Citizens South Banking 8-K Results of Operations and Financial Condition

For More Information: PRESS RELEASE

Gary F. Hoskins, CFO

(704) 884-2263

gary.hoskins@citizenssouth.com

FOR IMMEDIATE RELEASE

CITIZENS SOUTH BANKING CORPORATION ANNOUNCES

THIRD QUARTER RESULTS

GASTONIA, NC, October 19, 2009 ..  .  .  .  . Citizens South Banking Corporation (NASDAQ: CSBC), the holding company for Citizens South Bank, announced financial results for the third quarter ended September 30, 2009.  The Company reported a net loss of $759,000, or $0.10 per diluted share, for the quarter ended September 30, 2009, compared to net income of $822,000, or $0.11 per diluted share, for the quarter ended September 30, 2008.  The decline in earnings was primarily due to an increase in the provision for loan losses, which amounted to $4.0 million for the third quarter of 2009.  Kim S. Price, President and CEO, stated, “Given the state of the overall economy in the Charlotte Region, we have prudently and conservatively set aside an elevated provision for loan losses against our loan portfolio.   While we have recently seen signs of some improvement in the housing market, unemployment levels in the region remain high and we believe it is in our stockholders’ best interest to protect our balance sheet with these higher levels of reserves.”

Price continued, “We are fortunate that our long history of profitability and our “well capitalized” status affords us the flexibility to create these protections.  Our core earnings engine remains strong and is bolstered by an expanding net interest margin.  While we are encouraged by recent signs of an improving housing market and slightly improving employment rates, we think cautious optimism is warranted.”

Third Quarter 2009 Financial Highlights:

Credit Quality

The continued softening in the Charlotte Regional real estate market has resulted in increased levels of delinquent loans resulting in credit quality ratios that remain above the Company’s historical averages.   President Price commented, “With the recent completion of our normal regulatory examination, we are confident that our levels of non-performing assets are manageable, and continue to compare favorably with industry peers.” During the third quarter of 2009, nonperforming assets, which include nonperforming loans and other real estate owned, increased by $1.6 million to $14.1 million, or 1.72% of total assets at September 30, 2009, as compared to $12.5 million, or 1.49% of total assets, at June 30, 2009, and $4.5 million, or 0.55% of total assets at September 30, 2008.  Due to the general weakness in the economy and an increase in the Company’s nonperforming loans, the Company’s provision for loan losses increased to $4.0 million during the third quarter of 2009 as compared to $2.0 million during the second quarter of 2009 and $720,000 during the third quarter of 2008.  At September 30, 2009, the Company’s allowance for loan losses amounted to $9.5 million, or 1.54% of total loans, as compared to $8.7 million, or 1.38% of total loans at June 30, 2009, and $7.0 million, or 1.12% of total loans at September 30, 2008.  Net charge-offs for the third quarter totaled $3.2 million, or 0.51% of average loans.

Net Interest Margin

The Company’s net interest margin was 3.03% for the third quarter of 2009, as compared to 2.92% for the second quarter of 2009.  This 11 basis point increase in the linked-quarter net interest margin was largely due to a 24 basis point decrease in the Company’s cost of funds.  The Company has been focused on increasing core checking accounts which has contributed to this decrease in cost of funds.  In addition, higher-costing time deposits that matured during the third quarter repriced at lower rates and contributed to the lower cost of funds.

Noninterest Income and Noninterest Expense

Noninterest income for the third quarter of 2009 increased $1.0 million, or 67.62%, as compared to the third quarter of 2008. The Company realized a $952,000 net gain on the sale of assets during the third quarter of 2009 as compared to a net gain of $13,000 during the third quarter of 2008.  In addition, the Company experienced a $46,000 increase in mortgage banking income and a $57,000 increase in service charges on deposits.  Mortgage banking activity increased, primarily due to higher refinancing  as a result of lower market rates for mortgage loans.  Service charges on deposits increased due to the growth in the number and amount of core checking accounts.

Noninterest expense increased by $84,000, or 1.63%, during the comparable third quarter periods.  This increase was primarily due to a $207,000 increase in the Company’s FDIC deposit insurance expense.  Also during the comparable quarters, impairment on securities decreased by $135,000.

