First South Bancorp, Inc. Reports June 30, 2015 Quarterly Operating Results

WASHINGTON, N.C., July 21, 2015 /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 and six months ended June 30, 2015.

For the 2015 second quarter, net income increased 59.1% to $1.2 million, or $0.12 per diluted common share, from net income of $725,000, or $0.08 per diluted common share for the linked 2015 first quarter.  The improvement in net income on a linked quarter basis is due to increases in net interest income and non-interest income, as well as a decline in non-interest expenses.  The improvement reflects the impact of strong loan growth during the quarter coupled with enhanced fee income from deposit service offerings as the benefits of the branch acquisition transaction (the "acquisition") with Bank of America (BOA) are being realized.

Net income and earnings per diluted common share for the current quarter declined by $132,000 and $0.01, respectively, when compared with $1.3 million or $0.13 per diluted common share earned for the quarter ended June 30, 2014. 

Net income for the first six months of 2015 was $1.9 million, or $0.20 per diluted common share, compared to net income of $2.4 million, or $0.25 per diluted common share earned in the first six months of 2014.  Earnings for the current six month period were positively impacted by increases in net interest income and non-interest income, as well as lower loan loss provisions.  During this same period non-interest expenses have increased with growth of our franchise and supporting infrastructure.  In addition, during the first six-months of 2015, the Bank incurred $425,000 of one-time transaction expenses associated the nine newly acquired branch offices. 

Bruce Elder, President and CEO, commented, "Our biggest challenge heading into 2015 was to utilize the deposits acquired in December and put those funds to work in the loan and lease portfolio.  During the second quarter we experienced net portfolio growth of almost $55 million bringing our year-to-date net growth to over $63 million.  The growth will have a positive impact on interest income and earnings in future periods and growing earning assets remains a high priority.  We will also continue to focus increasing non-interest income and efficiently managing operating expenses to improve efficiency and bottom-line results.  While our efficiency ratio remains elevated due to the branch acquisition, we have made progress during the quarter.  During the 2015 second quarter the Bank consolidated three branch offices into other nearby existing offices. By combining our resources in these markets we are able to improve our efficiency while maintaining our commitment to the communities and customers we serve."

Mr. Elder commented further, "During the quarter ended June 30, 2015, we paid our sixth consecutive quarterly cash dividend of $0.025 per share.  Our dividend payments for the six months ended June 30, 2015 represent a 25% payout ratio of diluted earnings per share. The payment of these quarterly dividends reflects the Company's strong capital position, improved financial performance and our confidence in the future."

Net Interest Income

Net interest income for the 2015 second quarter increased to $7.2 million from $7.1 million for the linked 2015 first quarter, and $6.6 million for the 2014 second quarter.  Net interest income for the first six months of 2015 increased to $14.2 million, from $13.0 million for the comparative prior year period.  The tax equivalent net interest margin improved 5 basis points to 3.67% for the 2015 second quarter, from 3.62% for the linked 2015 first quarter, and fell 49 basis points when compared to the 4.16% for the 2014 second quarter.  The tax equivalent net interest margin for the first six months of 2015 declined by 56 basis points to 3.64%, from 4.20% for the comparative six month period of 2014.  The declines were the result of investing the acquired deposits in lower earning investment securities.

Net interest margin for the current period declined compared to the three-month period ended June 30, 2014 due to a change in earning asset mix.  The percentage of loans to total earning assets declined to 66% for the current period end compared to 72% for the prior period.  Despite the decline in margin, net interest income increased by $624,000 over the comparative prior year three-month period primarily as a result of a $157.3 million increase in average earning assets.  The expansion of our net interest income during the first half of 2015 compared to the same six month period of 2014 is due primarily to an increase in the volume of earning assets, which was partially offset by an increase in the volume of interest-bearing liabilities and a reduction in the yield on earning assets.  We anticipate level of our current margin remaining somewhat stable over the near-term unless there are dramatic movements in interest rates.

Asset Quality and Provisions for Loan Losses

Total nonperforming assets were $11.6 million, or 1.3% of total assets at June 30, 2015, compared to $13.2 million or 1.5% of total assets at December 31, 2014, and $17.4 million or 2.5% of total assets at June 30, 2014.  Total loans in non-accrual status were $4.3 million at June 30, 2015, compared to $5.0 million at December 31, 2014 and $7.8 million at June 30, 2014.  Our level of other real estate owned (OREO) declined to $7.0 million at June 30, 2014, from $7.8 million at December 31, 2014 and $8.7 million at June 30, 2014. The Bank continues to place improving asset quality metrics as a key component of its short-term and long-term performance objectives.   

