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, 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
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(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 4, 2000: 3,479,963
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1999 (unaudited) and September 30, 1999 1
Consolidated Statements of Operations for the Three
Months Ended December 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Stockholders' Equity for
the Three Months Ended December 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Three
Months Ended December 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>
DECEMBER 31 SEPTEMBER 30
1999 1999
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 12,595,426 $ 5,375,856
Interest-bearing deposits in financial institutions 8,442,853 4,034,076
Investment securities - available for sale 3,008,499 3,024,531
Mortgage-backed securities - available for sale 55,961,821 56,325,868
Loans receivable, net:
Held for sale 49,825,303 13,481,714
Held for investment 294,567,482 198,572,216
Premises and equipment, net 5,113,669 3,575,974
Deferred income taxes 2,847,571 2,314,930
Income tax recoverable 545,100 --
Real estate owned 208,647 591,144
Federal Home Loan Bank of Atlanta stock, at cost 2,607,700 1,460,200
Accrued interest receivable 1,938,319 2,022,055
Prepaid expenses and other assets 2,551,221 1,526,907
------------- -------------
Total assets $ 440,213,611 $ 292,305,471
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 74,759,896 $ 53,525,231
Savings 18,274,254 7,220,337
Large denomination certificates of deposit 41,179,850 31,399,212
Other time 211,287,235 142,473,215
------------- -------------
Total deposits 345,501,235 234,617,995
Borrowed money 33,824,961 1,318,340
Accrued interest payable 256,427 81,081
Income taxes payable 375,597 67,779
Advance payments by borrowers for property taxes and
insurance 897,282 89,067
Other liabilities 11,406,883 7,368,176
------------- -------------
Total liabilities 392,262,385 243,542,438
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 44,232,010 44,232,010
Retained earnings, substantially restricted 24,682,336 24,197,767
Treasury stock at cost, 878,981 and 813,503 shares (16,947,599) (15,770,962)
Unearned ESOP shares, 224,086 and 226,350 (2,240,865) (2,263,500)
Deferred stock awards (447,653) (783,392)
Accumulated other comprehensive (loss), net (1,370,643) (892,530)
------------- -------------
Total stockholders' equity 47,951,226 48,763,033
------------- -------------
Total liabilities and stockholders' equity $ 440,213,611 $ 292,305,471
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
---------------------------
1999 1998
---------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $5,594,052 $4,786,826
Interest and dividends on investments and deposits 1,211,225 860,238
---------- ----------
Total interest income 6,805,277 5,647,064
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Interest expense:
Interest on deposits 2,993,733 2,275,442
Interest on borrowings 176,758 144,016
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Total interest expense 3,170,491 2,419,458
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Net interest income before provision for possible
loan losses 3,634,786 3,227,606
Provision for possible loan losses 227,000 50,000
---------- ----------
Net interest income 3,407,786 3,177,606
---------- ----------
Other income:
Loan fees and service charges 305,690 292,575
Loan servicing fees 167,141 217,826
Gain on sale of real estate, net 91,975 22,379
Gain on sale of mortgage loans and mortgage-
backed securities -- 232,101
Other income 50,139 45,072
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Total other income 614,945 809,953
---------- ----------
General and administrative expenses:
Compensation and fringe benefits 1,793,191 1,743,168
Federal insurance premiums 32,225 28,949
Premises and equipment 210,366 116,050
Advertising 29,246 43,719
Payroll and other taxes 110,152 97,730
Other 467,817 552,686
---------- ----------
Total general and administrative expenses 2,642,997 2,582,302
---------- ----------
Income before income taxes 1,379,734 1,405,257
Income taxes 569,068 597,586
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NET INCOME $ 810,666 $ 807,671
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Basic earnings per share $ 0.25 $ 0.22
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Diluted earnings per share $ 0.25 $ 0.22
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Dividends per share $ 0.10 $ 0.07
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Average number of common shares outstanding 3,262,897(1) 3,746,652(1)
</TABLE>
(1) Excludes ESOP and MRP benefit plan shares not committed to be released or
vested, and treasury stock.
See Notes to Consolidated Financial Statements.
