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 June 30, 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 August 7, 1998:
2,849,366
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1998 (unaudited) and September 30, 1997 1
Consolidated Statements of Operations for the Three and
Nine Months Ended June 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended June 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 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>
JUNE 30 SEPTEMBER 30
1998 1997
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 3,863,967 $ 3,027,271
Interest-bearing deposits in financial institutions 7,646,578 12,744,980
Investment securities - available for sale 3,075,634 3,083,422
Mortgage-backed securities - available for sale 28,423,761 24,818,412
Loans receivable, net:
Held for sale 32,481,433 25,055,845
Held for investment 184,472,463 172,729,060
Premises and equipment, net 2,781,118 2,818,167
Deferred income taxes 781,834 821,863
Real estate owned 349,628 357,503
Federal Home Loan Bank stock, at cost 1,363,800 1,287,500
Accrued interest receivable 1,963,216 1,847,346
Prepaid expenses and other assets 1,862,686 689,828
------------- -------------
TOTAL ASSETS $ 269,066,118 $ 249,281,197
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Demand $ 43,431,595 $ 37,500,216
Savings 6,487,069 6,455,357
Time 149,150,229 131,160,215
------------- -------------
Total deposits 199,068,893 175,115,788
Borrowed money 7,248,672 12,621,120
Accrued interest payable 54,437 91,915
Income taxes payable 0 457,498
Advance payments by borrowers for property
taxes and insurance 233,887 182,731
Other liabilities 3,912,398 2,956,558
------------- -------------
210,518,287 191,425,610
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 43,038,178 42,654,054
Unallocated ESOP shares, at cost (3,056,818) (3,118,984)
Unawarded MRP shares, at cost (2,316,077) (2,050,531)
Treasury stock, 30,834 shares, at cost (1,072,194) 0
Unrealized gain(loss) securities-AFS, net 361,446 300,318
Retained income, substantially restricted 21,564,201 20,041,635
------------- -------------
Total stockholders' equity 58,547,831 57,855,587
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 269,066,118 $ 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 NINE MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,868,752 $ 4,222,735 $13,783,889 $11,639,894
Interest and dividends on investments and deposits 733,786 687,978 2,388,412 1,709,536
----------- ----------- ----------- -----------
Total interest income 5,602,538 4,910,713 16,172,301 13,349,430
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 2,337,281 1,926,413 6,735,842 6,048,311
Interest on borrowings 19,714 59,394 87,312 148,388
----------- ----------- ----------- -----------
Total interest expense 2,356,995 1,985,807 6,823,154 6,196,699
----------- ----------- ----------- -----------
Net interest income before provision for possible
loan losses 3,245,543 2,924,906 9,349,147 7,152,731
Provision for possible loan losses 110,000 541,000 210,000 747,578
----------- ----------- ----------- -----------
Net interest income 3,135,543 2,383,906 9,139,147 6,405,153
----------- ----------- ----------- -----------
Other income:
Loan fees and service charges 267,537 207,988 720,871 534,319
Loan servicing fees 154,721 141,096 485,912 452,848
Gain on sale of real estate, net (2,972) -- 29,090 2,091
Gain on sale of mortgage loans and mortgage-
backed securities 207,300 97,353 610,044 105,493
Other income 51,782 38,166 153,170 126,611
----------- ----------- ----------- -----------
Total other income 678,368 484,603 1,999,087 1,221,362
----------- ----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 1,822,310 1,258,701 5,462,103 3,160,071
Federal insurance premiums 28,605 28,581 82,885 56,288
Premises and equipment 84,477 81,890 248,391 282,964
Advertising 35,365 57,817 95,565 150,271
Payroll and other taxes 135,536 82,097 320,384 235,324
Other 457,503 133,866 1,220,389 1,090,407
----------- ----------- ----------- -----------
Total general and administrative expenses 2,563,796 1,642,952 7,429,717 4,975,325
----------- ----------- ----------- -----------
Income before income taxes 1,250,115 1,225,557 3,708,517 2,651,190
Income taxes 467,000 546,800 1,402,500 1,105,700
----------- ----------- ----------- -----------
NET INCOME $ 783,115 $ 678,757 $ 2,306,017 $ 1,545,490
=========== =========== =========== ===========
Basic earnings per share $ 0.30 $ 0.25 $ 0.89 $ 0.25
=========== =========== =========== ===========
Diluted earnings per share $ 0.30 $ 0.25 $ 0.89 $ 0.25
=========== =========== =========== ===========
Dividends per share $ 0.10 $ 0.10 $ 0.30 $ 0.10
=========== =========== =========== ===========
Average number of common shares outstanding 2,608,237 2,672,257 2,596,454 2,672,257
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Gain on
Retained Available
Additional Earnings Unallocated Unawarded For Sale
Common Paid-in Substantially ESOP Treasury MRP Securities,
