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 December 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 February 5, 1999:
3,938,550
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1998 (unaudited) and September 30, 1998 1
Consolidated Statements of Operations for the Three
Months Ended December 31, 1998 and 1997 (unaudited) 2
Consolidated Statements of Stockholders' Equity for
the Three Months Ended December 31, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Three
Months Ended December 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 7
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1998 1998
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 2,872,184 $ 5,243,853
Interest-bearing deposits in financial institutions 10,132,219 11,767,988
Investment securities - available for sale 3,081,070 3,107,545
Mortgage-backed securities - available for sale 47,298,687 27,016,679
Loans receivable, net:
Held for sale 24,988,254 38,406,628
Held for investment 190,227,432 186,592,403
Premises and equipment, net 3,622,902 3,558,836
Deferred income taxes 692,777 569,604
Real estate owned 554,905 411,938
Federal Home Loan Bank of Atlanta stock, at cost 1,363,800 1,363,800
Accrued interest receivable 1,839,710 1,935,490
Prepaid expenses and other assets 1,211,004 1,504,689
------------- -------------
Total assets $ 287,884,944 $ 281,479,453
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 50,470,309 $ 42,873,230
Savings 6,925,018 6,397,856
Large denomination certificates of deposit 26,530,526 25,587,798
Other time 124,447,083 129,776,201
------------- -------------
Total deposits 208,372,936 204,635,085
Borrowed money 14,723,388 11,932,919
Accrued interest payable 97,591 62,707
Income taxes payable 143,752 --
Advance payments by borrowers for property taxes and
insurance 232,944 451,860
Other liabilities 8,484,222 7,682,912
------------- -------------
Total liabilities 232,054,833 224,765,483
Common stock, $.01 par value, 8,000,000 shares authorized,
4,364,044 shares issued and outstanding 43,640 43,640
Additional paid in capital 43,892,448 43,801,987
Retained earnings, substantially restricted 22,634,082 22,091,243
Treasury stock at cost, 313,900 and 218,202 shares (6,781,935) (4,895,754)
Unearned ESOP shares, 266,828 and 268,709 (2,668,283) (2,687,093)
Deferred stock awards (1,790,581) (2,126,299)
Accumulated other comprehensive income, net 500,740 486,246
------------- -------------
Total stockholders' equity 55,830,111 56,713,970
------------- -------------
Total liabilities and stockholders' equity $ 287,884,944 $ 281,479,453
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31
------------------------
1998 1997
------------------------
Interest income:
Interest and fees on loans $4,786,826 $4,440,002
Interest and dividends on investments and deposits 860,238 799,581
---------- ----------
Total interest income 5,647,064 5,239,583
---------- ----------
Interest expense:
Interest on deposits 2,275,442 2,160,124
Interest on borrowings 144,016 43,562
---------- ----------
Total interest expense 2,419,458 2,203,686
---------- ----------
Net interest income before provision for possible
loan losses 3,227,606 3,035,897
Provision for possible loan losses 50,000 100,000
---------- ----------
Net interest income 3,177,606 2,935,897
---------- ----------
Other income:
Loan fees and service charges 292,575 232,854
Loan servicing fees 217,826 146,178
Gain on sale of real estate, net 22,379 39,940
Gain on sale of mortgage loans and mortgage-
backed securities 232,101 130,164
Other income 45,072 39,567
---------- ----------
Total other income 809,953 588,703
---------- ----------
General and administrative expenses:
Compensation and fringe benefits 1,743,168 1,720,609
Federal insurance premiums 28,949 26,695
Premises and equipment 116,050 80,260
Advertising 43,719 30,202
Payroll and other taxes 97,730 83,877
Other 552,686 352,399
---------- ----------
Total general and administrative expenses 2,582,302 2,294,042
---------- ----------
Income before income taxes 1,405,257 1,230,558
Income taxes 597,586 473,700
---------- ----------
Net income $ 807,671 $ 756,858
========== ==========
Basic earnings per share $ 0.22 $ 0.19*
---------- ----------
Diluted earnings per share $ 0.22 $ 0.19*
---------- ----------
Dividends per share $ 0.07 $ 0.066*
---------- ----------
Average number of common shares outstanding 3,746,652 3,893,141*
* Adjusted for three-for-two stock split of August 19, 1998.
