EXHIBIT 13

                               1999 ANNUAL REPORT

                                NEWSOUTH BANCORP
                                ================

<PAGE>

                                TABLE OF CONTENTS

Letter to Stockholders                                                       1

Selected Consolidated Financial Information and Other Data                   2

Management's Discussion and Analysis of Financial Condition
     and Results of Operations                                               3

Report of Independent Accountants                                           14

Consolidated Statements of Financial Condition                              15

Consolidated Statements of Operations                                       16

Consolidated Statements of Stockholders' Equity                             17

Consolidated Statements of Cash Flows                                       18

Notes to Consolidated Financial Statements                                  19

Board of Directors                                                          40

Executive Officers                                                          40

NewSouth Bank Office Locations                                              40

Stockholder Information                                                     41

                                MISSION STATEMENT

"Our mission is to become the premier  community bank in eastern North Carolina.
We will enhance  shareholder value by serving the personal and business needs of
our markets,  providing superior customer service,  investing in the communities
that we serve, and enriching the lives of our employees."

<PAGE>

                             LETTER TO STOCKHOLDERS

To Our Stockholders:

The year ended September 30, 1999 was the best in NewSouth's history. We met our
projected  financial  results and accomplished all of our strategic  objectives.
Record  earnings per share were  achieved,  the cash  dividend  payment rate was
increased by 42.9%,  and excellent  growth was achieved in our  commercial  loan
portfolio. The company continued to leverage its capital by signing a definitive
agreement to acquire Green Street  Financial  Corp, the holding  company of Home
Federal Savings and Loan  Association in  Fayetteville,  NC. We are pleased with
the results achieved during 1999 and are encouraged about the company's future.

Net income for the year ending September 30, 1999 was $3.2 million,  compared to
$3.1 million for 1998.  Diluted  earnings per share increased 13.8% to $0.91 per
share for 1999, from $0.80 per share for 1998.

On August 9, 1999,  NewSouth announced the signing of a definitive  agreement to
acquire Home  Federal  Savings and Loan  Association.  With  approximately  $161
million in assets,  this  acquisition,  which is  expected  to occur  during the
fourth quarter of 1999, will allow us to leverage our capital through a purchase
acquisition.   This  acquisition  will  give  us  an  important   entrance  into
southeastern  North Carolina and the cities of Fayetteville and Lumberton.  Home
Federal and NewSouth share the same philosophy of customer and community service
and safe and sound  banking  operations.  The company  should blend  quickly and
produce greater opportunities for NewSouth.

In conjunction with the Home Federal acquisition,  NewSouth Bank will change its
name to First South Bank.  This change will reflect our expanded market area and
also  reflect our desire to be first in  community  banking.  We look forward to
this change.

While energy and attention is focused on the  acquisition  and merger of the two
institutions,  NewSouth is continuing to expand. We are pleased to announce that
the Bank's ninth full service branch office in Chocowinity,  NC will open during
the fourth  quarter of 1999.  This office  will  compliment  our other  Beaufort
County  offices  and  serve  as  an  additional  base  for  developing  customer
relationships  and meeting the banking needs of our growing  market.  Additional
branch  offices are being planned and we will  continue to grow both  internally
and through acquisitions that will enhance our franchise value.

Many of our future  strategies  are focused on  enhancing  our  franchise  value
through dependable customer service, the development of a more effective banking
operation and our  commitment to becoming the best community bank in eastern and
southeastern  North  Carolina.  During  the coming  year,  we will  develop  and
implement a web page,  expanded 24 hour banking services,  establish an SBA loan
department,  implement  commercial sweep accounts and leasing services and offer
more products and services to meed the needs or our growing customer base.

Our people are our greatest asset and resource.  Our performance is dependant on
their  intelligence,  teamwork  and  their  individual  efforts  to  make  us  a
successful company. I want to thank them for their efforts in making NewSouth so
successful.

Each member of your Board of Directors  along with our  officers  and  employees
join me in  thanking  you for your  continued  support of NewSouth  Bancorp.  As
always,  your  comments or  suggestions  are welcome and we look forward to your
continued support.

                                                   Sincerely,

                                                   Tom Vann
                                                   President

                                       1
<PAGE>

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA

<TABLE>
<CAPTION>
                                                                     September 30,
                                           --------------------------------------------------------------
                                              1999          1998         1997         1996         1995
                                              ----          ----         ----         ----         ----
                                                                (Dollars in thousands)
Selected Financial Condition Data
---------------------------------
<S>                                        <C>           <C>          <C>          <C>          <C>
Total assets                               $ 292,305     $ 281,479    $ 249,281    $ 194,139    $ 177,704
Loans receivable, net                        212,054       224,999      197,785      155,681      144,541
Cash and investment securities                12,435        20,119       18,856       16,684        4,788
Mortgage-backed securities                    56,326        27,017       24,818       14,797       22,285
Deposits                                     234,618       204,635      175,116      171,213      153,457
Borrowings                                     1,318        11,933       12,621        1,040        4,000
Stockholders' equity                          48,763        56,714       57,856       18,347       17,688

Selected Operations Data
------------------------
Interest income                            $  23,129     $  21,867    $  18,515    $  15,349    $  14,385
Interest expense                               9,979         9,240        8,346        8,105        7,344
                                           ---------     ---------    ---------    ---------    ---------
Net interest income                           13,150        12,627       10,169        7,244        7,041
Provision for loan losses                        120           310          931          511           20
Noninterest income                             2,874         2,646        1,685        1,833        1,502
Noninterest expenses                          10,255         9,940        6,941        7,295        5,660
                                           ---------     ---------    ---------    ---------    ---------
Income before income taxes                     5,649         5,023        3,982        1,271        2,863
Income taxes                                   2,453         1,900        1,719          451          998
                                           ---------     ---------    ---------    ---------    ---------
Net income                                 $   3,196     $   3,123    $   2,263    $     820    $   1,865
                                           =========     =========    =========    =========    =========
Earnings per share (1)(2)                  $     .91     $     .80    $     .35    $      --    $      --
                                           =========     =========    =========    =========    =========
Dividends per share (2)                    $     .31     $     .27    $     .13    $      --    $      --
                                           =========     =========    =========    =========    =========

Selected Financial Ratios and Other Data
----------------------------------------

Performance Ratios:
Return on average assets                        1.09%         1.19%        1.00%         .45%        1.07%
Return on average equity                        6.03          5.40         6.57         4.45        11.17
Interest rate spread                            3.95          4.03         4.10         3.72         3.84
Net interest margin                             4.69          5.05         4.67         4.12         4.21
Average earning assets to average
   interest-bearing liabilities               121.04        127.57       115.00       108.52       108.40
Noninterest expense to average assets           3.50          3.80         3.06         3.97         3.26
Dividend payout ratio                          34.07         33.75        37.14           --           --

Quality Ratios:
Nonperforming assets to total assets             .41%          .43%         .65%         .62%         .42%
Nonperforming loans to total loans               .27           .36          .64          .66          .47
Loan loss reserves to total loans               1.53          1.50         1.64         1.51         1.30
Loan loss reserves to nonperforming
   loans                                      581.48        419.45       257.45       227.37       275.62
Provision for loan losses to total loans         .06           .14          .47          .32          .01

Capital Ratios:
Equity to total assets, end of period          16.69%        19.95%       23.23%        9.45%        9.95%
Average equity to average assets               18.09         22.14        15.17        10.05         9.61

Other Data:
Full service offices                               9             8            8            8            8
Loans serviced for others                  $ 275,255     $ 250,202    $ 253,647    $ 253,682    $ 229,635
</TABLE>

----------------------------
(1) Applies to net income of  $1,395,900  earned for the period April 8, 1997 to
September  30, 1997.

(2) Adjusted for three-for-two stock split on August 19, 1998.

                                        2

<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     NewSouth Bancorp,  Inc. (the "Company") was formed on April 7, 1997 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. Prior
to the stock conversion, the Company had no assets or liabilities and engaged in
no business  activities.  Subsequent  to the stock  conversion,  the Company has
engaged in no significant  activities  other than holding the stock of the Bank,
therefore,  this discussion relates to the consolidated  financial condition and
results of  operations  of the  Company and the Bank.  The  business of the Bank
consists  principally  of attracting  deposits from the general public and using
them to originate secured and unsecured commercial and consumer loans, permanent
mortgage and  construction  loans secured by  single-family  residences,  credit
cards and other loans.  The Bank's earnings depend primarily on its net interest
income,  which is the difference  between  interest  earned on  interest-earning
assets and interest paid on  interest-bearing  liabilities.  The Bank's earnings
are also affected by the level of its noninterest income and expenses.

     The operations of the Bank are affected by prevailing  economic  conditions
as well as policies of federal and state regulatory authorities. The Bank's cost
of funds is influenced by interest  rates paid on competing  investments,  rates
offered on deposits by other  financial  institutions  in the Bank's market area
and by general market  interest  rates.  Lending  activities are affected by the
demand for financing of real estate and various types of commercial and consumer
loans,  which are  influenced by interest  rates at which such  financing may be
offered.

     The  Bank's  business  emphasis  is  to  operate  as  a   well-capitalized,
profitable and independent community oriented financial institution dedicated to
providing  quality  customer  service  and meeting  the  financial  needs of the
communities  it serves.  Management  believes the Bank can be more  effective in
serving its customers  than many larger  competitors,  because of its ability to
quickly and  effectively  respond to customer  needs and  inquiries.  The Bank's
ability to provide  these  services is enhanced by the  stability  of the Bank's
senior management team.

LIQUIDITY AND CAPITAL RESOURCES

     As a state chartered  commercial bank, the Bank must meet certain liquidity
requirements  established by the North Carolina  Office of The  Commissioner  of
Banks (the "Commissioner").  Savings banks which convert to commercial banks are
required to maintain 15% liquidity pursuant to the conversion guidelines adopted
by the  Commissioner.  The Bank's  liquidity  ratio,  as  computed  under  these
guidelines,  was 22.9% at September  30, 1999 compared to 15.1% at September 30,
1998.

