UNITED STATES
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 March 31, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
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)
(Zip Code)
(252) 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 requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of April 30, 1998: 2,909,500
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1998 (unaudited) and September 30, 1997 1
Consolidated Statements of Operations for the Three
and Six Months Ended March 31, 1998 and 1997 (unaudited) 2
Consolidated Statements of Stockholders' Equity for
the Six Months Ended March 31, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
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 Financial Condition
<TABLE>
<CAPTION>
March 31 September 30
1998 1997
---- ----
Assets (unaudited)
<S> <C> <C>
Cash and due from banks $ 3,746,417 $ 3,027,271
Interest-bearing deposits in financial institutions 11,516,971 12,744,980
Investment securities - available for sale 3,081,356 3,083,422
Mortgage-backed securities - available for sale 36,837,031 24,818,412
Loans receivable, net:
Held for sale 17,302,615 25,055,845
Held for investment 185,210,155 172,729,060
Premises and equipment, net 2,793,874 2,818,167
Deferred income taxes 708,803 821,863
Real estate owned 364,378 357,503
Federal Home Loan Bank stock, at cost 1,363,800 1,287,500
Accrued interest receivable 1,722,586 1,847,346
Prepaid expenses and other assets 1,470,354 689,828
------------- -------------
TOTAL ASSETS $ 266,118,340 $ 249,281,197
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Demand $ 41,517,285 $ 37,500,216
Savings 6,709,434 6,455,357
Time 152,537,420 131,160,215
------------- -------------
Total deposits 200,764,139 175,115,788
Borrowed money 2,129,143 12,621,120
Accrued interest payable 85,421 91,915
Income taxes payable 15,797 457,498
Advance payments by borrowers for
property taxes and insurance 64,194 182,731
Other liabilities 5,205,395 2,956,558
------------- -------------
208,264,089 191,425,610
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 29,095
Additional paid in capital 42,654,054 42,654,054
Unallocated ESOP shares, at cost (3,077,471) (3,118,984)
Unawarded MRP shares, at cost (3,275,299) (2,050,531)
Unrealized gain(loss) securities-AFS, net 475,673 300,318
Retained income, substantially restricted 21,048,199 20,041,635
------------- -------------
Total stockholders' equity 57,854,251 57,855,587
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,118,340 $ 249,281,197
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
NewSouth Bancorp, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
------------------------- -------------------------
1998 1997 1998 1997
------------------------- -------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $4,475,135 $3,844,526 $ 8,915,137 $7,417,160
Interest and dividends on investments and deposits 855,087 511,278 1,654,667 1,021,558
---------- ---------- ----------- ----------
Total interest income 5,330,222 4,355,804 10,569,804 8,438,718
---------- ---------- ----------- ----------
Interest expense:
Interest on deposits 2,238,436 2,050,120 4,398,560 4,121,897
Interest on borrowings 24,036 73,787 67,598 88,995
---------- ---------- ----------- ----------
Total interest expense 2,262,472 2,123,907 4,466,158 4,210,892
---------- ---------- ----------- ----------
Net interest income before provision for possible
loan losses 3,067,750 2,231,897 6,103,646 4,227,826
Provision for possible loan losses 0 100,000 100,000 206,578
---------- ---------- ----------- ----------
Net interest income 3,067,750 2,131,897 6,003,646 4,021,248
---------- ---------- ----------- ----------
Other income:
Loan fees and service charges 220,480 168,917 453,334 326,331
Loan servicing fees 185,013 150,174 331,191 311,752
Gain on sale of real estate, net (7,878) 2,091 32,062 2,091
Gain on sale of mortgage loans and mortgage-
backed securities 272,580 -- 402,744 8,140
Other income 61,821 45,368 101,387 88,444
---------- ---------- ----------- ----------
Total other income 732,016 366,550 1,320,718 736,758
---------- ---------- ----------- ----------
General and administrative expenses:
Compensation and fringe benefits 1,919,184 973,633 3,639,793 1,901,371
