U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended June 30, 1997
Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
- -----
For the transition period from ________ to ________
Commission File Number: 0-22219
NEWSOUTH BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1999749
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1311 Carolina Avenue, Washington, North Carolina 27889
------------------------------------------------------
(Address of Principal Executive Offices)
(919) 946-4178
--------------
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [X] No [ ]
As of July 31, 1997, the registrant had 2,909,500 shares of Common
Stock issued and outstanding.
<PAGE>
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1997 (unaudited) and September 30, 1996 ...................1
Consolidated Statements of Operations for the Three and
Nine Months Ended June 30, 1997 and 1996 (unaudited) ...............2
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 1997 and 1996 (unaudited) ....................3
Notes to Consolidated Financial Statements .........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................6
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings .................................................11
Item 2. Changes in Securities .............................................11
Item 3. Defaults Upon Senior Securities ...................................11
Item 4. Submission of Matters to a Vote of Security Holders ...............11
Item 5. Other Information .................................................11
Item 6. Exhibits and Reports on Form 8-K ..................................11
SIGNATURES .................................................................12
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30 September 30
1997 1996
--------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,360,713 $ 2,811,326
Interest-bearing deposits in banks 10,006,584 5,765,251
Investment securities:
Available for sale 5,079,750 8,106,581
Mortgage backed securities:
Available for sale 27,930,775 14,797,424
Loans receivable, net:
Held for sale 21,711,938 21,627,590
Held for investment 162,185,593 134,053,705
Premises and equipment, net 2,838,707 2,900,421
Income taxes refundable 51,524 385,373
Deferred income taxes 175,289 223,983
Real estate owned 946,848 178,509
Federal Home Loan Bank stock, at cost 1,287,500 1,287,500
Accrued interest receivable 1,786,524 1,382,569
Prepaid expenses and other assets 648,387 618,921
--------------- ---------------
TOTAL ASSETS $ 238,010,132 $ 194,139,153
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Demand $ 34,146,579 $ 27,334,469
Savings 6,400,924 7,019,797
Time 128,393,575 136,859,020
--------------- ---------------
Total deposits 168,941,078 171,213,286
Borrowed money 7,502,335 1,039,608
Accrued interest payable 98,604 67,939
Advance payments by borrowers for property
taxes and insurance 247,940 383,517
Other liabilities 3,320,204 3,088,232
--------------- ---------------
180,110,161 175,792,582
Stockholders' equity:
Preferred stock, $.01 par value, authorized
1 ,000,000 shares; none issued
Common stock, $.01 par value, authorized
8,000,000 shares; 2,909,500 issued and outstanding 29,095 --
Additional paid-in-capital 42,423,041 --
ESOP note receivable (3,491,400) --
MRP shares held in trust for future awards (737,400) --
Unrealized gain (loss) securities available-for-sale 116,059 40,535
Retained income, substantially restricted 19,560,576 18,306,036
--------------- ---------------
Total stockholders' equity 57,899,971 18,346,571
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 238,010,132 $ 194,139,153
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------------ -------------------------------
1997 1996 1997 1996
------------------------------ -------------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,222,735 $ 3,339,449 $ 11,639,895 $ 9,995,021
Interest and dividends in investments and deposits 687,978 458,681 1,709,536 1,399,676
------------ ------------ ------------- ------------
Total interest income 4,910,713 3,798,130 13,349,431 11,394,697
Interest expense:
Interest on deposits 1,926,413 1,918,277 6,048,311 5,883,688
Interest on borrowings 59,394 30,775 148,388 143,864
------------ ------------ ------------- ------------
Total interest expense 1,985,807 1,949,052 6,196,699 6,027,552
Net interest income before provision for possible
