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First South Bancorp Inc Reports Operating Results (10-Q)

November 05, 2010 | About:
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10qk

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First South Bancorp Inc (FSBK) filed Quarterly Report for the period ended 2010-09-30.

First South Bancorp Inc has a market cap of $98.7 million; its shares were traded at around $10.07 with a P/E ratio of 17.4 and P/S ratio of 1.6. The dividend yield of First South Bancorp Inc stocks is 3.6%. First South Bancorp Inc had an annual average earning growth of 37.1% over the past 10 years.

Highlight of Business Operations:

Key performance ratios are return on average assets (ROA), return on average equity (ROE), and efficiency. ROA was .5% and .7% for the three and nine months ended September 30, 2010, compared to 0.8% for both the three and nine months ended September 30, 2009. ROE was 4.6% and 6.3% for the three and nine months ended September 30, 2010, compared to 8.1% and 8.4% for the three and nine months ended September 30, 2009. The efficiency ratio was 55.5% and 57.0% for the three and nine months ended September 30, 2010, compared to 61.1% and 58.5% for the three and nine months ended September 30, 2009.

Interest Expense. Interest expense declined to $2.2 million and $6.9 million for the three and nine months ended September 30, 2010, from $3.9 million and $13.1 million for the three and nine months ended September 30, 2009, reflecting a decline in interest rates between the comparative reporting periods and a decline in the volume of average interest-bearing liabilities. The effective cost of funds improved to 1.2% and 1.3% for the three and nine months ended September 30, 2010, from 2.0% and 2.2% for the three and nine months ended September 30, 2009. The Company was able to improve its cost of funds by the combination of deposit repricing, the rollover of maturing time deposits and the repositioning of borrowings within the current lower interest rate environment. Average deposits and borrowings declined to $718.7 million and $717.9 million for the three and nine months ended September 30, 2010, from $771.9 million and $778.1 million for the three and nine months ended September 30, 2009.

Net Interest Income. Net interest income increased to $8.7 million and $26.1 million for the three and nine months ended September 30, 2010, from $8.3 million and $24.1 million for the three and nine months ended September 30, 2009. The interest rate spread (the difference between the effective yield on average earning assets and the effective cost of average deposits and borrowings) improved to 4.7% and 4.6% for the three and nine months ended September 30, 2010, from 4.1% and 3.9% for the three and nine months ended September 30, 2009. The net interest margin on interest-earning assets (net interest income divided by average interest-earning assets) improved to 4.7% for both the three and nine months ended September 30, 2010, compared to 4.1% and 4.0% for the three and nine months ended September 30, 2009. The increase in interest rate spread and net yield on interest-earning assets is a result of effectively managing the rates earned and paid and the volume of interest-earning assets and interest-bearing liabilities.

Income Taxes. Income tax expense declined to $424,000 and $2.5 million for the three and nine months ended September 30, 2010, from $1.1 million and $3.5 million for the three and nine months ended September 30, 2009. Changes in amounts of income tax provisions reflect changes in the volume of pretax income and estimated income tax rates in effect during each respective period. The effective income tax rates were 29.6% and 37.4% for the three and nine months ended September 30, 2010, compared to 38.9% and 38.7% for the three and nine months ended September 30, 2009. See “Critical Accounting Policies” for additional information.

The FDIC requires the Bank to meet a minimum leverage capital requirement of Tier 1 capital (consisting of retained earnings and common stockholders equity, less any intangible assets) to assets ratio of 4%. The FDIC also requires the Bank to meet a ratio of total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier 1 capital. The North Carolina Office of the Commissioner of Banks requires the Bank to maintain a capital surplus of not less than 50% of common capital stock. The Bank was in compliance with all regulatory capital requirements at September 30, 2010 and December 31, 2009.

The Bank has experienced intense price competition for both loans and deposits over the past two years, which presented a net interest margin management challenge. Net interest margin management has been significantly influenced by the Federal Reserve s 500 basis point rate cuts since September 2007. The Federal Reserve s aggressive series of rate cuts caused immediate downward pricing of the Bank s loan portfolio, while simultaneously outpacing the ability to reduce its funding cost as rapidly. With the prime rate set at 3.25% since December 2008, and the current federal funds rate at 0% to 0.25%, it is not foreseeable that interest rates can decline farther. Over the remainder of 2010, the Bank anticipates little compression in its net interest margin as maturing time deposits continue to reprice at lower rates, although there are no guarantees or assurances.

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