FSBK First South Bancorp

WASHINGTON, N.C., July 21, 2016 /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, 2016. 

2016 Second Quarter Highlights

• Solid earnings performance with growth in net income, earnings per share, as well as returns on average assets and average equity
• Increase in pre-tax, pre-provision operating earnings by $540,000 compared with linked 2016 first quarter results
• Strong loan growth as we increased our loans-held-for-investment by $29.8 million
• Improvement in asset quality metrics with lower levels of past due and non-performing loans
• Continued deposit growth with strong increase in non-interest bearing deposits
• Expansion of our net interest margin
• Increased quarterly cash dividend payment rate to $0.03 per share, a 20% increase

Net Income.  Net income for the second quarter of 2016 was $1.6 million or $0.17 per diluted common share and compares favorably to the $1.5 million or $0.15 per diluted common share and $1.2 million or $0.12 per diluted common share of net income generated during the linked 2016 first quarter and the comparative prior year quarter, respectively.   The improvement in quarterly net income is primarily attributable to an increase in net interest income, reflecting the impact of strong loan growth over the past twelve months.

The Company showed significant improvement in pre-tax, pre-provision operating earnings for the quarter ended June 30, 2016.  Pre-tax, pre-provision operating earnings, which excludes certain revenue and expense items as shown on the accompanying table of Supplemental Financial Data, was $2.5 million for the current quarter compared to $2.0 million for the quarter ended March 31, 2016 and $1.8 million for the comparative quarter ended June 30, 2015.

The Company generated net income of $3.1 million for the first six months of 2016 or $0.32 per diluted common share compared to $1.9 million or $0.20 per diluted common share earned during the first six months of 2015.  Earnings for the current six month period were positively impacted by increases in net interest income and non-interest income, as well as lower non-interest expenses, while being partially offset by an increase in the provision for loan losses associated with the strong loan portfolio growth.  During the first quarter of 2015, the Bank incurred $425,000 of pre-tax one-time transaction expenses associated with acquiring nine branch offices.

Bruce Elder, President and CEO, commented, "When we expanded our geographic franchise footprint in December 2014 through a branch acquisition transaction, we realized that it would take time to leverage the personnel, facilities and low-cost deposits we acquired.  As of the quarter ended June 30, 2016, we have created shareholder value by generating pre-tax, pre-provision operating earnings in excess of those levels achieved for the quarter ended immediately preceding the branch acquisition.  As we continue to grow our earning asset base, further diversify our sources of non-interest income and improve operating efficiency, our earnings potential should show progress toward high performance."

Mr. Elder commented further, "During the quarter ended June 30, 2016, we were pleased to increase our quarterly dividend payment rate by 20% to $0.03 per share.  Our dividend payments for the first six months of 2016 represent a 17% payout ratio of diluted earnings per share. The Board of Directors' decision to increase the quarterly dividend rate reflects the Company's strong capital position, improved financial performance and confidence in the Company's future."

Net Interest Income.  Net interest income for the 2016 second quarter increased to $8.1 million, from $7.8 million for the linked 2016 first quarter and $7.2 million for the 2015 second quarter.  Net interest income for the first six months of 2016 increased to $15.9 million, from $14.2 million for the comparative prior year six month period.  The tax equivalent net interest margin improved 10 basis points to 3.76% for the 2016 second quarter, from 3.66% for the linked 2016 first quarter, and improved 9 basis points when compared to the 3.67% for the 2015 second quarter.    The improvement in the tax-equivalent net interest margin is due to a significant change in the mix of our earning assets over comparative periods as we have replaced lower yielding investments with higher yielding loans.  On the liability side of the balance sheet, while we continue to seek expansion of our non-maturity deposit base, we have also taken steps to protect the Company from a rising rate environment by adding some longer-term funding.

Growth and changes in the mix of our earning asset base positively impacted net interest income as well as the net interest margin for the first six months of 2016 when compared to the first six months of 2015.  Net interest income increased by $1.6 million and the net interest margin improved 7 basis points over the comparative prior year six month period.  During this same comparative period average earning assets increased $68.6 million and the percentage of average loans outstanding to total average earning assets increased to 73.1% from 61.9%.