See Notes to Consolidated Financial Statements.
2
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Additional Earnings Unearned Deferred Comprehensive
Common Paid-in Substantially Treasury ESOP Stock Income,
Stock Capital Restricted Stock Shares Awards Net Total
------- ----------- ----------- ----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1998 $43,640 $43,801,987 $22,091,243 $(4,895,754) $(2,687,093) $(2,126,299) $486,246 $56,713,970
Net income 807,671 807,671
Change in unrealized gains on
securities available-for-sale,
net of taxes 14,494 14,494
MRP amortization 335,718 335,718
Acquisition of treasury shares (1,886,181) (1,886,181)
Dividends ($.07 per share) (264,832) (264,832)
Release of ESOP shares 90,461 18,810 109,271
------- ----------- ----------- ----------- ----------- ----------- -------- -----------
Balance December 31, 1998 $43,640 $43,892,448 $22,634,082 $(6,781,935) $(2,668,283) $(1,790,581) $500,740 $55,830,111
------- ----------- ----------- ----------- ----------- ----------- -------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31
-----------------------------
1998 1997
-----------------------------
Operating activities:
<S> <C> <C>
Net Income $ 807,671 756,858
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 50,000 100,000
Depreciation 67,031 39,207
ESOP compensation 109,271 20,793
MRP compensation 335,718
Accretion of discounts on securities 93 93
Gain on disposal of real estate acquired in settlement of loans (22,379) (40,840)
Gain on sale of loans and mortgage-backed securities (232,102) (130,164)
Originations of loans held for sale, net (51,539,886) (13,550,873)
Proceeds from sale of loans held for sale 41,120,140 5,544,111
Other operating activities 1,060,834 470,814
-----------------------------
Net cash used in operating activities (8,243,609) (6,790,001)
Investing activities:
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 3,838,356 2,291,043
Loan originations, net of principal repayments of loans
held for investment (4,168,494) (4,268,577)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 322,099 165,692
Purchases of premises and equipment (133,097) (29,025)
-----------------------------
Net cash provided (used) in investing activities (141,136) (1,840,867)
Financing activities:
Net increase in deposit accounts 3,737,851 8,885,192
Proceeds from FHLB borrowings 32,000,000 4,500,000
Repayments of FHLB borrowings (28,500,000) (14,500,000)
Acquisition of MRP shares (1,224,768)
Treasury stock purchased (1,886,181)
Cash dividends paid (264,832) (257,720)
Net change in repurchase agreements (709,531) 286,023
-----------------------------
Net cash provided by financing activities 4,377,307 (2,311,273)
-----------------------------
Increase (decrease) in cash and cash equivalents (4,007,438) (10,942,141)
Cash and cash equivalents, beginning of period 17,011,841 15,772,251
-----------------------------
Cash and cash equivalents, end of period $ 13,004,403 4,830,110
=============================
Supplemental disclosures:
Real estate acquired in settlement of loans $ 483,465 59,839
Exchange of loans for mortgage-backed securities $ 24,052,059 17,958,559
</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 formed for the purpose of issuing
common stock and owning 100% of the stock of NewSouth Bank (the "Bank") and
operating through the Bank a commercial banking business. 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, 1998, 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 month period ended December 31, 1998 are not necessarily indicative of the
results of operations that may be expected for the year ended September 30,
1999.
NOTE 3. EARNINGS PER SHARE.