     The Bank's  primary  sources of funds are deposits,  principal and interest
payments on loans,  proceeds  from loan sales and advances from the Federal Home
Loan Bank of Atlanta (the "FHLB").  While maturities and scheduled  amortization
of  loans  are  predictable  sources  of  funds,   deposit  flows  and  mortgage
prepayments are greatly  influenced by interest rates,  economic  conditions and
local competition.

     The  primary  investing   activity  of  the  Bank  is  the  origination  of
commercial,  consumer and mortgage  loans.  During the years ended September 30,
1999 and 1998,  the Bank had loan  originations  of $177.5  million  and  $173.1
million,  respectively.  The primary  financing  activities  of the Bank are the
attraction of checking,  certificate  and savings  deposits,  and obtaining FHLB
advances.

     The Bank's most liquid assets are cash and cash equivalents.  The levels of
these  assets are  dependent  on the Bank's  operating,  financing,  lending and
investing  activities  during any given period.  At September 30, 1999 and 1998,
cash and cash equivalents totaled $9.4 million and $17.0 million,  respectively.
The Bank has other sources of liquidity if a need for  additional  funds arises.
During the years ended  September 30, 1999 and 1998, the Bank sold and exchanged
real estate loans  totaling $86.1 million and $54.1  million,  respectively.  At
September 30, 1999, the Bank had no outstanding FHLB advances,  compared to $9.5
million at September 30, 1998. At September 30, 1999,  the Bank had $1.3 million
of retail repurchase agreements, compared to $1.9 million at September 30, 1998.
Other sources of liquidity  include  investment and  mortgage-backed  securities
designated as available  for sale,  which totaled $59.4 million at September 30,
1999 and $30.1 million at September 30, 1998.

                                       3
<PAGE>

     At September 30, 1999  stockholders'  equity was $48.8 million  compared to
$56.7  million at  September  30, 1998.  At  September  30, 1999 the Company had
3,550,541  shares of common stock  outstanding,  net of 813,503 treasury shares.
Net income for the year ended  September 30, 1999 was $3.2 million,  compared to
$3.1 million for the year ended September 30, 1998.

     As a  North  Carolina  chartered  commercial  bank  and a  Federal  Deposit
Insurance Corporation (the "FDIC") insured institution,  the Bank is required to
meet various capital standards by its state and federal regulatory agencies. The
Bank's stand-alone  equity was $42.6 million at September 30, 1999,  compared to
$42.0 million at September  30, 1998,  which is  substantially  in excess of all
such regulatory requirements. The Commissioner requires the Bank at all times to
maintain a capital  surplus of not less than 50% of common  capital  stock.  The
FDIC requires the Bank to meet a minimum leverage capital  requirement of Tier I
capital (consisting of retained earnings and common  stockholders'  equity, less
any  intangible  assets) to assets  ratio of at least 4% and a total  capital to
risk-weighted  assets  ratio  of 8%,  of  which 4% must be in the form of Tier I
capital.  The Bank was in compliance  with all capital  requirements of both the
Commissioner and the FDIC at September 30, 1999 and September 30, 1998.

ASSET/LIABILITY MANAGEMENT

     The Bank strives to achieve  consistent net interest  income and reduce its
exposure to adverse changes in interest rates by matching the terms to repricing
of its  interest-sensitive  assets and  liabilities.  Factors  beyond the Bank's
control, such as market interest rates and competition,  may also have an impact
on the Bank's interest income and interest expense.

     In the  absence  of any other  factors,  the  overall  yield on the  Bank's
earning assets  generally will increase from existing levels when interest rates
rise over an  extended  period of time,  and  conversely  interest  income  will
decrease  when  interest  rates  decrease.  In general,  interest  expense  will
increase  when  interest  rates  rise  over an  extended  period  of  time,  and
conversely   interest  expense  will  decrease  when  interest  rates  decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest  expense which are caused by changes in market interest rates, the Bank
can significantly influence its net interest income.

     The  President  of the Bank  reports to the Board of Directors on a regular
basis on interest rate risk and trends,  as well as liquidity and capital ratios
and  requirements.  The Board of Directors  reviews the maturities of the Bank's
assets and  liabilities  and  establishes  policies and  strategies  designed to
regulate  the  Bank's  flow of funds and to  coordinate  the  sources,  uses and
pricing of such funds.  The first priority in structuring and pricing the Bank's
assets and  liabilities is to maintain an acceptable  interest rate spread while
reducing the net effects of changes in interest rates. The Bank's  management is
responsible for  administering  the policies and  determinations of the Board of
Directors with respect to the Bank's asset and liability goals and strategies.

     A principal  strategy in managing the Bank's interest rate risk has been to
increase  interest rate sensitive  assets such as commercial and consumer loans.
At September 30, 1999, the Bank had $89.5 million of commercial  loans and $50.8
million of consumer loans, or 41.5% and 23.6%, respectively, of the Bank's gross
loan portfolio,  compared to $73.3 million and $48.4 million,  respectively,  at
September 30, 1998.  At September 30, 1999,  the Bank had $13.5 million of loans
held for sale,  compared to $38.4  million at September  30, 1998.  Depending on
conditions  existing  at a  given  time,  as  part  of its  interest  rate  risk
management strategy,  the Bank may sell fixed-rate residential mortgage loans in
the secondary market.

     In managing its portfolio of investment securities, the Bank has emphasized
the purchase of  short-term  securities  to reduce it's exposure to increases in
interest  rates.  The Bank had $59.4 million of investment  and  mortgage-backed
securities  classified as available for sale at September 30, 1999,  compared to
$30.1 million at September 30, 1998.  The Bank is holding these  investment  and
mortgage-backed  securities  as  available  for sale so that they may be sold if
needed for liquidity or asset and liability management purposes.

                                       4
<PAGE>

MARKET RISK

     Market risk  reflects the risk of economic loss  resulting  from changes in


market  prices  and  interest  rates.  The  risk of  loss  can be  reflected  in
diminished current market values and/or reduced potential net interest income in
future periods.  The Bank's market risk arises primarily from interest rate risk
inherent  in its  lending  and  deposit  taking  activities.  The Bank  does not
maintain a trading account for any class of financial  instruments,  nor does it
engage in hedging  activities  or  purchase  high-risk  derivative  instruments.
Furthermore,  the Bank is not  subject  to  foreign  currency  exchange  risk or
commodity price risk.

     Management  measures the Bank's  interest rate risk by computing  estimated
changes in net interest  income and the net portfolio  value ("NPV") of its cash
flows from assets,  liabilities  and  off-balance  sheet items in the event of a
range of assumed  changes in market  interest  rates.  The  Bank's  exposure  to
interest  rates is reviewed on a quarterly  basis by senior  management  and the
Board of  Directors.  Exposure to interest rate risk is measured with the use of
interest rate  sensitivity  analysis to determine the change in NPV in the event
of hypothetical  changes in interest rates,  while interest rate sensitivity gap
analysis is used to determine the repricing characteristics of the Bank's assets
and  liabilities.  If estimated  changes to NPV and net interest  income are not
within the limits  established by the Board, the Board may direct  management to
adjust the Bank's asset and  liability  mix to bring  interest  rate risk within
Board approved limits.

     NPV  represents  the market value of  portfolio  equity and is equal to the
market value of assets minus the market value of liabilities,  with  adjustments
made for  off-balance  sheet items.  This analysis  assesses the risk of loss in
market risk  sensitive  instruments in the event of a sudden and sustained 1% to
3%  increases  and  decreases  in market  interest  rates.  The Bank's  Board of
Directors  has adopted an interest  rate risk policy which  establishes  maximum
increases in NPV of 17%, 36% and 56% and decreases in NPV of 15%, 36% and 61% in
the event of sudden and  sustained  1% to 3%  increases  or  decreases in market
interest rates.  Table 1 below presents the Bank's  projected  change in NPV for
the various rate shock levels at September 30, 1999.

TABLE 1 - PROJECTED CHANGE IN NPV AND NET INTEREST INCOME

                   Net Portfolio Value                 Net Interest Income
Change       -------------------------------      ------------------------------
in Rates     $ Amount   $ Change   % Change       $ Amount   $ Change  % Change
--------     --------   --------   --------       --------   --------  --------
                                   (Dollars in  thousands)

+ 300   bp   $ 42,653   $(12,790)    (23.1)%      $ 11,024   $   (466)    (4.1)%
+ 200   bp     47,065     (8,378)    (15.1)         11,231       (259)    (2.3)
+ 100   bp     51,339     (4,104)     (7.4)         11,377       (113)    (1.0)
Base           55,443         --        --          11,490         --       --
- 100   bp     59,070      3,627       6.5          11,561         71       .6
- 200   bp     61,995      6,552      11.8          11,647        157      1.4
- 300   bp     63,691      8,248      14.9          11,732        242      2.1

     Table 1 indicates  that at September  30, 1999,  in the event of sudden and
sustained  increases in market interest rates, the Bank's estimated net interest
income and NPV would be  expected to  decrease,  and that in the event of sudden
and sustained decreases in market interest rates,  estimated net interest income
and NPV would be  expected  to  increase.  At  September  30,  1999,  the Bank's
estimated  changes in NPV were  within the targets  established  by the Board of
Directors.

     Computations of prospective  effects of hypothetical  interest rate changes
are based on numerous assumptions,  including relative levels of market interest
rates,  loan  prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results.  Further,  the  computations do not contemplate
any actions the Bank may undertake in response to changes in interest rates. The
NPV  calculation  is based on the net  present  value of  discounted  cash flows
utilizing market prepayment assumptions and market rates of interest provided by
surveys performed during each quarterly period, with adjustments made to reflect
the shift in the  Treasury  yield curve  between the survey date and the quarter
end date.