Asset Quality and Provision for Credit Losses.  Total nonperforming assets were $8.3 million, or 0.87% of total assets at June 30, 2016, compared to $9.4 million or 1.0% of total assets at December 31, 2015, and $11.6 million or 1.3% of total assets at June 30, 2015.  Total loans in non-accrual status were $2.6 million at June 30, 2016, compared to $3.2 million at December 31, 2015 and $4.3 million at June 30, 2015.  Our level of other real estate owned (OREO) declined to $5.5 million at June 30, 2016, from $6.1 million at December 31, 2015 and $7.0 million at June 30, 2015.  Management and the Board of Directors believe that improving asset quality is a key driver of stock price performance and increased overall shareholder value.

The allowance for loan and lease losses (ALLL) was $8.3 million at June 30, 2016, representing 1.25% of loans and leases held for investment, compared to $7.9 million at December 31, 2015, or 1.30% of loans and leases held for investment, and $7.4 million at June 30, 2015, or 1.35% of loans and leases held for investment.  The Bank recorded $325,000 of provision for credit losses in the 2016 second quarter, $225,000 in the linked 2016 first quarter, and $140,000 in the comparative 2015 second quarter.  For the six months ended June 30, 2016, the Bank recorded $550,000 of provision for credit losses, compared to $140,000 in the first six months of 2015.  Management believes the Company is adequately reserved for potential future credit losses.

Non-Interest Income.  Total non-interest income was $3.5 million for the 2016 second quarter, compared to $3.6 million for both the linked 2016 first quarter and the 2015 second quarter.

Deposit fees and service charges were $1.9 million for the 2016 second quarter and represented 54.4% of total non-interest income.  The Company generated $1.9 million of deposit fees and service charges for the linked 2016 first quarter and $2.1 million in the comparative 2015 second quarter.

Total non-interest income generated from the sale and servicing of mortgage loans and loan fees increased to $842,000 for the 2016 second quarter, compared to $648,000 in the linked 2016 first quarter and $877,000 for the 2015 second quarter.  We continue to explore various strategies to enhance our non-interest income from the mortgage business, including the potential purchase of mortgage servicing rights.

Sales of OREO resulted in a net loss of $14,000 and $12,000, respectively, for the 2016 second quarter and the linked 2016 first quarter, compared to a net gain of $27,000 for the 2015 second quarter, as the Bank continues its efforts to reduce its level of nonperforming assets.

Net gains from investment securities sales were $184,000 for the 2016 second quarter, compared to $284,000 for the linked 2016 first quarter and $201,000 for the 2015 second quarter.  During the 2016 second quarter and linked 2016 first quarter, we sold $9.8 million and $30.4 million, respectively, of investment securities primarily to fund net growth in our loan portfolio.

Included in other non-interest income is revenue from investments in Bank-owned life insurance (BOLI) of $142,000 for the 2016 second quarter, compared to $135,000 for the linked 2016 first quarter and $128,000 for the 2015 second quarter.

Other non-interest income also includes Small Business Administration (SBA) related revenue of $142,000 for the 2016 second quarter and $144,000 for the 2016 first quarter.  While the Bank has originated SBA loans in prior years, we began the process of actively selling and servicing these credits during 2016.

Total core non-interest income, excluding net gains from securities and OREO sales, has remained relatively constant at $3.4 million for the 2016 second quarter, $3.3 million for the linked 2016 first quarter and $3.4 million for the comparative 2015 second quarter, primarily due to the consistency of deposit fees and service charges.

For the first six months of 2016, total non-interest income increased to $7.1 million, from $6.8 million for the first six months of 2015.  Fees and service charges on deposits were $3.8 million for the first six months of 2016, compared to $4.0 million for the six months ended June 30, 2015.  Revenue generated from the sale and servicing of mortgage loans and loan fees remained consistent at $1.5 million for the first six months of 2016 and 2015.  Gains realized from the sale of investment securities were $467,000 and $451,000 for the first six months of 2016 and 2015, respectively.  The Bank recognized a net loss of $26,000 and a net gain of $73,000 on the disposal of OREO during the first six months of 2016 and 2015, respectively.  BOLI earnings increased to $277,000 for the first six months of 2016, from $254,000 for the first six months of 2015.