The allowance for loan and lease losses (ALLL) was $7.4 million at June 30, 2014, representing 1.35% of loans and leases held for investment, compared to $7.5 million at December 31, 2014, or 1.57% of loans and leases held for investment, and $7.9 million at June 30, 2014, or 1.69% of loans and leases held for investment.  The Bank recorded $140,000 of provision for credit losses in the 2015 second quarter, none in the linked 2015 first quarter, and $450,000 in the comparative 2014 second quarter.  For the six months ended June 30, 2015, the Bank recorded $140,000 of provision for credit losses, compared to $700,000 in the first six months of 2014.  Management believes the ALLL remains adequate.

Non-Interest Income

Total non-interest income is $3.6 million for the 2015 second quarter, compared to $3.2 million for the linked 2015 first quarter and $2.2 million for the 2014 second quarter. 

Deposit fees and service charges increased to $2.1 million for the 2015 second quarter and represented 58.1% of total non-interest income.  These results were improved over the $1.9 million generated for the linked 2015 first quarter and the $1.1 million earned in the comparative second quarter of 2014.  This increase primarily reflects the additional fees and service charges generated from the acquisition transaction.  We anticipate additional service charge revenue from deposits going forward, as we focus on growing our core deposit base through new customer acquisition.

Total non-interest income generated from the sale and servicing of mortgage loans and loan fees increased to $877,000 for the 2015 second quarter, compared to $624,000 in the linked 2015 first quarter and $612,000 for the 2014 second quarter.  An early spring sales season, coupled with the opportunities we are experiencing in the new markets we entered through the branch acquisition resulted in a higher level of activity for the current quarter.  Due to volatility in interest rates near the end of the second quarter, mortgage originations may decline in the third quarter, as compared to the second quarter.  We continue to explore various strategies to enhance our non-interest income, including the purchasing of servicing rights.

Included in other non-interest income is revenue from investments in Bank-owned life insurance (BOLI) of $128,000 for the 2015 second quarter, compared to $127,000 the linked 2015 first quarter and $132,000 for the 2014 second quarter.

Net gains from sales of OREO were $27,000 for the 2015 second quarter, compared to $46,000 for the linked 2015 first quarter and $34,000 for the 2014 second quarter, as the Bank continues in its efforts of disposing of nonperforming assets.

Net gains from investment securities sales were $201,000 for the 2015 second quarter, compared to $251,000 for the linked 2015 first quarter and none for the 2014 second quarter.  During 2014, we implemented a strategy to pre-invest a large portion of the anticipated acquisition transaction proceeds into short and intermediate term investment securities until the funds could be converted to higher yielding assets.  During the 2015 second quarter and linked first quarter, we sold $9.0 million and $13.8 million, respectively, of investment securities primarily to fund net growth in our loan portfolio.

Total core non-interest income, excluding net gains from securities and OREO sales, improved to $3.4 million for the 2015 second quarter, from $2.9 million for the linked 2015 first quarter and $2.1 million for the comparative 2014 second quarter, primarily due to the increase in deposit fees and service charges.

For the first six months of 2015, total non-interest income was $6.8 million, compared to $4.1 million for the first six months 2014.  Fees and service charges on deposits increased significantly to $4.0 million for the first six months of 2015, compared to $2.1 million for the 2014 six month period, primarily resulting from additional revenue generated from accounts acquired in the acquisition.  Revenue generated from the sale and servicing of mortgage loans and loan fees increased to $1.5 million for the first six months of 2015, from $1.1 million for 2014 six month period.  Net gains recognized from the sale of investment securities and OREO increased to $452,000 and $73,000, respectively, for the first six months of 2015, from $14,000 and $73,000, respectively, for the first six months of 2014, reflecting an increased volume of sales activity in the respective periods.  BOLI earnings declined to $254,000 for the first six months of 2015, from $265,000 for the first six months of 2014.

Non-Interest Expense

Total non-interest expense declined to $9.0 million for the 2015 second quarter, from $9.3 million for the linked 2015 first quarter, but was an increase over the $6.5 million reported for the comparative 2014 second quarter.  For the first six months of 2015, total non-interest expense increased to $18.3 million, from the $13.0 million reported in the first six months of 2014.