losses 2,924,906 1,849,079 7,152,731 5,368,145
Provision for possible loan losses 541,000 100,000 747,578 368,000
------------ ------------ ------------- ------------
Net interest income 2,383,906 1,749,079 6,405,153 5,000,145
Other income:
Loan fees and service charges 207,988 151,604 534,319 415,273
Loan servicing fees 141,096 159,328 452,848 470,098
Gain on sale of real estate, net 0 7,178 2,091 21,348
Gain on sale of mortgage loans and mortgage-
backed securities 97,353 46,684 105,493 369,419
Other income 38,166 49,463 126,611 145,378
------------ ------------ ------------- ------------
Total other income 484,603 414,257 1,221,362 1,421,516
General and administrative expenses:
Compensation and fringe benefits 1,258,701 881,619 3,160,071 2,678,571
Federal insurance premiums 28,581 88,538 56,288 265,467
Premises and equipment 81,890 295,438 282,964 536,906
Advertising 57,817 36,724 150,271 79,990
Payroll and other taxes 82,097 73,594 235,324 211,396
Other 133,866 376,893 1,090,407 992,800
------------ ------------ ------------- ------------
Total general and administrative expenses 1,642,952 1,752,806 4,975,325 4,765,130
Income before income tax 1,225,557 410,530 2,651,190 1,656,531
Income tax expense (benefit) 546,800 (24,483) 1,105,700 545,397
------------ ------------ ------------- ------------
Net income $ 678,757 $ 435,013 $ 1,545,490 $ 1,111,134
============ ============ ============= ============
Earnings per share $ 0.25 n/a $ 0.25 n/a
Dividends per share $ 0.10 n/a $ 0.10 n/a
Average number of common shares outstanding 2,672,257 n/a 2,672,257 n/a
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
---------------------------------------
1997 1996
---------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 1,545,490 $ 1,111,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 747,578 368,000
Depreciation 110,190 307,085
Accretion of discounts on securities 19,825 13,310
Gain on disposal of premises and equipment and real estate
acquired in settlement of loans (1,710) (24,013)
Gain on sale of mortgage loans and mortgage-backed securities (105,493) (369,419)
Loan originations, net of principal repayments, of loans held for sale (28,619,371) (47,194,419)
Proceeds from sale of loans 10,115,618 45,485,430
Changes in assets and liabilities:
Accrued interest receivable (403,955) (155,691)
Income taxes refundable 333,849 (149,714)
Prepaid expenses and other assets (29,466) (97,486)
Accrued interest payable 30,665 (353)
Income taxes payable 0 (75,720)
Other 96,393 (247,455)
--------------- ---------------
Net cash used in operating activities (16,160,387) (1,029,311)
--------------- ---------------
INVESTING ACTIVITIES:
Proceeds from maturities and sale of securities available-for-sale 5,000,000 1,000,000
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 104,840 181,833
Proceeds from principal repayments and sales of mortgage-backed
securities available-for-sale 5,522,771 8,166,345
Purchases of investment securities available-for-sale (2,000,000) (3,043,438)
Purchases of premises and equipment (48,857) (343,145)
Loan originations, net of principal repayments of loans held
for investment (29,750,553) (6,233,547)
--------------- ---------------
Net cash used in investing activities (21,171,799) (271,952)
--------------- ---------------
FINANCING ACTIVITIES:
Net increase in deposit accounts (2,272,208) 9,908,965
Proceeds from borrowings 49,916,131 27,760,323
Repayments of borrowings (43,453,404) (30,092,040)
Net proceeds from conversion 37,932,387 0
--------------- ---------------
Net cash provided by financing activities 42,122,906 7,577,248
--------------- ---------------
Increase in cash and cash equivalents 4,790,720 6,275,985
Cash and cash equivalents, beginning of period 8,576,577 1,785,686
--------------- ---------------
Cash and cash equivalents, ending of period $ 13,367,297 $ 8,061,671
=============== ===============
Supplemental disclosures:
Exchange of loans for mortgage-backed securities $ 18,524,209 $ 1,545,859
Real estate acquired in settlement of loans $ 871,087 $ 197,516
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Nature of Business
NewSouth Bancorp, Inc. (the "Company") was incorporated under the laws of the
State of Delaware for the purpose of becoming the holding company for Home
Savings Bank, SSB (the "Savings Bank") in connection with the Savings Bank's
conversion from a North Carolina chartered mutual savings bank to a North