Non-Interest Expense  Total non-interest expense has remained stable with $9.0 million for the 2016 second quarter, $9.1 million for the linked 2016 first quarter, and $9.0 million for the 2015 second quarter.  For the first six months of 2016, total non-interest expense was $18.2 million, compared to $18.3 million reported in the first six months of 2015.

Compensation and benefit expenses, the largest component of non-interest expenses, were $4.9 million for the 2016 second quarter, compared to $5.0 million for the linked 2016 first quarter and $4.8 million for the 2015 second quarter.  For the first six months of 2016, compensation expense increased to $10.0 million, from $9.5 million for the first six months of 2015.  Expenses in the first six months of 2016 included severance costs associated with branch consolidations during the period.  The Bank will continue to manage overall staffing levels to ensure we meet the ongoing needs of our customers and support future growth.

FDIC insurance premiums were $161,000 for the 2016 second quarter, compared to $162,000 for the linked 2016 first quarter and $149,000 for the 2015 second quarter.  For the first six months of 2016, FDIC insurance was $322,000, compared to $282,000 for the first six months of 2015.  The increase in FDIC insurance premiums was due to the growth in our balance sheet.

Premises and equipment expense remained stable at $1.4 million for both the 2016 second quarter, the linked 2016 first quarter and $1.3 million for the 2015 second quarter.  For the first six months of 2016, premises and equipment expense was $2.8 million, compared to $2.7 million for the first six months of 2015.  During the first six months of 2016 the Bank consolidated three existing branches into nearby locations.  Occupancy expense for the 2016 period includes the retirement of certain leasehold improvements and other fixed assets at locations that were consolidated and closed. We will continue to explore opportunities to gain efficiency and performance improvement from our branch network.

Advertising expense was $229,000 for the 2016 second quarter, compared to $188,000 for the linked 2016 first quarter and $217,000 for the 2015 second quarter.  For the first six months of 2016, advertising expense increased to $417,000, from $380,000 for the first six months of 2015. The Bank continues to invest in building our brand awareness throughout our expanded footprint with additional marketing efforts.

Data processing costs declined to $750,000 for the 2016 second quarter, from $796,000 for the linked 2016 first quarter, and $880,000 for the comparative 2015 second quarter.  For the first six months of 2016, data processing expense declined to $1.5 million, from $2.0 million for the first six months of 2015.  Data processing expense for 2015 included $173,000 of one-time expenses associated with a branch acquisition transaction.

Total amortization of intangible assets, including mortgage servicing rights and identifiable intangible assets, was $134,000 for the 2016 second quarter, compared to $132,000 for the linked 2016 first quarter and $130,000 for the 2015 second quarter.  For the first six months of 2016, amortization of intangible assets was $265,000, compared to $257,000 for the first six months of 2015.

Expenses attributable to ongoing maintenance, property taxes and insurance for OREO properties were $110,000 for the 2016 second quarter, compared to $86,000 for the linked 2016 first quarter and $115,000 for the 2015 second quarter.  For the first six months of 2016, OREO related expenses were $196,000, compared to $278,000 for the first six months of 2015. Management continuously analyzes the carrying value of OREO and makes valuation adjustments as necessary.  Quarterly valuation adjustments for the current, linked and comparative prior year quarters are $103,000, $7,000 and $41,000, respectively and valuation adjustments for the six-month periods ended June 20, 2016 and 2015 are $110,000 and $86,000, respectively.

Other non-interest expense declined to $1.2 million for the 2016 second quarter, from $1.3 million for the linked 2016 first quarter, and $1.4 million for the 2015 second quarter.  As previously mentioned, during the first quarter of 2016, the Bank consolidated three existing branches into nearby locations.  Two of these locations were leased and the third was owned.  In the first quarter of this year the Bank entered into a contract to sell the owned location and realized an $85,000 pre-tax loss during the period as a result.  For the first six months of 2016, other non-interest expense declined to $2.6 million from $2.8 million for the first six months of 2015.

