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First South Bancorp, Inc. Reports December 31, 2008 Quarterly and Year End Earnings

Posted on: Friday, 16 January 2009, 09:00 CST

WASHINGTON, N.C., Jan. 16 /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 ended December 31, 2008 and for the year ended December 31, 2008.

Net income was $2,019,462 ($0.21 per share diluted) for the 2008 fourth quarter compared to net income of $2,055,654 ($0.21 per share diluted) for the linked 2008 third quarter, and $4,135,885 ($0.42 per share diluted) for the comparative 2007 fourth quarter.

Net income for the year ended December 31, 2008 was $10,987,820 ($1.12 per share diluted) compared to net income of $17,003,227 ($1.70 per share diluted) for the year ended December 31, 2007.

The Bank recorded loan loss provisions of $1.2 million in the 2008 fourth quarter, $1.7 million in the linked 2008 third quarter and $150,000 in the comparative 2007 fourth quarter. Additionally, the Bank recorded fair value write downs on other real estate owned of $254,000 during the 2008 fourth quarter, $462,000 in the linked 2008 third quarter and none in the comparative 2007 fourth quarter. The loan loss provisions and other real estate owned write downs contributed to the reduced earnings for the fourth quarter and linked third quarter, when compared to the prior year fourth quarter.

"This continues to be a challenging time for financial institutions," said Bill Wall, executive vice president and chief financial officer. "The economy has moved into a deeper recessionary environment and economic pressure on the housing and real estate markets continue to impact property values and financial institutions credit quality. During the second half of 2008, we experienced an increase in non-performing assets. While loan loss provisions and other real estate owned write downs were significant during this period, we believe these were prudent conservative actions necessary to strengthen our ability to better manage through this unprecedented economic cycle in order to support the long-term success of the Company," said Wall.

"First South continues to maintain a strong capital position in excess of the well-capitalized regulatory guidelines and anticipates continuation of dividend payments. The Company remains profitable, has a solid capital position, and combined with these conservative actions should enhance our future earnings when economic and financial market conditions improve," stated Wall.

Net interest income for the fourth quarter was $8.3 million and $9.0 million for the linked third quarter, compared to $10.3 million for the 2007 fourth quarter. The decrease in net interest income results primarily from a decline in the net interest margin, significantly influenced by the Federal Reserve's 500 basis point rate cuts since September 2007. It has also been impacted by the decline in average earning assets attributable to the increased level of nonaccrual loans and other real estate owned. Average earning assets were $814.0 million for the fourth quarter, $830.8 million for the linked third quarter and $851.6 million for the 2007 fourth quarter. The net interest margin on average earning assets was 4.08% for the fourth quarter and 4.32% for the linked third quarter, compared to 4.83% for the 2007 fourth quarter.

The cost of funds for the fourth quarter improved to 2.59%, from 2.71% for the linked third quarter, and 3.59% for the 2007 fourth quarter. The Bank was able to improve its cost of funds by the combination of the pricing of new deposits, the renewal of maturing time deposits and the repositioning of borrowings within the lower interest rate environment between the respective periods.

Total non-interest income for the fourth quarter was $2.1 million and $2.4 million for the linked third quarter, compared to $2.7 million for the 2007 fourth quarter. During the fourth quarter, the Bank recorded $177,000 of net losses on the sale of other real estate owned in its best efforts to reduce these non-earning assets. The Bank sells mortgage loans and mortgage-backed securities to support a more balanced sensitivity to future interest rate changes. During these reporting periods, net gains recognized on these sales was $74,000, $136,000 and $241,000, respectively, reflecting declines in both volume and rates.

The Bank continues to maintain a consistent level of non-interest income across both loan and deposit service offerings. Revenues from loan fees, deposit fees and service charges and servicing fee income was $2.0 million for the fourth quarter, $2.1 million for the linked third quarter, and $2.0 million for the 2007 fourth quarter.

