CITIZENS SOUTH BANKING CORP. 
By GASTONIA, N.C., May 7 /PRNewswire-FirstCall/ -- Citizens South Banking Corporation (Nasdaq: CSBC), the parent company for Citizens South Bank, reported net income available to common stockholders of $10.0 million, or $1.29 per diluted share, for the quarter ended March 31, 2010, compared to $203,000, or $0.03 per diluted share, for the quarter ended March 31, 2009. Several significant factors affect the comparability of the first quarter 2010 and 2009 results, including the following items:
-- In the first quarter of 2010, the Company realized an $18.7 million
pre-tax gain related to the acquisition of Bank of Hiawassee in
Hiawassee, Georgia in an FDIC-assisted transaction. This gain resulted
from the difference between the purchase price and the acquisition date
fair value of the acquired assets and assumed liabilities.
-- Also in the first quarter of 2010, the Company recorded acquisition and
integration-related expenses of $787,000 related to the acquisition of
Bank of Hiawassee. These expenses were primarily related to
professional services, severance payments, and data processing
integration expenses incurred as a result of the acquisition and
integration of Bank of Hiawassee.
President Kim Price stated, "FDIC-assisted transactions are an attractive low-risk way for strong financial institutions like Citizens South Bank to expand their customer base and geographic footprint. This transaction included loss-share agreements with the FDIC which limit the exposure to future loan losses the Company may incur from the acquired loans. Bank of Hiawassee enjoyed a rich history of providing superior service to its customers in North Georgia for over 100 years. We plan to capitalize on that philosophy as we look to expand our franchise into Western North Carolina and Upstate South Carolina."
First Quarter Financial Highlights:
Acquisition of Bank of Hiawassee:
On March 19, 2010, Citizens South Bank, the wholly-owned subsidiary of Citizens South Banking Corporation, acquired substantially all of the assets and assumed substantially all of the liabilities of Bank of Hiawassee, from the Federal Deposit Insurance Corporation ("FDIC"), as receiver. The Bank of Hiawassee was a Georgia state-chartered bank headquartered in Hiawassee, Georgia, and operated five full-service offices in the North Georgia area. The following is a summary of the assets acquired and the liabilities assumed in this transaction:
-- $285.8 million of total assets at book value, which were increased to
$343.3 million after applying purchase accounting fair market
adjustments;
-- $229.9 million of total loans at book value, which were decreased to
$183.2 million after applying purchase accounting fair market
adjustments;
-- $291.4 million of total deposits at book value, which were increased to
$292.2 million after applying purchase accounting fair market
adjustments;
-- $30.0 million of total borrowings at book value, which were increased to
$31.6 million after applying purchase accounting fair market
adjustments.
The acquired loans, also referred to as "covered loans," are covered by loss-share agreements between the FDIC and Citizens South Bank which afford Citizens South Bank significant protection against future loan losses. Under these loss-share agreements, the FDIC will cover 80% of loan losses up to $102 million and 95% of loan losses that exceed $102 million. The Bank recorded an estimated receivable from the FDIC in the amount of $36.3 million, which represents the discounted value of the FDIC's estimated portion of the expected future loan losses. Also, the FDIC retained $58.0 million of nonperforming assets in the transaction, further reducing the risk to the Company.
Citizens South Bank received a $33.0 million discount on the assets acquired and paid a $2.5 million, or 1%, deposit premium, resulting in net proceeds of $30.5 million to Citizens South Bank funded by the FDIC. Also, as a part of this acquisition, the Company recorded a $1.6 million core deposit intangible that will be amortized over an eight-year period under the accelerated method. After applying purchase accounting adjustments to the acquired assets and liabilities, the Company recognized an $18.7 million pre-tax gain from the acquisition. The fair value estimates and the resulting gain should be considered preliminary, as generally accepted accounting principles ("GAAP") allow for adjustments for a period of one year as relevant information becomes available regarding the estimated fair value on the date of acquisition.
The operating results of Citizens South Banking Corporation for the period ended March 31, 2010, include the results of the acquired assets and assumed liabilities for the 12 days after the March 19, 2010, acquisition date.
In conjunction with the acquisition the Company issued and sold 1,490,400 shares of its common stock at a purchase price of $4.50 per share and 8,280 shares of Series B Preferred Stock at a purchase price of $1,000.00 per share in a private placement. Each share of Series B Preferred Stock is convertible into shares of common stock at the conversion price of $4.50 upon approval by the Company's stockholders. The gross proceeds raised in this private placement totaled $15.0 million.