                                       5
<PAGE>

     Certain  shortcomings  are inherent in the method of analysis  presented in
Table 1. For example,  although  certain assets and liabilities may have similar
maturities  to  repricing,  they may react in  differing  degrees  to changes in
market  interest  rates.  The  interest  rates on  certain  types of assets  and
liabilities may fluctuate in advance of changes in market interest rates,  while
interest  rates on other types may lag behind  changes in market rates.  Certain
assets such as  adjustable-rate  loans have features which  restrict  changes in
interest  rates  on a  short-term  basis  and over  the  life of the  asset.  In
addition,  the proportion of adjustable-rate loans in the Bank's portfolio could
decrease in future periods if market  interest rates remain at or decrease below
current levels due to refinance  activity.  Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate from
those assumed in the table.  Also,  the ability of many borrowers to repay their
adjustable-rate debt may decrease in the event of an increase in interest rates.

     In  addition,  the Bank uses  interest  rate  sensitivity  gap  analysis to
monitor  the   relationship   between  the   maturity   and   repricing  of  its
interest-earning assets and interest-bearing  liabilities,  while maintaining an
acceptable interest rate spread. Interest rate sensitivity gap is defined as the
difference between the amount of  interest-earning  assets maturing or repricing
within a specific  time  period and the amount of  interest-bearing  liabilities
maturing or repricing within that time period. A gap is considered positive when
the   amount  of   interest-rate-sensitive   assets   exceeds   the   amount  of
interest-rate-sensitive  liabilities, and is considered negative when the amount
of    interest-rate-    sensitive    liabilities    exceeds    the   amount   of
interest-rate-sensitive  assets.  Generally,  during a period of rising interest
rates,  a negative  gap would  adversely  affect net  interest  income,  while a
positive  gap would result in an increase in net  interest  income.  Conversely,
during a period of falling  interest  rates,  a negative  gap would result in an
increase in net interest income,  while a positive gap would  negatively  affect
net interest income. The Bank's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings.

RATE/VOLUME ANALYSIS

     Net interest income can also be analyzed in terms of the impact of changing
interest rates on average  interest-earning assets and average  interest-bearing
liabilities and the changing  volume or amount of these assets and  liabilities.
Table 2 below  represents  the  extent to which  changes in  interest  rates and
changes  in  the  volume  of  average   interest-earning   assets  and   average
interest-bearing  liabilities  have  affected  the  Bank's  interest  income and
interest  expense  during the periods  indicated.  For each  category of average
interest-earning asset and average  interest-bearing  liability,  information is
provided on changes  attributable  to: (i) changes in volume  (changes in volume
multiplied by old rate);  (ii) changes in rate (change in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the changes
in volume); and (iv) net change (total of the previous columns).

TABLE 2 - RATE/VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                      ------------------------------------------------------------------------------------
                                              1999      vs.      1998                     1999      vs.      1998
                                      ----------------------------------------    ----------------------------------------
                                             Increase (Decrease) Due to                  Increase (Decrease) Due to
                                      ----------------------------------------    ----------------------------------------
                                                              Rate/                                       Rate/
                                       Volume      Rate      Volume     Total      Volume      Rate      Volume     Total
                                       ------      ----      ------     -----      ------      ----      ------     -----
                                                                    (In thousands)
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest income:
   Loans receivable ...............   $ 1,338    $  (902)   $   (62)   $   374    $ 2,670    $   104    $    17    $ 2,791
   Investment securities ..........         5          3         --          8        (54)        47         (8)       (15)
 Mortgage-backed securities .......     1,066        (89)       (42)       935        784        (10)        (5)       769
   Other interest-earning assets ..        30        (79)        (6)       (55)      (250)       101        (44)      (193)
                                      -------    -------    -------    -------    -------    -------    -------    -------
      Total interest-earning assets     2,439     (1,067)      (110)     1,262      3,150        242        (40)     3,352
                                      -------    -------    -------    -------    -------    -------    -------    -------

Interest expense:
   Deposits .......................     1,207       (813)      (110)       284        369        610         29      1,008
   FHLB advances ..................       587        (10)       (92)       485       (138)         1         (1)      (138)
   Other interest-bearing
      liabilities .................        (5)       (27)         2        (30)        33         (6)        (3)        24
                                      -------    -------    -------    -------    -------    -------    -------    -------
   Total interest-bearing
      liabilities .................     1,789       (850)      (200)       739        264        605         25        894
                                      -------    -------    -------    -------    -------    -------    -------    -------
Change in net interest income .....   $   650    $  (217)   $    90    $   523    $ 2,886    $  (363)   $   (65)   $ 2,458
                                      =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

                                       6
<PAGE>

TABLE 3 - YIELD/COST ANALYSIS

<TABLE>
<CAPTION>
                                                                             Year Ended September 30,
                                            ----------------------------------------------------------------------------------------
                                                        1999                           1998                          1997
                                            ----------------------------     -------------------------     -------------------------
                                                                 Average                       Average                       Average
                                            Average               Yield/     Average            Yield/     Average           Yield/
                                            Balance    Interest    Cost      Balance   Interest  Cost      Balance  Interest  Cost
                                            -------    --------    ----      -------   --------  ----      -------  --------  ----
                                                                                (Dollars in thousands)
Interest-earning assets:
<S>                                         <C>         <C>         <C>      <C>       <C>       <C>       <C>       <C>       <C>
   Loans receivable (1)                     $220,123    $19,262     8.75%    $205,587  $18,888   9.19%     $176,311  $16,097   9.13%
   Investment securities                       4,484        319     7.11        4,410      311   7.05         5,287      326   6.17
   Mortgage-backed securities                 46,279      3,225     6.97       31,565    2,290   7.25        20,832    1,521   7.30
   Other Interest-earning assets               9,248        323     3.49        8,570      378   4.41        15,249      571   3.75
                                            --------    -------     ----     --------  -------   ----       -------   ------   ----

     Total interest-earning assets           280,134     23,129     8.26      250,132   21,867   8.74       217,679   18,515   8.51
                                                        -------     ----                ------   ----                 ------   ----
Non-interest-earning assets                   13,026                           11,278                         9,311
                                            --------                         --------                      --------
     Total assets                           $293,160                         $261,410                      $226,990
                                            ========                         ========                      ========

Interest-bearing liabilities:
   Deposits                                 $218,742      9,380     4.29     $193,061    9,096   4.71      $184,672    8,088   4.38
   FHLB advances                              10,885        549     5.04        1,071       64   5.98         3,400      202   5.94
   Other interest-bearing liabilities          1,815         50     2.75        1,944       80   4.12         1,218       56   4.60
                                            --------    -------     ----      -------   ------   ----      --------  -------   ----
Total interest-bearing liabilities           231,442      9,979     4.31      196,076    9,240   4.71       189,290    8,346   4.41
                                                        -------     ----                 -----   ----                -------   ----
Non-interest-bearing liabilities               8,688                            7,445                         3,265
                                            --------                          -------                       -------
   Total liabilities                         240,130                          203,521                       192,555
   Stockholders' equity                       53,030                           57,889                        34,435
                                            --------                          -------                       -------
     Total liabilities and retained income  $293,160                         $261,410                      $226,990
                                            ========                         ========                      ========
Net interest income                                     $13,150                        $12,627                       $10,169
                                                        =======                        =======                       =======
Interest rate spread (2)                                            3.95%                        4.03%                         4.10%
                                                                    ====                         ====                          ====
Net yield on interest-earning assets (3)                            4.69%                        5.05%                         4.67%
                                                                    ====                         ====
Ratio of average interest-earning assets
   to average interest bearing liabilities                        121.04%                      127.57%                       115.00%
                                                                  ======                       ======                        ======
</TABLE>

-------------------------------------------------------

(1)  Includes non-performing loans.
(2)  Represents  the  difference  between the average yield on  interest-earning
     assets and the average cost of interest bearing liabilities.
(3)  Represents  the net  interest  income  divided by average  interest-earning
     assets.

                                        7

<PAGE>

ANALYSIS OF NET INTEREST INCOME

     Net interest income  represents the difference  between income derived from
interest-earning   assets  and  the   interest   expense   on   interest-bearing
liabilities.  Net  interest  income is affected by both the  difference  between
rates  of  interest  earned  on  interest-earning   assets  and  rates  paid  on
interest-bearing liabilities ("interest rate spread") and the relative volume of
interest-earning assets and interest-bearing liabilities.

     Table 3  above  sets  forth  certain  information  relating  to the  Bank's
statements  of financial  condition and  statements of operations  for the three
years ended September 30, 1999, 1998, and 1997 and reflects the yield on average
interest-earning assets and the cost of average interest-bearing liabilities for
the periods indicated.  Average balances are derived from month end balances and
the Bank does not believe that the use of month end balances  instead of average
daily balances has caused any material difference in the information presented.

RESULTS OF OPERATIONS

Comparison of Financial Condition at September 30, 1999 and 1998

     Total assets  increased 3.8% to $292.3 million at September 30, 1999,  from
$281.5 million at September 30, 1998. Loans receivable (net of loans-in-process,
deferred  fees and loan  loss  reserves)  decreased  5.7% to $212.1  million  at
September  30,  1999,  from $225.0  million at September  30,  1998.  Investment
securities and  mortgage-backed  securities  increased 97.0% to $59.4 million at
September 30, 1999, from $30.1 million at September 30, 1998.

     In recent years,  the Bank has increased its emphasis on the origination of
both  secured  and  unsecured  commercial  and  consumer  loans in order to take
advantage of generally higher yields as well as shorter terms to maturity. Prior
thereto,  a majority of the loans  originated  by the Bank were  mortgage  loans
secured by single-family residences.  From time to time, the Bank sells selected
mortgage  loans in the  secondary  market in order to reduce  interest  rate and
credit risk, while retaining servicing to generate additional fee income.