Federal insurance premiums 27,585 27,707 54,280 27,707
Premises and equipment 83,654 105,871 163,914 201,074
Advertising 29,999 67,305 60,200 92,454
Payroll and other taxes 100,972 82,566 184,848 153,227
Other 396,687 607,228 749,086 956,542
---------- ---------- ----------- ----------
Total general and administrative expenses 2,558,081 1,864,310 4,852,121 3,332,375
---------- ---------- ----------- ----------
Income before income taxes 1,241,685 634,137 2,472,243 1,425,631
Income taxes 475,600 248,600 949,300 558,900
---------- ---------- ----------- ----------
Net income $ 766,085 $ 385,537 $ 1,522,943 $ 866,731
========== ========== =========== ==========
Diluted earnings per share $ 0.30 $ n/a $ 0.59 $ n/a
========== ===========
Dividends per share $ 0.10 $ n/a $ 0.20 $ n/a
========== ===========
Average number of common shares outstanding 2,585,188 n/a 2,590,419 n/a
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
NewSouth Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
Six Months Ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain on
Retained Available
Additional Earnings Unallocated Unawarded For Sale
Common Paid-in Substantially ESOP MRP Securities,
Stock Capital Restricted Shares Shares Net Total
------- ----------- ----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1997 $29,095 $42,654,054 $20,041,635 $(3,118,984) $(2,050,531) $300,318 $57,855,587
Net income 1,522,943 1,522,943
Change in unrealized gains on securities
available-for-sale, net of taxes 175,355 175,355
Acquisition of MRP shares (1,224,768) (1,224,768)
Dividends on common stock (516,379) (516,379)
Release of ESOP shares 41,513 41,513
------- ----------- ----------- ----------- ----------- -------- -----------
Balance March 31, 1998 $29,095 $42,654,054 $21,048,199 $(3,077,471) $(3,275,299) $475,673 $57,854,251
======= =========== =========== =========== =========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NewSouth Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31
-----------------------------
1998 1997
-----------------------------
Operating activities:
<S> <C> <C>
Net Income $ 1,522,943 $ 866,731
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 100,000 206,578
Depreciation 77,308 72,765
ESOP compensation 406,597 --
Accretion of discounts on securities 186 13,217
Gain on disposal of premises and equipment and real estate
acquired in settlement of loans (32,062) (2,091)
Gain on sale of mortgage loans and mortgage-backed
securities (402,744) 8,140
Originations of loans held for sale, net (31,740,998) (20,421,852)
Proceeds from sale of loans held for sale 21,847,266 4,102,921
Other operating activities 659,484 (1,220,819)
------------ ------------
Net cash used in operating activities (7,562,020) (16,374,410)
Investing activities:
Proceeds from maturities of securities available for sale -- 5,000,000
Purchases of investment securities -- (2,000,000)
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 6,321,384 5,114,288
Loan originations, net of principal repayments of loans
held for investment (12,771,793) (19,807,026)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 217,654 104,840
Redemptions (purchases) FHLB Stock (76,300) --
Purchases of premises and equipment (53,015) (18,250)
------------ ------------
Net cash used in investing activities (6,362,070) (11,606,148)
Financing activities:
Net increase in deposit accounts 25,648,351 60,567,952
Proceeds from FHLB borrowings 8,500,000 25,000,000
Repayments of FHLB borrowings (19,500,000) (25,000,000)
Acquisition of MRP shares (1,224,768) --
Cash dividends paid (516,379) --
Net change in repurchase agreements 508,023 183,116
------------ ------------
Net cash provided by financing activities 13,415,227 60,751,068
Increase (decrease) in cash and cash equivalents (508,863) 32,770,510
Cash and cash equivalents, beginning of period 15,772,251 8,576,577
------------ ------------
Cash and cash equivalents, end of period $ 15,263,388 $ 41,347,087
============ ============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 190,698 $ 839,198
Exchange of loans for mortgage-backed securities $ 17,958,559 $ 8,310,216
</TABLE>
See Notes to Consolidated Financial Statements.