2
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NEWSOUTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Additional Earnings, Unearned Deferred Comprehensive
Common Paid-in Substantially Treasury ESOP Stock Income (Loss),
Stock Capital Restricted Stock Shares Awards Net Total
------- ----------- ----------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1999 $43,640 $44,232,010 $24,197,767 $(15,770,962) $(2,263,500) $(783,392) $ (892,530) $48,763,033
Net income 810,666 810,666
Other comprehensive loss, net
of taxes (478,113) (478,113)
MRP amortization 335,739 335,739
Acquisition of treasury shares (1,176,637) (1,176,637)
Dividends ($.10 per share) (326,097) (326,097)
Release of ESOP shares 22,635 22,635
------- ----------- ----------- ------------ ----------- --------- ----------- -----------
Balance December 31, 1999 $43,640 $44,232,010 $24,682,336 $(16,947,599) $(2,240,865) $(447,653) $(1,370,643) $47,951,226
------- ----------- ----------- ------------ ----------- --------- ----------- -----------
</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
-----------------------------
1999 1998
-----------------------------
Operating activities:
<S> <C> <C>
Net Income $ 810,666 $ 807,671
Adjustments to reconcile net income to net cash used
in operating activities:
Provision for loan losses 227,000 50,000
Depreciation 81,283 67,031
ESOP compensation 22,635 109,271
MRP compensation 335,739 335,718
Accretion of discounts on securities 93 93
Gain on disposal of real estate acquired in settlement of loans (89,211) (22,379)
Gain on sale of loans and mortgage-backed securities -- (232,102)
Originations of loans held for sale, net (2,393,110) (51,539,886)
Proceeds from sale of loans held for sale -- 41,120,140
Other operating activities 2,257,317 1,060,834
------------ ------------
Net cash provided by (used in) operating activities 1,252,412 (8,243,609)
Investing activities:
Proceeds from principal repayments and sales of
mortgage-backed securities available for sale 1,151,853 3,838,356
Loan originations, net of principal repayments of loans
held for investment (6,369,783) (4,168,494)
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 573,573 322,099
Purchases of premises and equipment (376,976) (133,097)
Net cash to purchase Home Federal Savings & Loan Association (26,530,907) --
------------ ------------
Net cash provided (used) in investing activities (31,552,240) (141,136)
Financing activities:
Net increase in deposit accounts 9,234,288 3,737,851
Proceeds from FHLB borrowings 70,700,000 32,000,000
Repayments of FHLB borrowings (39,200,000) (28,500,000)
Treasury stock purchased (1,176,637) (1,886,181)
Cash dividends paid (326,097) (264,832)
Net change in repurchase agreements 1,006,621 (709,531)
Principal payment received on ESOP 1,690,000 --
------------ ------------
Net cash provided by financing activities 41,928,175 4,377,307
------------ ------------
Increase (decrease) in cash and cash equivalents 11,628,347 (4,007,438)
Cash and cash equivalents, beginning of period 9,409,932 17,011,841
------------ ------------
Cash and cash equivalents, end of period $ 21,038,279 $ 13,004,403
============ ============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 87,552 $ 483,465
Exchange of loans for mortgage-backed securities $ 1,568,721 $ 24,052,059
</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 First South Bank (the "Bank")
(formerly NewSouth 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
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, 1999, 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, 1999 are not necessarily indicative of the
results of operations that may be expected for the year ended September 30,
2000.
NOTE 3. EARNINGS PER SHARE.
The Company's earnings per share for the three month periods ended December 31,
1999 and 1998 is based on weighted average shares of 3,262,897 and 3,746,652,
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, 1999, as their effect would have been anti-dilutive.
NOTE 4. DIVIDENDS DECLARED.
On December 14, 1999, the Board of Directors declared a cash dividend of $0.10
per share to stockholders of record as of January 4, 2000 and payable on January
21, 2000. This dividend payment represents a payout ratio of 40.0% of the
earnings for the quarter ended December 31, 1999, and is the Company's eleventh
consecutive quarterly cash dividend.
NOTE 5. COMPREHENSIVE INCOME.