     Commercial  loans  increased  22.1% to $89.5 million at September 30, 1999,
from $73.3 million at September 30, 1998, while consumer loans increased 5.1% to
$50.8  million at September  30, 1999 from $48.4  million at September 30, 1998,
reflecting  the Bank's  emphasis of structuring  itself as a commercial  banking
entity.  Residential real estate mortgage loans decreased 29.6% to $75.5 million
at September 30, 1999, from $107.3 million at September 30, 1998.  During fiscal
1999,  the Bank  originated  $91.2 million of residential  real estate  mortgage
loans, compared to $95.7 million during fiscal 1998. The Bank sold and exchanged
$86.1 million of real estate loans during fiscal 1999, compared to $54.1 million
during fiscal 1998.  Loans  serviced for others was $275.3  million at September
30, 1999,  compared to $250.2  million at September  30,  1998.  Commercial  and
consumer loan  originations  increased to $86.3 million during fiscal 1999, from
$77.4 million during fiscal 1998.

     Deposits  increased  14.7% to $234.6  million at September  30, 1999,  from
$204.6 million at September 30, 1998. Certificates of deposit increased 11.9% to
$173.9 million at September 30, 1999, from $155.4 million at September 30, 1998.
The Bank  continued  its  efforts of  attracting  lower cost core  deposits,  as
checking  accounts  increased 24.8% to $53.5 million at September 30, 1999, from
$42.9  million at September  30,  1998.  Total  borrowings  were $1.3 million at
September 30, 1999  compared to $11.9 million at September 30, 1998,  supporting
the Bank's banking operations and liquidity requirements during the periods.

     Stockholders'  equity was $48.8 million at September 30, 1999,  compared to
$56.7  million at  September  30,  1998.  The ratio of equity to total assets at
September 30, 1999  decreased to 16.7% from 19.9% at September 30, 1998.  During
the years ended September 30, 1999 and 1998, the Company declared four quarterly
cash  dividends  each,  totaling  $1.1  million and $1.0  million  respectively,
reflecting  dividend  payout  ratios  of 34.1% and  33.8%  respectively.  Future
quarterly  dividends  will be  determined  at the  discretion  of the  Board  of
Directors  based upon  earnings,  the capital  and  financial  condition  of the
Company and general economic conditions.

     The  Company's  note  receivable  from the Employee  Stock  Ownership  Plan
("ESOP")  declined to $2.3 million at September  30, 1999,  from $2.7 million at
September   30,  1998,   reflecting   the  release  of  42,359  shares  to  ESOP
participants.  The note is reported as a reduction of  stockholders'  equity and
requires an annual  $349,000  principal  payment plus interest at prime plus one
percent. Although the ESOP note is secured solely by shares of common

                                       8
<PAGE>

stock of the Company,  the Bank expects to make  discretionary  contributions to
the ESOP in  amounts  at least  equal to the  required  principal  and  interest
payments.  At September 30, 1999,  226,350  unallocated  shares  remained in the
ESOP, compared to 268,709 at September 30, 1998.

     During fiscal 1998,  the  Company's  stockholders  approved the  Management
Recognition  Plan  ("MRP"),  representing  174,570  shares  (4%  of  outstanding
shares),  costing $3.3 million.  This deferred stock awards plan was established
for the benefit of directors  and officers of the Company and the Bank,  and the
vesting  schedule  provides  that  one-third of the shares are earned and become
non-forfeitable  on April 8, 1998,  1999, and 2000.  During 1999,  58,187 of the
awarded shares were vested.  At September 30, 1999, the remaining  58,187 of the
awarded  shares are being held in trust for future  vesting,  and  reported as a
reduction in stockholders' equity as deferred stock awards.

     Pursuant to stock repurchase  programs adopted by the Company during fiscal
years 1999 and 1998,  the Company  acquired  595,301  and 218,202  shares of its
common stock,  respectively,  through open market and private purchases.  Shares
acquired under the repurchase program are being held as treasury stock, at cost.
At September 30, 1999,  treasury  shares were 813,503  totaling  $15.8  million,
compared to 218,202  shares  totaling  $4.9 million at September  30, 1998.  The
Company  believes the  repurchase of its  outstanding  common stock will improve
liquidity in the market for its common  stock,  increase per share  earnings and
book value, provide an attractive  investment for the Company's excess funds and
decrease the potential  dilutive  effect caused by the future  exercise of stock
options.

Comparison of Operating Results for the Years Ended September 30, 1999 and 1998

     Net  Income.  Net  income  increased  to $3.2  million  for the year  ended
September  30, 1999,  from $3.1 million for the year ended  September  30, 1998.
Basic and diluted  earnings per share increased 13.8% to $0.91 per share for the
year ended  September  30, 1999,  compared to $0.80 per share for the year ended
September 30, 1998.  The average number of shares  outstanding  (net of unearned
ESOP, MRP and treasury  shares) was 3,530,811 and 3,876,813,  respectively,  for
the years ended September 30, 1999 and 1998,  reflecting the impact of the stock
repurchases.

     Interest Income. Interest income increased 5.8% to $23.1 million for fiscal
1999,  from $21.9  million for fiscal 1998.  The increase in interest  income on
loans and investments during 1999 results  principally from the increased volume
of average  interest-earning  assets.  The average  balance of  interest-earning
assets  increased  12.0% to $280.1 million for fiscal 1999,  from $250.1 million
for fiscal 1998. The yield on average  interest-earning  assets declined to 8.3%
for 1999,  from 8.7% for 1998,  reflecting the general decline in interest rates
during 1999.

     Interest  Expense.  Interest  expense  increased  8.0% to $9.9  million for
fiscal 1999, from $9.2 million for fiscal 1998. The increase in interest expense
on deposits and borrowings  during 1999 results  principally  from the increased
volume  of  average  interest-bearing   liabilities.   The  average  balance  of
interest-bearing  liabilities increased 18.0% to $231.4 million for fiscal 1999,
from $196.1  million for fiscal 1998. The cost of  interest-bearing  liabilities
declined  to 4.3% for 1999,  from 4.7% for 1998,  also  reflecting  the  general
decline in interest rates during 1999.

     Net Interest  Income.  Net interest income  increased 4.1% to $13.2 million
for fiscal  1999,  from $12.6  million  for fiscal  1998.  The  increase  in net
interest income is primarily due to the combination of the increases in both the
volume of  average  interest-earning  assets and  interest-bearing  liabilities,
offset by the general decline in interest rates during 1999, as discussed above.
The net yield on interest-earning assets (net interest income divided by average
interest-earning  assets)  declined to 4.7% for fiscal 1999, from 5.0% for 1998.
See Table 2 (Rate/Volume  Analysis) and Table 3 (Yield/Cost  Analysis) above for
additional  information  on interest  income,  interest  expense,  net  interest
income, average balances and yield/cost ratios.

     Provision  for Loan Losses.  The Bank  maintains an allowance for losses on
loans based upon  management's  evaluation of risks in the loan  portfolio,  the
Bank's  past loan loss  experience,  and current and  expected  future  economic
conditions.  The Bank provided  $120,000 and $310,000 for loan losses during the
years ended  September 30, 1999 and 1998,  respectively.  These  provisions were
necessary to support the growth and risks  associated  with the emphasis  placed
upon  commercial  and consumer  lending.  The allowance for loan losses was $3.3
million at September  30, 1999,  compared to $3.4 million at September 30, 1998,
which the Bank  believes  is  adequate  to absorb  potential  losses in its loan
portfolio.  The ratio of the  allowance  for loan losses to total loans,  net of
loans-in-process  and deferred  loan fees,  was 1.5% at  September  30, 1999 and
1998.

                                       9
<PAGE>

     The Bank uses a systematic approach in determining the adequacy of its loan
loss  allowance  and  the  necessary  provision  for  loan  losses,   through  a
classification  of  assets  program,  whereby  the loan  portfolio  is  reviewed
generally, and delinquent loans are analyzed individually, on a quarterly basis.
Consideration is given to the loan status,  payment  history,  ability to repay,
probability of repayment,  and  loan-to-value  percentages.  As a result of this
review and analysis,  loans are classified in appropriate  categories applicable
to their circumstances.  After reviewing current economic conditions, changes in
delinquency  status,  and actual  loan losses  incurred by the Bank,  management
establishes an  appropriate  reserve  percentage  applicable to each category of
assets,  and provision  for loan losses is recorded when  necessary to bring the
allowance to a level  consistent with this analysis.  The ratio of nonperforming
loans to total loans was 0.2% at September  30, 1999 and 0.4% at  September  30,
1998.

     Other Income.  Other income increased 8.6% to $2.9 million for fiscal 1999,
from $2.6  million for fiscal 1998.  Other  income  consists of fees and service
charges earned on loans,  service charges on deposit accounts,  gains from sales
of  loans,  and  other  miscellaneous  income.  Loan  fees and  service  charges
increased  28.5% to $1.3 million for fiscal 1999, from $985,000 for fiscal 1998,
reflecting  the  growth in the  commercial  and  consumer  loan  portfolios  and
checking  accounts  during 1999.  Gains from sales of loans and  mortgage-backed
securities  declined to $560,000 for fiscal 1999 from  $796,000 for fiscal 1998.
The volume of loans and  mortgage-backed  securities  sold during 1999 was $46.0
million, compared to $45.1 million for 1998, reflecting more competitive pricing
in the secondary  mortgage  market.  Servicing fee income on loans  serviced for
others  increased to $762,000 for 1999 from $637,000 for 1998, as loans serviced
for others  increased 9.2% to $275.3 million at September 30, 1999,  from $250.2
million at September 30, 1998.

     General and Administrative  Expenses.  General and administrative  expenses
increased  3.2% to $10.3  million for fiscal  1999,  from $9.9 million in fiscal
1998.  The  Company's  efficiency  ratio  (noninterest  expenses  divided by net
interest income plus noninterest income) improved to 63.9% for fiscal 1999, from
65.1% for fiscal 1998.

