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October 13, 2010 at 15:00 PM EDT
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.

First South Bancorp, Inc. and Subsidiary







Consolidated Statements of Financial Condition
















September 30,



December 31,




2010



2009

*

Assets


(unaudited)



















Cash and due from banks

$

16,331,418


$

17,758,370


Interest-bearing deposits in financial institutions


24,483,235



11,879,794


Investment securities - available for sale


0



407,317


Mortgage-backed securities - available for sale


86,921,971



96,725,468


Mortgage-backed securities - held for investment


322,819



513,882


Loans and leases receivable, net:







 Held for sale


5,163,550



6,548,980


 Held for investment


637,216,753



652,106,538


Premises and equipment, net


9,215,998



8,539,759


Other real estate owned


8,598,517



10,561,071


Federal Home Loan Bank of Atlanta stock, at cost







    which approximates market


3,610,700



3,889,500


Accrued interest receivable


2,981,970



3,318,141


Goodwill


4,218,576



4,218,576


Mortgage servicing rights


1,298,828



1,278,688


Identifiable intangible assets


110,040



133,620


Income tax receivable


1,956,063



1,831,598


Prepaid expenses and other assets


9,481,773



10,179,333









         Total assets

$

811,912,211


$

829,890,635









Liabilities and Stockholders' Equity














Deposits:







 Demand

$

237,676,896


$

224,507,362


 Savings


24,946,121



23,137,391


 Large denomination certificates of deposit


222,787,058



224,198,974


 Other time


210,645,373



216,667,331


         Total deposits


696,055,448



688,511,058


Borrowed money


12,164,166



37,380,388


Junior subordinated debentures


10,310,000



10,310,000


Other liabilities


6,089,267



7,475,085


         Total liabilities


724,618,881



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


35,889,574



35,841,364


Retained earnings, substantially restricted


81,454,239



82,111,114


Treasury stock at cost


(32,122,465)



(32,158,074)


Accumulated other comprehensive income, net


1,974,542



322,277


          Total stockholders' equity


87,293,330



86,214,104
















          Total liabilities and stockholders' equity

$

811,912,211


$

829,890,635









*Derived from audited consolidated financial statements









First South Bancorp, Inc. and Subsidiary 

Consolidated Statements of Operations



(unaudited)



Three Months Ended



Nine Months Ended



September 30



September 30



2010



2009



2010



2009













Interest income:












 Interest and fees on loans

$

9,970,388


$

11,162,577


$

29,872,142


$

34,428,527

 Interest and dividends on investments and deposits


992,276



1,033,088



3,070,839



2,779,797

          Total interest income


10,962,664



12,195,665



32,942,981



37,208,324













Interest expense:












 Interest on deposits


2,050,824



3,537,810



6,298,950



11,815,289

 Interest on borrowings


81,915



293,355



302,082



974,106

 Interest on junior subordinated notes


89,021



90,658



251,805



307,966

          Total interest expense


2,221,760



3,921,823



6,852,837



13,097,361

























Net interest income


8,740,904



8,273,842



26,090,144



24,110,963

Provision for credit losses


3,961,787



1,260,000



8,451,787



4,480,000

          Net interest income after provision for credit losses


4,779,117



7,013,842



17,638,357



19,630,963













Non-interest income:












 Fees and service charges


1,772,368



1,835,435



5,198,288



5,477,372

 Loan servicing fees


188,292



173,967



555,072



496,795

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


39,858



(86,875)



73,578



(161,323)

 Gain on sale of mortgage loans


478,996



247,189



844,520



935,291

 Gain on sale of mortgage-backed securities


696,410



-



1,631,891



-

 Gain on sale of investment securities


-



-



2,406



917,866

 Other  income


223,777



231,313



618,740



768,081

          Total non-interest income


3,399,701



2,401,029



8,924,495



8,434,082

























Non-interest expense:












 Compensation and fringe benefits


3,994,384



3,524,025



11,800,621



10,523,200

 Federal deposit insurance premiums


285,040



274,908



868,918



955,117

 Premises and equipment


417,751



451,967



1,315,500



1,371,822

 Advertising


46,168



37,155



111,582



100,171

 Payroll and other taxes


349,388



330,426



1,066,098



1,017,520

 Data processing


636,299



625,837



1,899,367



1,829,505

 Amortization of intangible assets


123,165



122,003



348,126



371,334

 Other


893,270



1,164,154



2,576,365



2,877,064

          Total non-interest expense


6,745,465



6,530,475



19,986,577



19,045,733













Income before income taxes


1,433,353



2,884,396



6,576,275



9,019,312













Income taxes


423,742



1,122,727



2,458,604



3,493,246













Net income

$

1,009,611


$

1,761,669


$

4,117,671


$

5,526,066













Per share data:












Basic earnings per share

$

0.10


$

0.18


$

0.42


$

0.57

Diluted earnings per share

$

0.10


$

0.18


$

0.42


$

0.57

Dividends per share

$

0.09


$

0.20


$

0.49


$

0.60

Weighted average shares-Basic


9,743,971



9,738,475



9,743,490



9,738,225

Weighted average shares-Diluted


9,743,971



3,738,550



9,743,724



9,738,250



First South Bancorp, Inc.