Credit Quality
The Company's quarterly provision for loan losses totaled $3.0 million for the first quarter of 2010 compared to $4.2 million for the fourth quarter of 2009. As a result, the Company's allowance for loan losses totaled $9.2 million, or 1.52% of total non-covered loans, at March 31, 2010, as compared to $9.2 million, or 1.51% of total non-covered loans, at December 31, 2009. The $3.0 million provision for loan losses was attributable to the Company's "non-covered" loan portfolio, which excludes loans assumed from Bank of Hiawassee that are subject to the FDIC loss-share agreements.
The quarter-to-quarter reduced provisioning was primarily due to a lower level of charge-offs during the quarter and improved trends in past due loans. During the fourth quarter of 2009 net charge-offs totaled $4.5 million, or 2.9% of average non-covered loans, compared to $3.0 million, or 2.0% of average non-covered loans, for the first quarter of 2010. The Company had previously established specific reserves for $605,000 of the first quarter charge-offs through increased loan loss provisions in prior quarters.
While non-covered loans 30 days or more past due improved by $3.0 million, or 13.8%, in the first quarter of 2010, nonperforming non-covered loans, which includes loans that are 90 days or more delinquent or in nonaccrual status and are not covered under the FDIC loss-share agreements, increased by $1.7 million to $13.7 million, or 2.26% of non-covered loans at March 31, 2010, as compared to $12.0 million, or 1.96% of total assets, at December 31, 2009. Most of this increase during the first quarter was attributable to two loans secured by commercial land totaling $3.5 million that were placed on nonaccrual status during the quarter. President Price commented, "While land acquisition and development loans continue to present challenges in this economy, we are seeing clear signs of progress in lot sales and we are making slow, but steady progress in reducing these exposures."
Net Interest Margin
The Company's net interest margin improved to 3.20% for the first quarter of 2010, as compared to 2.81% for the first quarter of 2009 and 3.12% for the fourth quarter of 2009. This eight-basis point increase in the linked-quarter net interest margin represents the fourth consecutive quarter in which the Company has experienced margin expansion. The Company has been focused on increasing core demand deposit accounts which has contributed to this decrease in the cost of funds. Also, higher-costing time deposits that matured during the first quarter repriced at lower rates and contributed to the lower cost of funds. Further margin expansion might have been experienced except for the approximately $100 million of excess liquidity resulting largely from the Bank of Hiawassee acquisition. Management expects to deploy this excess liquidity in the coming quarters.
Balance Sheet Changes
Management's efforts to reduce exposures in the non-covered residential construction and acquisition and development loan portfolio resulted in a decrease in outstanding loans of $3.7 million during the three months ended March 31, 2010, excluding loans acquired from Bank of Hiawassee. Speculative residential construction loans decreased by $1.9 million, or 17.4%, and residential acquisition and development loans decreased by $1.4 million, or 3.9%, during the three month period ended March 31, 2010. Management expects that these efforts will continue and that loan demand in general will remain soft throughout 2010. However, the Company expects to extract market share gains in selective loan categories in certain markets as a result of market disruptions stemming from several recently completed and announced bank mergers in the Charlotte and North Georgia markets.
The Company continues to experience steady deposit growth. Excluding the deposits assumed in the Bank of Hiawassee acquisition, total deposits increased by $1.6 million during the first quarter of 2010. This growth was primarily driven by demand deposit accounts which increased by $1.4 million, or 1.2%, and money market accounts which increased by $3.7 million, or 3.2%, during the quarter. The steady growth in core deposits was attributable to a continued focus on deposit gathering by our team members, enhanced treasury management services, and increased market share due to mergers of competitors and a general "flight to quality" among community bank depositors.
The Company's capital position continues to be a source of strength during these uncertain economic times. The Bank continues to exceed all regulatory capital measures and 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 was 15.53% at March 31, 2010, compared to 14.07% at December 31, 2009. In addition, the Company had a tangible common equity ratio of 5.78% at March 31, 2010. The Company's tangible common equity ratio excludes $8.3 million of Series B Preferred Stock that is expected to be converted to common stock during the second quarter of 2010. If this preferred stock had been converted to common stock at March 31, 2010, the Company's tangible common equity ratio would have been 6.51%, as compared to 6.47% at December 31, 2009. Mr. Price commented, "Capital has been a strength of this Bank since our founding in 1904. This strength continues and has provided our Company with a cushion to be able to absorb elevated levels of loan losses during recessionary periods throughout the Company's history, including the Great Depression."
