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, 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)
VIRGINIA 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 July 25, 1999: 3,720,501
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1999 (unaudited) and September 30, 1998 1
Consolidated Statements of Operations for the Three
and Nine Months Ended June 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Stockholders' Equity for
the Nine Months Ended June 30, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 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>
JUNE 30 SEPTEMBER 30
1999 1998
------------- -------------
Assets (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 4,639,576 $ 5,243,853
Interest-bearing deposits in financial institutions 4,340,562 11,767,988
Investment securities - available for sale 3,039,157 3,107,545
Mortgage-backed securities - available for sale 53,085,336 27,016,679
Loans receivable, net:
Held for sale 16,225,604 38,406,628
Held for investment 200,197,817 186,592,403
Premises and equipment, net 3,617,005 3,558,836
Deferred income taxes 1,366,021 569,604
Real estate owned 594,748 411,938
Federal Home Loan Bank of Atlanta stock, at cost 1,460,200 1,363,800
Accrued interest receivable 2,033,057 1,935,490
Prepaid expenses and other assets 1,746,885 1,504,689
------------- -------------
Total assets $ 292,345,968 $ 281,479,453
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 52,763,027 $ 42,873,230
Savings 7,014,390 6,397,856
Large denomination certificates of deposit 28,600,341 25,587,798
Other time 130,199,736 129,776,201
------------- -------------
Total deposits 218,577,494 204,635,085
Borrowed money 15,321,296 11,932,919
Accrued interest payable 150,679 62,707
Advance payments by borrowers for property taxes and
insurance 229,387 451,860
Other liabilities 7,379,597 7,682,912
------------- -------------
Total liabilities 241,658,453 224,765,483
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 23,726,118 22,091,243
Treasury stock at cost, 643,543 and 218,202 shares (12,715,376) (4,895,754)
Unearned ESOP shares, 263,105 and 268,709 (2,631,058) (2,687,093)
Deferred stock awards (1,119,130) (2,126,299)
Accumulated other comprehensive income, net (509,127) 486,246
------------- -------------
Total stockholders' equity 50,687,515 56,713,970
------------- -------------
Total liabilities and stockholders' equity $ 292,345,968 $ 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 NINE MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1999 1998 1999 1998
----------------------------- -----------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,966,334 $ 4,868,752 $14,459,317 $13,783,889
Interest and dividends on investments and deposits 969,045 733,786 2,752,242 2,388,412
----------- ----------- ----------- -----------
Total interest income 5,935,379 5,602,538 17,211,559 16,172,301
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 2,316,870 2,337,281 6,883,531 6,735,842
Interest on borrowings 182,916 19,714 485,565 87,312
----------- ----------- ----------- -----------
Total interest expense 2,499,786 2,356,995 7,369,096 6,823,154
----------- ----------- ----------- -----------
Net interest income before provision for possible
loan losses 3,435,593 3,245,543 9,842,463 9,349,147
Provision for possible loan losses 0 110,000 50,000 210,000
----------- ----------- ----------- -----------
Net interest income 3,435,593 3,135,543 9,792,463 9,139,147
----------- ----------- ----------- -----------
Other income:
Loan fees and service charges 314,786 267,537 929,721 720,871
Loan servicing fees 168,841 154,721 546,812 485,912
Gain on sale of real estate, net 2,772 -2,972 41,420 29,090
Gain on sale of mortgage loans and mortgage-
backed securities 120,718 207,300 533,182 610,044
Other income 77,928 51,782 179,580 153,170
----------- ----------- ----------- -----------
Total other income 685,045 678,368 2,230,715 1,999,087
----------- ----------- ----------- -----------
General and administrative expenses:
Compensation and fringe benefits 1,698,507 1,822,310 5,186,793 5,462,103
Federal insurance premiums 30,734 28,605 90,981 82,885
Premises and equipment 121,156 84,477 349,484 248,391
Advertising 27,642 35,365 103,855 95,565
Payroll and other taxes 157,330 135,536 419,877 320,384
Other 539,138 457,503 1,559,166 1,220,389
----------- ----------- ----------- -----------
Total general and administrative expenses 2,574,507 2,563,796 7,710,156 7,429,717
----------- ----------- ----------- -----------
Income before income taxes 1,546,131 1,250,115 4,313,022 3,708,517
Income taxes 761,618 467,000 1,920,645 1,402,500
----------- ----------- ----------- -----------
NET INCOME $ 784,513 $ 783,115 $ 2,392,377 $ 2,306,017
----------- ----------- ----------- -----------