4
<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 NewSouth
Bank (the "Bank") in connection with the Bank's conversion from a North Carolina
chartered mutual savings bank to a North Carolina chartered commercial bank on
April 7, 1997, pursuant to its Plan of Conversion. 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 on April 8, 1997
under the symbol "NSBC".
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements (except for the
Statement of Financial Condition at September 30, 1997, 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 necessary
for a fair presentation of the financial position and results of operations for
the periods presented have been included, none of which were other than normal
recurring accruals. 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 April 7, 1997, such
statements include only the accounts and operations of the Bank. The results of
operations for the three and six month periods ended March 31, 1998 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1998.
Note 3. Earnings Per Share
The Company's earnings per share for the three and six month periods ended March
31, 1998 is based on weighted average shares of 2,585,188 and 2,590,419,
respectively, of common stock outstanding, excluding ESOP and MRP benefit plan
shares not committed to be released or granted. Earnings per share have been
calculated in accordance with Statement of Position 93-6, "Employers' Accounting
for Employee Stock Ownership Plans" and Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The Company adopted SFAS No.
128 on October 1, 1997 and it has had no effect on earnings per share, as the
Company had no common stock equivalents or convertible securities outstanding
during the three and six month periods ended March 31, 1998.
Note 4. Dividends Declared
On March 19, 1998, the Board of Directors declared a cash dividend of $0.10 per
share to stockholders of record as of April 2, 1998 and payable on April 24,
1998. This dividend payment represents a payout ratio of 33.3% of the earnings
for the quarter ended March 31, 1998.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Prior to April 7, 1997 the Company had no assets 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.
Comparison of Financial Condition at March 31, 1998 and September 30, 1997
Total consolidated assets were $266.1 million at March 31, 1998 compared to
$249.3 million at September 30, 1997. Total earning assets increased by $15.6
million to $255.3 million at March 31, 1998 from $239.7 million at September 30,
1997.
Interest-bearing deposits in financial institutions were $11.5 million at March
31, 1998 compared to $12.7 million at September 30, 1997. These funds are
primarily used to support the liquidity management activities and daily
operations of the Bank . Since September 30, 1997, the Bank has implemented
various investment strategies as a newly-converted commercial bank to increase
its regulatory liquidity levels. The Bank has securitized certain mortgage loans
previously held for sale into mortgage-backed securities, resulting in a
mortgage-backed securities portfolio of $36.8 million at March 31, 1998 compared
to $24.8 million at September 30, 1997. Consequently, loans held for sale
declined to $17.3 million at March 31, 1998 from $25.1 million at September 30,
1997. The Bank continued to experience favorable consumer and commercial loan
demand as loans held for investment increased to $185.2 million at March 31,
1998 from $172.7 million at September 30, 1997. To support the risk associated
with these types of loans, the Bank had reserves for potential loan losses of
$3.2 million at March 31, 1998 and September 30, 1997, or 1.6% of loans
outstanding at the end of each period. Earning assets amounted to 96.0% of total
assets at March 31, 1998, compared to 96.2% at September 30, 1997.
Total interest-bearing liabilities increased to $202.9 million at March 31, 1998
from $187.7 million at September 30, 1997. Total deposits increased by $25.7
million, or 14.6%, to $200.8 million at March 31, 1998 from $175.1 million at
September 30, 1997. Borrowed money declined to $2.1 million at March 31, 1998
from $12.6 million, reflecting principal repayments attributable to funds
provided from the aforementioned deposit growth.
Stockholders' equity was $57.9 million at March 31, 1998 and at September 30,
1997. See "Consolidated Statements of Stockholders' Equity". At March 31, 1998,
the Company's stockholders' equity to total assets ratio was 21.7% compared to
23.2% at September 30, 1997. As a North Carolina chartered commercial bank, the
Bank must meet various capital standards required by federal and state banking
regulatory agencies. The Bank's stand-alone capital was $41.0 million at March
31, 1998, substantially in excess of all regulatory capital requirements. See
"Liquidity and Capital Resources" below.