Income Statement Changes
Noninterest income for the first quarter of 2010 increased $19.0 million as compared to the first quarter of 2009. This increase was primarily due to the $18.7 million gain on the acquisition of the Bank of Hiawassee. In addition, the Company recorded a $42,000 increase in service charges on deposits, a $62,000 increase in brokerage fee income and a $94,000 increase in other noninterest income during the first quarter. The continued growth in core deposits was the driving factor in the growth in service charges on deposits while the acquisition of Bank of Hiawassee was a primary contributor to the increase in brokerage fee income.
Noninterest expense increased by $1.4 million during the first quarter periods. The increase was primarily due to $787,000 in merger and integration expenses associated with the acquisition of Bank of Hiawassee. Also, the Company recorded a $151,000 increase in compensation and benefits, a $158,000 increase in FDIC deposit insurance premiums, a $359,000 increase in valuation adjustments on other real estate owned and a $97,000 increase in other noninterest expense. The Company has already begun implementing cost reduction measures related to the acquisition of Bank of Hiawassee and will begin to benefit from these actions in the second quarter of 2010. These cost cutting measures, which include staff consolidations, data processing and technology integration, and facilities evaluations, should be fully implemented by the end of the third quarter of 2010.
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 March 31, 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.
Important Tables Follow
Citizens South Banking Corporation
Quarterly Financial Highlights (Unaudited)
2010 2009
---- ----
At and for the quarters ended
-----------------------------
December September
March 31 31 30 June 30 March 31
-------- --------- ---------- ------- --------
(Dollars
in
Thousands,
Except
per Share
Data)
Summary of
Operations:
Interest
income -
taxable
equivalent $9,167 $9,317 $9,620 $9,820 $9,829
Interest
expense 3,393 3,531 3,947 4,346 4,702
----- ----- ----- ----- -----
Net
interest
income -
taxable
equivalent 5,774 5,786 5,673 5,474 5,127
Less:
Taxable
equivalent
adjustment 98 106 139 142 144
--- --- --- --- ---
Net
interest
income 5,676 5,680 5,534 5,332 4,983
Provision
for loan
losses 3,050 4,155 3,975 1,950 900
----- ----- ----- ----- ---
Net
interest
income
after
provision
for loan
losses 2,626 1,525 1,559 3,382 4,083
Noninterest
income 20,228 2,451 2,501 2,016 1,249
Noninterest
expense 6,356 34,867 5,229 5,239 4,937
----- ------ ----- ----- -----
Income
(loss)
before
income
taxes 16,498 (30,891) (1,169) 159 395
Income tax
(benefit)
expense 6,201 (611) (672) (155) (61)
----- ---- ---- ---- ---
Net income
(loss) 10,297 (30,280) (497) 314 456
Preferred
stock
dividend
and
discount
on
preferred
stock 257 259 262 259 253
--- --- --- --- ---
Net income
(loss)
available
to common
stockholders $10,040 $(30,539) $(759) $55 $203
======= ======== ===== === ====
Per Common
Share
Data:
Net
income:
Basic $1.29 $(4.11) $(0.10) $0.01 $0.03
Diluted 1.29 (4.11) (0.10) 0.01 0.03
Weighted
average
shares
outstanding:
Basic 7,786,819 7,426,992 7,419,206 7,404,218 7,392,742
Diluted 7,786,819 7,426,992 7,419,206 7,404,218 7,392,742
End of
period
shares
outstanding 9,125,942 7,526,854 7,526,854 7,526,854 7,515,957
Cash
dividends
declared $0.04 $0.04 $0.04 $0.04 $0.04
Book value 7.69 6.87 11.08 11.1 11.19
Tangible
book
value 7.16 6.80 7.06 7.07 7.14
End of
Period
Balances:
Total
assets $1,132,593 $791,532 $820,608 $836,283 $851,390
Loans, net
of
deferred
fees 778,413 610,201 616,793 629,962 635,008
Investment
securities 100,161 83,369 90,174 97,452 114,933
Interest-
earning
assets 987,669 725,835 734,938 751,733 765,747