Basic earnings per share $ 0.23 $ 0.20(1) $ 0.67 $ 0.59(1)
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.23 $ 0.20(1) $ 0.67 $ 0.59(1)
----------- ----------- ----------- -----------
Dividends per share $ 0.07 $ 0.067(1) $ 0.21 $ 0.20(1)
----------- ----------- ----------- -----------
Average number of common shares outstanding 3,439,285(2) 3,912,119(1)(2) 3,595,206(2) 3,894,464(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
NINE MONTHS ENDED JUNE 30, 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 $56,713,970
Net income 2,392,377 2,392,377
Change in unrealized gains
on securities available-
for-sale, net of taxes (995,373) (995,373)
MRP amortization 1,007,169 1,007,169
Acquisition of treasury shares (7,819,622) (7,819,622)
Dividends ($.21 per share) (757,502) (757,502)
Release of ESOP shares 90,461 56,035 146,496
------- ----------- ------------ ------------ ----------- ----------- ---------- -----------
Balance June 30, 1999 $43,640 $43,892,448 $ 23,726,118 $(12,715,376) $(2,631,058) $(1,119,130) $(509,127) $50,687,515
------- ----------- ------------ ------------ ----------- ----------- ---------- -----------
</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
-----------------------------
1999 1998
-----------------------------
Operating activities:
<S> <C> <C>
Net Income $ 2,392,377 $ 2,306,017
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 50,000 210,000
Depreciation 212,617 116,099
ESOP compensation 146,496 626,047
MRP compensation 1,007,169 1,343,346
Accretion of discounts on securities 279 279
Gain on disposal of real estate acquired in settlement of loans (41,420) (29,090)
Gain on sale of loans and mortgage-backed securities (533,182) (610,044)
Originations of loans held for sale, net (54,221,698) (50,747,939)
Proceeds from sale of loans held for sale 36,671,185 25,701,112
Other operating activities (908,058) (1,340,591)
------------ ------------
Net cash used in operating activities (15,224,235) (22,424,764)
Investing activities:
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 12,604,820 14,734,602
Loan originations, net of principal repayments of loans
held for investment (14,422,131) (12,277,376)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 625,327 361,838
Purchases FHLB Stock (96,400) (76,300)
Purchases of premises and equipment (272,746) (79,950)
------------ ------------
Net cash provided (used) in investing activities (1,561,130) 2,662,814
Financing activities:
Net increase in deposit accounts 13,942,409 23,953,105
Proceeds from FHLB borrowings 61,000,000 13,500,000
Repayments of FHLB borrowings (56,500,000) (19,500,000)
Acquisition of MRP shares 0 (1,224,768)
Treasury stock purchased (7,819,622) (1,072,194)
Cash dividends paid (757,502) (783,451)
Net change in repurchase agreements (1,111,623) 627,552
------------ ------------
Net cash provided by financing activities 8,753,662 15,500,244
------------ ------------
Increase (decrease) in cash and cash equivalents (8,031,703) (4,261,706)
Cash and cash equivalents, beginning of period 17,011,841 15,772,251
------------ ------------
Cash and cash equivalents, end of period $ 8,980,138 $ 11,510,545
============ ============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 766,717 $ 323,973
Exchange of loans for mortgage-backed securities $ 40,125,838 $ 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 nine month periods ended June 30, 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 nine month periods ended June
30, 1999 is based on weighted average shares of 3,439,285 and 3,595,206,
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
nine month periods ended June 30, 1999, as their effect would have been
anti-dilutive.
NOTE 4. DIVIDENDS DECLARED
On June 17, 1999, the Board of Directors declared a cash dividend of $0.07 per
share payable July 22, 1999 to stockholders of record as of July 2, 1999. This
dividend payment represents a payout ratio of 30.4% of the consolidated earnings
for the quarter ended June 30, 1999, and is the Company's ninth 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 nine month periods ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 784,513 $ 783,115 $ 3,362,377 $ 2,306,017
----------- ----------- ----------- -----------
Reclassification of gains
recognized in net income,
net of income taxes (120,718) (181,577) (138,881) (272,724)
Gains unrealized, net of
income taxes (707,302) 67,350 (856,492) 333,852
----------- ----------- ----------- -----------
Other comprehensive income (828,020) (114,227) (995,373) 61,128
----------- ----------- ----------- -----------
Comprehensive income $ (43,507) $ 668,888 $ 2,367,004 $ 2,367,145
=========== =========== =========== ===========
</TABLE>
NOTE 6. FORWARD LOOKING STATEMENTS.