Loan Portfolio

A sluggish economy and management’s efforts to reduce exposures in the residential construction and land acquisition and development loan portfolio resulted in a decrease in outstanding loans of $9.9 million during the nine months ended September 30, 2009.  Management expects that these efforts will continue and that loan demand will remain soft throughout 2009.  However, the Company expects to extract market share gains in selective loan categories as a result of market disruptions stemming from a number of recently completed and announced mergers in the Charlotte market and with the Company’s expansion directly into the Mecklenburg County, North Carolina market.

Deposit Portfolio

Total deposits increased by $20.1 million, or 3.5%, during the first nine months of 2009 to $601.6 million at September 30, 2009.  This growth was driven by demand deposit accounts which increased by $25.1 million, or 20.43%, to $147.8 million at September 30, 2009.  This strong growth was caused in part by positive publicity that the Company received during the first quarter of 2009 relating to our nationally recognized program for utilization of TARP funds for low interest mortgage loans.  The strong growth was also partly attributable to retail and commercial demand deposit account incentives, enhanced treasury management services, and increased market share due to merger disruptions of competitors.

Capital

Despite the weak economic conditions that our industry is facing, the Company’s capital position continues to be a source of strength during these uncertain times.  The Bank’s capital ratios continue to exceed all regulatory measures and the Bank is considered “well-capitalized” for regulatory purposes.  The Company’s capital ratio improved to 12.67% at September 30, 2009, compared to 12.45% at June 30, 2009, and 10.06% at September 30, 2008.   Mr. Price commented, “Despite our strong capital position, last week the Company announced that it had filed a registration statement to sell approximately $30 million in common stock.  Our Board of Directors elected to raise additional capital in order to repay the $20.5 million in TARP proceeds received from the U.S. Treasury Department last year and to pursue additional growth and acquisition opportunities that may become available.”

About Citizens South Banking Corporation

Headquartered in Gastonia, North Carolina, Citizens South Bank was founded in 1904.  Deposits are FDIC insured up to applicable regulatory limits.  At September 30, 2009, the Bank had approximately $820.6 million in assets with 16 full-service offices in the Charlotte region, including Gaston, Iredell, Rowan, Mecklenburg, and Union counties in North Carolina, and York County, South Carolina.  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, 2008, describe some of these factors.

-END-

Important Tables Follow

# # #

Citizens South Banking Corporation

Quarterly Financial Highlights(Unaudited)

Summary of Operations:

	2009									2008
	At and for the quarters ended
	September 30			June 30			March 31			December 31			September 30
(Dollars in Thousands, Except per Share Data)
Summary of Operations:
Interest income – taxable equivalent	$	9,620		$	9,820		$	9,829		$	10,480		$	10,940
Interest expense		3,947			4,346			4,702			5,172			5,424
Net interest income – taxable equivalent		5,673			5,474			5,127			5,308			5,516
Less:  Taxable equivalent adjustment		139			142			144			134			134
Net interest income		5,534			5,332			4,983			5,174			5,382
Provision for loan losses		3,975			1,950			900			1,460			720
Net interest income after provision for loan losses		1,559			3,382			4,083			3,714			4,662
Noninterest income		2,501			2,016			1,249			1,254			1,492
Noninterest expense		5,229			5,239			4,937			4,496			5,145
Income (loss) before income taxes		(1,169	)		159			395			472			1,009
Income tax (benefit) expense		(672	)		(155	)		(61	)		(9	)		187
Net income (loss)		(497	)		314			456			481			822
Preferred stock dividend and discount on preferred stock		262			259			253			54			-
Net income (loss) available to common stockholders	$	(759	)	$	55		$	203		$	427		$	822
Per Common Share Data:
Net income:
Basic	$	(0.10	)	$	0.01		$	0.03		$	0.06		$	0.11
Diluted		(0.10	)		0.01			0.03			0.06			0.11
Weighted average shares outstanding:
Basic		7,419,206			7,404,218			7,392,742			7,361,434			7,358,086
Diluted		7,419,206			7,404,218			7,392,742			7,379,466			7,386,513
End of period shares outstanding		7,526,854			7,526,854			7,515,957			7,515,957			7,516,816
Cash dividends declared	$	0.04		$	0.04		$	0.04		$	0.085		$	0.085
Book value		11.08			11.11			11.19			11.21			11.02
Tangible book value		7.06			7.07			7.14			7.15			6.84
End of Period Balances:
Total assets	$	820,608		$	836,283		$	851,390		$	817,213		$	823,030
Loans, net of deferred fees		616,793			629,962			635,008			626,688			628,496
Investment securities		90,174			97,452			114,933			109,180			107,522
Interest-earning assets		734,938			751,733			765,747			733,448			732,683
Deposits		601,614			616,233			628,571			581,488			584,928
Stockholders’ equity		103,990			104,158			104,663			104,720			82,827
Quarterly Average Balances:
Total assets	$	831,268		$	841,169		$	829,319		$	820,166		$	817,613
Loans, net of deferred fees		624,112			635,645			626,722			627,888			615,755
Investment securities		94,674			107,140			110,502			108,146			116,269
Interest-earning assets		741,974			751,381			740,404			733,858			724,949
Deposits		609,243			616,926			593,166			579,967			581,162
Stockholders’ equity		103,913			104,813			104,884			88,498			82,478
Financial Performance Ratios:
Return on average assets (annualized)		(0.36	)%		0.03	%		0.10	%		0.21	%		0.40	%
Return on average common equity (annualized)		(3.61	)		0.26			0.98			1.92			3.97
Return on tangible common equity (annualized)		(6.77	)		1.48			2.88			3.39			8.45
Noninterest income to average total assets (annualized)		1.20			0.96			0.60			0.61			0.73
Noninterest expense to average total assets (annualized)		2.52			2.49			2.39			2.19			2.52
Efficiency ratio		65.08			71.29			79.22			69.94			74.85

Citizens South Banking Corporation

Quarterly Financial Highlights - continued(Unaudited)

	2009									2008
	At and for the quarters ended
	September 30			June 30			March 31			December 31			September 30
(Dollars in Thousands, Except per Share Data)
Net Interest Margin (annualized):
Yield on earning assets		5.13	%		5.26	%		5.38	%		5.67	%		5.99	%
Cost of funds		2.30			2.54			2.90			3.02			3.13
Net interest spread		2.83			2.72			2.48			2.65			2.86
Net interest margin (1)		3.03			2.92			2.81			2.84			3.02
Credit Quality Information and Ratios:
Allowance for loan losses – beginning of period	$	8,685		$	8,730		$	8,026		$	7,027		$	6,757
Add:  Provision for loan losses		3,975			1,950			900			1,460			720
Less:  Net charge-offs		3,161			1,995			196			461			450
Allowance for loan losses – end of period		9,499			8,685			8,730			8,026			7,027
Nonperforming loans		10,698			10,360			6,267			3,032			3,335
Other real estate owned (OREO)		3,444			2,111			1,672			2,601			1,214
Nonperforming assets		14,142			12,471			7,939			5,633			4,549
Allowance for loan losses to total loans		1.54	%		1.38	%		1.37	%		1.28	%		1.12	%
Net charge-offs to average loans		0.51			0.32			0.03			0.07			0.07
Nonperforming loans to total loans		1.73			1.64			0.98			0.48			0.53
Nonperforming assets to total assets		1.72			1.49			0.93			0.69			0.55
Nonperforming assets to total loans and OREO		2.28			1.97			1.25			0.89			0.72
Capital Ratios:
Tangible common equity ratio		6.72	%		6.61	%		6.54	%		6.82	%		6.94	%
Average equity to average total assets		12.50			12.46			12.65			10.79			10.09
Equity to assets at period end		12.67			12.45			12.29			12.81			10.06

