658,600
Accrued interest receivable		3,318,141		3,786,760
Goodwill		4,218,576		4,218,576
Mortgage servicing rights		1,278,688		1,005,725
Identifiable intangible assets		133,620		165,060
Prepaid expenses and other assets		12,010,931		5,417,231

Total assets	$	829,890,635	$	875,855,121

Liabilities and Stockholders' Equity

Deposits:
Demand	$	224,507,362	$	223,365,542
Savings		23,137,391		26,555,881
Large denomination certificates of deposit		224,198,974		207,102,876
Other time		216,667,331		259,402,497
Total deposits		688,511,058		716,426,796
Borrowed money		37,380,388		52,558,492
Junior subordinated debentures		10,310,000		10,310,000
Other liabilities		7,475,085		8,738,808
Total liabilities		743,676,531		788,034,096


Common stock, $.01 par value, 25,000,000 shares authorized;
11,254,222 issued; 9,742,296 and 9,738,096 shares outstanding		97,423		97,381
Additional paid-in capital		35,841,364		35,924,426
Retained earnings, substantially restricted		82,111,114		82,867,095
Treasury stock at cost		(32,158,074)		(32,247,365)
Accumulated other comprehensive income, net		322,277		1,179,488
Total stockholders' equity		86,214,104		87,821,025


Total liabilities and stockholders' equity	$	829,890,635	$	875,855,121

*Derived from audited consolidated financial statements

First South Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
		Three Months Ended				Year Ended
		December 31				December 31
		2009		2008		2009		2008

Interest income:
Interest and fees on loans	$	10,782,733	$	12,460,618	$	45,211,260	$	55,182,193
Interest and dividends on investments and deposits		1,068,842		911,604		3,848,639		4,181,602
Total interest income		11,851,575		13,372,222		49,059,899		59,363,795

Interest expense:
Interest on deposits		2,644,057		4,538,604		14,459,345		21,095,044
Interest on borrowings		270,558		369,221		1,244,664		1,563,978
Interest on junior subordinated notes		81,710		169,661		389,677		657,576
Total interest expense		2,996,325		5,077,486		16,093,686		23,316,598


Net interest income		8,855,250		8,294,736		32,966,213		36,047,197
Provision for credit losses		2,700,000		1,150,000		7,180,000		4,043,600
Net interest income after provision for credit losses		6,155,250		7,144,736		25,786,213		32,003,597

Non-interest income:
Fees and service charges		1,899,647		1,870,412		7,377,019		7,750,195
Loan servicing fees		182,878		167,577		679,673		658,073
Gain (loss) on sale of other real estate, net		(39,409)		(177,380)		(200,732)		(80,542)
Gain on sale of mortgage loans		261,737		74,027		1,197,029		586,571
Gain on sale of mortgage-backed securities		-		-		-		97,537
Gain on sale of investment securities		-		-		917,866		-
Other income		221,584		214,378		988,865		1,071,726
Total non-interest income		2,526,437		2,149,014		10,959,720		10,083,560


Non-interest expense:
Compensation and fringe benefits		3,595,642		3,309,183		14,118,842		13,750,085
Federal insurance premiums		298,510		127,182		1,253,627		280,372
Premises and equipment		451,806		456,381		1,823,628		1,969,006
Advertising		23,341		25,816		123,513		112,758
Payroll and other taxes		309,928		275,979		1,327,449		1,246,743
Data processing		623,089		677,044		2,452,593		2,630,821
Amortization of intangible assets		117,268		102,351		488,602		434,260
Other		880,283		1,013,182		3,756,547		3,740,652
Total non-interest expense		6,299,867		5,987,118		25,344,801		24,164,697

Income before income taxes		2,381,820		3,306,632		11,401,132		17,922,460

Income taxes		872,050		1,287,170		4,365,296		6,934,640

Net income	$	1,509,770	$	2,019,462	$	7,035,836	$	10,987,820


Per share data:
Basic earnings per share	$	0.16	$	0.21	$	0.72	$	1.13
Diluted earnings per share	$	0.16	$	0.21	$	0.72	$	1.12
Dividends per share	$	0.20	$	0.20	$	0.80	$	0.80
Weighted average shares-Basic		9,738,475		9,738,096		9,738,225		9,761,944
Weighted average shares-Diluted		9,738,475		9,743,987		9,738,244		9,781,761

First South Bancorp, Inc.		Supplemental Quarterly Financial Data (Unaudited)

			12/31/2009		9/30/2009		6/30/2009		3/31/2009		12/31/2008
Consolidated balance sheet data:		(dollars in thousands except per share data)
Total assets		$	829,891	$	855,933	$	886,192	$	875,850	$	875,855
Loans receivable (net):
Mortgage			51,820		49,944		53,537		60,132		46,252
Commercial			508,279		528,216		547,904		566,706		585,893
Consumer			88,893		92,809		94,749		98,292		101,180
Leases			9,664		10,727		9,717		10,692		11,406
	Total		658,656		681,696		705,907		735,822		744,731