Carolina chartered stock savings bank (the "Converted Bank") pursuant to its
Plan of Conversion (the "Stock Conversion"). Upon completion of the Stock
Conversion, the Savings Bank converted from a North Carolina chartered stock
savings bank to a North Carolina commercial bank (the "Bank Conversion"), known
as NewSouth Bank (the "Bank") and the Bank succeeded to all of the assets and
liabilities of the Converted Bank. The Stock Conversion and the Bank Conversion
were consummated on April 7, 1997. The Company issued 2,909,500 shares of its
common stock, par value $.01 per share, for $15.00 per share, raising net
proceeds of approximately $42.5 million. NewSouth Bank, opened for business the
first day under that name on April 8, 1997. The common stock of the Company
began trading on the Nasdaq National Market System under the symbol "NSBC" on
April 8, 1997.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1996, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (none of
which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The financial statements of the Company are
presented on a consolidated basis with those of the Bank, although the Company
did not own any shares of the Bank and had no assets, liabilities, equity or
operations at any date prior to April 7, 1997. Therefore, although certain
financial statements presented in this Form 10-Q include periods prior to June
30, 1997, such statements include only the accounts and operations of the Bank.
The results of operations for the three and nine month periods ended June 30,
1997 are not necessarily indicative of the results of operations that may be
expected for the year ended September 30, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Prospectus of the Company, dated February 11, 1997.
Note 3. Earnings Per Share
The Company's earnings per share for the three month period ended June 30, 1997
is based on 2,672,257 weighted average shares outstanding for the period,
excluding ESOP and MRP benefit plan shares not committed to be released or
granted. Earnings per share has been calculated in accordance with Statement of
Position 93-6 "Employers' Accounting for Employee Stock Ownership Plans."
Earnings per share for the three month period ended June 30, 1997 is reported
based upon the assumption that such shares had been outstanding from the
beginning of the three month period. Earnings per share for the three month
period ended June 30, 1996 have not been presented in the consolidated
statements of income because the Bank had not converted to stock form and the
Company had not completed its stock offering at any time during that period.
Note 4. Dividends Declared
On June 19, 1997, the Board of Directors of the Company declared a dividend of
$.10 per share to stockholders of record as of July 2, 1997 and payable on July
25, 1997.
4
<PAGE>
Note 5. Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Common Retained Unrealized ESOP Management Total
stock and income, gains on note recognition
APIC substantially securities receivable plan
restricted available
for sale
----------- ----------- -------- ----------- --------- -----------
Balances at
<S> <C> <C> <C> <C> <C> <C>
Sept. 30, 1996 $ - $18,306,036 $ 40,535 $ - $ - $18,346,571
Stock issuance
proceeds 42,452,136 - - (3,491,400) - 38,960,736
Purchase of
MRP shares - - - - (737,400) (737,400)
Changes in net
unrealized gains
on securities
available for sale,
net of taxes - - 75,524 - - 75,524
Dividends
declared - (290,950) - - - (290,950)
Net income for
nine months
ended June 30,
1997 - 1,545,490 - - - 1,545,490
----------- ----------- -------- ----------- --------- -----------
Balances at June
30, 1997 $42,452,136 $19,560,576 $116,059 ($3,491,400) ($737,400) $57,899,971
=========== =========== ======== =========== ========= ===========
</TABLE>
Note 6. Impact of Recent Accounting Standards
The Company will adopt Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires the
Company to change its method of computing, presenting and disclosing earnings
per share information. Upon adoption, all prior period data presented will be
restated to conform to the provisions of SFAS No. 128. Management has not
determined the effect of adopting SFAS No. 128.
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income" for the
fiscal year ending September 30, 1999. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. Management has not determined the
effect of adopting SFAS No. 130.