(1)   Net interest margin is calculated on a fully tax equivalent basis

 Citizens South Banking Corporation

Condensed Consolidated Statements of Financial Condition

	September 30, 2009			December 31, 2008
(Dollars in thousands except per share data)	(unaudited)
ASSETS
Cash and due from banks	$	9,846		$	9,444
Interest-earning bank balances		35,650			613
Cash and cash equivalents		45,496			10,057
Investment securities available-for-sale, at fair value		79,112			109,180
Investment securities held to maturity, at amortized cost		11,062			-
Loans receivable, net of deferred fees		616,793			626,688
Allowance for loan losses		(9,499	)		(8,026	)
Loans, net		607,294			618,662
Other real estate owned		3,444			2,601
Premises and equipment, net		15,367			16,834
Accrued interest receivable		2,317			2,609
Federal Home Loan Bank stock, at cost		4,149			4,793
Bank owned life insurance		17,341			16,813
Intangible assets		30,282			30,525
Other assets		4,744			5,139
Total assets	$	820,608		$	817,213
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand deposit accounts	$	147,796		$	122,731
Money market deposit accounts		115,727			103,271
Savings accounts		10,999			10,708
Time deposits		327,092			344,778
Total deposits		601,614			581,488
Borrowed money		110,711			124,365
Other liabilities		4,293			6,640
Total liabilities		716,618			712,493
Stockholders' Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
20,500 shares issued and outstanding at September 30, 2009 and
December 31, 2008		20,569			20,507
Common stock, $0.01 par value, 20,000,000 shares authorized,
9,062,727 shares issued at June 30, 2009 and
December 31, 2008; 7,526,854 shares outstanding at September 30, 2009
and 7,515,957 shares outstanding at December 31, 2008		48,587			48,099
Retained earnings, substantially restricted		34,270			36,089
Accumulated other comprehensive income		564			25
Total stockholders’ equity		103,990			104,720
Total liabilities and stockholders’ equity	$	820,608		$	817,213

Citizens South Banking Corporation

Condensed ConsolidatedStatements of Operations (Unaudited)

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2009			2008		2009			2008
(Dollars in thousands except per share data)
Interest Income
Loans and loan fees	$	8,376		$	9,415	$	25,176		$	28,160
Investment securities		1,077			1,377		3,623			3,952
Interest-bearing deposits		28			13		46			149
Total interest income		9,481			10,805		28,845			32,261
Interest Expense
Deposits		2,791			3,997		9,515			13,397
Borrowed funds		1,156			1,426		3,480			3,783
Total interest expense		3,947			5,423		12,995			17,180
Net interest income		5,534			5,382		15,850			15,081
Provision for loan losses		3,975			720		6,825			1,815
Net interest income after provision for loan losses		1,559			4,662		9,025			13,266
Noninterest Income
Service charges on deposit accounts		859			802		2,427			2,256
Mortgage banking income		215			169		975			650
Other loan fees		36			84		175			296
Dividends on FHLB stock		-			40		-			168
Increase in cash value of bank-owned life insurance		202			195		570			571
Net gain on sale of assets		952			13		1,016			275
Other noninterest income		237			189		603			549
Total noninterest income		2,501			1,492		5,766			4,765
Noninterest Expense
Compensation and benefits		2,570			2,553		7,588			7,601
Occupancy and equipment expense		632			662		1,958			2,012
Professional fees		233			200		707			639
Amortization of intangible assets		81			126		243			402
FDIC deposit insurance		232			25		825			58
Valuation adjustment on other real estate owned		-			-		175			-
Restructuring expenses		-			-		-			220
Impairment of securities		333			468		547			468
Other noninterest expense		1,148			1,111		3,362			3,330
Total noninterest expense		5,229			5,145		15,405			14,730
Net income (loss) before income taxes		(1,169	)		1,009		(614	)		3,301
Income tax expense (benefit)		(672	)		187		(887	)		647
Net income (loss)		(497	)		822		273			2,654
Preferred stock dividend and discount on preferred stock		262			-		774			-
Net income (loss) available to common stockholders	$	(759	)	$	822	$	(501	)	$	2,654
Net income (loss) per common share:
Basic	$	(0.10	)	$	0.11	$	(0.07	)	$	0.36
Diluted	$	(0.10	)	$	0.11	$	(0.07	)	$	0.36
Weighted average common shares outstanding:
Basic		7,419,206			7,358,086		7,405,199			7,380,236
Diluted		7,419,206			7,386,513		7,405,199			7,414,274