Cash and investments			30,045		46,741		57,342		50,867		63,284
Mortgage-backed securities			97,239		86,275		81,596		51,100		32,827
Premises and equipment			8,540		8,608		8,714		8,866		9,050
Goodwill			4,219		4,219		4,219		4,219		4,219
Mortgage servicing rights			1,279		1,247		1,230		1,079		1,006

Deposits:
Savings			23,138		23,407		24,730		26,561		26,556
Checking			224,507		220,018		225,647		224,249		223,366
Certificates			440,866		466,426		480,634		469,624		466,505
	Total		688,511		709,851		731,011		720,434		716,427

Borrowings			37,380		39,040		49,695		49,606		52,558
Junior subordinated debentures			10,310		10,310		10,310		10,310		10,310
Stockholders' equity			86,214		87,281		86,708		87,785		87,821

Consolidated earnings summary:
Interest income		$	11,851	$	12,196	$	12,442	$	12,571	$	13,372
Interest expense			2,996		3,922		4,546		4,629		5,078
Net interest income			8,855		8,274		7,896		7,942		8,294
Provision for credit losses			2,700		1,260		1,700		1,520		1,150
Noninterest income			2,527		2,401		3,212		2,821		2,149
Noninterest expense			6,300		6,530		6,513		6,002		5,987
Income taxes			872		1,123		1,135		1,236		1,287
Net income		$	1,510	$	1,762	$	1,760	$	2,005	$	2,019

Per Share Data:
Earnings per share-Basic		$	0.16	$	0.18	$	0.18	$	0.21	$	0.21
Earnings per share-Diluted		$	0.16	$	0.18	$	0.18	$	0.21	$	0.21
Dividends per share		$	0.20	$	0.20	$	0.20	$	0.20	$	0.20
Book value per share		$	8.85	$	8.96	$	8.90	$	9.01	$	9.02

Average shares-Basic			9,738,475		9,738,475		9,738,096		9,738,096		9,738,096
Average shares-Diluted			9,738,475		9,738,550		9,738,096		9,738,096		9,743,987

			12/31/2009		9/30/2009		6/30/2009		3/31/2009		12/31/2008
		(dollars in thousands except per share data)
Performance ratios:
Yield on earning assets			6.09%		6.09%		6.10%		6.19%		6.57%
Cost of funds			1.61%		2.03%		2.32%		2.37%		2.59%
Net interest spread			4.48%		4.06%		3.78%		3.82%		3.98%
Net interest margin on earning assets			4.55%		4.13%		3.87%		3.91%		4.08%
Earning assets to total assets			91.81%		92.38%		92.43%		92.79%		92.29%

Return on average assets			0.72%		0.81%		0.80%		0.91%		0.92%
Return on average equity			6.88%		8.06%		7.98%		9.07%		9.19%
Efficiency ratio			55.28%		61.10%		58.57%		55.70%		57.25%
Dividend payout ratio			125.00%		111.11%		111.11%		95.24%		95.24%

Average assets		$	842,556	$	867,976	$	881,307	$	878,795	$	879,864
Average earning assets		$	777,896	$	801,625	$	816,210	$	812,831	$	813,993
Average equity		$	87,762	$	87,418	$	88,240	$	88,443	$	87,876

Equity/Assets			10.39%		10.20%		9.78%		10.02%		10.02%
Tangible Equity/Assets			9.86%		9.69%		9.29%		9.52%		9.53%

Asset quality data and ratios:
Nonaccrual loans		$	5,838	$	7,132	$	7,609	$	6,940	$	10,727
Restructured loans		$	4,343	$	4,304	$	4,304	$	4,276	$	4,275
Total nonperforming loans		$	10,181	$	11,436	$	11,913	$	11,216	$	15,002
Other real estate owned		$	10,561	$	12,474	$	10,408	$	10,573	$	7,711
Total nonperforming assets		$	20,742	$	23,910	$	22,321	$	21,789	$	22,713

Allowance for loan and lease losses		$	13,504	$	12,318	$	11,726	$	10,878	$	11,618
Allowance for unfunded loan commitments		$	240	$	269	$	269	$	312	$	340
Allowance for credit losses		$	13,744	$	12,587	$	11,995	$	11,190	$	11,958

Allowance for loan and lease losses to loans			2.00%		1.77%		1.63%		1.45%		1.53%
Allowance for unfunded loan commitments
	to unfunded commitments		0.27%		0.29%		0.28%		0.30%		0.29%
Allowance for credit losses to loans			2.04%		1.81%		1.67%		1.50%		1.58%

Net charge-offs (recoveries)		$	1,543	$	668	$	894	$	2,288	$	854
Net charge-offs (recoveries) to loans			0.234%		0.098%		0.127%		0.311%		0.115%
Nonperforming loans to loans			1.55%		1.68%		1.69%		1.52%		2.01%
Nonperforming assets to assets			2.50%		2.79%		2.52%		2.49%		2.59%
Loans to deposits			95.66%		96.03%		96.57%		102.16%		103.95%
Loans to assets			79.37%		79.64%		79.66%		84.03%		85.03%
Loans serviced for others		$	289,324	$	281,935	$	268,266	$	254,195	$	255,510