Stock Capital Restricted Shares Shares Shares Net Total
------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1997 $29,095 $42,654,054 $20,041,635 $(3,118,984) $ 0 $(2,050,531) $ 300,318 $57,855,587
Net income 2,306,017 2,306,017
Change in unrealized gains on securities
available-for-sale, net of taxes 61,128 61,128
MRP shares purchased (1,224,768) (1,224,768)
Treasury shares purchased (1,072,194) (1,072,194)
Dividends on common stock (783,451) (783,451)
MRP shares awarded 384,124 959,222 1,343,346
Release of ESOP shares 62,166 62,166
------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 1998 $29,095 $43,038,178 $21,564,201 $(3,056,818) $(1,072,194) $(2,316,077) $ 361,446 $58,547,831
======= =========== =========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30
---------------------------
1998 1997
---------------------------
Operating activities:
<S> <C> <C>
Net Income $ 2,306,017 $ 1,545,490
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 210,000 747,578
Depreciation 116,099 110,190
ESOP compensation 626,047 280,126
MRP shares awarded 1,343,346 0
Accretion of discounts on securities 279 19,825
Gain on disposal of real estate acquired in settlement of loans (29,090) (1,710)
Gain on sale of loans and mortgage-backed securities (610,044) (105,493)
Originations of loans held for sale, net (50,747,939) (28,619,371)
Proceeds from sale of loans held for sale 25,701,112 10,115,618
Other operating activities (1,340,591) (252,640)
------------ ------------
Net cash used in operating activities (22,424,764) (16,160,387)
Investing activities:
Proceeds from maturities of securities available for sale 0 5,000,000
Purchases of investment securities 0 (2,000,000)
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 14,734,602 5,522,771
Loan originations, net of principal repayments of loans
held for investment (12,277,376) (29,750,553)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 361,838 104,840
Purchases of FHLB Stock (76,300) 0
Purchases of premises and equipment (79,950) (48,857)
------------ ------------
Net cash provided (used) in investing activities 2,662,814 (21,171,799)
Financing activities:
Net increase (decrease) in deposit accounts 23,953,105 (2,272,208)
Proceeds from FHLB borrowings 13,500,000 41,000,000
Repayments of FHLB borrowings (19,500,000) (35,000,000)
Acquisition of MRP shares (1,224,768) 0
Net proceeds from issuing stock 0 37,932,387
Treasury stock purchased (1,072,194) 0
Cash dividends paid (783,451) 0
Net change in repurchase agreements 627,552 462,727
------------ ------------
Net cash provided by financing activities 15,500,244 42,122,906
Increase (decrease) in cash and cash equivalents (4,261,706) 4,790,720
Cash and cash equivalents, beginning of period 15,772,251 8,576,577
------------ ------------
Cash and cash equivalents, end of period $ 11,510,545 $ 13,367,297
============ ============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 323,973 $ 871,087
Exchange of loans for mortgage-backed securities $ 17,958,559 $ 18,524,209
</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") is incorporated under the laws of the
State of Delaware and its purpose is being the holding company of NewSouth Bank
(the "Bank"). The common stock of the Company is traded on the Nasdaq National
Market System 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. The results of operations for the
three and nine month periods ended June 30, 1998 are not necessarily indicative
of the results of operations that may be expected for the year ended September
30, 1998.
Certain financial statements presented in this Form 10-Q include periods prior
to April 7, 1997, the date the Company completed is stock conversion, therefore
such statements include only the accounts and operations of the Bank.
NOTE 3. EARNINGS PER SHARE.
The Company's earnings per share for the three and nine month periods ended June
30, 1998 is based on weighted average shares of 2,608,237 and 2,596,454,
respectively, of common stock outstanding, excluding ESOP and MRP benefit plan
shares not committed to be released or granted, and treasury shares. 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's outstanding stock options were not included in the earnings per share
calculation for the three and nine month periods ended June 30, 1998, as their
effect would have been anti-dilutive.
NOTE 4. DIVIDENDS DECLARED.
On June 18, 1998, the Board of Directors declared a cash dividend of $0.10 per
share to stockholders of record as of July 2, 1998 and payable on July 24, 1998.
This dividend payment represents a payout ratio of 33.3% of the earnings for the
quarter ended June 30, 1998.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 JUNE 30, 1998 AND SEPTEMBER 30, 1997
Total consolidated assets were $269.1 million at June 30, 1998 compared to
$249.3 million at September 30, 1997. Total earning assets increased by $17.8
million to $257.5 million at June 30, 1998 from $239.7 million at September 30,
1997.