Total non-interest expense was $6.0 million for the fourth quarter, $6.3 million for the linked third quarter and $6.1 million for the 2007 fourth quarter. Non-interest expense in the second half of 2008 includes the increase in fair value write downs on other real estate owned discussed above and increased FDIC insurance premiums. One-time FDIC insurance assessment credits received under the Federal Deposit Reform Act of 2005 beginning in June 2007 thru June 2008 have been exhausted. FDIC insurance premiums were $127,000 for the fourth quarter and $109,000 for the linked third quarter, compared to $23,000 for the 2007 fourth quarter. The largest component of non- interest expense, compensation and fringe benefits, declined to $3.3 million for the fourth quarter and $3.4 million for the linked third quarter, from $3.8 million for the 2007 fourth quarter. In managing its compensation expense, the Bank has reduced its full time equivalent employees to 273 at December 31, 2008 from 287 at December 31, 2007.

Nonaccrual loans were $10.7 million at December 31, 2008, $8.5 million at September 30, 2008 and $7.6 million at December 31, 2007. Restructured loans were $4.3 million at December 31, 2008, $4.0 million at September 30, 2008 and none at December 31, 2007. The current level of nonaccrual and restructured loans is attributable to current economic conditions and decreasing property values in the Bank's market area. Management believes it has thoroughly evaluated its nonaccrual and restructured loans and they are either well collateralized or adequately reserved. However, there can be no assurance in the future that regulators, increased credit risks in the loan portfolio, further declines in economic conditions and other factors will not require additional adjustments to the allowance for credit losses. As a result of the increased provisions for credit losses during 2008, the allowance for credit losses was $12.0 million at December 31, 2008 compared to $9.9 million at December 31, 2007, representing 1.58% of total loans at December 31, 2008 and 1.27% at December 31, 2007.

Other real estate owned increased to $7.7 million at December 31, 2008 from $1.6 million at December 31, 2007, reflecting foreclosures of certain nonaccrual loans. Other real estate owned consists primarily of single family residential properties, developed building lots and a partially developed residential subdivision. Based on fair value analysis, the Bank believes the adjusted carrying values of these properties are representative of their fair market values, although there can be no assurances that the ultimate sales will be equal to or greater than the carrying values.

Deposits declined to $716.4 million at December 31, 2008 from $761.4 million at December 31, 2007, while borrowings increased to $52.6 million at December 31, 2008 from $42.1 million at December 31, 2007. During 2008, the Bank has been challenged by intense competitive market pressure on deposit rates. In efforts to reduce its funding cost, the Bank has been repricing new and maturing time deposits at lower rates, obtained lower costing borrowings, and combined the volume of its lower costing checking accounts, has effectively managed to reduce its cost of funds as discussed above.

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. 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".