Income tax expense increased to $665,000 for the 2016 second quarter, from $574,000 for the linked 2016 first quarter and $486,000 for the 2015 second quarter.  For the first six months of 2016, income tax expense increased to $1.2 million, from $742,000 for the first six months of 2015.  The effective income tax rates were 29.20% for the 2016 second quarter, 28.20% for the linked 2016 first quarter and 29.62% for the comparative 2015 second quarter.  The effective income tax rates were 28.72% and 28.32% for the respective 2016 and 2015 six month periods.

Balance Sheet.  Total assets increased to $961.5 million at June 30, 2016, from $946.3 million at December 31, 2015.  The increase is attributable to strong growth in the loan and lease portfolio, partially offset by the sale of investment securities and a reduction in interest-bearing deposits with banks to help fund the increased level of loans outstanding.

Loans and leases held for investment grew by $61.8 million during the first six months of 2016.  As a result of this net growth, total loans and leases held for investment increased to $668.8 million at June 30, 2016, from $607.0 million at December 31, 2015.  Loans held for sale increased to $5.3 million at June 30, 2016, from $3.9 million at December 31, 2015.  The loan to deposit ratio has steadily improved from 75.30% at December 31, 2015 to 81.66% at June 30, 2016.

The investment securities portfolio and interest-bearing deposits declined to $216.7 million at June 30, 2016, from $267.4 million at December 31, 2015.  This reduction was the result of cash flows from scheduled amortization and maturities, as well as sales of securities, with the proceeds used to support growth in loans outstanding.

The Bank's investment in BOLI increased to $17.8 million at June 30, 2016, from $15.6 million at December 31, 2015.  The investment returns from the BOLI are utilized to offset a portion of the cost of providing benefits to our employees.

Total deposits increased to $825.5 million at June 30, 2016, from $811.3 million at December 31, 2015.  Total non-maturity deposits grew to $561.6 million at June 30, 2016, from $551.3 million at December 31, 2015.  In addition, total certificates of deposit increased to $263.8 million at June 30, 2016, from $260.0 million at December 31, 2015.

Stockholders' equity increased by $5.2 million to $87.3 million at June 30, 2016, from $82.2 million at December 31, 2015.  This increase primarily reflects the $3.1 million of net income earned for the first six months of 2016 and a $2.6 million increase in accumulated other comprehensive income resulting from the mark-to-market adjustment of the available-for-sale securities portfolio, net of $522,000 of dividends declared. 

The tangible equity to assets ratio increased to 8.46% at June 30, 2016, from 8.04% at December 31, 2015.  The tangible book value per common share increased to $8.57 at June 30, 2016, from $8.02 at December 31, 2015.

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 was 0.68% for the 2016 second quarter, compared with 0.63% for the linked 2016 first quarter and 0.53% for the 2015 second quarter.  ROE was 7.55% for the 2016 second quarter compared with 6.97% for the linked 2016 first quarter and 5.66% for the 2015 second quarter.  The efficiency ratio (noninterest expenses as a percentage of net interest income plus noninterest income) improved to 77.59% for the 2016 second quarter, from 80.74% for the linked 2016 first quarter, and 83.71% for the 2015 second quarter.  The efficiency ratio measures the proportion of net operating revenues that are absorbed by overhead expenses.

Corporate and Investor Information.  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 to business and individual customers. The Bank operates through its main office headquartered in Washington, North Carolina, and has 30 full service branch offices located throughout eastern and central North Carolina.  First South Bank is a wholly-owned subsidiary of First South Bancorp, Inc.

The Bank also provides a full menu of leasing services through its wholly-owned subsidiary, First South Leasing, LLC. In addition, under its First South Wealth Management division, the Bank makes securities brokerage services available through an affiliation with an independent broker/dealer.

Additional investor information for the Company and the Bank may be accessed on our website at www.firstsouthnc.com.

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 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 and the accompanying Supplemental Financial Data contain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States ("GAAP").  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 disclosures above and in the Supplemental Financial Data for reconciliations of any non-GAAP measures to the most directly comparable GAAP measure.

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(NASDAQ: FSBK)

For more information contact:
Bruce Elder (CEO)       (252) 940-4936
Scott McLean (CFO)    (252) 940-5016
Website: www.firstsouthnc.com

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SOURCE First South Bancorp, Inc.