     The largest single  component of these  expenses,  compensation  and fringe
benefits,  declined 4.4% to $6.9 million for fiscal 1999,  from $7.2 million for
fiscal 1998.  During fiscal 1999, the benefits expense for the MRP plan declined
29.4% to $1.3  million,  compared  to $1.9  million  for fiscal  1998.  The Bank
recorded  $854,000 in benefits expense for the ESOP in fiscal 1999,  compared to
$826,000 in fiscal 1998. Other noninterest  expenses including deposit insurance
premiums,  premises and equipment,  advertising  and office  expenses  sustained
marginal incremental  increases from 1998 to 1999,  supporting a 17.3% growth in
assets from September 30, 1997 to September 30, 1999.

     Income Taxes.  The provision for income taxes increased to $2.5 million for
fiscal 1999 from $1.9  million for fiscal 1998.  The  increase in provision  for
income taxes is the result of the increased  pretax earnings to $5.6 million for
fiscal 1999,  from $5.0 million for fiscal 1998,  and the  effective  income tax
rates for each period.

Comparison of Financial Condition at September 30, 1998 and 1997

     Total assets  increased 12.9% to $281.5 million at September 30, 1998, from
$249.3 million at September 30, 1997. Loans receivable (net of loans-in-process,
deferred fees and loan loss  reserves)  increased  13.8%,  to $225.0  million at
September  30,  1998 from  $197.8  million at  September  30,  1997.  Investment
securities and  mortgage-backed  securities  increased 8.0%, to $30.1 million at
September 30, 1998, from $27.9 million at September 30, 1997.

     Commercial  loans  increased  17.4% to $73.3 million at September 30, 1998,
from $62.4 million at September 30, 1997,  while consumer loans declined 3.0% to
$48.4 million at September  30, 1998,  from $49.9 million at September 30, 1997.
Residential  real estate  mortgage  loans  increased  17.6% to $120.2 million at
September 30, 1998,  from $102.2  million at September  30, 1997.  During fiscal
1998,  the Bank  originated  $95.7 million of residential  real estate  mortgage
loans, compared to $66.9 million during fiscal 1997. The Bank sold and exchanged
$54.1 million of real estate loans during fiscal 1998, compared to $31.7 million
during fiscal 1997.  Loans  serviced for others was $250.2  million at September
30, 1998,  compared to $253.7  million at September  30, 1997.  Commercial  real
estate,  commercial  business and consumer loan originations  increased to $77.4
million during fiscal 1998, from $76.8 million during fiscal 1997.

     Deposits  increased  16.9%,  to $204.6 million at September 30, 1998,  from
$175.1 million at September 30, 1997.  Certificates of deposits  increased 18.4%
to $155.4  million at September 30, 1998,  from $131.2  million at September 30,
1997, and checking  accounts  increased  16.8% to $42.9 million at September 30,
1998,  from $37.5

                                       10
<PAGE>

million at September 30, 1997.  Total borrowings were $12.0 million at September
30, 1998, compared to $12.6 million at September 30, 1997, supporting the growth
in earning assets and banking operations during the periods.

     Stockholders'  equity was $56.7 million at September 30, 1998,  compared to
$57.9  million at  September  30,  1997.  The ratio of equity to total assets at
September 30, 1998 declined to 19.9%,  from 23.2% at September 30, 1997.  During
the year ended  September 30, 1998,  the Company  declared four  quarterly  cash
dividends totaling $1.0 million, reflecting a dividend payout ratio of 33.8%.

     The  Company's  note  receivable  from the ESOP declined to $2.7 million at
September  30, 1998,  from $3.1 million at September  30, 1997,  reflecting  the
release of 43,189 shares to ESOP  participants.  At September 30, 1998,  268,709
unallocated shares remained in the ESOP.

     During the year ended  September 30, 1998,  58,195 of the shares awarded to
MRP participants were vested,  and 116,374 of the awarded shares were being held
in trust for future vesting, and reported as a reduction in stockholders' equity
as deferred stock awards.

Comparison of Operating Results for the Years Ended September 30, 1998 and 1997

     Net Income.  Net income  increased 38.0% to $3.1 million for the year ended
September 30, 1998, from $2.3 million for the year ended September 30, 1997. The
increase  in net income is  attributable  to a 28.8%  increase  in net  interest
income and other  income,  offset in part by a 43.2%  increase  in  general  and
administrative expenses.

     Interest  Income.  Interest  income  increased  18.1% to $21.9  million for
fiscal 1998, from $18.5 million for fiscal 1997. The increase in interest income
on loans and  investments  during  1998  results  from the  increased  volume of
average  interest-earning  assets.  Interest on loans  increased  17.3% to $18.9
million in fiscal 1998,  from $16.1  million in fiscal 1997,  due primarily to a
$29.3 million increase in the average balance of loans receivable between fiscal
1998 and 1997, and an increase in the average yield on loans to 9.19% for fiscal
1998 from 9.13% for fiscal 1997.  The yield on average  interest-earning  assets
was 8.7% for 1998, compared to 8.5% for 1997.

     Interest Expense.  Interest expense for fiscal 1998 increased 10.7% to $9.2
million,  from $8.3 million for fiscal 1997. This resulted  principally  from an
increase  in the  rates  paid on  average  interest-bearing  liabilities.  Total
deposits  increased 16.9% to $204.6 million for fiscal 1998, from $175.1 million
for fiscal 1997. The average cost of interest-bearing  liabilities  increased to
4.7% for 1998,  from 4.4% for 1997.  The  average  balance  of  interest-bearing
liabilities  increased  3.6% to $196.1  million  for fiscal  1998,  from  $189.3
million for fiscal 1997.

     Net Interest  Income.  Net interest income increased 24.2% to $12.6 million
for the year ended  September  30, 1998,  from $10.2  million for the year ended
September 30, 1997.

     Provision for Loan Losses. The Bank provided $310,000 and $931,000 for loan
losses  during the years ended  September 30, 1998 and 1997,  respectively.  The
allowance  for loan losses was $3.4 million at September  30, 1998,  compared to
$3.2 million at  September  30,  1997,  which the Bank  believes was adequate to
absorb  potential  losses in its loan portfolio.  The ratio of the allowance for
loan losses to total loans, net of loans-in-process  and deferred loan fees, was
1.5% at September 30, 1998, compared to 1.6% at September 30, 1997. The ratio of
nonperforming  loans to total loans was 0.4% at  September  30, 1998 and 0.6% at
September 30, 1997.

     Other Income. Other income increased 57.0% to $2.7 million for fiscal 1998,
from $1.7  million for fiscal 1997.  Other  income  consists of fees and service
charges earned on loans,  service charges on deposit accounts,  gains from sales
of  loans,  and  other  miscellaneous  income.  Loan  fees and  service  charges
increased to $985,000 for fiscal 1998 from $752,000 for fiscal 1997,  reflecting
the  growth in the loan  portfolio  during  1998.  Gains from sales of loans and
mortgage-backed  securities increased to $796,000 for fiscal 1998, from $124,000
for fiscal  1997,  as the volume of loans and  mortgage-backed  securities  sold
during 1998 increased to $45.1 million,  from $19.8 million for 1997.  Servicing
fee income on loans  serviced  for others was  $637,000  for 1998,  compared  to
$613,000 for 1997.

     General and Administrative  Expenses.  General and administrative  expenses
increased  43.2% to $9.9  million for fiscal  1998,  from $6.9 million in fiscal
1997. The Company's  efficiency  ratio  increased to 65.1% for fiscal 1998, from
58.6% for fiscal 1997.

                                       11
<PAGE>

     The largest single  component of these  expenses,  compensation  and fringe
benefits, increased to $7.2 million for fiscal 1998 from $4.6 million for fiscal
1997.  During fiscal 1998 the Bank recorded $1.9 million of benefits expense for
the MRP plan,  compared to no expense MRP expense in fiscal  1997.  In addition,
the Bank  recorded  $826,000  in benefits  expense for the ESOP in fiscal  1998,
compared  to  $603,000  in fiscal  1997.  This  increase is also a result of the
growth in  personnel  and  management  required to support  the 45.0%  growth in
assets from September 30, 1996 to September 30, 1998. Other noninterest expenses
including deposit insurance  premiums,  premises and equipment,  advertising and
zoffice expenses remained relatively constant from period to period.

     Income Taxes.  The provision for income taxes increased to $1.9 million for
fiscal 1998 from $1.7  million for fiscal 1997.  The  increase in provision  for
income taxes is the result of the increased  pretax earnings to $5.0 million for
fiscal  1998,  from $4.0  million for fiscal 1997 and the  effective  income tax
rates then in effect.

IMPACT OF INFLATION AND CHANGING PRICES

     The financial  statements of the Bank and accompanying  footnotes 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 the relative  purchasing
power of money  over  time and due to  inflation.  The  impact of  inflation  is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies,  nearly all the assets and liabilities of the Bank are monetary. As a
result,  interest rates have a greater impact on the Bank'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.

YEAR 2000

     A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000 ("Y2K").  Many computer  programs that can
only distinguish the final two digits of the year entered (a common  programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment,  interest or delinquency  based on the wrong date
or are expected to be unable to compute payment, interest or delinquency.  Rapid
and accurate data  processing is essential to the  operations of the Bank,  most
other financial institutions and many other companies.

     In  compliance  with  regulatory  guidelines,  the  Bank  has  formed a Y2K
committee  to review the effects the century date change may have on all current
operating  systems and to assess the  potential  risks  associated  with the Y2K
issue. Formal Y2K strategic contingency plans have been developed to address the
necessary steps to insure that problems and disruptions related to the Y2K issue
are minimized.

     All material data  processing  functions of the Bank that could be impacted
by the Y2K issue are provided by a national third party service  bureau,  Bisys,
Inc. Bisys has dedicated  significant  resources in assuring its systems are Y2K
compliant. In doing so, Bisys developed a comprehensive testing and verification
program, in which the Bank participated.