The Company's earnings per share for the three month periods ended December 31,
1998 and 1997 is based on weighted average shares of 3,746,652 and 3,893,141,
respectively, of common stock outstanding, excluding ESOP and deferred stock
awards plan shares not committed to be released or vested, 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 and deferred stock awards shares were not
included in the diluted earnings per share calculation for the three month
period ended December 31, 1998, as their effect would have been anti-dilutive.
NOTE 4. DIVIDENDS DECLARED.
On December 17, 1998, the Board of Directors declared a cash dividend of $0.07
per share to stockholders of record as of January 4, 1999 and payable on January
22, 1999. This dividend payment represents a payout ratio of 31.8% of the
earnings for the quarter ended December 31, 1998, and is the Company's seventh
consecutive quarterly cash dividend.
5
<PAGE>
NOTE 5. COMPREHENSIVE INCOME.
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". As required by SFAS No.
130, prior year information has been modified to conform with the new
presentation.
Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only component of other comprehensive
income relates to unrealized gains on available for sale securities.
Information concerning the Company's other comprehensive income for the three
month periods ended December 31, 1998 and 1997 is as follows:
1998 1997
----------- -----------
Net income $ 807,671 $ 756,858
Reclassification of gains recognized in net income (18,163) (5,539)
Gains unrealized, net of income taxes 32,657 262,684
----------- -----------
Other comprehensive income 14,494 256,945
----------- -----------
Comprehensive income $ 822,165 $ 1,013,803
=========== ===========
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has engaged in no 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 DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
Total assets were $287.9 million at December 31, 1998 compared to $281.5 million
at September 30, 1998. Total earning assets increased by $8.8 million to $277.1
million at December 31, 1998 from $268.3 million at September 30, 1998.
Interest-bearing deposits in financial institutions was $10.1 million at
December 31, 1998 compared to $11.8 million at September 30, 1998. These funds
are primarily used to support the liquidity management activities and daily
operations of the Bank . Since September 30, 1998, the Bank has implemented
various investment strategies 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 $47.3 million at December 31, 1998, compared to $27.0 million at September
30, 1998. Consequently, loans held for sale decreased to $25.0 million at
December 31, 1998 from $38.4 million at September 30, 1998. The Bank continued
to experience consumer and commercial loan growth, as loans held for investment
increased to $190.2 million at December 31, 1998 from $186.6 million at
September 30, 1998. To support the risk associated with these types of loans,
the Bank had reserves for potential loan losses of $3.4 million at both December
31, 1998 and September 30, 1998. The ratio of reserves for loan losses to loans
outstanding, net of loans in process and deferred loan fees, was 1.6% at
December 31, 1998 compared to 1.5% at September 30, 1998. Earning assets
amounted to 96.3% of total assets at December 31, 1998, compared to 95.3% at
September 30, 1998.
Total interest-bearing liabilities increased to $223.1 million at December 31,
1998 from $216.6 million at September 30, 1998. Total deposits increased by $3.8
million to $208.4 million at December 31, 1998 from $204.6 million at September
30, 1998. Borrowings increased to $14.7 million at December 31, 1998 from $11.9
million at September 30, 1998, supporting the growth in earning assets and
banking operations during the period.
Stockholders' equity was $55.8 million at December 31, 1998, compared to $56.7
million at September 30, 1998. See "Consolidated Statements of Stockholders'
Equity". At December 31, 1998, the stockholders' equity to total assets ratio
was 19.4%, compared to 20.1% at September 30, 1998. 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 $42.5 million at December 31, 1998, substantially in excess of all
regulatory capital requirements. See "Liquidity and Capital Resources" below.
Pursuant to a stock repurchase plan adopted by the Company, during the three
months ended December 31, 1998 the Company acquired 95,698 shares of its common
stock through both open market and private purchases, totaling $1.9 million, and
are being held as treasury stock at cost. At December 31, 1998 a total of
313,900 shares totaling $6.8 million are being held as treasury stock, compared
to 218,202 shares totaling $4.9 million at September 30, 1998.