Deposits 884,127 609,345 606,614 616,233 628,571
Stockholders'
equity 96,331 72,322 103,990 104,158 104,663
Quarterly
Average
Balances:
Total
assets $873,418 $823,608 $831,268 $841,169 $829,319
Loans, net
of
deferred
fees 599,826 610,568 624,112 635,645 626,722
Investment
securities 89,020 87,061 94,673 107,140 110,502
Interest-
earning
assets 732,124 736,134 741,974 751,381 740,404
Deposits 614,007 605,608 609,243 616,926 593,166
Stockholders'
equity 78,292 103,313 103,913 104,813 104,884
Financial
Performance
Ratios:
Return on
average
assets
(annualized) 4.66 % (14.71) % (0.36) % 0.03 % 0.10 %
Return on
average
common
equity
(annualized) 73.21 (146.44) (3.61) 0.26 0.98
Noninterest
income to
average
total
assets
(1)
(annualized) 0.67 1.19 1.20 0.96 0.60
Noninterest
expense
to
average
total
assets
(2)
(annualized) 2.91 2.54 2.52 2.49 2.38
Efficiency
ratio (1)
(2) 77.35 64.27 65.08 71.29 79.22
Citizens South Banking Corporation
Quarterly Financial Highlights - continued (Unaudited)
2010 2009
---- ----
At and for the quarters ended
-----------------------------
December September
March 31 31 30 June 30 March 31
-------- --------- ---------- ------- --------
(Dollars in
Thousands,
Except per
Share Data)
Net Interest
Margin
(annualized):
Yield on
earning
assets 5.02 % 4.98 % 5.13% 5.26 % 5.38 %
Cost of
funds 2.01 2.09 2.30 2.54 2.90
---- ---- ---- ---- ----
Net interest
spread 3.01 2.89 2.83 2.72 2.48
Net interest
margin (3) 3.20 3.12 3.03 2.92 2.81
Credit
Quality
Information
and Ratios:
Past due
loans -
non-
covered (30
days or
more) $18,851 $21,879 $20,670 $19,458 $17,105
Past due
loans-
non-
covered to
total non-
covered
loans 3.11 % 3.59 % 3.35 % 3.09 % 2.69 %
Past due
loans -
covered by
FDIC loss-
share (30
days or
more) (4) 27,965 - - - -
Past due
loans-
covered to
total
covered
loans 15.4 % - - - -
Allowance
for loan
losses -
beginning
of period 9,189 9,499 8,685 8,730 8,026
Add:
Provision
for loan
losses 3,050 4,155 3,975 1,950 900
Less: Net
charge-
offs 3,009 4,465 3,161 1,995 196
----- ----- ----- ----- ---
Allowance
for loan
losses -
end of
period 9,230 9,189 9,499 8,685 8,730
Allowance
for loan
losses to
non-
covered
loans 1.52 % 1.51 % 1.54 % 1.38 % 1.37 %
Net charge-
offs to
average
non-
covered
loans
(annualized) 1.98 2.93 2.04 1.28 0.13
Nonperforming
non-
covered
loans to
total non-
covered
loans 2.26 1.96 1.73 1.64 0.99
Nonperforming
non-
covered
assets to
total
assets 1.78 2.15 1.72 1.49 0.93
Nonperforming
non-
covered
assets to
total non-
covered
loans &
OREO 3.30 2.77 2.28 1.97 1.25
Nonperforming
Assets:
Nonperforming
loans:
Non-covered
loans:
Residential $1,618 $898 $345 $432 $700
Construction 443 1,048 1,554 1,335 1,609
Acquisition
and
development 2,890 3,419 3,510 379 379
Commercial
land 6,148 3,640 1,884 1,813 653
Other
commercial
real estate 1,422 1,841 2,197 5,307 1,481
Commercial
business 131 - - 94 20
Consumer
loans 1,083 1,144 1,208 1,000 1,425
----- ----- ----- ----- -----
Total
nonperforming
non-
covered
loans 13,735 11,990 10,698 10,360 6,267
Total
nonperforming
loans
covered by
FDIC loss-
share (5) 18,148 - - - -
------ --- --- --- ---
Total
nonperforming
loans 31,883 11,990 10,698 10,360 6,267
Other real
estate
owned -
non-
covered 6,462 5,067 3,444 2,111 1,672
Other real
estate
owned -
covered by
FDIC loss-
share 933 - - - -
--- --- --- --- ---
Total
nonperforming
assets 39,278 17,057 14,142 12,471 7,939
Capital
Ratios:
Tangible
common
equity
ratio 5.78 % 6.47 % 6.72 % 6.61 % 6.54 %
Total risk-
based
capital
(Bank only) 15.53 14.07 14.68 14.31 13.07
Tier 1 risk-
based
capital
(Bank only) 14.47 12.98 13.53 13.27 12.05
Tier 1 total
capital
(Bank only) 9.18 10.44 10.70 10.35 10.09
(1) Calculated excluding the $18.7 million gain on acquisition of
Bank of Hiawassee in the quarter ended March 31, 2010.
