Attached files
| file | filename |
|---|---|
| 8-K - FORM 8-K - FIRST SOUTH BANCORP INC /VA/ | v468088_8k.htm |
EXHIBIT 99.1 – Shareholder Communications Letter
(First South Bancorp, Inc. Letterhead)
June 2, 2017
Dear Stockholder,
First South Bancorp (the “Company”) issued a press release on April 20, 2017 reporting first quarter financial results, and filed its Securities and Exchange Commission Form 10-Q on May 9, 2017. The 10-Q document contains a more comprehensive discussion regarding the financial condition and performance of your Company as of and for the three-month period ended March 31, 2017. Both documents can be found through the “Investor Information” link within the “About Us” section of our website at www.firstsouthnc.com. Included with this newsletter is a set of financial statements as of and for the three- month period ended March 31, 2017. Here are some highlights from our announcement:
| Ø | Strong quarterly earnings performance with net income of $1.9 million, diluted EPS of $0.20 per share, return on average assets of 0.75%, return on average equity of 8.52% and return on average tangible common equity* of 9.32%. |
| Ø | Pre-tax, pre-provision operating earnings* for the quarter of $3.0 million are 48% higher than the $2.0 million reported for the prior year first quarter. |
| Ø | Total assets grew to $1.04 billion at March 31, 2017, the Company’s first quarter-end reporting period to surpass the billion dollar threshold. |
| Ø | Loans and leases held for investment grew $88.1 million or 13.8% during the past twelve months to $727.1 million. |
| Ø | Deposits grew $101.2 million or 12.4% during the past twelve months to $919.9 million. |
| Ø | Total non-interest bearing deposits grew 24.6% to $204.6 million on a year-over-year basis. |
| Ø | Net interest margin expanded to 3.74% for the quarter, compared to 3.66% for the first quarter of 2016. |
| Ø | Asset quality metrics continue to improve. |
| Ø | Continued to maintain a strong capital position. |
| Ø | The consolidation of two branches into nearby locations should improve future efficiency. |
| Ø | Increased quarterly dividend payment rate to $0.035 per share, a 16.7% increase over the previous quarterly dividend of $0.03. |
From a balance sheet perspective, total assets have grown to over $1 billion, total loans and leases held for investment are $727 million, total deposits are $920 million and total stockholders’ equity is $89 million. While the size of the Company does not directly impact profitability, continuing to grow and expand allows us to leverage our resources and expenses over a greater dollar amount of assets, thus improving our efficiency and our earnings. Over the twelve-month period from March 31, 2016 to March 31, 2017, we have grown the loan and lease portfolio by over $88 million. Largely due to the loan and lease growth, total interest income increased by $932,000 or almost 11% for the first quarter of 2017 compared to the comparative prior year period. Deposits, which are the Company’s main funding source, have grown by over $101 million over the last twelve months with approximately $96 million being in lower cost checking, savings and money market accounts and $5 million in certificates of deposit. Non-interest income is $3.3 million for the current three-month period compared to $3.6 million a year ago. Excluding certain one-time revenues and gains on investment securities sales in the first quarter of 2016 totaling $514,000, core non-interest income* increased by $236,000 in the current period. Revenues from mortgage loan activities accounted for $148,000 of the total increase in non-interest income. Total non-interest expenses declined by $59,000 during the first quarter of 2017 compared to the prior year comparative quarter.
The Federal Reserve Open Market Committee (FOMC) has raised short-term interest rates by 0.25% on two occasions beginning in December 2016. Intermediate and longer term interest rates have remained at historically low levels. Due to the growth in our loan and lease portfolio, coupled with a shift of earning assets from lower-yielding to higher-yielding assets, the Company has been able to expand its net interest margin for the first quarter of 2017 to 3.74% from 3.66% a year ago. Despite the significant loan and lease growth at these lower rates of interest, we have been able to increase the overall yield on our portfolio by 5 basis points from 4.59% a year ago to 4.64% for the most recent quarter. Our overall cost of interest-bearing funding remains at a low 0.41%.