During the six months ended March 31, 1998, the Management Recognition Plan
("MRP") established for the future benefit of directors and officers of the
Company and the Bank, purchased 38,680 shares of the Company's common stock in
the open market at an average cost of $31.66 per share, totaling approximately
$1.2 million. These shares are being held in trust for
6
<PAGE>
future awards, subject to stockholder approval, and are reported as a reduction
in stockholders' equity. The MRP has purchased in the open market 116,380 shares
of the Company's common stock, or 4% of all issued and outstanding shares, at a
weighted average cost of $28.14 per share.
On March 19, 1998 the board of directors of the Company declared a quarterly
cash dividend of $0.10 per share, payable April 24, 1998 to stockholders of
record of April 2, 1998. This dividend payment is the Company's fourth
consecutive quarterly cash dividend and represents a payout ratio of 33.3% of
the consolidated earnings for the three months ended March 31, 1998.
Comparison of Operating Results for the Three and Six Months Ended March 31,
1998 and 1997
General. Net income for the three and six months ended March 31, 1998 was
$766,000 and $1.5 million, compared to $386,000 and $867,000 for the three and
six months ended March 31, 1997. Earnings per share are only presented for the
three and six months ended March 31, 1998. Prior to the completion of its stock
conversion on April 7, 1997, the Company had no assets and engaged in no
business activities. Accordingly, prior period comparative financial information
relates to the Bank only, as the Company had not completed its stock offering.
Interest Income. Interest income increased to $5.3 million and $10.6 million for
the three and six months ended March 31, 1998, from $4.3 million and $8.4
million for the three and six months ended March 31, 1997. This increase is
primarily attributable to the increase in the volume of interest-earning assets,
due from the infusion of the proceeds received from the stock conversion.
Average interest-earning assets were $246.8 million and $243.3 million,
respectively for the three and six months ended March 31, 1998, compared to
$206.8 million and $199.7 million for the three and six months ended March 31,
1997. The yield on average interest- earning assets increased to 8.6% and 8.7%
for the three and six months ended March 31, 1998 from 8.4% and 8.5% for the
three and six months ended March 31, 1997.
Interest Expense. Interest expense on deposits and borrowings had marginal
increases to $2.3 million and $4.5 million for the three and six months ended
March 31, 1998 from $2.1 million and $4.2 million for the three and six months
ended March 31, 1997. Average interest-bearing liabilities increased to $194.9
million and $191.7 million for the three and six months ended March 31, 1998
from $186.2 million and $181.6 million for the three and six months ended March
31, 1997. The effective cost of average interest-bearing liabilities had
marginal increases to 4.6% and 4.7%, respectively, for the three and six months
ended March 31, 1998 from 4.5% and 4.6% for the three and six months ended March
31, 1997. In addition, the Bank has increased its checking account base by
10.7%, to $41.5 million at March 31, 1998 from $37.5 million at September 31,
1997, reflecting its efforts of attracting lower costing core deposits.
Net Interest Income. Net interest income increased to $3.1 million and $6.1
million for the three and six months ended March 31, 1998 from $2.2 million and
$4.2 million for the three and six months ended March 31, 1997. This increase
resulted from the combination of the increase in the yield and volume of
interest-earning assets in excess of the cost and volume of interest- bearing
liabilities. The Bank's interest rate spread (the difference between the
effective yield on average interest-earning assets and the effective cost of
average interest-bearing liabilities) increased to 4.0%, respectively, for both
the three and six months ended March 31, 1998 from
7
<PAGE>
3.9%, respectively, for both the three and six months ended March 31, 1997. The
Bank's net yield on interest-earning assets (net interest income divided by
average interest-earning assets) increased to 5.0%, respectively, for both the
three and six months ended March 31, 1998 from 4.3% and 4.2% for the three and
six months ended March 31, 1997.