This Form 10-Q contains certain forward looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in general and local market
conditions, legislative and regulatory conditions, and an adverse interest rate
environment.
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, this
discussion focuses primarily on the Bank's results of operations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND SEPTEMBER 30, 1998
Total assets were $292.3 million at June 30, 1999 compared to $281.5 million at
September 30, 1998. Total earning assets increased by $10.1 million to $278.4
million at June 30, 1999 from $268.3 million at September 30, 1998.
Interest-bearing deposits in financial institutions were $4.3 million at June
30, 1999 compared to $11.8 million at September 30, 1998. These funds are
primarily used to support the Bank's daily liquidity management activities and
operations. 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 $53.1 million
at June 30, 1999 compared to $27.0 million at September 30, 1998. Consequently,
loans held for sale have declined to $16.2 million at June 30, 1999 from $38.4
million at September 30, 1998. The Bank continues to experience favorable retail
consumer and commercial loan demand as loans held for investment increased to
$200.2 million at June 30, 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 June 30, 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 95.2% of total assets at June 30, 1999, compared to
95.3% at September 30, 1998.
Total interest-bearing liabilities increased to $233.9 million at June 30, 1999
from $216.6 million at September 30, 1998. Total deposits increased by $14.0
million, to $218.6 million at June 30, 1999 from $204.6 million at September 30,
1998. Borrowings increased to $15.3 million at June 30, 1999 from $11.9 million,
supporting the growth in earning assets and banking operations during the
period.
Stockholders' equity was $50.7 million at June 30, 1999, compared to $56.7
million at September 30, 1998. See "Consolidated Statements of Stockholders'
Equity". At June 30, 1999, the Company's equity to assets ratio was 17.3%
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 June 30, 1999, substantially in excess of all regulatory
capital requirements. See "Liquidity and Capital Resources" below.
During the nine months ended June 30, 1999, the Company purchased 425,341 shares
of its common stock through open market and private purchases, totaling
approximately $7.8 million, pursuant to stock repurchase plans adopted by the
board of directors. These shares are being held as treasury stock, at cost. At
June 30, 1999, treasury shares were 643,543 totaling $12.7 million, compared to
218,202 shares totaling $4.9 million at September 30, 1998.
7
<PAGE>
On June 17, 1999 the board of directors of the Company declared a quarterly cash
dividend of $0.07 per share, payable July 22, 1999 to stockholders of record of
July 2, 1999. This dividend payment is the Company's ninth consecutive quarterly
cash dividend and represents a payout ratio of 30.4% of the consolidated
earnings for the three months ended June 30, 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1999 AND 1998
GENERAL. Net income for the three and nine months ended June 30, 1999 was
$785,000 and $2.4 million, compared to $783,000 and $2.3 million for the three
and nine months ended June 30, 1998. Earnings per share for the three and nine
months ended June 30, 1999 were $0.23 and $0.67 per share, compared to $0.20 and
$0.59 per share for the three and nine months ended June 30, 1998 (adjusted for
an August 19, 1998 three-for-two stock split).
INTEREST INCOME. Interest income increased to $5.9 million and $17.2 million for
the three and nine months ended June 30, 1999, from $5.6 million and $16.2
million for the three and nine months ended June 30, 1998. This increase is
primarily attributable to the growth of interest-earning assets. Average
interest-earning assets were $283.2 million and $278.8 million, for the three
and nine months ended June 30, 1999, compared to $255.0 million and $246.8
million for the three and nine months ended June 30, 1998. The yield on average
interest-earning assets was 8.4% and 8.2% for the three and nine months ended
June 30, 1999, compared to 8.8% and 8.7% for the three and nine months ended
June 30, 1998.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $2.5
million and $7.4 million for the three and nine months ended June 30, 1999, from
$2.4 million and $6.8 million for the three and nine months ended June 30, 1998.
Average interest-bearing liabilities increased to $235.8 million and $228.4
million for the three and nine months ended June 30, 1999, from $202.9 million
and $195.0 million for the three and nine months ended June 30, 1998. The
effective cost of average interest-bearing liabilities decreased to 4.2% and
4.3% for the three and nine months ended June 30, 1999 from 4.6% and 4.7% for
the three and nine months ended June 30, 1998. The Bank has increased its
checking account base by 20.3%, to $52.8 million at June 30, 1999 from $43.9
million at June 30, 1998, reflecting its efforts of attracting lower costing
core deposits.
