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, 1999.
[ ] 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, 1999:
3,769,482
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1999 (unaudited) and September 30, 1998 1
Consolidated Statements of Operations for the Three
and Six Months Ended March 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Stockholders' Equity for the
Six Months Ended March 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 1999 and 1998 (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>
MARCH 31 SEPTEMBER 30
1999 1998
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 4,109,742 $ 5,243,853
Interest-bearing deposits in financial institutions 18,523,276 11,767,988
Investment securities - available for sale 3,059,410 3,107,545
Mortgage-backed securities - available for sale 44,837,235 27,016,679
Loans receivable, net:
Held for sale 22,283,123 38,406,628
Held for investment 197,009,448 186,592,403
Premises and equipment, net 3,601,148 3,558,836
Deferred income taxes 814,008 569,604
Real estate owned 456,002 411,938
Federal Home Loan Bank of Atlanta stock, at cost 1,460,200 1,363,800
Accrued interest receivable 1,872,862 1,935,490
Prepaid expenses and other assets 1,831,175 1,504,689
------------ ------------
Total assets $299,857,629 $281,479,453
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 51,641,631 $ 42,873,230
Savings 7,232,635 6,397,856
Large denomination certificates of deposit 30,143,033 25,587,798
Other time 134,394,130 129,776,201
------------ ------------
Total deposits 223,411,429 204,635,085
Borrowed money 14,915,210 11,932,919
Accrued interest payable 130,080 62,707
Income taxes payable -- --
Advance payments by borrowers for property taxes and
insurance 201,193 451,860
Other liabilities 8,325,488 7,682,912
------------ ------------
Total liabilities 246,983,400 224,765,483
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 23,183,623 22,091,243
Treasury stock at cost, 518,341 and 218,202 shares -10,459,908 -4,895,754
Unearned ESOP shares, 264,960 and 268,709 -2,649,605 -2,687,093
Deferred stock awards -1,454,862 -2,126,299
Accumulated other comprehensive income, net 318,893 486,246
------------ ------------
Total stockholders' equity 52,874,229 56,713,970
------------ ------------
Total liabilities and stockholders' equity $299,857,629 $281,479,453
============ ============
</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
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,706,156 $ 4,475,135 $ 9,492,983 $ 8,915,137
Interest and dividends on investments and deposits 922,959 855,087 1,783,197 1,654,667
----------- ----------- ----------- -----------
Total interest income 5,629,115 5,330,222 11,276,180 10,569,804
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 2,291,219 2,238,436 4,566,661 4,398,560
Interest on borrowings 158,632 24,036 302,648 67,598
----------- ----------- ----------- -----------
Total interest expense 2,449,851 2,262,472 4,869,309 4,466,158
----------- ----------- ----------- -----------
Net interest income before provision for possible
loan losses 3,179,264 3,067,750 6,406,871 6,103,646
Provision for possible loan losses 0 0 50,000 100,000
----------- ----------- ----------- -----------
Net interest income 3,179,264 3,067,750 6,356,871 6,003,646
----------- ----------- ----------- -----------
Other income:
Loan fees and service charges 322,359 220,480 614,935 453,334
Loan servicing fees 160,145 185,013 377,971 331,191
Gain on sale of real estate, net 16,269 -7,878 38,648 32,062
Gain on sale of mortgage loans and mortgage-
backed securities 180,363 272,580 412,464 402,744
Other income 56,581 61,821 101,653 101,387
----------- ----------- ----------- -----------
Total other income 735,717 732,016 1,545,671 1,320,718
----------- ----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 1,745,118 1,919,184 3,488,286 3,639,793
Federal insurance premiums 31,298 27,585 60,248 54,280
Premises and equipment 112,279 83,654 228,328 163,914
Advertising 32,527 29,999 76,214 60,200
Payroll and other taxes 142,043 100,972 262,547 184,848
Other 490,082 396,687 1,020,028 749,086
----------- ----------- ----------- -----------
Total general and administrative expenses 2,553,347 2,558,081 5,135,651 4,852,121
----------- ----------- ----------- -----------
Income before income taxes 1,361,634 1,241,685 2,766,891 2,472,243
Income taxes 561,441 475,600 1,159,027 949,300
----------- ----------- ----------- -----------
NET INCOME $ 800,193 $ 766,085 $ 1,607,864 $ 1,522,943
----------- ----------- ----------- -----------
Basic earnings per share $ 0.22 $ 0.20(1) $ 0.44 $ 0.39(1)
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.22 $ 0.20(1) $ 0.44 $ 0.39(1)
----------- ----------- ----------- -----------
Dividends per share $ 0.07 $ 0.067(1) $ 0.14 $ 0.13(1)
----------- ----------- ----------- -----------
Average number of common shares outstanding 3,599,901(2) 3,877,576(1)(2) 3,675,038(2) 3,885,422(1)(2)
</TABLE>
(1) Adjusted for three-for-two stock split of August 19, 1998.