For more information contact: Bill Wall (CFO) Phone: (252) 940-5017 Website: www.firstsouthnc.com First South Bancorp, Inc. and Subsidiary Consolidated Statements of Financial Condition December 31 December 31 2008 2007 * Assets (unaudited) Cash and due from banks $20,888,676 $22,273,592 Interest-bearing deposits in financial institutions 5,831,683 1,755,695 Investment securities - available for sale 36,563,646 49,064,278 Mortgage-backed securities - available for sale 31,995,157 37,828,064 Mortgage-backed securities - held for investment 832,221 1,291,762 Loans and leases receivable, net: Held for sale 5,566,262 7,515,626 Held for investment 739,165,035 757,567,279 Premises and equipment, net 9,049,929 9,433,399 Real estate owned 7,710,560 1,601,704 Federal Home Loan Bank of Atlanta stock, at cost which approximates market 3,658,600 3,210,100 Accrued interest receivable 3,786,760 5,103,405 Goodwill 4,218,576 4,218,576 Mortgage servicing rights 1,005,725 1,150,616 Identifiable intangible assets 165,060 196,500 Prepaid expenses and other assets 5,702,167 7,077,115 Total assets $876,140,057 $909,287,711 Liabilities and Stockholders' Equity Deposits: Demand $223,365,542 $243,647,606 Savings 26,555,881 17,497,763 Large denomination certificates of deposit 207,102,876 204,509,581 Other time 259,402,497 295,714,633 Total deposits 716,426,796 761,369,583 Borrowed money 52,558,492 42,067,421 Junior subordinated debentures 10,310,000 10,310,000 Other liabilities 9,023,744 9,505,385 Total liabilities 788,319,032 823,252,389 Common stock, $.01 par value, 25,000,000 shares authorized; 11,254,222 issued; 9,738,096 and 9,808,655 shares outstanding, respectively 97,381 98,087 Additional paid-in capital 35,924,426 36,761,824 Retained earnings, substantially restricted 82,867,095 79,679,027 Treasury stock at cost (32,247,365) (30,880,120) Accumulated other comprehensive income, net 1,179,488 376,504 Total stockholders' equity 87,821,025 86,035,322 Total liabilities and stockholders' equity $876,140,057 $909,287,711 *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 2008 2007 2008 2007 Interest income: Interest and fees on loans $12,460,618 $16,444,216 $55,182,193 $64,975,487 Interest and dividends on investments and deposits 911,604 1,147,524 4,181,602 5,102,761 Total interest income 13,372,222 17,591,740 59,363,795 70,078,248 Interest expense: Interest on deposits 4,538,604 6,665,612 21,095,044 27,499,996 Interest on borrowings 369,221 436,905 1,563,978 771,976 Interest on junior subordinated notes 169,661 206,788 657,576 839,110 Total interest expense 5,077,486 7,309,305 23,316,598 29,111,082 Net interest income 8,294,736 10,282,435 36,047,197 40,967,166 Provision for credit losses 1,150,000 150,000 4,043,600 350,000 Net interest income after provision for credit losses 7,144,736 10,132,435 32,003,597 40,617,166 Non-interest income: Fees and service charges 1,870,412 1,864,573 7,750,195 7,341,240 Loan servicing fees 167,577 163,241 658,073 651,358 Gain (loss) on sale of real estate, net (177,380) 134 (80,542) 49,644 Gain on sale of mortgage loans 74,027 240,565 586,571 519,361 Gain on sale of mortgage backed securities - - 97,537 - Other income 214,378 457,486 1,071,726 1,575,171 Total non- interest income 2,149,014 2,725,999 10,083,560 10,136,774 Non-interest expense: Compensation and fringe benefits 3,309,183 3,774,401 13,750,085 13,973,012 Federal insurance premiums 127,182 22,910 280,372 94,349 Premises and equipment 456,381 502,754 1,969,006 1,938,555 Advertising 25,816 23,938 112,758 125,490 Payroll and other taxes 275,979 342,143 1,246,743 1,308,248 Data processing 677,044 655,563 2,630,821 2,524,983 Amortization of intangible assets 102,351 99,955 434,260 394,508 Other 1,013,182 662,811 3,740,652 2,551,831 Total non- interest expense 5,987,118 6,084,475 24,164,697 22,910,976 Income before income taxes 3,306,632 6,773,959 17,922,460 27,842,964 Income taxes 1,287,170 2,638,074 6,934,640 10,839,737 Net income $2,019,462 $4,135,885 $10,987,820 $17,003,227 Per share data: Basic earnings per share $0.21 $0.42 $1.13 $1.71 Diluted earnings per share $0.21 $0.42 $1.12 $1.70 Dividends per share $0.20 $0.19 $0.80 $0.76 Weighted average shares-Basic 9,738,096 9,862,276 9,761,944 