During the first quarter, we closed two branch offices and consolidated those operations into two other nearby branch locations. We should begin to realize the cost savings from these consolidations in future periods. In conjunction with the consolidation of one of our Washington, NC branch offices, we have completed a renovation of the branch located at our headquarters at 1311 Carolina Avenue. This is the fourth branch that we have re-designed to create a better customer-focused experience. We would invite you to visit the remodeled location and give us an opportunity to show you around! And speaking about visiting, we encourage you to like us on Facebook or follow us on LinkedIn or Instagram. We have an expanding social media presence and you can keep abreast of events and “goings on” at First South Bank through these social media channels.
Based in part on our strong financial results for the first quarter, along with the prospect of regulatory and tax reform, our stock price continues to perform well. As of May 9, 2017, FSBK closed at $13.31 per share, up $1.36 or 11.38% compared to the year-end closing price of $11.95. Your Board of Directors recently announced the declaration of a $0.035 per share dividend paid on May 19, 2017, to shareholders of record May 8, 2017. It remains a top priority to create a high performing community bank and we are taking steps each quarter to accomplish this goal.
The Annual Meeting of Stockholders will be held on Thursday, June 29, 2017 at our Operations Center on Creekside Drive in Washington, NC. We mailed our Annual Report and Proxy Statement to stockholders on June 2, 2017. This year, we will again have a Stockholder Proposal on the ballot. I would ask that you read the Stockholder Proposal Regarding the Sale, Merger or Other Disposition of the Company and the Company’s Statement of Opposition on pages 17 and 18 of the Proxy Statement. I encourage you, as you make your decision on how to vote on this matter, to give careful consideration to the financial progress your Company has made over the past five years. Additionally, please consider that your Board of Directors is in the best position to determine if or when to sell this Company as opposed to being pressured into making a decision which may not be in the best interest of the Company’s stockholders. The Board recommends that you vote “AGAINST” the proposal to sell the Company. My contact information is shown below and I am happy to discuss any concerns you may have regarding the proposal.
Thank you for your continued support of First South Bancorp.
Sincerely,
/s/ Bruce W. Elder
Bruce W. Elder, President & CEO
(252) 940-4936
bruce.elder@firstsouthnc.com
Forward-Looking Statements
Statements contained in this letter 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. The Company assumes no obligation and does not intend to update these forward-looking statements, except as required by law.
Important Additional Information Regarding Proxy Solicitation
First South Bancorp, Inc. (the “Company”) has filed a definitive proxy statement and form of proxy card with the U.S. Securities and Exchange Commission (the “SEC”) in connection with the solicitation of proxies for the Company’s 2017 Annual Meeting (the “Definitive Proxy Statement”). The Company, its directors and certain of its executive officers will be participants in the solicitation of proxies from stockholders in respect of the 2017 Annual Meeting. BEFORE MAKING ANY VOTING DECISION, INVESTORS AND STOCKHOLDERS OF THE COMPANY ARE URGED TO READ ALL RELEVANT DOCUMENTS FILED WITH OR FURNISHED TO THE SEC, INCLUDING THE COMPANY’S DEFINITIVE PROXY STATEMENT AND ANY SUPPLEMENTS THERETO BECAUSE THEY CONTAIN IMPORTANT INFORMATION. Investors and stockholders are able to obtain a copy of the definitive proxy statement and other relevant documents filed by the Company free of charge from the SEC’s website, www.sec.gov. The Company’s stockholders are also be able to obtain, without charge, a copy of the Definitive Proxy Statement and other relevant filed documents by directing a request by mail to First South Bancorp, Inc., Attn: Corporate Secretary, 1311 Carolina Avenue, Washington, North Carolina 27889 or from the investor information section of the Company’s website, https://www.firstsouthnc.com.
*NON-GAAP FINANCIAL MEASURES
Important disclosures about and reconciliations of non-GAAP measures to the corresponding GAAP measures, are provided below and attached to this letter.