The Company will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" for the fiscal year ending September 30,
1999. SFAS No. 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed. Management has not determined the effect of adopting SFAS No. 131.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Prior to April 7, 1997 the Company had no assets or liabilities and engaged in
no business activities. Subsequent to the Stock Conversion the Company has
engaged in no significant activity other than holding the stock of the Bank, and
operating through the Bank a commercial banking business. Therefore, the
discussion below focuses primarily on the Bank's results of operations.
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest earned on interest-earning assets,
consisting primarily of commercial, consumer and mortgage loans, mortgage-backed
securities and investment securities, and the interest paid on interest-bearing
liabilities which consist primarily of deposits and borrowings. Net interest
income is also a function of the Bank's interest rate spread, which is the
difference between the yield received on average interest-earning assets and the
cost paid on average interest-bearing liabilities. The Bank's earnings are also
affected by its level of noninterest income, primarily including loan fees,
service fees and charges, and gains on sales of loans, and noninterest expense,
primarily including compensation and employee benefits, occupancy expenses and
federal deposit insurance premiums. Earnings are also affected by general
economic conditions and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities,
events beyond control of the Bank.
Comparison of Financial Condition at June 30, 1997 and September 30, 1996
Total assets increased by $43.9 million, or 22.6%, to $238.0 million at June 30,
1997 from $194.1 million at September 30, 1996. The increase in assets was
supported by the net proceeds received from the Stock Conversion. On April 7,
1997 the Company issued 2,909,500 shares of common stock and received $42.5
million, which represents the actual net proceeds from the offering, including
$3.5 million in shares purchased by the Employee Stock Ownership Plan ("ESOP").
Total interest-earning assets increased by $42.6 million, or 22.9%, to $228.2
million at June 30, 1997 from $185.6 million at September 30, 1996, reflecting
the investment of the Stock Conversion net proceeds. Investments and
mortgage-backed securities increased by $l4.3 million, or 47.9%, to $44.3
million at June 30, 1997 from $30.0 million at September 30, 1996. Loans
receivable increased by $28.2 million, or 18.1%, to $183.9 million at June 30,
1997 from $155.7 million at September 30, 1996. This loan growth has been
consistent for the Bank, which operates in a lending market that has supported
stable loan demand over the past several years. To support this loan growth, the
Bank increased its allowance for loan losses to $3.1 million at June 30, 1997,
or 1.66% of total loans (net of loans-in-process and deferred fees), which the
Bank believes is adequate to absorb potential losses in its loan portfolio.
Earning assets increased to 95.9% of total assets at June 30, 1997 from 95.6% of
total assets at September 30, 1996.
6
<PAGE>
Total interest-bearing liabilities increased by $4.2 million, or 2.4%, to $176.4
million at June 30, 1997 from $172.2 million at September 30, 1996. Total
deposits decreased by $2.3 million to $168.9 million at June 30, 1997 from
$171.2 million at September 30, 1996. During the three months ended June 30,
1997, approximately $11.8 million of deposits were withdrawn by depositors to
purchase shares of the Company's common stock subscribed for in the Stock
Conversion. Although total deposits declined during the nine months ended June
30, 1997, checking accounts increased by $6.8 million, or 24.9%, to $34.1
million at June 30, 1997 from $27.3 at September 30, 1996, reflecting the Bank's
efforts to increase lower cost core checking accounts. Total borrowings
increased to $7.5 million at June 30, 1997 from $1.0 million at September 30,
1996, to support the growth in earning assets and banking operations. The
Company's note receivable from the ESOP totaling $3.5 million, requiring a
$349,000 annual principal payment plus interest at prime plus one percent, is
reported as a reduction of stockholders' equity. Although repayment of such debt
is secured solely by 232,760 shares of common stock of the Company purchased by
the ESOP (an aggregate of 8% of the common stock issued in the Stock
Conversion), the Bank expects to make discretionary contributions to the ESOP in
an amount at least equal to the principal and interest payments on the ESOP
debt.