(2) Excludes ESOP and MRP benefit plan shares not committed to be released or
vested, and treasury stock.
See Notes to Consolidated Financial Statements.
2
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1999
(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 $56,713,970
Net income 1,607,864 1,607,864
Change in unrealized gains
on securities available-for-sale,
net of taxes -167,353 -167,353
MRP amortization 671,437 671,437
Acquisition of treasury shares -5,564,154 -5,564,154
Dividends ($.07 per share) -515,484 -515,484
Release of ESOP shares 90,461 37,488 127,949
------- ----------- ----------- ------------ ----------- ---------- --------- -----------
Balance March 31, 1999 $43,640 $43,892,448 $23,183,623 $-10,459,908 $-2,649,605 $-1,454,862 $ 318,893 $52,874,229
======= =========== =========== ============ =========== =========== ========= ===========
</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
--------------------------
1999 1998
--------------------------
Operating activities:
<S> <C> <C>
Net Income $ 1,607,864 $ 1,522,943
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 50,000 100,000
Depreciation 139,075 77,308
ESOP compensation 127,949 41,513
MRP compensation 671,437 --
Accretion of discounts on securities 186 186
Gain on disposal of real estate acquired in settlement of loans -36,688 -33,831
Gain on sale of loans and mortgage-backed securities -412,464 -402,744
Originations of loans held for sale, net -44,053,003 -31,740,998
Proceeds from sale of loans held for sale 36,671,184 21,847,266
Other operating activities -89,450 1,026,337
----------- -----------
Net cash used in operating activities -5,323,910 -7,562,020
Investing activities:
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 6,018,298 6,321,384
Loan originations, net of principal repayments of loans
held for investment -11,113,034 -12,771,793
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 640,573 217,654
Purchases FHLB Stock -96,400 -76,300
Purchases of premises and equipment -183,347 -53,015
----------- -----------
Net cash used in investing activities -4,733,910 -6,362,070
Financing activities:
Net increase in deposit accounts 18,776,344 25,648,351
Proceeds from FHLB borrowings 59,000,000 8,500,000
Repayments of FHLB borrowings -55,500,000 -19,500,000
Acquisition of MRP shares -- -1,224,768
Treasury stock purchased -5,564,154 --
Cash dividends paid -515,484 -516,379
Net change in repurchase agreements -517,709 508,023
----------- -----------
Net cash provided by financing activities 15,678,997 13,415,227
----------- -----------
Increase (decrease) in cash and cash equivalents 5,621,177 -508,863
Cash and cash equivalents, beginning of period 17,011,841 15,772,251
----------- -----------
Cash and cash equivalents, end of period $22,633,018 $15,263,388
=========== ===========
Supplemental disclosures:
Real estate acquired in settlement of loans $ 645,989 $ 190,698
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 Bank has
determined that it has one significant operating segment, the providing of
general commercial banking services to its markets located in eastern North
Carolina.