This letter and the accompanying Supplemental Financial Data contain financial information determined by methods other than in accordance with generally accepted accounting principles (GAAP) in the United States. 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. 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. Reconciliations of non-GAAP disclosures are provided within the accompanying tables to this letter.
First South Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
| March 31, | December 31, | March 31, | ||||||||||
| 2017 | 2016 | 2016 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Assets | ||||||||||||
| Cash and due from banks | $ | 21,650,045 | $ | 22,854,712 | $ | 17,729,075 | ||||||
| Interest-bearing deposits with banks | 49,062,514 | 23,320,968 | 18,385,994 | |||||||||
| Investment securities available for sale, at fair value | 194,538,513 | 192,606,119 | 213,011,148 | |||||||||
| Investment securities held to maturity | 509,912 | 509,617 | 508,746 | |||||||||
| Mortgage loans held for sale | 2,506,883 | 5,098,518 | 2,489,873 | |||||||||
| Loans and leases held for investment | 727,142,668 | 700,642,291 | 639,044,574 | |||||||||
| Allowance for loan and lease losses | (8,940,879 | ) | (8,673,172 | ) | (8,135,054 | ) | ||||||
| Net loans and leases held for investment | 718,201,789 | 691,969,119 | 630,909,520 | |||||||||
| Premises and equipment, net | 11,572,036 | 11,291,596 | 12,143,734 | |||||||||
| Assets held for sale | 192,720 | 192,720 | 1,083,320 | |||||||||
| Other real estate owned | 3,114,760 | 3,229,423 | 5,956,092 | |||||||||
| Federal Home Loan Bank stock, at cost | 1,528,900 | 1,573,700 | 1,828,700 | |||||||||
| Accrued interest receivable | 2,973,712 | 3,525,684 | 2,845,975 | |||||||||
| Goodwill | 4,218,576 | 4,218,576 | 4,218,576 | |||||||||
| Mortgage servicing rights | 2,140,105 | 2,148,905 | 1,247,005 | |||||||||
| Identifiable intangible assets | 1,550,768 | 1,611,187 | 1,824,432 | |||||||||
| Bank-owned life insurance | 18,219,320 | 18,080,183 | 17,653,186 | |||||||||
| Prepaid expenses and other assets | 7,443,786 | 8,470,887 | 8,272,379 | |||||||||
| Total assets | $ | 1,039,424,339 | $ | 990,701,914 | $ | 940,107,755 | ||||||
| Liabilities and Stockholders' Equity | ||||||||||||
| Deposits: | ||||||||||||
| Non-interest bearing demand | $ | 204,575,610 | $ | 196,917,165 | $ | 164,244,311 | ||||||
| Interest bearing demand | 298,983,678 | 272,098,903 | 244,323,710 | |||||||||
| Savings | 147,718,357 | 145,031,981 | 146,254,503 | |||||||||
| Large denomination certificates of deposit | 135,765,040 | 122,819,510 | 119,229,985 | |||||||||
| Other time | 132,823,471 | 133,732,804 | 144,614,799 | |||||||||
| Total deposits | 919,866,156 | 870,600,363 | 818,667,308 | |||||||||
| Borrowed money | 15,000,000 | 17,000,000 | 21,500,000 | |||||||||
| Junior subordinated debentures | 10,310,000 | 10,310,000 | 10,310,000 | |||||||||
| Other liabilities | 4,966,400 | 5,607,832 | 5,451,329 | |||||||||
| Total liabilities | 950,142,556 | 903,518,195 | 855,928,637 | |||||||||