Stockholders' equity increased by $39.6 million to $57.9 million at June 30,
1997 from $18.3 million at September 30, 1996, reflecting the infusion of the
net proceeds of the Stock Conversion and the consolidated earnings of the
Company during the period. At June 30, 1997, the Company's stockholders' equity
amounted to 24.3% of total assets. As a North Carolina chartered commercial
bank, the Bank is required to meet various capital standards established by
federal and state banking agencies. The Bank's stand-alone equity was $39.5
million at June 30, 1997 which is substantially in excess of all such regulatory
capital requirements (see "Liquidity and Capital Resources" below).
During the three months ended June 30, 1997, the Management Recognition Plan
Trust ("MRP") established for the benefit of the directors and officers of the
Company and the Bank, purchased 36,000 shares of the Company's common stock in
the open market at a $24.48 average cost per share totaling approximately
$881,000. These shares are being held in trust for future awards and are
reported as a reduction in stockholders' equity. The MRP is expected to purchase
up to 116,380 shares of the Company's common stock (an aggregate of 4% of the
common stock issued in the Stock Conversion) in the open market.
On June 19, 1997, the board of directors declared the initial quarterly cash
dividend for the Company. The cash dividend was declared at $0.10 per share to
shareholders of record of July 2, 1997, payable on July 25, 1997.
Comparison of Operating Results for the Three and Nine Months Ended June 30,
1997
General. Net income for the three and nine months ended June 30, 1997 was
$679,000 and $1.5 million, compared to net income of $435,000 and $1.1 million
for the three and nine months ended June 30, 1996. The Company's earnings for
the three months ended June 30, 1997, its initial quarterly earnings as a public
company, represent a 56.0% increase over the comparative June 30, 1996 quarterly
earnings. Earnings per share for the Company of $0.25 per share have only been
presented for the three months ended June 30, 1997. Prior to the completion of
the Stock Conversion on April 7, 1997, the Company had no assets and engaged in
no business
7
<PAGE>
activities. Accordingly, the current year financial information prior to April
7, 1997 and for the three and nine months ended June 30, 1996 relate to the Bank
only, as the Company had not completed its stock offering at any time during
those periods.
Interest Income. Interest income increased to $4.9 million and $13.3 million for
the three and nine months ended June 30, 1997 from $3.8 million and $11.4
million for the three and nine months ended June 30, 1996. As discussed above,
these increases were attributable to the increase in the volume of
interest-earning assets, due primarily from the infusion of cash received in the
Stock Conversion. The yield on average interest-earning assets was 8.3% and
8.4%, respectively, for the three and nine months ended June 30, 1997 as
compared to 8.7% and 8.8% for the three and nine months ended June 30, 1996,
reflecting a gradual decline in market interest rates during the current year
periods.
Interest Expense. Interest expense on deposits and borrowings experienced
marginal increases to $2.0 million and $6.2 million for the three and nine
months ended June 30, 1997 from $1.9 million and $6.0 million for the three and
nine months ended June 30, 1996. The effective cost of average interest-bearing
liabilities declined to 3.9% and 4.4% for the three and nine months ended June
30, 1997 from 4.8% and 5.0% for the three and nine months ended June 30, 1996.
As a result of the net proceeds received from the Stock Conversion and the
gradual decline in market interest rates during the 1997 periods, the Bank was
able to manage the cost it paid on deposits. In addition, the Bank has increased
its efforts of attracting lower costing checking accounts as discussed above.