The common stock of the Company is traded on the Nasdaq Amex 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 and six month periods ended March 31, 1999 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 and six month periods ended March
31, 1999 is based on weighted average shares of 3,599,901 and 3,675,038,
respectively, of common stock outstanding, excluding ESOP and deferred stock
award 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 plan shares were
not included in the diluted earnings per share calculation for the three and six
month periods ended March 31, 1999, as their effect would have been
anti-dilutive.
NOTE 4. DIVIDENDS DECLARED
On March 18, 1999, the Board of Directors declared a cash dividend of $0.07 per
share to stockholders of record as of April 2, 1999 and payable on April 22,
1999. This dividend payment represents a payout ratio of 31.8% of the earnings
for the quarter ended March 31, 1999, and is the Company's eighth 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
and six month periods ended March 31, 1999 and 1998 is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net income $ 800,193 $ 766,085 $ 1,607,864 $ 1,522,943
Reclassification of gains
recognized in net income (18,163) (85,608) (18,163) (91,147)
Gains unrealized, net of
income taxes (163,684) 4,018 (149,190) 266,502
----------- ----------- ----------- -----------
Other comprehensive income (181,847) (81,590) (167,353) 175,355
----------- ----------- ----------- -----------
Comprehensive income $ 618,346 $ 684,495 $ 1,440,511 $ 1,347,588
=========== =========== =========== ===========
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 MARCH 31, 1999 AND SEPTEMBER 30, 1998
Total assets were $299.9 million at March 31, 1999 compared to $281.5 million at
September 30, 1998. Total earning assets increased by $18.6 million to $286.9
million at March 31, 1999 from $268.3 million at September 30, 1998.
Interest-bearing deposits in financial institutions were $18.5 million at March
31, 1999 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 $44.8 million at March 31, 1999 compared to $27.0 million at September 30,
1998. Consequently, loans held for sale declined to $22.3 million at March 31,
1999 from $38.4 million at September 30, 1998. The Bank continued to experience
favorable consumer and commercial loan demand as loans held for investment
increased to $197.0 million at March 31, 1999 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 $3.3 million at March 31, 1999 and $3.4
million at September 30, 1998, or 1.5% of loans outstanding at the end of each
period. Earning assets amounted to 95.7% of total assets at March 31, 1999,
compared to 95.3% at September 30, 1998.
Total interest-bearing liabilities increased to $238.3 million at March 31, 1999
from $216.6 million at September 30, 1998. Total deposits increased by $18.8
million, or 9.2%, to $223.4 million at March 31, 1999 from $204.6 million at
September 30, 1998. Borrowings increased to $14.9 million at March 31, 1999 from
$11.9 million, supporting the growth in earning assets and banking operations
during the period.
Stockholders' equity was $52.9 million at March 31, 1999, compared to $56.7
million at September 30, 1998. See "Consolidated Statements of Stockholders'
Equity". At March 31, 1999, the Company's equity to assets ratio was 17.6%
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 $42.9 million at March 31, 1999, substantially in excess of all regulatory
capital requirements. See "Liquidity and Capital Resources" below.
During the six months ended March 31, 1999, the Company purchased 300,139 shares
of it's common stock through open market and private purchases, totaling
approximately $5.6 million, pursuant to stock repurchase plans adopted by the
board of directors. These shares are being held as treasury stock, at cost. At
March 31, 1999, treasury shares were 518,341 totaling $10.5 million, compared to
218,202 shares totaling $4.9 million at September 30, 1998.