Supplemental Quarterly Financial Data (Unaudited)


















9/30/2010


6/30/2010


3/31/2010


12/31/2009


9/30/2009


(dollars in thousands except per share data)

Consolidated balance sheet data:












Total assets


$

811,912

$

812,771

$

800,608

$

829,891

$

855,933

Loans receivable (net):











Mortgage


$

53,995

$

49,470

$

48,379

$

51,820

$

49,944

Commercial



496,489


502,425


498,525


508,279


528,216

Consumer



83,801


83,550


85,502


88,893


92,809

Leases



8,095


9,413


9,877


9,664


10,727


Total


$

642,380

$

644,858

$

642,283

$

658,656

$

681,696














Cash and investments

$

40,815

$

34,737

$

22,690

$

30,045

$

46,741

Mortgage-backed securities


87,245


92,559


94,735


97,239


86,275

Premises and equipment


9,216


9,240


9,034


8,540


8,608

Goodwill



4,219


4,219


4,219


4,219


4,219

Mortgage servicing rights


1,299


1,268


1,281


1,279


1,247














Deposits:












Savings


$

24,946

$

25,155

$

24,709

$

23,138

$

23,407

Checking



237,677


224,950


225,997


224,507


220,018

Certificates



433,432


444,435


433,734


440,866


466,426


Total


$

696,055

$

694,540

$

684,440

$

688,511

$

709,851














Borrowings


$

12,164

$

12,665

$

12,441

$

37,380

$

39,040

Junior subordinated debentures


10,310


10,310


10,310


10,310


10,310

Stockholders' equity


87,293


87,110


85,962


86,214


87,281














Consolidated earnings summary:











Interest income


$

10,963

$

10,829

$

11,151

$

11,851

$

12,196

Interest expense



2,222


2,258


2,372


2,996


3,922

Net interest income


8,741


8,571


8,779


8,855


8,274

Provision for credit losses


3,962


2,070


2,420


2,700


1,260

Noninterest income


3,400


2,830


2,694


2,527


2,401

Noninterest expense


6,745


6,741


6,500


6,300


6,530

Income taxes



424


1,032


1,003


872


1,123

Net income


$

1,010

$

1,558

$

1,550

$

1,510

$

1,762














Per Share Data:












Earnings per share-Basic

$

0.10

$

0.16

$

0.16

$

0.16

$

0.18

Earnings per share-Diluted

$

0.10

$

0.16

$

0.16

$

0.16

$

0.18

Dividends per share

$

0.09

$

0.20

$

0.20

$

0.20

$

0.20

Book value per share

$

8.96

$

8.94

$

8.82

$

8.85

$

8.96














Average shares-Basic


9,743,971


9,743,971


9,742,505


9,738,475


9,738,475

Average shares-Diluted


9,743,971


9,744,679


9,742,505


9,738,550


9,738,550

































9/30/2010


6/30/2010


3/31/2010


12/31/2009


9/30/2009




(dollars in thousands except per share data)

Performance ratios:











Yield on earning assets


5.92%


5.86%


5.99%


6.09%


6.09%

Cost of funds



1.24%


1.26%


1.32%


1.61%


2.03%

Net interest spread


4.68%


4.60%


4.67%


4.48%


4.06%

Net interest margin on earning assets


4.72%


4.64%


4.72%


4.55%


4.13%

Earning assets to total assets


90.96%


91.13%


91.66%


91.81%


92.38%














Return on average assets


0.50%


0.77%


0.76%


0.72%


0.81%

Return on average equity


4.60%


7.17%


7.13%


6.88%


8.06%

Efficiency ratio



55.50%


59.05%


56.59%


55.28%


61.10%

Dividend payout ratio


90.00%


125.00%


125.00%


125.00%


111.11%














Average assets


$

813,900

$

808,266

$

811,859

$

842,556

$

867,976

Average earning assets

$

741,214

$

738,645

$

744,415

$

777,896

$

801,625

Average equity


$

87,760

$

86,957

$

86,897

$

87,762

$

87,418














Equity/Assets



10.75%


10.72%


10.74%


10.39%


10.20%

Tangible Equity/Assets


10.22%


10.18%


10.19%


9.86%


9.69%














Asset quality data and ratios:











Nonaccrual loans

$

14,073

$

12,308

$

8,578

$

5,838

$

7,132

Restructured loans

$

5,156

$

5,647

$

4,377

$

4,343

$

4,304

Total nonperforming loans

$

19,229

$

17,955

$

12,955

$

10,181

$

11,436

Other real estate owned

$

8,599

$

8,452

$

8,383

$

10,561

$

12,474

Total nonperforming assets

$

27,828

$

26,407

$

21,338

$

20,742

$

23,910














Allowance for loan and lease losses

$

8,611

$

7,951

$

13,221

$

13,504

$

12,318

Allowance for unfunded loan commitments

$

163

$

171

$

178

$

240

$

269

Allowance for credit losses

$

8,774

$

8,122

$

13,399

$

13,744

$

12,587














Allowance for loan and lease losses to loans


1.32%


1.21%


2.01%


2.00%


1.77%

Allowance for unfunded loan commitments












to unfunded commitments


0.20%


0.20%


0.20%


0.27%


0.29%

Allowance for credit losses to loans


1.35%


1.24%


2.04%


2.04%


1.81%














Net charge-offs (recoveries)

$

3,310

$

7,347

$

2,765

$

1,543

$

668

Net charge-offs (recoveries) to loans


0.52%


1.14%


0.43%


0.23%


0.10%

Nonperforming loans to loans


2.99%


2.78%


2.02%


1.55%


1.68%

Nonperforming assets to assets


3.43%


3.25%


2.67%


2.50%


2.79%

Loans to deposits


92.29%


92.85%


93.84%


95.66%


96.03%

Loans to assets



79.12%


79.34%


80.22%


79.37%


79.64%

Loans serviced for others

$

307,395

$

299,361

$

296,452

$

289,324

$

281,935



For more information contact:

Bill Wall (CFO)

Phone: (252) 940-5017

Website: www.firstsouthnc.com



SOURCE First South Bancorp, Inc.

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