Compensation and benefit expenses, the largest component of non-interest expenses, increased to $4.8 million for the 2015 second quarter, from $4.7 million for the linked 2015 first quarter and $3.8 million 2014 second quarter.  For the first six months of 2015, compensation expense increased to $9.5 million, from $7.6 million for the first six months of 2014.  The increase for the 2015 periods is attributable to the expense for the staff in the nine acquired branch offices, as well as staffing for our new Durham, NC commercial loan team and our new Customer Care Center.  The Bank will continue to manage overall staffing levels to ensure we meet the ongoing needs of our customers and to support future growth.

FDIC insurance premiums increased to $149,000 for the 2015 second quarter, from $133,000 for the linked 2015 first quarter and $139,000 for the comparative 2014 second quarter.  For the first six months of 2015, FDIC insurance was $282,000, compared to $284,000 for the first six months of 2014. The increased quarterly FDIC insurance premium is primarily attributable to growth of the deposit insurance assessment calculation base resulting from the acquisition transaction.

Premises and equipment expense was $1.3 million for the 2015 second quarter, compared to $1.4 million for the linked 2015 first quarter and $831,000 for the 2014 second quarter.  Premises and equipment costs for the first quarter of 2015 include $57,000 of one-time acquisition expenses.  For the first six months of 2015, premises and equipment expense increased to $2.7 million from $1.7 million for the first six months of 2014.  While the recent branch acquisition has resulted in a larger infrastructure cost than our historical levels, we continue to pursue opportunities to gain efficiency and performance from our branch network and will make adjustments, such as we have with recent branch consolidations in Kinston, Rocky Mount and Lumberton.  As such, given our current branch structure we would anticipate occupancy cost to maintain or improve from their current levels. 

Advertising expense was $217,000 for the 2015 second quarter, compared to $163,000 for the linked 2015 first quarter and $106,000 for the 2014 second quarter.  For the first six months of 2015, advertising expense increased to $380,000, from $169,000 for the first six months of 2014. The Bank is investing in building our brand awareness throughout our expanded footprint with additional marketing efforts, and as such, we anticipate that our advertising expenses will be above that of our historical levels. 

Data processing costs declined to $880,000 for the 2015 second quarter, from $1.1 million for the linked 2015 first quarter, but increased by $311,000, when compared to the $568,000 reported for the 2014 first quarter.  Data processing expense for the 2015 first quarter included $173,000 of one-time acquisition expenses.  For the first six months of 2015, data processing expense increased to $2.0 million, from $1.2 million for the first six months of 2014. Data processing costs fluctuate in conjunction with changes in the number of customer accounts and transaction activity volumes and therefore, with the addition of accounts and customers from the acquisition, going forward we expect these costs to be above that of prior periods.

Total amortization of intangible assets, including mortgage servicing rights and identifiable intangible assets, was $130,000 for the 2015 second quarter, compared to $127,000 for the linked 2015 first quarter and a $15,000 recovery for the 2014 second quarter.  For the first six months of 2015, amortization of intangible assets increased to $257,000, from $108,000 for the first six months of 2014.  Amortization of mortgage servicing rights was $58,000 for the 2015 second quarter and $56,000 for the linked first quarter, compared to a $15,000 recovery for the 2014 second quarter.  Amortization of the Company's core deposit intangible, which is the only identifiable intangible asset subject to amortization, was $72,000 for both the 2015 second quarter and the linked first quarter, compared to none for the 2014 second quarter.

Expenses attributable to ongoing maintenance, property taxes and insurance for OREO properties were $115,000 for the 2015 second quarter, compared to $163,000 for the linked 2015 first quarter and $107,000 for the 2014 second quarter.  For the first six months of 2015, OREO related expenses increased to $278,000, from $228,000 for the first six months of 2014.  Quarterly OREO valuation adjustments were $41,000 for the 2015 second quarter, compared to $44,000 for the linked 2015 first quarter and none for the 2014 second quarter.

Other non-interest expense was $1.4 million for both the 2015 first quarter and the linked 2015 first quarter, compared to $898,000 for the 2014 second quarter.  For the first six months of 2015, other non-interest expense increased to $2.8 million, from $1.8 million for the first six months of 2014.  The year-over-year increase in operating expenses is primarily due to the branch acquisition. 

Income tax expense was $486,000 for the 2015 second quarter, compared to $257,000 for the linked 2015 first quarter and $542,000 for the 2014 second quarter.  For the first six months of 2015, income tax expense declined to $742,000, from $960,000 for the first six months of 2014.  The effective income tax rates were 29.62% for the 2015 second quarter, 26.15% for the linked 2015 first quarter and 29.66% for the comparative 2014 second quarter.  The effective income tax rates were 28.32% and 28.67% for the respective 2015 and 2014 six month periods.  The Bank's investment in BOLI and tax-exempt municipal bonds contribute to lowering the Company's level of income tax expense and its effective income tax rates.