Provision for Loan Losses. During the three months ended March 31, 1998, the
Bank recorded no provisions for loan losses, but recorded $100,000 of additional
provisions during the six months ended March 31, 1998, compared to $100,000 and
$207,000 for the three and six months ended March 31, 1997. Provisions, which
are charged to operations, and the resulting allowance for loan losses are
amounts the Bank believes will be adequate to absorb potential losses on
existing loans that may become uncollectible. Increases or decreases in the
provision and resulting allowances are based upon a review and classification of
the Bank's 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. The Bank
maintained an allowance for loan losses of $3.2 million at March 31, 1998 and
September 30, 1997, respectively, or 1.6% of total loans outstanding at the end
of each period. The Bank believes the current level of its allowance for loan
losses is adequate to provide for possible future losses, although there are no
assurances that possible future losses, if any, will not exceed estimated
amounts.
Noninterest Income. Noninterest income increased to $732,000 and $1.3 million
for the three and six months ended March 31, 1998 from $366,000 and $737,000 for
the three and six months ended March 31, 1997. Noninterest income consists of
fees and service charges earned on loans, service charges on deposit accounts,
gains from sales of loans and mortgage-backed securities and other miscellaneous
income. During the three and six months ended March 31, 1998, the Bank recorded
gains from sales of loans and mortgage-backed securities of $273,000 and
$403,000, respectively, compared to no gains in the three months ended March 31,
1997 and $8,000 for the six months ended March 31, 1997. The volume of loans and
mortgage-backed securities sold during the 1998 periods was $16.3 million and
$21.8 million, respectively, compared to no sales and $1.0 million for the
respective 1997 periods.
Noninterest Expense. Noninterest expenses were $2.5 million and $4.8 million for
the three and six months ended March 31, 1998, compared to $1.9 million and $3.3
million for the three and six months ended March 31, 1997. The largest single
component of these expenses, compensation and fringe benefits, increased to $1.9
million and $3.6 million for the three and six months ended March 31, 1998 from
$974,000 and $1.9 million for the three and six months ended March 31, 1997.
During the three and six months ended March 31, 1998, the Bank accrued
approximately $673,000 and $1.1 million of estimated bonuses under a bonus plan.
In addition, during the three and six months ended March 31, 1998, the Bank
recorded $198,000 and $407,000 in benefits expense for the Employee Stock
Ownership Plan ("ESOP"). Other noninterest expenses including premises and
equipment, advertising, and office supplies remained relatively constant from
period to period.
The bonus plan was adopted in September 1997 to provide incentive compensation
to directors, officers and certain employees only in the event the MRP intended
to be submitted to the stockholders of the Company for approval at an April 8,
1998 special meeting of stockholders
8
<PAGE>
was not approved. The amounts accrued under the bonus plan during the three and
six month periods ended March 31, 1998 were approximately equal to the amounts
that would be accrued for the prospective MRP awards, in the event the MRP was
approved at the special meeting. However, no payments were made to potential
awardees under the bonus plan pending the outcome of the vote on the MRP at the
special meeting. The MRP was approved by the stockholders at the special meeting
and the bonus plan has been terminated with no payments or awards having been
made. No further accruals under the MRP were deemed necessary for the three and
six months ended March 31, 1998, as the accrual for potential payments under the
bonus plan were approximately equal to the accrual that otherwise would have
been necessary with respect to the awards under the MRP during these periods.
As part of the stock conversion, the Company formed an ESOP that acquired
232,760 shares of the Company's common stock , 8% of all issued and outstanding
shares. The compensation expense associated with the ESOP is reported in
accordance with SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans".
Income Taxes. Income tax expense was $476,000 and $949,000 for the three and six
months ended March 31, 1998, compared to $248,000 and $559,000 for the three and
six months ended March 31, 1997. The changes in the amounts of income tax
provisions reflects the changes in income before income taxes and the estimated
income tax rates in effect during the respective periods.
