CITIZENS SOUTH BANKING CORP - FORM 8-K - EX-99.1 - October 18, 2010

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Citizens South Banking Corporation Announces Third Quarter Results

GASTONIA, N.C., Oct. 18 /PRNewswire-FirstCall/ -- Citizens South Banking Corporation (Nasdaq: CSBC), the parent company for Citizens South Bank, reported a net loss available to common stockholders of $528,000, or ($0.05) per diluted share, for the quarter ended September 30, 2010, compared to a loss of $759,000, or ($0.10) per diluted share, for the quarter ended September 30, 2009.  For the nine months ended September 30, 2010, the Company reported net income available to common stockholders of $9.6 million, or $1.04 per common share, compared to a loss of $501,000, or ($0.07) per common share, for the nine months ended September 30, 2009.

President Kim S. Price stated, "While we are experiencing some improving asset quality metrics, we continue to build our loan loss provision aggressively, given the continued uncertainty of the general economy and local real estate markets.  However, with pre-tax, pre-provision earnings at near record levels the past two quarters, we are encouraged by the strength of our core operating earnings power going forward."

Third Quarter Financial Highlights:

Credit Quality

The Company's credit quality continued to compare favorably with southeastern peers and some credit-quality metrics continued to demonstrate signs of improvement. During the third quarter, the Company's total non-covered past due loans (loans not covered under FDIC loss-share agreements) decreased 34.9% from $10.1 million at June 30, 2010, or 1.68% of total non-covered loans, to $6.6 million, or 1.11% of total non-covered loans, at September 30, 2010.  This represented the Company's lowest level of past due non-covered loans in over 18 months.  As these loans move through the collection and disposition process, updated collateral values are obtained and loans are written down on the Company's books to their fair value.  As a result, during the third quarter net loan charge-offs on non-covered loans totaled $2.0 million.  This represented the third consecutive quarter that net charge-offs have decreased since a peak of $4.5 million during the fourth quarter of 2009. The current level of net loan charge-offs represented 1.36% of average non-covered loans during the third quarter.  However, as past due loans move through the resolution process, this results in higher non-performing loans which increased to $19.8 million at September 30, 2010, from $13.0 million at June 30, 2010.  These loans are in various stages of collection and resolution.  

Despite the positive trends in net loan charge-offs and non-performing past due loans, the Company maintained its quarterly provision for loan losses at $3.0 million for the third quarter of 2010 compared to $3.0 million for the second quarter of 2010 in order to continue to build the level of loan loss reserves.  As a result, the Company's allowance for loan losses increased to $10.8 million, or 1.81% of total non-covered loans at September 30, 2010, as compared to $9.8 million, or 1.62% of total non-covered loans, at June 30, 2010.  The $3.0 million provision for loan losses was attributable to the Company's non-covered loan portfolio, which excludes loans that are subject to the FDIC loss-share agreements.  

President Price commented, "Our primary focus has been and continues to be on asset quality. With some improving trends in unemployment levels and a stabilizing housing market, we remain cautiously optimistic about the future direction of the local economy.  We also expect to continue to build our loan loss reserve level until such time as these indicators are more clearly sustainable."

Net Interest Margin

On a linked quarter basis, the Company's net interest margin decreased by six basis points to 3.42% for the third quarter of 2010, as compared to 3.48% for the second quarter.   However, compared to the third quarter of 2009, the Company's net interest margin has improved by 37 basis points.  The Company has focused on increasing core demand deposit accounts, which have contributed to a decrease in the cost of funds.  However, limited loan demand and increased levels of liquidity have offset some of the positive effects of the lower cost of funds.

Balance Sheet Changes

Management's efforts to reduce exposures in the non-covered residential construction and acquisition and development loan portfolios resulted in a $14.6 million decrease in these loan portfolios during the nine months ended September 30, 2010, excluding covered loans acquired from the FDIC-assisted acquisition of Bank of Hiawassee.  Speculative residential construction loans decreased by $5.0 million, or 46.0%, and residential acquisition and development loans decreased by $9.6 million, or 26.9%, during the nine month period ended September 30, 2010.  Management expects that these efforts will continue and that new loan demand in general will remain soft through the first half of 2011.  