Interest-bearing deposits in financial institutions was $7.6 million at June 30,
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 $28.4 million at June 30, 1998, compared to $24.8
million at September 30, 1997. Loans held for sale increased to $32.5 million at
June 30, 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 $184.5 million at June 30, 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 $3.3 million at June 30, 1998
and $3.2 million at September 30, 1997, or 1.5% and 1.6%, respectively, of loans
outstanding at the end of each period. Earning assets amounted to 95.7% of total
assets at June 30, 1998, compared to 96.2% at September 30, 1997.
Total interest-bearing liabilities increased to $206.3 million at June 30, 1998
from $187.7 million at September 30, 1997. Total deposits increased by $24.0
million, or 13.7%, to $199.1 million at June 30, 1998 from $175.1 million at
September 30, 1997. Borrowed money declined to $7.2 million at June 30, 1998
from $12.6 million, reflecting principal repayments attributable to funds
provided from the aforementioned deposit growth.
Stockholders' equity was $58.5 million at June 30, 1998, compared to $57.9
million at September 30, 1997. See "Consolidated Statements of Stockholders'
Equity". At June 30, 1998, the Company's stockholders' equity to total assets
ratio was 21.8%, 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 $41.4 million at June 30, 1998, substantially in excess of all regulatory
capital requirements. See "Liquidity and Capital Resources" below.
During the nine months ended June 30, 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. The MRP has purchased in the open market 116,380 shares of the
Company's common stock, or 4% of all issued and outstanding
6
<PAGE>
shares, at a weighted average cost of $28.14 per share. On April 8, 1998 the
stockholders approved the MRP and 38,797 of the plan shares were awarded to plan
participants. At June 30, 1998, 77,853 shares remain in the MRP trust for future
awards and are reported as a reduction in stockholders' equity.
On June 18, 1998 the Board of Directors of the Company declared a quarterly cash
dividend of $0.10 per share, payable July 24, 1998 to stockholders of record of
July 2, 1998. This dividend payment is the Company's fifth consecutive quarterly
cash dividend and represents a payout ratio of 33.3% of consolidated earnings
for the three months ended June 30, 1998. Dividends of $0.30 per share paid for
the nine months ended June 30, 1998 represent a payout ratio of 33.7% of
consolidated earnings for that period.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1998 AND 1997
GENERAL. Net income for the three and nine months ended June 30, 1998 was
$783,000 and $2.3 million, compared to $679,000 and $1.5 million for the three
and nine months ended June 30, 1997. Comparative earnings per share are
presented for the three and nine months ended June 30, 1998 and 1997; however,
earnings per share for the nine months ended June 30, 1997 excludes financial
information relating to the Bank only prior to April 7, 1997.
INTEREST INCOME. Interest income increased to $5.6 million and $16.2 million for
the three and nine months ended June 30, 1998, from $4.9 million and $13.3
million for the three and nine months ended June 30, 1997. This increase is
primarily attributable to the increase in the volume of interest-earning assets,
due from growth and the investment of the proceeds received from the stock
conversion. Average interest-earning assets were $255.0 million and $246.8
million, respectively, for the three and nine months ended June 30, 1998,
compared to $225.8 million and $206.8 million for the three and nine months
ended June 30, 1997. The yield on average interest-earning assets increased to
8.8% and 8.7% for the three and nine months ended June 30, 1998 from 8.3% and
8.4% for the three and nine months ended June 30, 1997.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $2.4
million and $6.8 million for the three and nine months ended June 30, 1998 from
$2.0 million and $6.2 million for the three and nine months ended June 30, 1997.
Average interest-bearing liabilities increased to $202.9 million and $195.0
million for the three and nine months ended June 30, 1998 from $185.9 million
and $180.3 million for the three and nine months ended June 30, 1997. The
effective cost of average interest-bearing liabilities increased to 4.6% and
4.7%, respectively, for the three and nine months ended June 30, 1998 from 4.0%
and 4.4% for the three and nine months ended June 30, 1997. The Bank's checking
account base increased by 17.1%, to $43.9 million at June 30, 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 $3.2 million and $9.3
million for the three and nine months ended June 30, 1998 from $2.9 million and
$7.2 million for the three and nine months ended June 30, 1997. This increase
resulted from the combination of the increase in the net yield and volume of
interest-earning assets in excess of the cost and volume of interest-bearing
liabilities. The Bank's net yield on interest-earning assets (net interest
income divided
7
<PAGE>
by average interest-earning assets) increased to 5.1%, respectively, for both
the three and nine months ended June 30, 1998, from 4.9% and 4.5% for the three
and nine months ended June 30, 1997. 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) remained constant
during these periods, at 4.2% and 4.0% for the three and nine months ended June
30, 1998, compared to 4.3% and 4.0% for the three and nine months ended June 30,
1997.