     The Bank has  successfully  completed an extensive series of simulated date
testing on the Bisys host  system,  including  the century  date  rollover  from
December 31, 1999 to January 3, 2000 for all system applications.  All Bank user
departments have successfully  completed  testing their system  applications and
business resumption  contingency plans,  assuring validation of the century date
changes and system readiness.  Additional  testing has also taken place with all
other external mission critical information systems and relationships with which
the Bank exchanges data or information.

     The Bank has implemented an aggressive customer awareness campaign aimed at
educating its  customers on both the Y2K issue and the Bank's Y2K plans.  In the
event of any real or perceived Y2K concerns,  a cash  contingency  plan has been
developed to deal with any potential increase in currency demand. Throughout the
remainder of 1999,  the Bank will continue to implement  its customer  awareness
campaign.  In  addition,  the Bank will  continue  to monitor and refine its Y2K
preparedness to insure it is ready for this unprecedented event.

     In  addressing  the Y2K  issue,  the Bank has  used  its  current  internal
staffing  with  little  reliance  on  outside  resources.   Bisys  has  provided
remediated host system software at no expense to the Bank and major system is

                                       12
<PAGE>

expected to be replaced in the near future.  As a result,  estimated Y2K related
expenses of $70,000 were accrued fiscal year 1999,  compared to less than $5,000
for fiscal 1998.  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.

FORWARD LOOKING STATEMENTS

     The  Private  Securities  Litigation  Reform  Act of 1995  states  that the
disclosure  of forward  looking  information  is  desirable  for  investors  and
encourages  such  disclosure  by  providing a safe  harbor for  forward  looking
statements by corporate management.  This Annual Report, including the Letter to
Stockholders and Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward looking statements that involve risk and
uncertainty.  In order to comply with the terms of the safe harbor,  the Company
notes that a variety of risks and  uncertainties  could cause its actual results
and  experience  to differ  materially  from the  anticipated  results  or other
expectations  expressed in the Company's forward looking  statements.  The risks
and  uncertainties  that may affect the  operations,  performance,  development,
growth  projections and results of the Company's  business include,  but are not
limited to,  economic  growth,  interest rate movements,  timely  development of
technology enhancements for products, services and operating systems, the impact
of competitive products, services and pricing, customer requirements, regulatory
changes and similar  matters.  Readers of this report are cautioned not to place
undue reliance on forward  looking  statements  that are subject to influence by
these risk factors and  unanticipated  events.  Accordingly,  actual results may
differ materially from management's expectations.

SIGNIFICANT ACTIVITIES AND SUBSEQUENT EVENTS

     On August 9, 1999,  the Company signed an Agreement and Plan of Merger (the
"Plan") with Green Street  Financial  Corp ("Green  Street").  The Plan provided
that  the  Company  acquire  Green  Street  for a cash  purchase  price of $59.2
million,  representing $15.25 per share of Green Street common stock. The merger
was  consummated  on November 30, 1999, and was accounted for using the purchase
method of accounting.  Summary financial  information related to Green Street as
of September 30, 1999 and for the year then ended is as follows (unaudited):

     Total assets                         $160,819,000
     Total deposits                        100,806,000
     Stockholders' equity                   58,599,000
     Total revenue                          11,877,000
     Net income                              2,480,000

     Concurrently with the Green Street  acquisition,  the Bank changed its name
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 six of
Triangle's  branch  offices for a premium of  approximately  4.0% of the assumed
deposits,  and  purchase  the 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 are expected to become branch offices of the
Bank, while one of the branch offices is expected to be closed with the deposits
and loans to be serviced out of a nearby,  existing  branch  office of the Bank.
The transaction is expected to be completed in the first quarter of 2000.

                                       13
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
NewSouth Bancorp, Inc.
Washington, North Carolina

In our opinion, the accompanying  consolidated statements of financial condition
and the related consolidated  statements of operations,  of stockholders' equity
and of cash flows  present  fairly,  in all  material  respects,  the  financial
position of NewSouth Bancorp, Inc. and Subsidiary at September 30, 1999 and 1998
and the results of their  operations  and their cash flows for each of the three
years in the period ended  September  30, 1999,  in  conformity  with  generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

November 2, 1999

                                       14
<PAGE>

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
SEPTEMBER 30, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS                                                                       1999           1998
<S>                                                                     <C>            <C>
Cash and due from banks                                                 $  5,375,856   $  5,243,853
Interest-bearing deposits in financial institutions                        4,034,076     11,767,988
Investment securities - available for sale                                 3,024,531      3,107,545
Mortgage-backed securities - available for sale                           56,325,868     27,016,679
Loans receivable, net:
   Held for sale                                                          13,481,714     38,406,628
   Held for investment                                                   198,572,216    186,592,403
Premises and equipment, net                                                3,575,974      3,558,836
Deferred income taxes                                                      2,314,930        569,604
Real estate owned                                                            591,144        411,938
Federal Home Loan Bank of Atlanta stock, at cost
   which approximates market                                               1,460,200      1,363,800
Accrued interest receivable                                                2,022,055      1,935,490
Prepaid expenses and other assets                                          1,526,907      1,504,689
                                                                        -------------  -------------

      Total assets                                                      $292,305,471   $281,479,453
                                                                        =============  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
   Demand                                                               $ 53,525,231   $ 42,873,230
   Savings                                                                 7,220,337      6,397,856
   Large denomination certificates of deposit                             31,399,212     25,587,798
   Other time                                                            142,473,215    129,776,201
                                                                        -------------  -------------
      Total deposits                                                     234,617,995    204,635,085
Borrowed money                                                             1,318,340     11,932,919
Accrued interest payable                                                      81,081         62,707
Income taxes payable                                                          67,779              -
Advance payments by borrowers for property taxes and insurance                89,067        451,860
Other liabilities                                                          7,368,176      7,682,912
                                                                        -------------  -------------
      Total liabilities                                                  243,542,438    224,765,483
Commitments and contingencies (Notes 10 and 14)
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     43,801,987
Retained earnings, substantially restricted                               24,197,767     22,091,243
Treasury stock at cost, 813,503 and 218,202 shares at September 30,
   1999 and 1998, respectively                                           (15,770,962)    (4,895,754)
Unearned ESOP shares, 226,350 and 268,709 shares at September 30, 1999
   and 1998, respectively                                                 (2,263,500)    (2,687,093)
Deferred stock awards                                                       (783,392)    (2,126,299)
Accumulated other comprehensive income (loss), net                          (892,530)       486,246
                                                                        -------------  -------------
      Total stockholders' equity                                          48,763,033     56,713,970
                                                                        -------------  -------------

      Total liabilities and stockholders' equity                        $292,305,471   $281,479,453
                                                                        =============  =============
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       15
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                             1999            1998            1997
<S>                                                      <C>             <C>             <C>
Interest income:
   Interest and fees on loans                            $ 19,261,766    $ 18,888,253    $ 16,096,914
   Interest and dividends on investments and deposits       3,867,259       2,978,655       2,418,451
                                                         ------------    ------------    ------------
      Total interest income                                23,129,025      21,866,908      18,515,365
                                                         ------------    ------------    ------------

Interest expense:
   Interest on deposits                                     9,379,641       9,096,290       8,088,144
   Interest on borrowings                                     599,422         143,342         258,084
                                                         ------------    ------------    ------------
      Total interest expense                                9,979,063       9,239,632       8,346,228
                                                         ------------    ------------    ------------

Net interest income before provision for loan losses       13,149,962      12,627,276      10,169,137
Provision for loan losses                                     120,000         310,000         931,078
                                                         ------------    ------------    ------------
      Net interest income                                  13,029,962      12,317,276       9,238,059
                                                         ------------    ------------    ------------
Other income:
   Loan fees and service charges                            1,265,974         985,439         752,470
   Loan servicing fees                                        762,125         637,480         613,353
   Gain on sale of real estate, net                            61,027          28,478          32,190
   Gain on sale of mortgage loans and mortgage-backed
      securities                                              560,469         796,004         124,066
   Other income                                               224,118         198,647         162,893
                                                         ------------    ------------    ------------
      Total other income                                    2,873,713       2,646,048       1,684,972
                                                         ------------    ------------    ------------
General and administrative expenses:
   Compensation and fringe benefits                         6,924,085       7,239,911       4,603,764
   Federal insurance premiums                                 123,431         113,646          88,165
   Premises and equipment                                     501,270         356,550         377,468
   Advertising                                                137,806         134,978         181,016
   Payroll and other taxes                                    520,656         417,140         311,290
   Other                                                    2,047,568       1,677,841       1,379,348
                                                         ------------    ------------    ------------
      Total general and administrative expenses            10,254,816       9,940,066       6,941,051
                                                         ------------    ------------    ------------

Income before income taxes                                  5,648,859       5,023,258       3,981,980

Income taxes                                                2,452,713       1,899,900       1,719,350
                                                         ------------    ------------    ------------

Net income                                               $  3,196,146    $  3,123,358    $  2,262,630

Other comprehensive income (loss), net                     (1,378,776)        185,928         259,783
                                                         ------------    ------------    ------------

Comprehensive income                                     $  1,817,370    $  3,309,286    $  2,522,413
                                                         ============    ============    ============

Net income per common share:
Basic                                                    $        .91    $        .80    $        .35 (1)
                                                         ============    ============    ============

Diluted                                                  $        .91    $        .80    $        .35 (1)
                                                         ============    ============    ============
</TABLE>