9,914,929 Weighted average shares-Diluted 9,743,987 9,955,496 9,781,761 10,027,728 First South Bancorp, Inc. Supplemental Quarterly Financial Data (Unaudited) 12/31/2008 9/30/2008 6/30/2008 3/31/2008 12/31/2007 Consolidated balance sheet data: (dollars in thousands except per share data) Total assets $876,140 $888,633 $910,244 $913,887 $909,288 Loans receivable (net): Mortgage 46,252 44,035 47,710 51,013 50,461 Commercial 585,893 590,212 601,485 606,514 601,300 Consumer 101,180 102,929 102,870 101,071 100,387 Leases 11,406 12,546 13,021 13,679 12,935 Total 744,731 749,722 765,086 772,277 765,083 Cash and investments 63,284 69,176 75,114 73,124 73,094 Mortgage-backed securities 32,827 32,503 34,859 37,756 39,120 Premises and equipment 9,050 9,234 9,333 9,305 9,433 Goodwill 4,219 4,219 4,219 4,219 4,219 Mortgage servicing rights 1,006 1,076 1,111 1,131 1,151 Deposits: Savings 26,556 18,249 18,682 17,866 17,498 Checking 223,366 229,271 247,642 252,153 243,648 Certificates 466,505 475,350 477,969 484,310 500,224 Total 716,427 722,870 744,293 754,329 761,370 Borrowings 52,558 57,772 54,164 52,099 42,067 Junior subordinated debentures 10,310 10,310 10,310 10,310 10,310 Stockholders' equity 87,821 86,824 86,917 87,073 86,026 Consolidated earnings summary: Interest income $13,372 $14,389 $15,219 $16,383 $17,591 Interest expense 5,078 5,411 6,045 6,783 7,309 Net interest income 8,294 8,978 9,174 9,600 10,282 Provision for credit losses 1,150 1,745 1,149 0 150 Noninterest income 2,149 2,441 2,821 2,674 2,726 Noninterest expense 5,987 6,322 5,896 5,960 6,084 Income taxes 1,287 1,296 1,938 2,413 2,638 Net income $2,019 $2,056 $3,012 $3,901 $4,136 Per Share Data: Earnings per share-Basic $0.21 $0.21 $0.31 $0.40 $0.42 Earnings per share- Diluted $0.21 $0.21 $0.31 $0.40 $0.42 Dividends per share $0.20 $0.20 $0.20 $0.20 $0.19 Book value per share $9.02 $8.92 $8.91 $8.92 $8.77 Average shares-Basic 9,738,096 9,751,221 9,756,519 9,802,770 9,862,276 Average shares- Diluted 9,743,987 9,768,515 9,782,038 9,833,335 9,955,496 12/31/2008 9/30/2008 6/30/2008 3/31/2008 12/31/2007 (dollars in thousands except per share data) Performance ratios: Yield on earning assets 6.57% 6.93% 7.15% 7.62% 8.26% Cost of funds 2.59% 2.71% 2.97% 3.30% 3.59% Net interest spread 3.98% 4.22% 4.18% 4.32% 4.67% Net interest margin on earning assets 4.08% 4.32% 4.31% 4.46% 4.83% Earning assets to total assets 92.29% 92.03% 92.83% 92.99% 93.55% Return on average assets 0.92% 0.92% 1.32% 1.70% 1.81% Return on average equity 9.19% 9.37% 13.72% 17.97% 19.22% Efficiency ratio 57.25% 55.30% 49.09% 48.49% 47.26% Dividend payout ratio 95.24% 95.24% 64.52% 50.00% 45.24% Average assets $879,864 $898,349 $914,012 $919,708 $913,729 Average earning assets $813,993 $830,759 $851,486 $858,705 $851,569 Average equity $87,876 $87,737 $87,790 $86,810 $86,096 Equity/Assets 10.02% 9.77% 9.55% 9.53% 9.46% Tangible Equity/Assets 9.52% 9.28% 9.07% 9.05% 8.98% Asset quality data and ratios: Nonaccrual loans $10,727 $8,510 $6,390 $12,819 $7,555 Restructured loans $4,275 $4,017 $4,036 $0 $0 Total nonperforming loans $15,002 $12,527 $10,426 $12,819 $7,555 Other real estate owned $7,711 $6,987 $4,026 $1,526 $1,602 Total nonperforming assets $22,713 $19,514 $14,452 $14,345 $9,157 Allowance for loan and lease losses $11,618 $11,284 $9,957 $9,394 $9,487 Allowance for unfunded loan commitments $340 $378 $391 $393 $403 Allowance for credit losses $11,958 $11,662 $10,348 $9,787 $9,890 Allowance for loan and lease losses to loans 1.53% 1.48% 1.28% 1.20% 1.22% Allowance for unfunded loan commitments to unfunded commitments 0.29% 0.28% 0.32% 0.26% 0.27% Allowance for credit losses to loans 1.58% 1.53% 1.33% 1.25% 1.27% Net charge-offs (recoveries) $854 $431 $588 $102 $254 Net charge-offs (recoveries) to loans 0.115% 0.057% 0.077% 0.013% 0.033% Nonperforming loans to loans 2.01% 1.67% 1.36% 1.66% 0.99% Nonperforming assets to assets 2.59% 2.20% 1.59% 1.57% 1.01% Loans to deposits 101.86% 101.98% 101.94% 102.38% 100.49% Loans to assets 83.29% 82.96% 83.35% 84.50% 84.12% Loans serviced for others $255,510 $259,326 $256,515 $255,700 $254,671

SOURCE First South Bancorp, Inc.

Source: PR Newswire

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