First South Bancorp (FSBK) Reports Increase Quarterly and Six-Month Operating Results

WASHINGTON, N.C., July 18, 2012 /PRNewswire/ — First South Bancorp, Inc. (NASDAQ: FSBK) (the “Company”), the parent holding company of First South Bank (the “Bank”), reports its unaudited operating results for the quarter ended June 30, 2012, and for the six months ended June 30, 2012.

For the 2012 second quarter, net income increased 25.8% to $480,751 ($0.05 per diluted common share), from net income of $382,090 ($0.04 per diluted common share) earned in the comparative 2011 second quarter. Net income for the first six months of 2012 increased 33.0% to $942,647 ($0.10 per share diluted), from net income of $708,873 ($0.07 per share diluted) earned in the first six months of 2011.

Tom Vann, President and CEO, commented, “I am pleased to report the Company’s operating results for the second quarter of 2012. The Company continues to generate solid core earnings.  Second quarter 2012 net earnings were $480,751, after recording $775,000 of credit loss provisions and $898,090 of other real estate owned valuation adjustments.  In the 2012 second quarter, we continued evaluating the credit quality of the Bank’s loan portfolio and market values of foreclosed properties.  While the level of our nonperforming assets has declined by approximately $4.4 million during the first half of this year, based on our evaluation we will continue to take a conservative position in managing the financial stress some of our borrowers are facing.  Consequently, we are provisioning accordingly to maintain our allowance for loan and lease losses at an adequate level.  Mitigating our nonperforming assets will continue to be a top priority for the Bank during 2012,” said Mr. Vann.

Asset Quality

Total nonperforming assets, including loans on non-accrual status, restructured loans on non-accrual status and other real estate owned, declined to $55.7 million at June 30, 2012, from $60.0 million at December 31, 2011.  Loans on non-accrual status declined to $37.8 million at June 30, 2012, from $43.0 million at December 31, 2011.

The Bank recorded $775,000 of provisions for credit losses in the 2012 second quarter, compared to $3.1 million in the 2011 second quarter. Credit loss provisions were necessary to maintain the allowance for loan and lease losses (ALLL) at a level that management believes is adequate to absorb probable future losses in the loan portfolio.  The ALLL was $14.0 million at June 30, 2012 (2.8% of total loans), compared to $15.2 million at December 31, 2011 (2.8% of total loans). Net charge offs were $1.2 million in the 2012 second quarter, compared to $3.7 million in the 2011 second quarter.

Mr. Vann stated, “Management continues to take a prudent and conservative posture in provisioning for credit losses as we mitigate problem assets.  We believe the current level of our ALLL 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 ALLL.”

Other real estate owned increased marginally to $17.8 million at June 30, 2012, from $17.0 million at December 31, 2011, reflecting foreclosure activity net of sales and write-downs of certain real estate properties.

Net Interest Income

Net interest income declined to $7.5 million for the 2012 second quarter, from $8.2 million for the 2011 second quarter. The change in levels of net interest income is influenced by the volume of interest-earning assets and interest-bearing liabilities and the management of rates earned and paid during each respective reporting period. The net interest margin on average earning assets remained relatively consistent at 4.4% for the 2012 second quarter, compared to 4.6% for 2011 second quarter.

Non-Interest Income

Total non-interest income increased to $2.7 million for the 2012 second quarter, from $2.5 million for the comparative 2011 second quarter.  The Bank strives to maintain a consistent level of revenue across loan and deposit service offerings.  Fees, service charges and loan servicing fees remained relatively constant at $1.7 million for the 2012 second quarter, compared to $1.8 million for the 2011 second quarter.

Net gains from mortgage loan sales increased to $264,266 for the 2012 second quarter, from $111,546 for the comparative 2011 second quarter.  Net gains from investment securities sales were $485,047 for the 2012 second quarter. There were no sales of investment securities during 2011 second quarter.

In its efforts of mitigating nonperforming assets, the Bank recognized net losses of $47,056 on the sale of other real estate owned properties during the 2012 second quarter, compared to net gains of $53,387 in the 2011 second quarter.

Non-Interest Expense

Total non-interest expense increased to $8.6 million for the 2012 second quarter, from $7.0 million for the comparative 2012 second quarter.  Compensation and fringe benefits, the largest component of these expenses, increased to $4.4 million for the 2012 second quarter, from $3.9 million for the comparative 2011 second quarter.  This increase primarily results from the accrual of anticipated lump-sum retirement benefits payable to the current CEO upon his retirement at the end of the 2012 third quarter, and the employment of the successor CEO during the current period.

Expenses attributable to valuation adjustments, ongoing maintenance and property taxes for other real estate owned properties increased to $1.3 million for the 2012 second quarter, from $265,334 for the comparative 2011 second quarter.  “The stabilization of property values continues to be an issue in the markets we serve.  We will continue monitoring these values and mitigate nonperforming assets as quickly as feasible,” said Mr. Vann.

FDIC insurance premiums declined to $259,087 for the 2012 second quarter, from $293,284 for the comparative 2011 second quarter, reflecting a new change in the FDIC’s deposit insurance assessment calculation based on assets and tier one capital versus deposits.

Other noninterest expenses including premises and equipment, advertising, data processing, repairs and maintenance, office supplies, professional fees, taxes and insurance, etc., remained relatively consistent during the respective reporting periods.

Income tax expense increased to $272,348 for the 2012 second quarter, compared to a $225,671 for the comparative 2011 second quarter.  Changes in the amount of income tax expense reflects changes in pretax income, deductible expenses, the application of permanent and temporary differences and the applicable income tax rates in effect during each period.