The Company continues to experience steady core deposit growth. Excluding the deposits assumed in the Bank of Hiawassee acquisition, total core deposits increased by $10.0 million, or 3.5% during the first nine months of 2010.  This growth was primarily driven by demand deposit accounts, which increased by $8.0 million, or 5.0%, and money market accounts, which increased by $2.0 million, or 1.7%, during the nine-month period. The steady growth in core deposits was attributable to a continued focus on deposit gathering, enhanced treasury management services, and increased market share due to mergers and a general "flight to quality" among community bank depositors.

Capital

The Company's capital position continues to be a source of strength during these uncertain economic times.  The Bank's capital exceeds all regulatory capital measures and the Bank is considered "well-capitalized" for regulatory purposes.  This is the highest capital designation established by the Bank's regulatory authorities.  The Bank's total risk-based capital ratio improved to 17.0% at September 30, 2010, compared to 16.8% at June 30, 2010.  The Company's tangible common equity ratio which decreased slightly from 6.9% at June 30, 2010, to 6.7% at September 30, 2010, remained strong.

Income Statement Changes

Noninterest income for the third quarter of 2010 compared to the third quarter of 2009 decreased by $175,000, or 7.1%, to $2.3 million. Excluding gains on sale of investments, which totaled $973,000 for the third quarter of 2009 and $305,000 for the third quarter of 2010, noninterest income increased by $493,000, or 33.0% for the comparable periods.  Contributing to this increase was a $273,000 increase in service charges on deposits, a $246,000 increase in mortgage banking income and a $193,000 adjustment to the gain on acquisition.

Noninterest expense increased by $2.6 million during the comparable third quarter periods to $7.8 million for the quarter ended September 30, 2010.  The increase was primarily due to expenses related to the Bank of Hiawassee acquisition. The Company has implemented cost reduction measures related to the acquisition, including staff consolidation, data processing and technology integration, and facilities evaluations.  These cost reductions were fully implemented in the third quarter of 2010 and the full effect of these reductions should be experienced in the fourth quarter of 2010.  Also, the Company has experienced increased expenses related to the collection and disposition of assets covered by the FDIC loss share agreements amounting to $293,000.  The Company expects to recover 80% of these costs as claims are made from the FDIC for repayment in accordance with the terms of the loss share agreements.

About Citizens South Banking Corporation

Citizens South Bank was founded in 1904 and is headquartered in Gastonia, North Carolina.  Deposits are FDIC insured up to applicable regulatory limits.  At September 30, 2010, the Company had $1.1 billion in assets with 21 full-service offices in the Charlotte and North Georgia regions, including Gaston, Iredell, Rowan, Mecklenburg, and Union counties in North Carolina, York County in South Carolina, and Towns, Union, and Fannin counties in Georgia.  Citizens South Bank is an Equal Housing Lender and Member, FDIC.  The Bank is a wholly-owned subsidiary of Citizens South Banking Corporation, and shares of the common stock of the Company trade on the NASDAQ Global Market under the ticker symbol "CSBC".  The Company maintains a website at www.citizenssouth.com that includes information on the Company, along with a list of products and services, branch locations, current financial information, and links to the Company's filings with the SEC.  

Forward-looking Statements

This news release contains certain forward-looking statements which include, but are not limited to, statements of our earnings expectations, statements regarding our operating strategy, and estimates of our future costs and benefits.   These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Forward-looking statements speak only as of the date they are made and the Company is under no duty to update these forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. A number of factors could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements.  Factors that could cause such a difference include, but are not limited to, changes in general economic conditions – either locally or nationally, competition among depository and financial institutions, the continuation of current revenue and expense trends, significant changes in interest rates, unforeseen changes in the Company's markets, and legal, regulatory, or accounting changes.  The Company's reports filed from time to time with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2009, describe some of these factors.  