Balance Sheet 

Total assets increased to $899.7 million at June 30, 2015, from $885.9 million at December 31, 2014.  The increase is attributable to a net increase in the volume of earning assets, resulting primarily from net growth in the loan and lease receivable portfolio, and partially offset by the sale of investment securities and a reduction in the level of cash on our balance sheet to help fund loan growth. 

Loans and leases held for investment grew by $63.2 million during the first six months of 2015.  This reflects the eighth consecutive quarterly growth in loans and leases held for investment.  As a result of this net growth, total loans and leases held for investment increased to $543.6 million at June 30, 2015, from $480.4 million at December 31, 2014.  Loans held for sale increased to $6.2 million at June 30, 2015, from $4.8 million at December 31, 2014.

The investment securities portfolio and interest-bearing deposits declined to $276.1 million at June 30, 2015, from $325.6 million at December 31, 2014.  As previously noted, in 2014 the Bank implemented a strategy to pre-invest a large portion of the anticipated BOA transaction proceeds into short and intermediate term investment securities until the funds can be converted to higher yielding assets.  During the first six months of 2015, the Bank sold $22.8 million of investment securities primarily to fund our loan portfolio growth.

The Bank's investment in BOLI was $15.4 million at June 30, 2015, compared to $15.1 million at December 31, 2014.  The increase in BOLI levels is due to higher policy cash values.

Identifiable intangible assets were $2.0 million at June 30, 2015, compared to $2.2 million at December 31, 2014, reflecting the core deposit intangible associated with the acquisition transaction, which is being amortized over a ten year period.

Total deposits declined to $772.9 million at June 30, 2015, from $788.3 million at December 31, 2014.  Total non-maturity deposits declined to $529.4 million at June 30, 2015, from $533.9 million at December 31, 2014.  However, during the first half of 2015 our level of non-interest bearing deposits grew $11.4 million to $158.9 million.  Certificates of deposits declined to $243.5 million or 31.5% of total deposits at June 30, 2015, from $254.3 million or 32.3% of total deposits at December 31, 2014.

Stockholders' equity declined to $80.1 million at June 30, 2015, from $80.4 million at December 31, 2014.  This increase primarily reflects the $1.9 million of net income earned for the first six months, net of a $958,000 decline in accumulated other comprehensive income primarily resulting from the mark-to-market adjustment of the available-for-sale securities portfolio, $478,000 dividends declared, and $793,000 used to acquire shares of the Company's common stock pursuant to an announced repurchase program.  There were 9,503,964 common shares outstanding at June 30, 2015, compared to 9,598,007 shares outstanding at December 31, 2014, reflecting the net effect of 3,359 shares issued pursuant to the vesting of restricted stock awards and 97,402 shares purchased through the stock repurchase program.

The tangible equity to assets ratio was 8.21% at June 30, 2015, compared to 8.36% at December 31, 2014.  Despite the decline in tangible equity, our tangible book value per common share increased to $7.77 at June 30, 2015, from $7.71 at December 31, 2014 as a result of our share repurchases. 

Key Performance Ratios 

Some of our key performance ratios are the return on average assets (ROA), the return on average equity (ROE) and the efficiency ratio.  ROA is 0.53% for the 2015 second quarter, compared with 0.33% for the linked 2015 first quarter and 0.73% for the 2014 second quarter.  ROE is 5.63% for the 2015 second quarter compared with 3.59% for the linked 2015 first quarter and 6.61% for the 2014 second quarter.  The efficiency ratio (noninterest expenses as a percentage of net interest income plus noninterest income) improved to 83.71% for the 2015 second quarter, from 91.30% for the linked 2015 first quarter, but was higher than the 72.77% for the 2014 second quarter.  The efficiency ratio measures the proportion of net operating revenues that are absorbed by overhead expenses.

First South Bank has been serving the citizens of eastern and central 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 32 full service branch offices located throughout eastern and central North Carolina. 

The Company's common stock symbol as traded on the NASDAQ Global Select Market is "FSBK".

Forward-Looking Statements

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.

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States. First South Bancorp, Inc.'s management uses these "non-GAAP" measures in their analysis of the Company's performance. Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. See the attached disclosures for a reconciliation of any non-GAAP measures to the most directly comparable GAAP measure.

(NASDAQ: FSBK)

SOURCE First South Bancorp, Inc.

Related Links

http://www.firstsouthnc.com