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". Comprehensive income
includes net income and all other changes to the Company's equity, with the
exception of transactions with shareholders ("other
5
<PAGE>
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, 1999 and 1998 is as follows:
1999 1998
--------- ---------
Net income $ 810,666 $ 807,671
Reclassification of gains recognized in net income 0 (18,163)
Gains (losses) unrealized, net of income taxes (478,113) 32,657
--------- ---------
Other comprehensive income(loss) (478,113) 14,494
--------- ---------
Comprehensive income $ 332,553 $ 822,165
========= =========
NOTE 6. SIGNIFICANT ACTIVITIES AND SUBSEQUENT EVENTS.
On November 30, 1999 the Company consummated the acquisition of Green Street
Financial Corp ("Green Street"), pursuant to an Agreement and Plan of Merger
(the "Plan") signed on August 9, 1999. The Company acquired Green Street, using
the purchase method of accounting, for a cash purchase price of $59.2 million,
representing $15.25 per share of Green Street common stock. The source of funds
for the acquisition was cash on hand plus funds borrowed from the Federal Home
Loan Bank of Atlanta (the "FHLB"). At December 31, 1999, $30.2 million of the
FHLB borrowings remained outstanding. Summary financial information related to
the Green Street acquisition is as follows (unaudited): Total assets - $162.2
million, loans receivable - $125.4 million, deposits - $101.7 million, and
goodwill - $693,000.
The following unaudited pro forma condensed consolidated financial information
reflects the results of operations of the Company for the year ended September
30, 1999 as if the acquisition of Green Street had occurred on October 1, 1998,
and after giving effect to the purchase accounting adjustments. These pro forma
results are not necessarily indicative of what the Company's results of
operations would have been had the acquisition actually taken place on October
1, 1998, and may not be indicative of future operating results:
Year ended September 30, 1999
-----------------------------
Net interest income $16,236,000
Net income $ 3,384,000
Net income per share $ .96
Concurrently with the Green Street acquisition, the Bank changed its name from
NewSouth Bank to First South Bank.
On December 10, 1999, the Company signed a Purchase and Assumption Agreement
(the "Agreement) with Centura Bank and Triangle Bank to acquire six of
Triangle's branch offices located in Rocky Mount, North Carolina and Tarboro,
North Carolina, subject to regulatory approval and certain other conditions.
Under terms of the Agreement, the Bank will assume the deposits of the six
Triangle branch offices for a premium of approximately 4.0% of the assumed
deposits, and purchase loans, fixed assets and certain other assets associated
with the branch offices. At October 31, 1999, the deposits of the six branch
offices totaled approximately $147.0 million. Five of the six branch offices
will become branch offices of the Bank, while one of the branch offices will be
closed with the deposits and loans serviced out of a nearby, existing branch
office of the Bank. The transaction is expected to be completed in the first
quarter of 2000.
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, 1999 AND SEPTEMBER 30, 1999
Total assets were $440.2 million at December 31, 1999 compared to $292.3 million
at September 30, 1999, while total earning assets increased to $414.4 million at
December 31, 1999 from $276.9 million at September 30, 1999, reflecting the
Green Street acquisition.
Interest-bearing deposits in financial institutions was $8.4 million at December
31, 1999 compared to $4.0 million at September 30, 1999. These funds are
primarily used to support the liquidity management activities and daily
operations of the Bank . The Bank has implemented various investment strategies
to increase its regulatory liquidity levels, including the securitization of
certain mortgage loans previously held for sale into mortgage-backed securities,
resulting in a mortgage-backed securities portfolio of $56.0 million at December
31, 1999, compared to $56.3 million at September 30, 1999. Loans held for sale
increased to $49.8 million at December 31, 1999 from $13.5 million at September
30, 1999, and loans held for investment increased to $294.6 million at December
31, 1999 from $198.6 million at September 30, 1999, reflecting the Green Street
acquisition. To support the risk associated with the continuing growth of its
commercial and consumer loan portfolio, and the loan portfolio growth related to
the Green Street acquisition, the Bank had reserves for potential loan losses of
$4.5 million at December 31, 1999, compared to $3.3 million at September 30,
1999. The ratio of reserves for loan losses to loans outstanding, net of loans
in process and deferred loan fees, was 1.3% at December 31, 1999 compared to
1.5% at September 30, 1999. Earning assets amounted to 94.1% of total assets at
December 31, 1999, compared to 94.7% at September 30, 1999.