PROVISION FOR LOAN LOSSES. During the three and nine months ended June 30, 1998,
the Bank recorded provisions for loan losses of $110,000 and $210,000, compared
to $541,000 and $748,000 for the three and nine months ended June 30, 1997.
Provisions are charged to operations and the Bank believes the resulting
allowance for loan losses is adequate to absorb potential losses on 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's allowance
for loan losses was $3.3 million at June 30, 1998 and $3.2 million at September
30, 1997, or 1.5% and 1.6% of total loans outstanding at the end of each
respective 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 exceed estimated amounts.
NONINTEREST INCOME. Noninterest income increased to $678,000 and $2.0 million
for the three and nine months ended June 30, 1998 from $485,000 and $1.2 million
for the three and nine months ended June 30, 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 nine months ended June 30, 1998, the
Bank recorded gains from sales of loans and mortgage-backed securities of
$207,000 and $610,000, respectively, compared to $97,000 and $105,000 in the
three and nine months ended June 30, 1997. The volume of loans and
mortgage-backed securities sold during the 1998 periods was $9.5 million and
$34.7 million, respectively, compared to $6.0 million and $14.1 million for the
respective 1997 periods.
NONINTEREST EXPENSE. Noninterest expenses were $2.6 million and $7.4 million for
the three and nine months ended June 30, 1998, compared to $1.6 million and $5.0
million for the three and nine months ended June 30, 1997. The largest single
component of these expenses, compensation and fringe benefits, increased to $1.8
million and $5.5 million for the three and nine months ended June 30, 1998 from
$1.3 million and $3.2 million for the three and nine months ended June 30, 1997.
During the three and nine months ended June 30, 1998, the Bank recorded $411,000
and $1.6 million of benefits expense for the MRP plan. In addition, during the
three and nine months ended June 30, 1998, the Bank recorded $219,000 and
$626,000 in benefits expense for the Employee Stock Ownership Plan ("ESOP"),
compared to $280,000 for the three and nine months ended June 30, 1997. Other
noninterest expenses including premises and equipment, advertising, and office
supplies remained relatively constant from period to period.
8
<PAGE>
INCOME TAXES. Income tax expense was $467,000 and $1.4 million for the three and
nine months ended June 30, 1998, compared to $547,000 and $1.1 million for the
three and nine months ended June 30, 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 June
30, 1998, as calculated under such requirements, exceeded the requirements.
Liquidity 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
June 30, 1998, the Bank had cash, deposits in banks, investment securities,
mortgage-backed securities, FHLB stock and loans held for sale totaling $76.9
million, or 28.6% of total assets, compared to $70.0 million at September 30,
1997, or 28.1% of total assets.
The Bank believes it can meet future liquidity needs with 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. In addition, 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-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 June 30, 1998 and September 30,
1997.
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 industrial companies, nearly all assets
and liabilities of the Company are monetary. Interest rates have greater impact
on the Company's performance than do the effects 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.
9
<PAGE>
IMPACT OF RECENT ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities. SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (October 1,
2000 for the Company). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are to be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative id designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to limited use of derivative instruments, the
adoption of SFAS 133 will not have a significant effect on the Company's results
of operations or its financial postioion.
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 its
results of operations, liquidity, capital resources, or uncertainty that would
cause its reported financial condition not to be necessarily indicative of
future operating results or financial condition.
In a related matter, during the nine months ended June 30, 1998, the Bank
entered into a services agreement with a new data processing vendor, Bisys, Inc.
Bisys is a national provider of integrated outsourcing technology solutions. The
Bank completed the conversion to the 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 Special Meeting of Stockholders held on April 8, 1998, the
following matters were submitted to a vote of stockholders with the following
results:
For Against Abstain
--- ------- -------
A. Approval of the NewSouth Bancorp, Inc. 1,799,441 288,641 35,377
1997 Stock Option Plan
B. Approval of the NewSouth Bancorp, Inc. 1,864,795 239,156 19,508
Management Recognition Plan
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
One Form 8-K was filed during the three months ended June 30, 1998
under Item 5: Other Events. On May 11, 1998 the Company reported it
had adopted a program to repurchase up to 5% (145,475 shares) of
its issued and outstanding shares of common stock.
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: August 11, 1998 /s/ William L. Wall
-----------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 1998 /s/ Kristie W. Hawkins
-----------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
12
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