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FEB 22, 2013 1:27pm ET

First South Plans to Cut Problem Assets

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First South Bancorp Inc., Washington, N.C., is reducing its problem assets through two separate transactions. First, the company signed an agreement on Feb. 15 to sell $46.5 million in problem loans to Emerald Portfolio LLC. First South expects to receive $25.1 million.

The agreement resulted in a $17.6 million charge to First South’s 2012 earnings.

Secondly, the company has received a nonbinding indication of interest from Emerald to purchase the majority of its real estate owned, resulting in a $5.2 million pretax valuation charge to earnings.

On a pro forma basis, if fully carried out, the company will have $6.4 million of nonperforming assets on its books instead of $60 million, classified assets of $19.8 million instead of $86.2 million, and nonaccrual loans held for investment of $4.4 million instead of $43 million.

As a result of the financial consideration needed to execute the plan, First South had a 4Q12 loss of $13 million instead of net income of $1.1 million. The full-year loss is $11 million instead of net income of $3 million.

First South said it does not need to raise capital to execute the plan and it remains well capitalized.

Bruce Elder, president and CEO, commented, "We realize that the loss generated from this asset sale represents a significant use of capital. After careful consideration of the financial ramifications, management and the board of directors concluded that the benefits derived from the improved asset quality position achieved from an accelerated disposition plan, outweighed the initial impacts of the transaction on our institution. A portion of these losses embedded in the company's balance sheet would have been realized in future periods as these problem assets were subsequently resolved.”

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