(2) Calculated excluding the $29.6 million impairment of goodwill in
the quarter ended December 31, 2009 and $787,000 of acquisition and
integration-related expenses in the quarter ended March 31, 2010.
(3) Net interest margin is calculated on a fully tax equivalent basis.
(4) The contractual balance of past due loans covered by the FDIC
loss-share agreements at March 31, 2010, was $42.8 million.
(5) The contractual balance of nonaccrual loans covered by the FDIC
loss-share agreements at March 31, 2010, was 29.0 million.
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2010
March 31, December 31,
2010 2009
---- ----
(Dollars in thousands, except per share
data) (unaudited)
Assets
Cash and due from banks $11,888 $8,925
Interest-earning bank balances 142,269 44,255
------- ------
Cash and cash equivalents 154,157 53,180
Investment securities available for sale 61,908 50,990
Investment securities held to maturity 38,253 32,380
Loans, non-covered 606,493 610,201
Loans, covered by FDIC loss-share 181,150 -
Allowance for loan losses (9,230) (9,189)
Loans, net of deferred fees 778,413 601,012
Other real estate owned - non-covered 6,462 5,067
Other real estate owned - covered by
FDIC loss-share 933 -
Premises and equipment, net 15,436 15,436
FDIC loss-share receivable 36,301 -
Accrued interest receivable 3,499 2,430
Federal Home Loan Bank stock 6,397 4,149
Intangible assets 2,142 570
Bank-owned life insurance 17,692 17,522
Other assets 11,000 8,796
Total assets 1,132,593 791,532
========= =======
Liabilities
Deposits 884,127 609,345
Borrowed money 113,803 82,165
Subordinated debt 15,464 15,464
Retail repurchase agreements 9,489 8,970
Other liabilities 13,379 3,266
Total liabilities 1,036,262 719,210
Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value,
1,000,000 shares authorized; 28,780
and 20,500 issued and outstanding at
March 31, 2010 and
December 31, 2009, respectively 28,890 20,589
Common stock, $0.01 par value, 20,000,000
shares authorized; 10,517,127
and 9,062,727 shares issued at March 31,
2010 and December 31, 2009,
respectively, 9,125,942 and 7,526,854
shares outstanding at March 31, 2010
and December 31, 2009, respectively 106 91
Additional paid-in-capital 55,269 48,528
Retained earnings, substantially
restricted 12,235 3,411
Accumulated other comprehensive loss (169) (297)
Total stockholders' equity 96,331 72,322
------ ------
Total liabilities and stockholders'
equity 1,132,593 791,532
========= =======
CITIZENS SOUTH BANKING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2010, and 2009 (unaudited)
Three Months Ended
------------------
March 31, March 31,
2010 2009
---- ----
(Dollars in thousands, except per share
data)
Interest Income:
Loans $8,211 $8,358
Investment securities 808 1,315
Interest-bearing deposits 50 12
--- ---
Total interest income 9,069 9,685
----- -----
Interest Expense:
Deposits 2,264 3,528
Borrowed funds 1,129 1,174
----- -----
Total interest expense 3,393 4,702
----- -----
Net interest income 5,676 4,983
Provision for loan losses 3,050 900
----- ---
Net interest income after provision for
loan losses 2,626 4,083
----- -----
Noninterest Income:
Service charges on deposit accounts 790 747
Mortgage banking income 210 298
Other loan fees 43 58
Commissions on sales of financial
products 118 55
Dividends on FHLB stock 4 -
Income from bank-owned life insurance 189 186
Gain from acquisition 18,733 -
Net gain (loss) on sale of investments 33 -
Net gain (loss) on sale of other assets (62) (171)
Other income 170 76
--- ---
Total noninterest income 20,228 1,249
------ -----
Noninterest Expense:
Compensation and benefits 2,643 2,492
Occupancy and equipment expense 683 674
Office supplies expense 41 47
Advertising 57 78
Professional services 234 236
Telephone and communications 72 69
Data processing 140 128
Deposit insurance 260 103
Amortization of intangible assets 65 81
Valuation adjustment on other real estate
owned 484 125
Impairment on investment securities - 123
Acquisition and integration expenses 787 -
Other expenses 890 781
--- ---
Total noninterest expense 6,356 4,937
Income before income tax expense
(benefit) 16,498 395
Income tax expense (benefit) 6,201 (61)
----- ---
Net income 10,297 456
Dividends on preferred stock 257 253
--- ---
Net income available to common
stockholders 10,040 203
====== ===
Net income (loss) per common share:
Basic $1.29 $0.03
Diluted $1.29 $0.03
SOURCE Citizens South Banking Corporation