Quarterly Financial Highlights (unaudited)

2010


2009



At and For the Quarters Ended



September 30


June 30


March 31


December 31


September 2009

(Dollars in thousands, except per share data)





















Summary of Operations:











Interest income - taxable equivalent

$        11,675


$        12,308


$          9,210


$          9,387


$            9,656


Interest expense

3,790


4,083


3,393


3,531


3,947


Net interest income - taxable equivalent

7,885


8,225


5,817


5,856


5,709


Less: Taxable-equivalent adjustment

79


114


98


106


139


Net interest income

7,806


8,111


5,719


5,750


5,570


Provision for loan losses

3,000


3,000


3,050


4,155


3,975


Net interest income after loan loss provision

4,806


5,111


2,669


1,595


1,595


Noninterest income

2,290


2,415


20,185


2,381


2,465


Noninterest expense

7,781


7,279


6,356


34,867


5,229


Net income (loss) before income taxes

(685)


247


16,498


(30,891)


(1,169)


Income tax expense (benefit)

(413)


(108)


6,201


(611)


(672)


Net income (loss)

(272)


355


10,297


(30,280)


(497)


Dividends on preferred stock

256


257


257


259


262


Net income (loss) available to common shareholders

$           (528)


$               98


$        10,040


$      (30,539)


$              (759)












Per Common Share Data:











Net income:











 Basic

$          (0.05)


$            0.01


$            1.29


$          (4.11)


$             (0.10)


 Diluted

(0.05)


0.01


1.29


(4.11)


(0.10)


Weighted average shares outstanding:











 Basic

10,844,386


9,077,042


7,786,819


7,426,992


7,419,206


 Diluted

10,844,386


9,077,042


7,786,819


7,426,992


7,419,206


End of period shares outstanding

10,965,941


10,965,941


9,125,942


7,526,854


7,526,854


Cash dividends declared

$            0.01


$            0.04


$            0.04


$            0.04


$              0.04


Book value

6.86


6.91


7.39


6.87


11.08


Tangible book value

6.70


6.73


7.16


6.80


7.06












End of Period Balances:











Total assets

$   1,087,558


$   1,077,431


$   1,132,652


$      791,532


$        820,608


Loans, net of deferred fees

754,740


776,234


787,643


610,201


616,793


Investment securities

87,255


97,678


100,161


83,370


90,174


Interest-earning assets

937,278


927,757


987,669


725,835


734,938


Deposits

865,786


853,526


884,127


609,345


606,614


Shareholders' equity

95,682


96,410


96,390


72,322


103,990












Quarterly Average Balances:











Total assets

$   1,080,680


$   1,105,788


$      873,418


$      823,608


$        831,268


Loans, net of deferred fees

767,381


780,209


599,826


610,568


624,112


Investment securities

91,425


100,501


89,020


87,061


94,673


Interest-earning assets

915,882


949,130


732,124


736,134


741,974


Deposits

853,902


859,408


614,007


605,608


609,243


Shareholders' equity

96,258


96,282


78,292


103,313


103,913












Financial Performance Ratios (annualized) :











Return on average assets

-0.20%


0.04%


4.66%


-14.71%


-0.36%


Return on average common equity

-2.77%


0.56%


73.21%


-146.44%


-3.61%


Noninterest income to average total assets  (1)

0.85%


0.87%


9.24%


1.16%


1.19%


Noninterest expense to average total assets (2)

2.88%


2.63%


2.91%


16.93%


2.52%


Efficiency ratio  (1) (2)

76.47%


68.41%


24.44%


423.30%


63.97%



Quarterly Financial Highlights (unaudited)

2010


2009



At and For the Quarters Ended



September 30


June 30


March 31


December 31


September 2009

(Dollars in thousands, except per share data)





















Net Interest Margin (annualized) :











Yield on earning assets

4.91%


4.96%


5.02%


4.98%


5.13%


Cost of funds

1.66%


1.72%


2.01%


2.09%


2.30%


Net Interest spread

3.25%


3.24%


3.01%


2.89%


2.83%


Net interest margin (taxable equivalent)

3.42%


3.48%


3.22%


3.12%


3.05%












Credit Quality Information and Ratios:











Past due loans (30-89 days) accruing - non-covered

$          6,602


$        10,145


$          7,003


$        10,224


$          10,860


Past due loans - non-covered to total non-covered loans

1.11%


1.68%


1.15%


1.68%


1.76%













Past due loans (30-89 days) accruing - covered by FDIC loss-share (3)

$          8,701


$          5,257


$        11,030


-


-


Past due loans - covered to total covered loans

5.43%


3.07%


6.09%


-


-













Allowance for loan losses - beginning of period

$          9,796


$          9,230


$          9,189


$          9,499


$            8,685


Add:  Provision for loan losses

3,000


3,000


3,050


4,155


3,975


Less:  Net charge-offs (NCOs)