Total interest-bearing liabilities increased to $379.3 million at December 31,
1999 from $223.9 million at September 30, 1999. Total deposits increased $345.5
million at December 31, 1999 from $234.6 million at September 30, 1999,
reflecting the Green Street acquisition. Borrowings increased to $33.8 million
at December 31, 1999 from $1.3 million at September 30, 1999, reflecting $30.2
million of FHLB borrowings, net of repayments, to fund the Green Street
purchase.
Stockholders' equity was $48.0 million at December 31, 1999, compared to $48.8
million at September 30, 1999. See "Consolidated Statements of Stockholders'
Equity". At December 31, 1998, the ratio of stockholders' equity to total assets
was 10.9%, compared to 16.7% at September 30, 1999, reflecting the leveraging
effect of the Green Street acquisition. 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, 1999, 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, 1999 the Company acquired 65,478 shares of its common
stock through both open market and private purchases, totaling $1.2 million,
which are being held as treasury stock at
7
<PAGE>
cost. At December 31, 1999 a total of 878,981 shares totaling $16.9 million are
being held as treasury stock, compared to 813,503 shares totaling $15.8 million
at September 30, 1999.
On December 14, 1999, the Board of Directors of the Company declared a quarterly
cash dividend of $0.10 per share, payable January 21, 2000 to stockholders of
record as of January 4, 2000. This dividend payment is the Company's eleventh
consecutive quarterly cash dividend and represents a payout ratio of 40.0% of
consolidated earnings for the three months ended December 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Net income for the three months ended December 31, 1999 was $811,000,
compared to $807,000 for the three months ended December 31, 1998. Comparative
basic and dilutive earnings per share for the three months ended December 31,
1999 and 1998 are $0.25 and $0.22 per share, respectively.
INTEREST INCOME. Interest income increased to $6.8 million for the three months
ended December 31, 1999, from $5.6 million for the three months ended December
31, 1998. This increase is primarily attributable to the growth of
interest-earning assets. Average interest-earning assets increased to $329.1
million for the three months ended December 31, 1999, from $274.0 million for
the three months ended December 31, 1998. The yield on average interest-earning
assets was 8.3% for the three months ended December 31, 1999, compared to 8.2%
for the three months ended December 31, 1998.
INTEREST EXPENSE. Interest expense on deposits and borrowings increased to $3.2
million for the three months ended December 31, 1999 from $2.4 million for the
three months ended December 31, 1998. Average interest-bearing liabilities
increased to $283.4 million for the three months ended December 31, 1998 from
$219.6 million for the three months ended December 31, 1998. The effective cost
of average interest-bearing liabilities increased to 4.5% for the three months
ended December 31, 1999 from 4.4% for the three months ended December 31, 1998.
The Bank has increased its checking account base to $74.8 million at December
31, 1999 from $50.5 million at December 31, 1998, reflecting its efforts of
attracting lower costing core deposits.
NET INTEREST INCOME. Net interest income increased to $3.6 million for the three
months ended December 31, 1999 from $3.2 million for the three months ended
December 31, 1998. The Bank's net yield on interest-earning assets (net interest
income divided by average interest-earning assets) was 4.4% for the three months
ended December 31, 1999, compared to 4.7% for the three months ended December
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) was 3.8% for both the three months ended December
31, 1999 and 1998.
PROVISION FOR LOAN LOSSES. During the three months ended December 31, 1999, the
Bank recorded provisions for loan losses of $227,000, compared to $50,000 for
the three months ended December 31, 1998. These provisions were necessary to
support the risk associated with the Bank's growing commercial and consumer loan
portfolio and the loan portfolio growth related to the Green Street acquisition.
Provisions are charged to operations and the Bank believes the resulting
allowance for loan losses is adequate to absorb probable 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
8
<PAGE>
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 allowance for
loan losses is adequate to provide for probable future losses, although there
are no assurances that probable future losses, if any, will exceed estimated
amounts.
NONINTEREST INCOME. Noninterest income was $615,000 for the three months ended
December 31, 1999, compared to $810,000 for the three months ended December 31,
1998. 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 no gains recorded during the
three months ended December 31, 1999. The volume of loans and mortgage-backed
securities sold during the 1998 period was $42.0 million, compared to no sales
during the 1999 period. Fees and service charges earned on loans and deposits,
and other miscellaneous income, remained constant from period to period on a
comparative basis.