Net Interest Income. Net interest income increased to $2.9 million and $7.2
million for the three and nine months ended June 30, 1997 from $1.8 million and
$5.4 million for the three and nine months ended June 30, 1996. These increases
resulted from the combination of the increase in the volume of interest-earning
assets in excess of the increase in the volume of interest-bearing liabilities
during a period of increasing interest rate spreads. The Bank's interest rate
spread (the difference between the yield on average interest-earning assets and
the cost of average interest-bearing liabilities) increased to 4.4% and 4.0% for
the three and nine months ended June 30, 1997 from 3.9% and 3.8% for the three
and nine months ended June 30, 1996. The Bank's net yield on interest-earning
assets (net interest income divided by average interest-earning assets) also
increased, to 4.9% and 4.5% for the three and nine months ended June 30, 1997
from 4.2% and 4.1% for the three and nine months ended June 30, 1996.
Provision for Loan Losses. During the three and nine months ended June 30, 1997
the Bank recorded provisions for possible loan losses of $541,000 and $748,000,
respectively, compared to $100,000 and $368,000 for the three and nine months
ended June 30, 1996. Provisions, which are charged to operations, and the
resulting loan loss allowances are amounts the Bank believes will be adequate to
absorb losses on existing loans that may become uncollectible. The decision to
increase or decrease the provision and resulting allowances is based upon a
review and classification of the loan portfolio and other factors, such as past
collection experience, changes in the nature and volume of the loan portfolio,
risk characteristics of individual loans or groups of similar loans and
underlying collateral, overall portfolio quality and current and prospective
economic conditions. Historically, the Bank's level of nonperforming loans to
total loans has been lower in comparison to its peers, while its allowances for
loan losses to nonperforming loans has been higher in comparison to its peers.
The Bank believes that the current level of loan loss allowances discussed above
is adequate to provide for possible future losses, although there are no
assurances that such possible losses will not exceed estimated amounts.
8
<PAGE>
Noninterest Income. Noninterest income was $485,000 and $1.2 million for the
three and nine months ended June 30, 1997, compared to $414,000 and $1.4 million
for the three and nine months ended June 30, 1996. Noninterest income consists
of fees and service charges earned on loans, service charges on deposit
accounts, gains from loan sales, and other miscellaneous income. During the nine
months ended June 30, 1997, gains from sales of loans decreased to $105,000 from
$369,000 for the nine months ended June 30, 1996. The volume of loans sold
during the 1997 period was $10.1 million compared to $45.5 million for the 1996
period.
Noninterest Expense. Noninterest expense totaled $1.6 million and $5.0 million
for the three and nine months ended June 30, 1997, compared to $1.8 million and
$4.8 million for the three and nine months ended June 30, 1996. The largest
single component of these expenses, compensation and fringe benefits, increased
to $1.3 million and $3.2 million during the three and nine months ended June 30,
1997 from $882,000 and $2.7 million for the 1996 comparative periods. During the
three months ended June 30, 1997, the Bank incurred approximately $280,000 in
benefits expense associated with the establishment of an ESOP, as discussed
below.
As a part of the Stock Conversion, the Company established an ESOP that acquired
232,760 shares of the common stock offered in the Stock Conversion with funds
provided in the form of a loan from the Company. The loan is expected to be
repaid over a ten year period with funds provided by the Bank sufficient to
amortize the debt, plus interest at prime plus one percent. The compensation
expense associated with the ESOP is reported in accordance with SOP 93-6,
"Employers' Accounting for Employee Stock Ownership Plans".
Federal deposit insurance premiums declined to $29,000 and $56,000 for the three
and nine months ended June 30, 1997 from $89,000 and $265,000 for the three and
nine months ended June 30, 1996. Pursuant to the Deposit Insurance Funds Act of
1996, the Bank's deposit insurance rate has declined to 6.4 cents per $100 of
deposits for 1997 from 23 cents per $100 of deposits for 1996. Premises and
equipment expense declined to $82,000 and $283,000 during the three and nine
months ended June 30, 1997 from $295,000 and $537,000 for the comparative 1996
periods. During the three and nine months ended June 30, 1996 the Bank
recognized accelerated depreciation of $124,000, respectively, on certain fixed
assets with no future value due to obsolescence or excessive use. During the
three months ended June 30, 1997, other expenses were reduced by the reversal of
a $210,000 valuation allowance on mortgage loans held for sale which had been
recorded in the immediately preceding three month period, pursuant to SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", reflecting the gradual
decline in market interest rates during the current period, as compared to a
$63,000 increase in the valuation allowance recorded in the three month period
ended June 30, 1996.