2,044


2,434


3,009


4,465


3,161


Allowance for loan losses - end of period

10,752


9,796


9,230


9,189


9,499













Allowance for loan losses to total non-covered loans

1.81%


1.62%


1.52%


1.51%


1.54%


Net charge-offs to average non-covered loans (annualized)

1.36%


1.61%


1.98%


2.93%


2.04%


Nonperforming non-covered loans to non-covered loans

3.33%


2.15%


2.26%


1.96%


1.73%


Nonperforming non-covered assets to total assets

2.61%


1.97%


1.69%


2.15%


1.72%


Nonperforming non-covered assets to total non-covered loans and other real estate owned

4.71%


3.46%


3.12%


2.77%


2.28%













Nonperforming Assets (NPAs):











Nonperforming loans:











Non-covered loans:











 Residential

$          2,068


$          1,646


$          1,618


$             898


$               345


 Construction

163


896


443


1,048


1,554


 Acquisition and development

340


691


2,890


3,419


3,510


 Commercial land

5,034


3,252


6,148


3,640


1,884


 Other commercial real estate

9,566


4,127


1,422


1,841


2,197


 Commercial business

720


742


131


140


-


 Consumer

1,930


1,652


1,083


1,004


1,208


Total non-covered nonperforming loans

19,821


13,006


13,735


11,990


10,698


Total nonperforming loans covered by FDIC loss-share  (4)

22,416


24,924


15,846


-


-


Other real estate owned - non-covered

8,557


8,239


5,386


5,067


3,444


Other real estate owned - covered by FDIC loss share

3,183


2,343


2,009


-


-


Total nonperforming assets

$        53,977


$        48,512


$        36,976


$        17,057


$          14,142












Capital Ratios:











Tangible common equity

6.74%


6.86%


5.78%


6.47%


6.72%


Total Risk-Based Capital (Bank only)

17.02%


16.78%


15.53%


14.07%


14.68%


Tier 1 Risk-Based Capital (Bank only)

15.58%


15.52%


14.47%


12.98%


13.53%


Tier 1 Total Capital (Bank only)

9.58%


9.74%


9.18%


10.44%


10.70%


(1)  Includes the gain on acquisition of Bank of Hiawassee of $18.7 million for the quarter ended March 31, 2010.  Subsequent adjustments in the amounts of $605,000 and $193,000 were made for the quarters ended June 30, 2010 and September 30, 2010, respectively.

(2)  Includes $29.6 million impairment of goodwill for the quarter ended December 31, 2009.  Also includes acquisition and integration expenses of $787,000, $94,000, and $141,000 for the quarters ended March 31, 2010, June 30, 2010, and September 30, 2010, respectively.

(3)  The contractual balance of past due loans covered by  FDIC loss-share agreements totaled $13.8 million, $6.4 million, and $14.8 million at March 31, 2010, June 30, 2010, and September 30, 2010, respectively.

(4)  The contractual balance of nonperforming loans covered by  FDIC loss-share agreements totaled $29.0 million, $35.4 million and $29.1 million at March 31, 2010, June 30, 2010, and September 30, 2010, respectively.



CITIZENS SOUTH BANKING CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION






September 30,


December 31,


2010


2009

(Dollars in thousands)

(unaudited)







Assets




Cash and cash equivalents:




   Cash and due from banks

$                      16,792


$                        8,925

   Interest-earning bank balances

137,352


44,255

   Federal funds sold

-


-

      Cash and cash equivalents

154,144


53,180

Investment securities available for sale, at fair value

71,293


50,990

Investment securities held to maturity, at amortized cost

15,962


32,380

Federal Home Loan Bank stock, at cost

5,938


4,149

Presold loans in process of settlement

3,100


-

Loans:




   Covered by FDIC loss-share agreements

160,327


-

   Not covered by FDIC loss-share agreements

594,413


610,201

   Allowance for loan losses

(10,752)


(9,189)

      Net loans

743,988


601,012

Other real estate owned

11,740


5,067

Premises and equipment, net

23,972


15,436

FDIC loss share receivable

30,608


-

Accrued interest receivable

3,028


2,430

Bank-owned life insurance

18,107


17,522

Intangible assets

1,834


570

Other assets

3,844


8,796

         Total assets

$                 1,087,558


$                    791,532





Liabilities




Deposits:




   Non-interest bearing demand

$                      70,908


$                      45,830

   Interest-bearing demand

162,249


113,564

   Money market accounts

147,269


118,687

   Savings

17,021


10,584

   Time deposits

468,339


320,680

      Total deposits

865,786


609,345

Short-term borrowings

9,785


18,970

Long-term debt

101,236


87,629

Other liabilities

15,069


3,266

    Total liabilities

991,876


719,210

Commitments and contingencies




Shareholders' Equity




Preferred stock, $0.01 par value, Authorized: 1,000,000 shares;  




  Issued and outstanding: 20,500 shares

20,651


20,589

Common stock, $0.01 par value, Authorized: 20,000,000 shares;




  Issued: 11,011,414 and 9,062,727 shares respectively;




  Outstanding: 10,965,941 and 7,526,854 shares respectively

124


91

Additional paid-in-capital

63,018


48,528

Retained earnings, substantially restricted

11,791


3,411

Accumulated other comprehensive income (loss)

98


(297)

    Total shareholders' equity

95,682


72,322

       Total liabilities and shareholders' equity

$                 1,087,558


$                    791,532







CITIZENS SOUTH BANKING CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


















Three Months Ended


Nine Months Ended




30-Sep-10


30-Sep-09


30-Sep-10


30-Sep-09

(Dollars in thousands, except per share data)


















Interest Income:









Interest and fees on loans

$                 10,757


$                   8,413


$                 30,243


$                 25,350


Investment securities:










Taxable interest income

620


775


1,914


2,703



Tax-exempt interest income

131


301


509


920


Other interest income

88


28


236


46



Total interest income

11,596


9,517


32,902


29,019

Interest Expense:









Demand deposits and savings

684


636


2,053


2,034


Time deposits

2,018


2,155


5,818


7,481


Short-term borrowings

67


136


202


416


Long-term debt

1,021


1,020


3,194


3,064



Total interest expense

3,790


3,947


11,267


12,995











Net interest income

7,806


5,570


21,635


16,024

Provision for loan losses

3,000


3,975


9,050


6,825


Net interest income after provision for loan losses

4,806


1,595


12,585


9,199

Noninterest Income:









Service charges on deposit accounts

1,132


859


2,893


2,428


Mortgage banking income

461


215


1,028


975


Commissions on sales of financial products

53


43


359


137


Income from bank-owned life insurance

196


202


627


570


Gain from acquisition

193


-


19,531


-


Gain on sale of investments, available for sale

305


973


349


1,281


Loss on sale of other assets

(185)


(21)


(451)


(265)


Other income

135


194


554


466



Total noninterest income

2,290


2,465


24,890


5,592

Noninterest Expense:









Compensation and benefits

3,774


2,570


10,069


7,588


Occupancy and equipment expense

732


632


2,454


1,958


Advertising and business development

80


115


233


303


Professional services

262


233


729


707


Data processing fees

179


130


513


389


FDIC deposit insurance

355


232


969


825


Amortization of intangible assets

154


81


372


243


Valuation adjustment on other real estate owned

393


-


1,088


175


Impairment on investment securities

-


333


-


547


Acquisition and integration expenses

141


-


1,022


-


Other expenses

1,711


903


3,968


2,670



Total noninterest expense

7,781


5,229


21,417


15,405











Income before income tax expense (benefit)

(685)


(1,169)


16,058


(614)


Income tax expense (benefit)

(413)


(672)


5,680


(887)

Net income (loss)

(272)


(497)


10,378


273


Dividends on preferred stock

256


262


769


774











Net income (loss) available to common shareholders

$                     (528)


$                     (759)


$                   9,609


$                     (501)











Net income (loss) per common share:









Basic

$                    (0.05)


$                    (0.10)


$                     1.04


$                    (0.07)


Diluted

(0.05)


(0.10)


1.04


(0.07)











Weighted average common shares outstanding:









Basic

10,844,386


7,419,206


9,260,762


7,405,199


Diluted

10,844,386


7,419,206


9,260,762


7,405,199















CONTACT: Gary F. Hoskins, CFO, +1-704-884-2263, gary.hoskins@citizenssouth.com

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