NONINTEREST EXPENSE. Noninterest expenses were both $2.6 million for the three
months ended December 31, 1999 and 1998. The largest single component of these
expenses, compensation and fringe benefits, was $1.8 million for the three
months ended December 31, 1999 and $1.7 million for the three months ended
December 31, 1998. During both the three months ended December 31, 1999 and
1998, the Bank recorded $336,000 of benefits expense for the Management
Recognition Plan ("MRP"). During the three months ended December 31, 1999, the
Bank recorded $196,000 in benefits expense for the Employee Stock Ownership Plan
("ESOP"), compared to $289,000 for the three months ended December 31, 1998.
Other noninterest expenses including premises and equipment, advertising, and
office supplies have also remained constant from period to period on a
comparative basis.
INCOME TAXES. Income tax expense was $569,000 for the three months ended
December 31, 1999, compared to $598,000 for the three months ended December 31,
1998. 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, 1999, 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, 1999, the Bank had cash, deposits in banks,
investment securities, mortgage-backed securities, FHLB stock and loans held for
sale totaling $132.4 million, or 30.1% of total assets, compared to $83.7
million at September 30, 1999, or 28.6% 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,
9
<PAGE>
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 December 31, 1999 and September
30, 1999.
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", as amended, effective with the
fiscal quarter beginning July 1, 2000. 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.
YEAR 2000 COMPLIANCE
Neither the Company nor the Bank experienced any problems related to the Year
2000 ("Y2K") issue.
A great deal of information was disseminated about the global computer crash
that could have occurred in the year 2000. Many computer programs that only
distinguish two digits of the year entered (a common practice in earlier years)
were 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.
10
<PAGE>
In compliance with regulatory guidelines, the Bank formed a Y2K committee to
review the effects the century date change could have on all current systems and
to assess the potential risks associated with the Y2K issue. A formal Y2K
strategic plan and contingency were developed to address the necessary steps to
insure that problems and disruptions related to the Y2K issue were minimized.
All of the material data processing functions of the Bank that could have been
impacted by the Y2K issue are provided by a national third party service bureau,
Bisys, Inc. Bisys dedicated tremendous resources in assuring its systems were
Y2K compliant and in developing a comprehensive testing and verification
program. The Bisys client test facility provided the Bank with end-to-end
testing capabilities of all its hardware, software and related interfaces. All
Bank user departments were involved in an extensive Y2K testing program to
assure validation of the century date changes and the testing of the century
date rollover from December 31, 1999 to January 3, 2000 for all applications.
Additional testing also took place with all other external mission critical
information systems with which the Bank exchanges data or information. It is
believed that this readiness caused the Bank to experience no uninterrupted
operations related to Y2K.
In addressing the Y2K issue, the Bank used its current internal staffing with
little reliance on outside resources. Bisys, the Bank's major vendor, provided
remediated software at no expense to the Bank and no major system needs
replacing in coming years. As a result, no additional Y2K related expenses were
recorded during the three months ended December 31, 1999, compared to $20,000 of
Y2K expenses that were accrued during the three months ended December 31, 1998.
The Bank believes the cost of addressing the Y2K issue had 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.
The Bank believes that it will incur no additional costs relating to the Y2K
issue. In addition, the Bank will continue to monitor its data processing
systems, and its customers and vendors, to insure preparedness for any
unprecedented delayed Y2K related problems.
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
1. A Form 8-K was filed on December 1, 1999 under Item 2: Acquisition
or Disposition of Assets, reporting the Company had consummated its
acquisition of Green Street.
2. A Form 8-K was filed on December 22, 1999 under Item 5: Other
Events, reporting the Bank had reached an agreement with Centura Bank
and Triangle Bank for the Bank to acquire five branch offices of
Triangle Bank located in Rocky Mount, North Carolina and one branch
office in Tarboro, North Carolina.
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 11, 2000 /s/ William L. Wall
--------------------
William L. Wall
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 2000 /s/ Kristie W. Hawkins
-----------------------
Kristie W. Hawkins
Controller
Treasurer
(Principal Accounting Officer)
13
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