NET INTEREST INCOME. Net interest income increased to $3.4 million and $9.8
million for the three and nine months ended June 30, 1999, from $3.2 million and
$9.3 million for the three and nine months ended June 30, 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) was 4.2% and 3.9%for the three and nine months ended June 30, 1999,
compared to 4.2% and 4.0% for the three and nine months ended June 30, 1998. The
Bank's net yield on interest-earning assets (net interest income divided by
average interest-earning assets) was 4.9% and 4.7% for the three and nine months
ended June 30, 1999, compared to 5.1% for both the three and nine months ended
June 30, 1998.
PROVISION FOR LOAN LOSSES. The Bank recorded no provisions for loan losses
during the three months ended June 30, 1999, compared to $110,000 during the
three months ended June 30, 1998. During the nine months ended June 30, 1999 and
1998, the Bank recorded provisions for
8
<PAGE>
loan losses of $50,000 and $210,000, 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
June 30, 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 was $685,000 and $2.2 million for the
three and nine months ended June 30, 1999, compared to $678,000 and $2.0 million
for the three and nine months ended June 30, 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, continues to increase from period to period along with the
growth in earning assets and deposits.
NONINTEREST EXPENSE. Noninterest expenses were $2.6 million and $7.7 million for
the three and nine months ended June 30, 1999, compared to $2.6 million and $7.4
million for the three and nine months ended June 30, 1998. The largest single
component of these expenses, compensation and fringe benefits, was $1.7 million
and $5.2 million for the three and nine months ended June 30, 1999, compared to
$1.8 million and $5.5 million for the three and nine months ended June 30, 1998.
During the three and nine months ended June 30, 1999, the Bank recorded $336,000
and $1.0 million of benefits expense under a deferred stock awards Management
Recognition Plan, compared to $411,000 and $1.6 million for the three and nine
months ended June 30, 1998. During the three and nine months ended June 30,
1999, the Bank recorded $189,000 and $667,000 in benefits expense for the
Employee Stock Ownership Plan, compared to $219,000 and $626,000 for the three
and nine months ended June 30, 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 $762,000 and $1.9 million for the three and
nine months ended June 30, 1999, compared to $467,000 and $1.4 million for the
three and nine months ended June 30, 1998. The changes in the amounts of income
tax provisions reflects the changes in pretax income, the application of
permanent and temporary differences, and the estimated income tax rates in
effect during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Bank must meet certain liquidity requirements established by the State of
North Carolina Office of the Commissioner of Banks (the "Commissioner"). At June
30, 1999, the Bank's liquidity ratio exceeded such requirements. Liquidity
generally refers to the Bank's ability to
9
<PAGE>
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, 1999, the Bank had cash, deposits in
banks, investment securities, mortgage-backed securities, FHLB stock and loans
held for sale totaling $82.8 million, or 28.3% 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 June 30, 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. The assets and liabilities of the Company are
primarily monetary in nature and changes in market interest rates have greater
impact on the Company's performance than do the effects of general levels of
inflation. 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
A lot of attention has been given to the global computer problems that may occur
in the year 2000 ("Y2K"). Many computer programs that can only read two digits
of the year entered may read entries for the year 2000 as the year 1900 and
compute payment, interest or delinquency based on the wrong date, or may 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, business resumption
contingency plan and cash contingency plan have been developed to insure that
problems and disruptions related to Y2K are minimized.
All 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 has provided 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 testing their system applications and testing the
business resumption contingency plan, assuring validation of the century date
changes and system readiness. Additional testing is also taking place with all
other external mission critical information systems and relationships with which
the Bank exchanges data or information. Prior to year end, the Bank will
continue to refine and monitor its Y2K preparedness to insure it is ready for
this unprecedented event.
In addressing Y2K, the Bank has used its current internal staff with limited
reliance on outside resources. Bisys has provided remediated host system
software 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 testing its hardware, software and related
interfaces. As a result, estimated Y2K expenses of $70,000 were accrued during
the nine months ended June 30, 1999. 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
Not applicable.
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:
1. A Form 8-K was filed on April 5, 1999 under Item 2:
Acquisition or Disposition of Assets, reporting the Company had
completed its reincorporation from the state of Delaware to the
state of Virginia.
2. A Form 8-K was filed on May 4, 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% (187,081 shares) of its issued and
outstanding shares of common stock.
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: July 27, 1999 /s/ William L. Wall
-------------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: July 27, 1999 /s/ Kristie W. Hawkins
--------------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
13
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
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