Balance Sheet

Total assets declined to $742.0 million at June 30, 2012, from $746.9 million at December 31, 2011. Net loans and leases receivable declined to $491.5 million at June 30, 2012, from $525.2 million at December 31, 2011, reflecting the net of principal repayments, the volume of loans originated, foreclosures, sales, and securitizations of loans into mortgage-backed securities during the current year.

Investment securities increased to $165.0 million at June 30, 2012, from $138.5 million at December 31, 2011, reflecting the net of purchases, sales, and securitizations and principal repayments of certain mortgage loans during the current quarter.  Mortgage-backed securities increased to $146.4 million at June 30, 2012, from $138.5 million at December 31, 2011.  During the current period, the Bank implemented a strategy to diversify its investment portfolio through the purchase of certain tax-exempt municipal securities.  At June 30, 2012, the balance of newly acquired municipal securities was $18.6 million.

Cash and overnight investments increased to $34.8 million at June 30, 2012, from $32.8 million at December 31, 2011, reflecting net changes in the Bank’s cash flow and liquidity position resulting primarily from core deposit growth and slower loan demand.

Total deposits declined to $634.6 million at June 30, 2012, from $642.6 million at December 31, 2011.  Core checking and savings accounts increased to $291.6 million at June 30, 2012, from $272.7 at December 31, 2011; while certificates of deposits declined to $343.0 million at June 30, 2012, from $370.0 million at December 31, 2012.  The Bank strives to manage its cost of deposits by monitoring the volume and rates paid on maturing certificates of deposits in relationship to current funding needs and market interest rates.  The Bank did not renew certain higher rate maturing time deposits during the 2012 second quarter, and was able to reprice new and maturing time deposits at lower rates.  The cost of funds improved to 0.83% for the 2012 second quarter, from 1.14% for the comparative 2011 second quarter.

Stockholders’ equity increased to $86.2 million at June 30, 2012, from $84.1 million at December 31, 2011, reflecting year-to-date net income and changes in accumulated other comprehensive income.  The equity to assets ratio was 11.6% at June 30, 2012, compared to 11.3% at December 31, 2011.  There were 9,751,271 common shares outstanding at both June 30, 2012 and December 31, 2011.  The book value per common share increased to $8.84 at June 30, 2012, from $8.63 at December 31, 2011.

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 26 full service branch 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 Operations and Comprehensive Income
(unaudited)
				Three Months Ended						Six Months Ended
				June 30,						June 30,
				2012			2011			2012			2011
Interest income:
Interest and fees on loans			$	7,447,269		$	8,905,881		$	15,113,844		$	17,729,875
Interest and dividends on investments and deposits				1,370,749			1,282,570			2,617,711			2,349,776
Total interest income				8,818,018			10,188,451			17,731,555			20,079,651
Interest expense:
Interest on deposits				1,249,628			1,924,835			2,570,823			3,901,704
Interest on borrowings				923			1,553			2,039			28,967
Interest on junior subordinated notes				91,117			83,911			183,311			165,232
Total interest expense				1,341,668			2,010,299			2,756,173			4,095,903
Net interest income				7,476,350			8,178,152			14,975,382			15,983,748
Provision for credit losses				775,000			3,080,000			2,615,000			5,530,011
Net interest income after provision for credit losses				6,701,350			5,098,152			12,360,382			10,453,737
Non-interest income:
Fees and service charges				1,454,625			1,581,922			2,934,762			3,068,624
Loan servicing fees				202,776			196,988			415,577			395,072
Gain (loss) on sale of other real estate, net				(47,056)			53,387			(76,021)			(28,708)
Gain on sale of mortgage loans				264,266			111,546			568,874			231,528
Gain on sale of investment securities				485,047			–			1,518,904			52,146
Other  income				292,999			553,868			532,509			761,000
Total non-interest income				2,652,657			2,497,711			5,894,605			4,479,662
Non-interest expense:
Compensation and fringe benefits				4,387,489			3,941,577			8,545,101			7,731,256
Federal deposit insurance premiums				259,087			293,284			511,486			584,784
Premises and equipment				538,812			433,512			967,280			856,792
Advertising				67,531			38,280			133,565			85,384
Payroll and other taxes				357,480			352,520			763,275			754,148
Data processing				604,250			622,859			1,213,959			1,223,400
Amortization of intangible assets				124,942			145,578			225,498			292,781
Other real estate owned expense				1,307,097			265,334			2,585,396			484,851
Other				954,220			895,158			1,893,492			1,760,919
Total non-interest expense				8,600,908			6,988,102			16,839,052			13,774,315
Income before income tax expense				753,099			607,761			1,415,935			1,159,084
Income tax expense				272,348			225,671			473,288			450,211
NET INCOME			$	480,751		$	382,090		$	942,647		$	708,873
Other comprehensive income, net of taxes				1,348,083			843,478			1,114,357			623,231
Comprehensive income			$	1,828,834		$	1,225,568		$	2,057,004		$	1,332,104
Per share data:
Basic earnings per share			$	0.05		$	0.04		$	0.10		$	0.07
Diluted earnings per share			$	0.05		$	0.04		$	0.10		$	0.07
Average basic shares outstanding				9,751,271			9,751,271			9,751,271			9,751,271
Average diluted shares outstanding				9,751,271			9,751,271			9,751,271			9,751,271

For more information contact:
First South Bancorp, Inc. Bill Wall (CFO) (252-940-5017)
Website: www.firstsouthnc.com

SOURCE First South Bancorp, Inc.