First South Bancorp, Inc. Reports September 30, 2010 Quarterly and Nine Months Earnings

WASHINGTON, N.C., Oct. 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 and nine months ended September 30, 2010.

Net income was $1.0 million ($0.10 per share diluted) for the 2010 third quarter, compared to net income of $1.6 million ($0.16 per share diluted) for the linked 2010 second quarter, and $1.8 million ($0.18 per share diluted) for the comparative 2009 third quarter.  Net income for the first nine months of 2010 was $4.1 million ($0.42 per share diluted), compared to net income of $5.5 million ($0.57 per share diluted) for the first nine months of 2009.

The Bank recorded provisions for credit losses of $4.0 million in the 2010 third quarter compared to $2.1 million in the linked 2010 second quarter and $1.3 million in the comparative 2009 third 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. Based on the overall credit quality, credit risk analysis and historical loss experience of the loan and lease receivable portfolio, the Bank believes it has established the allowance for credit losses pursuant to generally accepted accounting principles, and has taken into account the views of its regulators and the current economic environment.  The allowance for credit losses was $8.8 million at September 30, 2010, representing 1.35% of total loans and leases.

Bill Wall, executive vice president and chief financial officer stated, "During the 2010 third quarter, we took a conservative posture in our provisioning for credit losses as we are aggressively classifying and 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."

"As we address and manage through a challenging credit environment for the Bank and our customers, we remain focused on long-term performance.  The Bank continues to focus on remediating problem assets, maintaining adequate capital levels and liquidity, improving operating efficiency, building core customer relationships and enhancing long-term shareholder value.  The Company remains profitable, continues to maintain a strong capital position in excess of the regulatory well-capitalized guidelines, and combined with volume of the allowance for credit losses should enhance our long-term operating performance when the current economic environment substantially improves," stated Wall.

Net interest income increased to $8.7 million for the 2010 third quarter, from $8.6 million for the linked 2010 second quarter and $8.3 million for the comparative 2009 third quarter. The net interest margin increased to 4.72% for the 2010 third quarter from 4.64% for the linked 2010 second quarter and 4.13% for the comparative 2009 third quarter.  The increase in net interest income and net interest margin continues to reflect a combination of effectively managing the rates earned on the current volume of interest-earning assets and rates paid on new and repricing interest-bearing liabilities during the current lower interest rate environment.

Total non-interest income increased to $3.4 million for the 2010 third quarter, from $2.8 million for the linked 2010 second quarter and $2.4 million for the comparative 2009 third quarter.  Revenue from loan and deposit service offerings (loan fees, deposit fees and service charges and servicing fee income) have remained consistent at $2.0 million for each of the 2010 third quarter, the linked 2010 second quarter and the comparative 2009 third quarter.

Net gains recognized from mortgage loan sales increased to $479,000 in the 2010 third quarter from $173,000 in the linked 2010 second quarter and $247,000 in the comparative 2009 third quarter. Net gains recognized from investment and mortgage-backed securities sales increased to $696,000 in the 2010 third quarter from $458,000 in the linked 2010 second quarter and none in the comparative 2009 third quarter.

Total non-interest expenses have also remained consistent at $6.7 million for both the 2010 third quarter the linked 2010 second quarter, and $6.5 million for the comparative 2009 third quarter.  Compensation and fringe benefits, the largest component of non-interest expense, was $4.0 million for the 2010 third quarter, compared to $4.1 million for the linked 2010 second quarter and $3.5 million for the comparative 2009 third quarter. FDIC insurance premiums were $285,000 for the 2010 third quarter, compared to $287,000 for the linked 2010 second quarter and $275,000 for the comparative 2009 third quarter, reflecting risk based assessment rates imposed by the FDIC.

Total assets declined to $811.9 million at September 30, 2010 from $829.9 million at December 31, 2009. Total loans declined to $642.4 million at September 30, 2010 from $658.7 million at December 31, 2009, reflecting a net combination of principal repayments, sales, securitizations and the volume of loans originated during the current period.   Mortgage-backed securities declined to $87.2 million at September 30, 2010 from $97.2 million at December 31, 2009, reflecting the net of principal repayments, sales and securitizations during the current period.  Cash and interest bearing deposits increased to $40.8 million at September 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 $19.2 million at September 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.

Other real estate owned declined to $8.6 million at September 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 $696.1 million at September 30, 2010 from $688.5 million at December 31, 2009. Borrowings declined to $12.2 million at September 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 third quarter improved to 1.24% from 1.26% for the linked 2010 second quarter and 2.03% for the comparative 2009 third 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.

SOURCE First South Bancorp, Inc.