7
<PAGE>
On December 18, 1998 the Board of Directors of the Company declared a quarterly
cash dividend of $0.07 per share, payable January 22, 1999 to stockholders of
record of January 4, 1999. This dividend payment is the Company's seventh
consecutive quarterly cash dividend and represents a payout ratio of 31.8% of
consolidated earnings for the three months ended December 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE THREE ENDED DECEMBER 31, 1998 AND 1997
GENERAL. Net income for the three months ended December 31, 1998 was $808,000,
compared to $757,000 for the three months ended December 31, 1997. Comparative
earnings per share for the three months ended December 31, 1998 and 1997 are
$0.22 and $0.19 per share, respectively. Earnings per share for the three months
ended December 31, 1997 have been adjusted to reflect a three-for-two stock
split on August 19, 1998.
INTEREST INCOME. Interest income increased to $5.6 million for the three months
ended December 31, 1998, from $5.2 million for the three months ended December
31, 1997. This increase is primarily attributable to the growth of
interest-earning assets. Average interest-earning assets increased to $274.0
million for the three months ended December 31, 1998, from $238.6 million for
the three months ended December 31, 1997. The yield on average interest-earning
assets was 8.2% for the three months ended December 31, 1998, compared to 8.8%
for the three months ended December 31, 1997.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $2.4
million for the three months ended December 31, 1998 from $2.2 million for the
three months ended December 31, 1997. Average interest-bearing liabilities
increased to $219.6 million for the three months ended December 31, 1998 from
$187.3 million for the three months ended December 31, 1997. The effective cost
of average interest-bearing liabilities decreased to 4.4% for the three months
ended December 31, 1998 from 4.7% for the three months ended December 31, 1997.
The Bank has increased its checking account base to $50.5 million at December
31, 1998 from $39.6 million at December 31, 1997, reflecting its efforts of
attracting lower costing core deposits.
NET INTEREST INCOME. Net interest income increased to $3.2 million for the three
months ended December 31, 1998 from $3.0 million for the three months ended
December 31, 1997. The Bank's net yield on interest-earning assets (net interest
income divided by average interest-earning assets) was 4.7% for the three months
ended December 31, 1998, compared to 5.1% for the three months ended December
31, 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) was 3.8% for the three months ended December 31,
1998, compared to 4.1% for the three months ended December 31, 1997.
PROVISION FOR LOAN LOSSES. During the three months ended December 31, 1998, the
Bank recorded provisions for loan losses of $50,000, compared to $100,000 for
the three months ended December 31, 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 believes the current level of its
8
<PAGE>
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 $810,000 for the three
months ended December 31, 1998 from $589,000 for the three months ended December
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
months ended December 31, 1998, the Bank recorded gains from sales of loans and
mortgage-backed securities of $232,000, compared to $130,000 for the three
months ended December 31, 1997. The volume of loans and mortgage-backed
securities sold during the 1998 period was $42.0 million, compared to $5.5
million for the 1997 period. Fees and service charges earned on loans and
deposits and other miscellaneous income have grown proportionately with the
growth in earning assets and deposits from period to period.
NONINTEREST EXPENSE. Noninterest expenses were $2.6 million for the three months
ended December 31, 1998, compared to $2.3 million for the three months ended
December 31, 1997. The largest single component of these expenses, compensation
and fringe benefits, was $1.7 million for both the three months ended December
31, 1998 and 1997. During the three months ended December 31, 1998, the Bank
recorded $336,000 of benefits expense for the Management Recognition Plan
("MRP"), compared to $482,000 for the three months ended December 31, 1997.
During the three months ended December 31, 1998, the Bank recorded $289,000 in
benefits expense for the Employee Stock Ownership Plan ("ESOP"), compared to
$208,000 for the three months ended December 31, 1997. Other noninterest
expenses including premises and equipment, advertising, and office supplies have
also grown proportionately with the growth in earning assets and deposits from
period to period.