| Common stock, $.01 par value, 25,000,000 shares authorized; 9,500,266; 9,494,935; and 9,493,776 shares outstanding, respectively | 95,003 | 94,949 | 94,938 | |||||||||
| Additional paid-in capital | 36,042,028 | 36,018,743 | 35,957,524 | |||||||||
| Retained earnings | 51,100,449 | 49,560,595 | 44,914,635 | |||||||||
| Accumulated other comprehensive income | 2,044,303 | 1,509,432 | 3,212,021 | |||||||||
| Total stockholders' equity | 89,281,783 | 87,183,719 | 84,179,118 | |||||||||
| Total liabilities and stockholders' equity | $ | 1,039,424,339 | $ | 990,701,914 | $ | 940,107,755 | ||||||
First South Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
Three Months Ended March 31, 2017 and 2016
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2017 | 2016 | |||||||
| Interest income: | ||||||||
| Interest and fees on loans | $ | 8,213,288 | $ | 7,191,595 | ||||
| Interest on investments and deposits | 1,390,679 | 1,480,252 | ||||||
| Total interest income | 9,603,967 | 8,671,847 | ||||||
| Interest expense: | ||||||||
| Interest on deposits | 753,989 | 669,276 | ||||||
| Interest on borrowings | 61,959 | 73,086 | ||||||
| Interest on junior subordinated notes | 124,250 | 140,039 | ||||||
| Total interest expense | 940,198 | 882,401 | ||||||
| Net interest income | 8,663,769 | 7,789,446 | ||||||
| Provision for credit losses | 265,000 | 225,000 | ||||||
| Net interest income after provision for credit losses | 8,398,769 | 7,564,446 | ||||||
| Non-interest income: | ||||||||
| Deposit fees and service charges | 1,856,220 | 1,907,407 | ||||||
| Loan fees and charges | 86,044 | 56,985 | ||||||
| Mortgage loan servicing fees | 321,838 | 234,001 | ||||||
| Gain on sale and other fees on mortgage loans | 473,562 | 413,861 | ||||||
| Gain (loss) on sale of other real estate, net | 81,651 | (12,168 | ) | |||||
| Gain on sale of investment securities | 0 | 283,514 | ||||||
| Other income | 478,787 | 692,285 | ||||||
| Total non-interest income | 3,298,102 | 3,575,885 | ||||||
| Non-interest expense: | ||||||||
| Compensation and fringe benefits | 5,113,553 | 5,039,954 | ||||||
| Federal deposit insurance premiums | 147,374 | 161,609 | ||||||
| Premises and equipment | 1,398,550 | 1,373,809 | ||||||
| Marketing | 63,739 | 187,818 | ||||||
| Data processing | 793,368 | 796,487 | ||||||
| Amortization of intangible assets | 149,197 | 131,527 | ||||||
| Other real estate owned expense | 164,767 | 93,674 | ||||||
| Other | 1,216,002 | 1,321,048 | ||||||
| Total non-interest expense | 9,046,550 | 9,105,926 | ||||||
| Income before income tax expense | 2,650,321 | 2,034,405 | ||||||
| Income tax expense | 778,124 | 573,611 | ||||||
| NET INCOME | $ | 1,872,197 | $ | 1,460,794 | ||||
| Per share data: | ||||||||
| Basic earnings per share | $ | 0.20 | $ | 0.15 | ||||
| Diluted earnings per share | $ | 0.20 | $ | 0.15 | ||||
| Dividends per share | $ | 0.035 | $ | 0.025 | ||||
| Average basic shares outstanding | 9,497,601 | 9,491,201 | ||||||
| Average diluted shares outstanding | 9,541,548 | 9,514,797 | ||||||
First South Bancorp, Inc.