7
<PAGE>
On March 18, 1999 the board of directors of the Company declared a quarterly
cash dividend of $0.07 per share, payable April 22, 1999 to stockholders of
record of April 2, 1999. This dividend payment is the Company's eighth
consecutive quarterly cash dividend and represents a payout ratio of 31.8% of
the consolidated earnings for the three months ended March 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1999 AND 1998
GENERAL. Net income for the three and six months ended March 31, 1999 was
$800,000 and $1.6 million, compared to $766,000 and $1.5 million for the three
and six months ended March 31, 1998. Earnings per share for the three and six
months ended March 31, 1999 were $0.22 and $0.44 per share, respectively,
compared to $0.20 and $0.39 per share for the three and six months ended March
31, 1998 (adjusted for an August 19, 1998 three-for-two stock split).
INTEREST INCOME. Interest income increased to $5.6 million and $11.3 million for
the three and six months ended March 31, 1999, from $5.3 million and $10.6
million for the three and six months ended March 31, 1998. This increase is
primarily attributable to the growth of interest-earning assets. Average
interest-earning assets were $281.2 million and $277.5 million, respectively for
the three and six months ended March 31, 1999, compared to $246.8 million and
$243.3 million for the three and six months ended March 31, 1998. The yield on
average interest-earning assets was 8.0% and 8.2% for the three and six months
ended March 31, 1999, compared to 8.6% and 8.7% for the three and six months
ended March 31, 1998.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $2.5
million and $4.9 million for the three and six months ended March 31, 1999, from
$2.3 million and $4.5 million for the three and six months ended March 31, 1998.
Average interest-bearing liabilities increased to $231.0 million and $225.6
million for the three and six months ended March 31, 1999, from $194.9 million
and $191.7 million for the three and six months ended March 31, 1998. The
effective cost of average interest-bearing liabilities decreased to 4.2% and
4.3%, respectively, for the three and six months ended March 31, 1998 from 4.6%
and 4.7% for the three and six months ended March 31, 1998. The Bank has
increased its checking account base by 24.3%, to $51.6 million at March 31, 1998
from $41.5 million at March 31, 1998, reflecting its efforts of attracting lower
costing core deposits.
NET INTEREST INCOME. Net interest income increased to $3.2 million and $6.4
million for the three and six months ended March 31, 1999, from $3.1 million and
$6.1 million for the three and six months ended March 31, 1998. 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) 3.8%, respectively, for both the three and six months ended March
31, 1999, compared to 4.0%, respectively, for both the three and six months
ended March 31, 1998. The Bank's net yield on interest-earning assets (net
interest income divided by average interest-earning assets) was 4.5% and 4.6%,
respectively, for the three and six months ended March 31, 1999, compared to
5.0%, respectively, for both the three and six months ended March 31, 1998.
8
<PAGE>
PROVISION FOR LOAN LOSSES. During the three months ended March 31, 1999 and
1998, the Bank recorded no provisions for loan losses. During the six months
ended March 31, 1999 and 1998, the Bank recorded provisions for loan losses of
$50,000 and $100,000, respectively. 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 $3.3 million allowance for loan losses maintained at
March 31, 1999 represents 1.5% of total loans outstanding at the end of the
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 $736,000 and $1.5 million
for the three and six months ended March 31, 1999, from $732,000 and $1.3
million for the three and six months ended March 31, 1998. Noninterest income
consisting 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, has grown proportionately with the growth in eaning
assets and deposits from period to period.
NONINTEREST EXPENSE. Noninterest expenses were $2.6 million and $5.1 million for
the three and six months ended March 31, 1999, compared to $2.6 million and $4.9
million for the three and six months ended March 31, 1998. The largest single
component of these expenses, compensation and fringe benefits, was $1.7 million
and $3.5 million for the three and six months ended March 31, 1999, compared to
$1.9 million and $3.6 million for the three and six months ended March 31, 1998.