Income Taxes. Income tax expense was $547,000 and $1.1 million for the three and
nine month ended June 30, 1997, compared to a $24,000 benefit and a $545,000
expense for the three and nine months ended June 30, 1996. The changes in the
amounts of income tax provisions reflect the changes in income before income
taxes and are generally reflective of the effective income tax rates in effect
during the respective periods.
9
<PAGE>
Liquidity and Capital Resources
As a state chartered commercial bank, NewSouth Bank must meet certain liquidity
requirements which are established by the State of North Carolina Office of the
Commissioner of Banks (the "Commissioner"). The Bank's liquidity ratio at June
30, 1997, as computed under such regulations, was in excess of such
requirements. The term "liquidity" generally refers to a bank's ability to
generate adequate amounts of funds to meet its cash needs. More specifically,
liquidity ensures that adequate funds are available to meet deposit withdrawals,
fund anticipated future loan commitments, maintain adequate reserve
requirements, pay operating expenses, provide funds for debt service, pay
dividends to shareholders, and other general commitments.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities,
earnings and funds provided from operations, its ability to borrow from the
Federal Home Loan Bank of Atlanta and the availability of loans held for sale.
While scheduled repayments on loans and mortgage-backed securities are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general market interest rates, economic conditions, and
competition. The Bank attempts to manage the pricing of its deposits in order to
maintain a desired deposit mix and balance. At June 30, 1997, the Bank had cash
and deposits in banks, investment securities, mortgage-backed securities and
loans held for sale totaling $64.7 million, or 27.2% of total assets.
The FDIC requires the Bank to meet a minimum leverage capital requirement of
Tier I capital (consisting of retained earnings and common stockholders' equity,
less any intangible assets) to assets ratio of at least 4%. The FDIC also
requires the Bank to meet a ratio of total capital to risk-weighted assets of
8%, of which at least 4% must be in the form of Tier I capital. The Commissioner
requires the Bank at all times to maintain a capital surplus of not less than
50% of common capital stock. The Bank was in compliance with all of the capital
requirements of both the FDIC and the Commissioner at June 30, 1997.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and the Bank have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in relative purchasing power
of money over time and due to inflation. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are monetary. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
The impact of inflation upon the the Bank is reflected in the cost and price it
pays for goods and services.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company in not engaged in any legal proceedings at the present
time. From time to time, the Bank is a party to legal proceedings
within the ordinary course of business wherein it enforces its
security interest in loans made by it, and other matters of a similar
nature.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWSOUTH BANCORP, INC.
/s/ William L. Wall
Date: August 1, 1997 ---------------------------
William L. Wall
Executive Vice President
Chief Operating Officer
(Principal Financial Officer)
/s/ Kristie W. Hawkins
Date: August 1, 1997 ----------------------------
Kristie W. Hawkins
Controller and Treasurer
(Chief Accounting Officer)
12
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,360,713
<INT-BEARING-DEPOSITS> 10,006,584
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,010,525
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
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<ALLOWANCE> 3,096,611
<TOTAL-ASSETS> 238,010,132
<DEPOSITS> 168,941,078
<SHORT-TERM> 7,502,335
<LIABILITIES-OTHER> 3,666,748
<LONG-TERM> 0
0
0
<COMMON> 29,095
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<INTEREST-INCOME-NET> 7,152,732
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<EXPENSE-OTHER> 4,975,325
<INCOME-PRETAX> 2,651,190
<INCOME-PRE-EXTRAORDINARY> 2,651,190
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,545,490
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 4.95
<LOANS-NON> 339,168
<LOANS-PAST> 0
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<LOANS-PROBLEM> 10,231
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