INCOME TAXES. Income tax expense was $598,000 for the three months ended
December 31, 1998, compared to $474,000 for the three months ended December 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
December 31, 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 December 31, 1998, the Bank had cash, deposits in banks,
investment securities, mortgage-backed securities, FHLB stock and loans held for
sale totaling $89.7 million, or 31.1% of total assets, compared to $86.9 million
at September 30, 1998, or 30.9% 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
9
<PAGE>
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 December 31, 1998 and September
30, 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 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.
IMPACT OF RECENT ACCOUNTING STANDARDS
The Company will adopt the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective with the fiscal
quarter beginning July 1, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that derivatives be recognized as either assets or liabilities in the
statement of financial position and be measured at fair value. The accounting
for changes in fair value of a derivative depends on the intended use of the
derivative and whether or not the derivative is designated as a hedging
instrument. SFAS No. 133 is not expected to have a material impact on the
Company's financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", was issued in October 1998. SFAS No. 134 amends existing
classification and accounting treatment of mortgage-backed securities retained
after mortgage loans held for sale are securitized for entities engaged in
mortgage banking activities. These securities previously were classified and
accounted for as trading and now may be classified as held-to-maturity or
available-for-sale. This statement is effective for the first fiscal quarter
beginning after December 15, 1998. SFAS No. 134 is not expected to have a
material impact on the Company's financial statements.
10
<PAGE>
YEAR 2000 COMPLIANCE
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000 ("Y2K"). Many computer programs that can
only distinguish two digits of the year entered (a common practice in earlier
years) are expected to read entries for the year 2000 as the year 1900 and
compute payment, interest or delinquency based on the wrong date or are expected
to be unable to compute payment, interest or delinquency. Rapid and accurate
data processing is essential to the operations of the Bank, most other financial
institutions and many other companies.
In compliance with regulatory guidelines, the Bank has formed a Y2K committee to
review the effects the century date change may have on all current systems and
to assess the potential risks associated with the Y2K issue. A formal Y2K
strategic plan and contingency plan have been developed to address the necessary
steps to insure that problems and disruptions related to the Y2K issue are
minimized. An inventory of all systems, both computer and non-computer related,
was completed in the process. Potential weaknesses were then documented and
prioritized as to their effect on critical business functions. All of the
material data processing functions of the Bank that could be impacted by the Y2K
issue are provided by a national third party service bureau, Bisys, Inc. Bisys
has dedicated tremendous resources in assuring its systems are Y2K compliant and
in developing a comprehensive testing and verification program. The Bisys client
test facility is providing the Bank with end-to-end testing capabilities of all
its hardware, software and related interfaces.
The recently released remediated version of the Bisys client test facility has
undergone extensive beta testing. Bisys has advised the Bank that its testing
through their client test facility is expected to reveal any potential problems
well in advance of the impending year 2000 deadline. All Bank user departments
are currently involved in an extensive Y2K testing program to assure validation
of the century date changes. On the Bisys host system, we have successfully
completed our testing of the century date rollover from December 31, 1999 to
January 3, 2000 for all applications. Additional testing is also taking place
with all other external mission critical information systems and relationships
with which the Bank exchanges data or information. It is believed that this
readiness will increase the likelihood of uninterrupted operations of the Bank.
In addressing the Y2K issue, the Bank has used its current internal staffing
with little reliance on outside resources. Bisys, the Bank's major vendor, has
provided remediated software at no expense to the Bank. No major system is
expected to be replaced in coming years. The Bank plans to increase its customer
awareness efforts and to implement a second phase of testing its hardware,
software and related interfaces. As a result, estimated Y2K related expenses of
$20,000 were accrued during the three months ended December 31, 1998. The Bank
believes the cost of addressing the Y2K 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.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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
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
None
12
<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: February 9, 1999 /s/ William L. Wall
-----------------------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: February 9, 1999 /s/ Kristie W. Hawkins
----------------------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
13
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