Supplemental Financial Data (Unaudited)
| Quarter to Date | ||||||||
| (dollars in thousands except per share data) | 3/31/2017 | 3/31/2016 | ||||||
| Per Share Data: | ||||||||
| Basic earnings per share | $ | 0.20 | $ | 0.15 | ||||
| Diluted earnings per share | $ | 0.20 | $ | 0.15 | ||||
| Dividends per share | $ | 0.035 | $ | 0.025 | ||||
| Book value per share | $ | 9.40 | $ | 8.87 | ||||
| Shares outstanding | 9,500,266 | 9,493,776 | ||||||
| Average basic shares | 9,497,601 | 9,491,201 | ||||||
| Average diluted shares | 9,541,548 | 9,514,797 | ||||||
| Performance ratios (tax equivalent): | ||||||||
| Yield on loans receivable | 4.64 | % | 4.59 | % | ||||
| Yield on average earning assets | 4.15 | % | 4.07 | % | ||||
| Total cost of funding sources | 0.41 | % | 0.42 | % | ||||
| Net interest spread | 3.62 | % | 3.55 | % | ||||
| Net interest margin | 3.74 | % | 3.66 | % | ||||
| Average earning assets to total average assets | 93.32 | % | 92.20 | % | ||||
| Return on average assets (annualized) | 0.75 | % | 0.63 | % | ||||
| Return on average equity (annualized) | 8.52 | % | 6.97 | % | ||||
| Efficiency ratio | 74.92 | % | 80.74 | % | ||||
| Average assets | $ | 1,014,310 | $ | 938,702 | ||||
| Average earning assets | $ | 946,578 | $ | 865,463 | ||||
| Average equity | $ | 89,143 | $ | 84,265 | ||||
| Equity/Assets | 8.59 | % | 8.95 | % | ||||
| Asset quality data and ratios: | ||||||||
| Nonaccrual loans and leases: | ||||||||
| Non-TDR nonaccrual loans and leases | ||||||||
| Earning | $ | 576 | $ | 945 | ||||
| Non-Earning | 1,479 | 895 | ||||||
| Total Non-TDR nonaccrual loans and leases | $ | 2,055 | $ | 1,840 | ||||
| TDR nonaccrual loans and leases | ||||||||
| Current TDRs | $ | 720 | $ | 847 | ||||
| Past Due TDRs | - | 154 | ||||||
| Total TDR nonaccrual loans and leases | $ | 720 | $ | 1,001 | ||||
| Total nonaccrual loans and leases | $ | 2,775 | $ | 2,841 | ||||
| Loans and leases >90 days past due, still accruing | - | 153 | ||||||
| Other real estate owned | 3,115 | 5,956 | ||||||
| Total nonperforming assets | $ | 5,890 | $ | 8,950 | ||||
| Allowance for loan and lease losses to loans and leases HFI | 1.23 | % | 1.27 | % | ||||
| Net charge-offs (recoveries) | $ | (3 | ) | $ | (44 | ) | ||
| Net charge-offs (recoveries) to total loans and leases | 0.00 | % | -0.01 | % | ||||
| Total nonaccrual loans and leases to total loans and leases HFI | 0.38 | % | 0.44 | % | ||||
| Total nonperforming assets to total assets | 0.57 | % | 0.95 | % | ||||
| Total loans and leases to total deposits | 79.32 | % | 78.36 | % | ||||
| Total loans and leases to total assets | 70.20 | % | 68.24 | % | ||||
| *Reconciliation of Non-GAAP Measures: | ||||||||
| Pre-tax pre-provision operating earnings (non-GAAP): | ||||||||
| Income before taxes (GAAP) | $ | 2,650 | $ | 2,035 | ||||
| Provision for credit losses | 265 | 225 | ||||||
| Pre-tax pre-provision net income | 2,915 | 2,260 | ||||||
| Securities (gains) losses, net | - | (284 | ) | |||||
| OREO valuations | 119 | 7 | ||||||
| OREO (gains) losses, (net) | (82 | ) | 12 | |||||
| Pre-tax pre-provision operating earnings (non-GAAP) | $ | 2,952 | $ | 1,995 | ||||
| Core non-interest income (non-GAAP): | ||||||||
| Non-interest income (GAAP) | $ | 3,298 | $ | 3,576 | ||||
| Securities (gains) losses, net | - | (284 | ) | |||||
| One-time (revenues) expenses | - | (230 | ) | |||||
| Core non-interest income (non-GAAP) | $ | 3,298 | $ | 3,062 | ||||
| Average equity | $ | 89,143 | $ | 84,265 | ||||
| Average intangible assets (a) | $ | 5,809 | $ | 6,088 | ||||
| Average tangible common equity (non-GAAP) | $ | 83,334 | $ | 78,177 | ||||
| Return on average tangible common equity (non-GAAP) | 9.32 | % | 7.78 | % | ||||
| (a) Excludes mortgage servicing rights | ||||||||