During the three and six months ended March 31, 1999, the Bank recorded $336,000
and $671,000 of benefits expense under a deferred stock awards Management
Recognition Plan, compared to $673,000 and $1.2 million for the three and six
months ended March 31, 1998. During the three and six months ended March 31,
1999, the Bank recorded $189,000 and $478,000 in benefits expense for the
Employee Stock Ownership Plan, compared to $198,000 and $407,000 for the three
and six months ended March 31, 1998. Other noninterest expenses including
premises and equipment, advertising, and office supplies has also grown
proportionately with the growth in earning assets and deposits from period to
period. On March 29, 1999, the Company completed the reincorporation of its
state of incorporation from Delaware to Virginia and is expected to reduce its
annual franchise tax expense by approximately $40,000 per year in the future.
INCOME TAXES. Income tax expense was $561,000 and $1.2 million for the three and
six months ended March 31, 1999, compared to $476,000 and $949,000 for the three
and six months ended March 31, 1998. The changes in the amounts of income tax
provisions reflects the changes in pretax income and the estimated income tax
rates in effect during the respective periods.
9
<PAGE>
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, 1999, 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, 1999, the Bank had cash, deposits in banks, investment
securities, mortgage-backed securities, FHLB stock and loans held for sale
totaling $94.3 million, or 31.4% 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 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 March 31, 1999 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 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.
IMPACT OF RECENT ACCOUNTING STANDARDS
The Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective with the fiscal quarter beginning July 1, 1999.
SFAS 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 133 is not expected
to have a material impact on the Company's financial statements.
10
<PAGE>
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 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 were previously 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 134 is not expected to have a material impact on the
Company's financial statements.
YEAR 2000 COMPLIANCE
Much information has been published about the global computer crash that may
occur in the year 2000 ("Y2K"). Many computer programs that can only read two
digits of the year entered 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 evaluate 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,
contingency plan and cash contingency plan have been developed to insure that
problems and disruptions related to Y2K are minimized.
All of the material data processing functions of the Bank that could be impacted
by Y2K are provided by a national third party service bureau, Bisys, Inc. Bisys
has dedicated significant resources in assuring its systems are Y2K compliant
and developing a comprehensive testing and verification program. The remediated
version of the Bisys client test facility has undergone extensive beta testing
and is providing the Bank with end-to-end testing capabilities of all its
hardware, software and related interfaces. On the Bisys host system, we have
successfully completed testing the century date rollover from December 31, 1999
to January 3, 2000 for all applications. All Bank user departments have
successfully completed the first phase of an extensive Y2K testing program and
are currently involved in the second phase of testing to assure validation of
the century date changes. Additional testing is also taking place with all other
external mission critical information systems and relationships with which the
Bank exchanges data or information. The Bank believes this readiness will
increase the likelihood of uninterrupted operations as a result of Y2K.
In addressing Y2K, the Bank has used its current internal staff with limited
reliance on outside resources. Bisys has provided remediated software at no
expense to the Bank and no major system is expected to be replaced in the near
future. The Bank plans to increase its customer awareness efforts, implement its
cash contingency plan and continue the second phase of testing its hardware,
software and related interfaces. As a result, estimated Y2K expenses of $50,000
and $70,000 were accrued during the three and six months ended March 31, 1999,
respectively. The Bank believes the cost of addressing the Y2K issue going
forward 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 I. 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 18, 1999, the
following matters were submitted to a vote of stockholders with the following
results:
A. The election of directors:
Name For Withheld
---- --- --------
Charles E. Parker, Jr. 3,572,057 37,555
Marshall T. Singleton 3,599,288 10,324
B. Plan of Reorganization to change state of incorporation from Delaware
to Virginia:
For Against Abstain Non-Voting
--- ------- ------- ----------
2,831,351 39,055 28,041 711,165
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
A Form 8-K was filed on February 5, 1999 under Item 5: Other
Events, reporting the Company had completed a previously announced 5%
stock repurchase program and had adopted a program to repurchase an
additional 5% (196,928 shares) of its issued and outstanding shares of
common stock.
<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 10, 1999 /s/ William L. Wall
-------------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1999 /s/ Kristie W. Hawkins
--------------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
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<PERIOD-START> OCT-01-1998
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