(1)  Calculated from date of conversion, see Note 2

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       16
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                           RETAINED
                                                         ADDITIONAL        EARNINGS,                        UNEARNED
                                             COMMON        PAID-IN      SUBSTANTIALLY      TREASURY           ESOP
                                             STOCK         CAPITAL        RESTRICTED         STOCK           SHARES
                                          -----------  --------------  ---------------  ---------------  --------------
<S>                                       <C>          <C>             <C>              <C>              <C>
BALANCE, SEPTEMBER 30, 1996               $        -   $           -   $   18,306,036   $            -   $           -
Issuance of shares of common stock            29,095      42,423,041                -                -      (3,491,400)
Net income                                         -               -        2,262,630                -               -
Other comprehensive income, net of taxes           -               -                -                -               -
Acquisition of shares for MRP                      -               -                -                -               -
Dividends ($.13 per share)                         -               -         (527,031)               -               -
Release of ESOP shares                             -         231,013                -                -         372,416
                                          -----------  --------------  ---------------  ---------------  --------------
BALANCE, SEPTEMBER 30, 1997                   29,095      42,654,054       20,041,635                -      (3,118,984)
Three for two stock split effected in the
   form of a 50% stock dividend               14,545               -          (14,545)               -               -
Net income                                         -               -        3,123,358                -               -
Fractional shares paid                             -               -           (4,652)               -               -
Other comprehensive income, net of taxes           -               -                -                -               -
Acquisition of shares for MRP                      -               -                -                -               -
Change in market value of deferred stock           -         753,959                -                -               -
MRP amortization                                   -               -                -                -               -
Acquisition of treasury shares                     -               -                -       (4,895,754)              -
Dividends ($.27 per share)                         -               -       (1,054,553)               -               -
Release of ESOP shares                             -         393,974                -                -         431,891
                                          -----------  --------------  ---------------  ---------------  --------------
BALANCE, SEPTEMBER 30, 1998                   43,640      43,801,987       22,091,243       (4,895,754)     (2,687,093)
Net income                                         -               -        3,196,146                -               -
Other comprehensive loss, net of taxes             -               -                -                -               -
MRP amortization                                   -               -                -                -               -
Acquisition of treasury shares                     -               -                -      (10,875,208)              -
Dividends ($.31 per share)                         -               -       (1,089,622)               -               -
Release of ESOP shares                             -         430,023                -                -         423,593
                                          -----------  --------------  ---------------  ---------------  --------------
BALANCE, SEPTEMBER 30, 1999               $   43,640   $  44,232,010   $   24,197,767   $  (15,770,962)  $  (2,263,500)
                                          ===========  ==============  ===============  ===============  ==============

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997   (continued)
--------------------------------------------------------------------------------
                                                           ACCUMULATED
                                                              OTHER
                                             DEFERRED     COMPREHENSIVE
                                              STOCK       INCOME (LOSS),
                                              AWARDS           NET            TOTAL
                                          -------------   -------------  --------------
<S>                                       <C>             <C>            <C>
BALANCE, SEPTEMBER 30, 1996               $          -    $     40,535   $  18,346,571
Issuance of shares of common stock                   -               -      38,960,736
Net income                                           -               -       2,262,630
Other comprehensive income, net of taxes             -         259,783         259,783
Acquisition of shares for MRP               (2,050,531)              -      (2,050,531)
Dividends ($.13 per share)                           -               -        (527,031)
Release of ESOP shares                               -               -         603,429
                                          -------------   -------------  --------------
BALANCE, SEPTEMBER 30, 1997                 (2,050,531)        300,318      57,855,587
Three for two stock split effected in the
   form of a 50% stock dividend                      -               -               -
Net income                                           -               -       3,123,358
Fractional shares paid                               -               -          (4,652)
Other comprehensive income, net of taxes             -         185,928         185,928
Acquisition of shares for MRP               (1,224,768)              -      (1,224,768)
Change in market value of deferred stock      (753,959)              -               -
MRP amortization                             1,902,959               -       1,902,959
Acquisition of treasury shares                       -               -      (4,895,754)
Dividends ($.27 per share)                           -               -      (1,054,553)
Release of ESOP shares                               -               -         825,865
                                          -------------   -------------  --------------
BALANCE, SEPTEMBER 30, 1998                 (2,126,299)        486,246      56,713,970
Net income                                           -               -       3,196,146
Other comprehensive loss, net of taxes               -      (1,378,776)     (1,378,776)
MRP amortization                             1,342,907               -       1,342,907
Acquisition of treasury shares                       -               -     (10,875,208)
Dividends ($.31 per share)                           -               -      (1,089,622)
Release of ESOP shares                               -               -         853,616
                                          -------------   -------------  --------------
BALANCE, SEPTEMBER 30, 1999               $   (783,392)   $   (892,530)  $  48,763,033
                                          =============   =============  ==============
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       17
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                               1999           1998           1997
<S>                                                        <C>           <C>            <C>
Operating activities:
   Net income                                              $ 3,196,146   $  3,123,358   $  2,262,630
   Adjustments to reconcile net income to net cash
      used in operating activities:
      Provision for loan losses                                120,000        310,000        931,078
      Depreciation                                             289,150        172,844        147,927
      ESOP compensation                                        853,616        825,865        603,429
      MRP compensation                                       1,342,907      1,902,959              -
      Accretion of discounts on securities                         371            372         24,263
      Provision for (benefit from) deferred income taxes      (825,748)       132,438       (765,372)
      Gain on disposal of premises and equipment and
         real estate acquired in settlement of loans           (64,373)       (34,259)       (33,506)
      Gain on sale of mortgage loans and  mortgage-
         backed securities                                    (560,469)      (796,004)      (124,066)
      Originations of loans held for sale, net             (60,777,625)   (66,892,933)   (35,004,100)
      Proceeds from sale of loans held for sale             40,597,010     36,106,871     13,175,014
      Other operating activities                              (337,366)     3,327,998        (50,297)
                                                           ------------  -------------  -------------
         Net cash used in operating activities             (16,166,381)   (21,820,491)   (18,833,000)
                                                           ------------  -------------  -------------
Investing activities:
   Proceeds from maturities of investment securities
      available for sale                                             -              -      7,000,000
   Purchases of investment securities                                -              -     (2,000,000)
   Proceeds from principal repayments and sales of
      mortgage-backed securities available for sale         14,141,098     16,314,270      8,914,741
   Originations of loans held for investment, net
      of principal repayments                              (12,863,836)   (14,631,404)   (40,566,654)
   Proceeds from disposal of premises and equipment
      and real estate acquired in settlement of loans          655,821        441,237        815,117
   Purchases of FHLB stock                                     (96,400)       (76,300)             -
   Purchases of premises and equipment                        (312,919)      (916,865)       (66,057)
                                                           ------------  -------------  -------------
         Net cash provided by (used in) investing
            activities                                       1,523,764      1,130,938    (25,902,853)
                                                           ------------  -------------  -------------
Financing activities:
   Net increase in deposit accounts                         29,982,910     29,519,297      3,902,502
   Proceeds from FHLB borrowings                            61,000,000     46,000,000     49,000,000
   Repayments of  FHLB borrowings                          (70,500,000)   (47,500,000)   (38,000,000)
   Net proceeds from issuance of stock                               -              -     38,960,736
   Purchase of treasury shares                             (10,875,208)    (4,895,754)             -
   MRP funding                                                       -     (1,224,768)    (2,050,531)
   Cash paid for fractional shares                                   -         (4,652)             -
   Cash dividends paid                                      (1,089,622)    (1,045,908)      (264,574)
   Net change in escrow accounts                              (362,793)       269,129       (198,118)
   Net change in repurchase agreements                      (1,114,579)       811,799        581,512
                                                           ------------  -------------  -------------
         Net cash provided by financing activities           7,040,708     21,929,143     51,931,527
                                                           ------------  -------------  -------------

Increase (decrease) in cash and cash equivalents            (7,601,909)     1,239,590      7,195,674
Cash and cash equivalents, beginning of year                17,011,841     15,772,251      8,576,577
                                                           ------------  -------------  -------------
Cash and cash equivalents, end of year                     $ 9,409,932   $ 17,011,841   $ 15,772,251
                                                           ============  =============  =============
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                       18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

1.   BASIS OF PRESENTATION AND ACCOUNTING POLICIES

     ORGANIZATION AND NATURE OF OPERATIONS

     NewSouth   Bancorp,   Inc.  (the  "Company")  is  a  bank  holding  company
     incorporated  under the laws of the State of Virginia.  NewSouth  Bank (the
     "Bank"),  the  wholly-owned  subsidiary  of the Company,  is organized  and
     incorporated  under  the laws of the state of North  Carolina.  The Bank is
     regulated  by the  Federal  Deposit  Insurance  Corporation  and the  North
     Carolina Office of the Commissioner of Banks.

     The consolidated  financial  statements include the accounts of the Company
     and its  wholly-owned  subsidiary,  the Bank. All significant  intercompany
     balances and transactions have been eliminated in consolidation.

     The  accounting  and reporting  policies of the Company and the Bank follow
     generally accepted  accounting  principles and general practices within the
     financial services industry as summarized below.

     CASH AND CASH EQUIVALENTS

     Cash and cash equivalents  include demand and time deposits (with remaining
     maturities  of ninety days or less at time of purchase) at other  financial
     institutions and federal funds sold. Generally, federal funds are purchased
     and sold for one-day periods.

     INVESTMENTS AND MORTGAGE-BACKED SECURITIES

     Investments in certain  securities are classified into three categories and
     accounted  for as  follows:  (1) debt  securities  that the  entity has the
     positive  intent and the  ability to hold to  maturity  are  classified  as
     held-to-maturity  and  reported  at  amortized  cost;  (2) debt and  equity
     securities that are bought and held  principally for the purpose of selling
     them in the near term are classified as trading  securities and reported at
     fair value, with unrealized gains and losses included in earnings; (3) debt
     and equity securities not classified as either held-to-maturity  securities
     or trading  securities are classified as available for sale  securities and
     reported at fair value,  with  unrealized  gains and losses  excluded  from
     earnings and reported as accumulated other comprehensive income, a separate
     component of equity.  As of September 30, 1999 the Bank has  classified all
     investments as available for sale.

     Premiums and discounts on debt securities are recognized in interest income
     using the interest method over the period to maturity.

     Mortgage-backed  securities represent  participating  interests in pools of
     long-term first mortgage loans.  Premiums and discounts are amortized using
     the interest  method over the  remaining  period to  contractual  maturity,
     adjusted for anticipated prepayments.