Liquidity and Capital Resources
As a state chartered commercial bank, the Bank must meet certain liquidity
requirements established by the State of North Carolina Office of the
Commissioner of Banks (the "Commissioner"). The Bank's liquidity ratio at March
31, 1998, as calculated under such requirements, exceeded the requirements.
Liquidity generally refers to the Bank's ability to generate adequate amounts of
funds to meet its cash needs. Adequate liquidity guarantees that sufficient
funds are available to meet deposit withdrawals, fund future loan commitments,
maintain adequate reserve requirements, pay operating expenses, provide funds
for debt service, pay dividends to stockholders, and meet other general
commitments. At March 31, 1998, the Bank had cash, deposits in banks, investment
securities, mortgage-backed securities, FHLB stock and loans held for sale
totaling $73.8 million, or 27.8% of total assets.
The Bank believes it has the ability to meet future liquidity needs with its
existing funding sources. The Bank's primary source of funds are deposits,
payments on loans and mortgage- backed securities, maturities of investment
securities, earnings and funds provided from operations, the ability to borrow
from the Federal Home Loan Bank of Atlanta and the availability of loans held
for sale. While scheduled repayments of loans and mortgage-backed securities are
relatively predictable sources of funds, deposit flows and loan prepayments are
substantially influenced by general market interest rates, economic conditions
and competition. The Bank attempts to manage its deposit pricing in order to
maintain a desired deposit mix.
The FDIC requires the Bank to meet a minimum leverage capital requirement of
Tier I capital (consisting of retained earnings and common stockholders's
equity, less any intangible assets) to assets ratio of 4%. The FDIC also
requires the Bank to meet a ratio of total capital to risk-
9
<PAGE>
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 capital requirements of the FDIC and the Commissioner at March 31,
1998.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company 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
assets and liabilities of the Company are monetary. As a result, interest rates
have greater impact on the Company'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 Company is reflected in the cost and prices it pays for
goods and services.
Year 2000 Compliance
The year 2000 poses many challenges for the banking industry. Many automated
applications may cease to properly function as a result of how date fields have
historically been programmed. Many programs were designed and developed without
considering the impact of the upcoming change in the century. Failure to address
this issue in a timely manner may cause banking institutions to experience
operational problems and could cause disruption of financial markets. Many
experts believe that even the most prepared organizations may encounter some
implementation problems. As a result, NewSouth Bank has developed a Year 2000
Strategic Plan (the "Plan") to take the necessary steps to insure that problems
and disruptions are minimized.
The Bank's primary data processing systems are outsourced to service bureaus,
who are addressing their Year 2000 program changes. The Bank's Plan includes
independent verification of Year 2000 compliance with its data processing
service bureau, vendors, suppliers, customers and others as may be identified.
The plan also includes analyzing, testing, and documenting that its service
bureau systems, and personal computers and equipment the Bank owns are Year 2000
compliant (including each PC, printer, modem, ATM, etc.). The Bank believes the
cost of addressing the Year 2000 issue will have no material impact on earnings
or uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial condition.
In a related matter, during the six months ended March 31, 1998, the Bank
entered into a services agreement with a new data processing vendor, Bisys, Inc.
Bisys is a leading national provider of integrated outsourcing technology
solutions. The Bank anticipates completing the conversion to the new Bisys
system during the June 1998 quarter. Bisys has developed a comprehensive Year
2000 testing and verification program. Through the Bisys client test facility,
end-to-end testing will be provided for all the Bank's hardware, software and
interfaces.
10
<PAGE>
PART II. OTHER INFORMATION
Item l. Legal Proceedings
The Company is 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, and other
matters of 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
At the Company's Annual Meeting of Stockholders held on February 12, 1998, the
following matters were submitted to a vote of stockholders with the following
results:
A. The election of directors:
Name Votes For Votes Withheld
---- --------- --------------
Linley H. Gibbs, Jr. 2,472,428 2,905
Thomas A. Vann 2,472,128 3,205
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.
Date: May 8, 1998 /s/ William L. Wall
-----------------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 8, 1998 /s/ Kristie W. Hawkins
-----------------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
12
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
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