     Gains and  losses on the sale of  securities  are  determined  by using the
     specific identification method.

                                       19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

     Loans  receivable  held for  investment  are stated at the amount of unpaid
     principal,  reduced  by an  allowance  for  loan  losses  and net  deferred
     origination  fees.  Interest  on loans is  accrued  based on the  principal
     amount outstanding and is recognized using the interest method. The accrual
     of interest is  discontinued,  and accrued but unpaid  interest is reversed
     when, in management's judgment, it is determined that the collectibility of
     interest,  but not  necessarily  principal,  is doubtful.  Generally,  this
     occurs when payment is delinquent in excess of ninety days.

     Loan origination  fees, as well certain direct loan origination  costs, are
     deferred. Such costs and fees are recognized as an adjustment to yield over
     the contractual lives of the related loans utilizing the interest method.

     Commitment  fees to originate or purchase  loans are  deferred,  and if the
     commitment  is  exercised,  recognized  over  the  life  of the  loan as an
     adjustment of yield. If the commitment expires unexercised, commitment fees
     are  recognized  in income  upon  expiration  of the  commitment.  Fees for
     originating  loans for other financial  institutions are recognized as loan
     fee income.

     A loan is considered impaired,  based on current information and events, if
     it is  probable  that the Bank  will be  unable to  collect  the  scheduled
     payments of principal  or interest  when due  according to the  contractual
     terms  of the loan  agreement.  Uncollateralized  loans  are  measured  for
     impairment  based  on the  present  value of  expected  future  cash  flows
     discounted  at  the  historical   effective   interest   rate,   while  all
     collateral-dependent  loans are measured for  impairment  based on the fair
     value of the  collateral.  At  September  30,  1999 and 1998 and during the
     years  then  ended  there  were  no  individual   loans   material  to  the
     consolidated financial statements which were defined as impaired.

     The Bank uses several  factors in  determining  if a loan is impaired.  The
     internal  asset  classification  procedures  include a  thorough  review of
     significant loans and lending relationships and include the accumulation of
     related data. This data includes loan payment status,  borrowers' financial
     data and borrowers' operating factors such as cash flows,  operating income
     or loss, etc.

     The  allowance  for loan  losses is  increased  by  charges  to income  and
     decreased  by  charge-offs  (net  of  recoveries).   Management's  periodic
     evaluation  of the  adequacy of the  allowance  is based on the Bank's past
     loan loss  experience,  known and inherent risks in the portfolio,  adverse
     situations that may affect the borrower's  ability to repay,  the estimated
     value of any underlying collateral, and current economic conditions.  While
     management  believes  that it has  established  the allowance in accordance
     with generally  accepted  accounting  principles and has taken into account
     the views of its regulators and the current economic environment, there can
     be no assurance  that in the future the Bank's  regulators  or risks in its
     portfolio will not require further increases in the allowance.

     LOANS HELD FOR SALE

     Loans  originated and intended for sale are carried at the lower of cost or
     aggregate estimated market value. Net unrealized losses are recognized in a
     valuation  allowance  by charges  to  income.  Gains and losses on sales of
     whole or participating interests in real estate loans are recognized at the
     time of  sale  and are  determined  by the  difference  between  net  sales
     proceeds  and  the  Bank's  basis  of the  loans  sold,  adjusted  for  the
     recognition of any servicing assets retained.

                                       20
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS

     Loans,  including impaired loans, are generally classified as nonaccrual if
     they are past due as to maturity or payment of  principal or interest for a
     period of more than 90 days,  unless such loans are well-secured and in the
     process of  collection.  If a loan or a portion of a loan is  classified as
     doubtful or is partially  charged off, the loan is generally  classified as
     nonaccrual.  Loans  that are on a current  payment  status or past due less
     than 90 days may also be  classified  as nonaccrual if repayment in full of
     principal and/or interest is in doubt.

     Loans may be returned to accrual  status when all  principal  and  interest
     amounts contractually due (including  arrearages) are reasonably assured of
     repayment  within an  acceptable  period of time,  and there is a sustained
     period of repayment performance  (generally a minimum of six months) by the
     borrower,  in  accordance  with  the  contractual  terms  of  interest  and
     principal.

     While a loan is classified as nonaccrual and the future  collectibility  of
     the  recorded  loan  balance  is  doubtful,  collections  of  interest  and
     principal  are generally  applied as a reduction to principal  outstanding,
     except in the case of loans with scheduled  amortization  where the payment
     is  generally   applied  to  the  oldest   payment  due.  When  the  future
     collectibility  of the recorded loan balance is expected,  interest  income
     may be  recognized  on a cash basis  limited to that which  would have been
     recognized on the recorded loan balance at the  contractual  interest rate.
     Receipts  in  excess of that  amount  are  recorded  as  recoveries  to the
     allowance  for  loan  losses  until  prior   charge-offs  have  been  fully
     recovered.

     MORTGAGE SERVICING RIGHTS

     The Company  accounts for its mortgage  servicing assets in accordance with
     SFAS No. 125  "Accounting  for Transfers and Servicing of Financial  Assets
     and  Extinguishments  of Liabilities".  Impairments of servicing assets are
     evaluated  through an  assessment of the fair value of those assets using a
     disaggregated,  discounted  cash-flows  method  under  which the assets are
     disaggregated   into   various   strata,    based   on   predominant   risk
     characteristics.   The  net  carrying  value  of  each  stratum,  based  on
     predominant risk  characteristics,  is compared to its discounted estimated
     future net cash flows to determine  whether  adjustments  should be made to
     carrying values or amortization schedules.  Impairment of a servicing asset
     is recognized through a valuation  allowance and a charge to current-period
     earnings  if it is  considered  to  be  temporary,  or,  through  a  direct
     write-down  of the asset and a charge to  current-period  earnings if it is
     considered other than temporary.  The predominant risk  characteristics  of
     the  underlying  loan that are used to  satisfy  the  servicing  assets and
     liabilities  for  measurement  purposes  generally  include  the  (1)  loan
     origination  date,  (2)  loan  rate,  (3)  loan  type and size and (4) loan
     maturity date.

     PREMISES AND EQUIPMENT

     Premises and equipment are stated at cost less accumulated depreciation and
     amortization.   Depreciation   and   amortization   are   computed  by  the
     straight-line  and accelerated  methods based on estimated service lives of
     assets.  Useful  lives  range  from 10 to 40 years  for  substantially  all
     premises and from 3 to 20 years for equipment and fixtures.

                                       21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     REAL ESTATE OWNED

     Assets acquired  through loan foreclosure are recorded as real estate owned
     ("REO")  at the lower of the  estimated  fair  value of the  property  less
     estimated  costs to sell at the date of foreclosure or the carrying  amount
     of  the  loan  plus  unpaid  accrued  interest.   The  carrying  amount  is
     subsequently reduced by additional allowances which are charged to earnings
     if the  estimated  fair value  declines  below its  initial  value plus any
     capitalized  costs.  Costs related to the  improvement  of the property are
     capitalized, whereas costs related to holding the property are expensed.

     INVESTMENT IN FEDERAL HOME LOAN BANK STOCK

     The Bank is required  to invest in stock of the  Federal  Home Loan Bank of
     Atlanta (FHLB) in the amount of 1% of its  outstanding  home loans or 5% of
     its outstanding  advances from the FHLB, whichever is greater. At September
     30, 1999 and 1998,  respectively the Bank owned 14,602 and 13,638 shares of
     the FHLB's $100 par value capital stock.

     INCOME TAXES

     Deferred tax asset and liability  balances are determined by application to
     temporary  differences  of the tax rate expected to be in effect when taxes
     will become payable or receivable.  Temporary  differences  are differences
     between the tax basis of assets and liabilities and their reported  amounts
     in the  financial  statements  that will  result in taxable  or  deductible
     amounts in future  years.  The effect on deferred  taxes of a change in tax
     rates is  recognized  in income in the period that  includes the  enactment
     date.

     STOCK SPLIT

     On July 16, 1998 the Company declared at three-for-two  stock split, in the
     form of a 50% stock  dividend,  payable August 19, 1998 to  stockholders of
     record on July 31,  1998.  Stockholders  received one  additional  share of
     common stock for every two shares held on the record date. All prior period
     share and per share data have been adjusted for the split.

     RECLASSIFICATIONS

     Certain  items  included  in  the  1998  financial   statements  have  been
     reclassified to conform to the 1999 presentation.  These  reclassifications
     have no  effect  on the  net  income  or  stockholders'  equity  previously
     reported.

     COMPREHENSIVE INCOME

     The Company  adopted  SFAS No.  130,  "Reporting  Comprehensive  Income" on
     October 1, 1998.  SFAS No. 130  establishes  standards  for  reporting  and
     displaying  comprehensive  income  and  its  components  in a  full  set of
     general-purpose financial statements.

                                       22
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     As required by SFAS No. 130,  prior year  information  has been modified to
     conform with the new  presentation.  The Company's only components of other
     comprehensive  income relate to unrealized  gains (losses) on available for
     sale securities.  Information  concerning the Company's other comprehensive
     income (loss) for the years ended  September 30, 1999,  1998 and 1997 is as
     follows:

<TABLE>
<CAPTION>
                                                1999           1998           1997
<S>                                         <C>            <C>            <C>
Unrealized gains (losses) on securities
   available for sale                       $(2,159,473)   $   578,471    $   411,520

Reclassification of net (gains) losses
   recognized in net income                    (138,881)      (272,724)        14,651

Income tax (expense) benefit relating to
   unrealized gains (losses) on available
   for sale securities                          919,578       (119,819)      (166,388)
                                            -----------    -----------    -----------

Other comprehensive income (loss), net      $(1,378,776)   $   185,928    $   259,783
                                            ===========    ===========    ===========
</TABLE>

     SEGMENT INFORMATION

     The  Company  adopted  SFAS  No.  131,  "Disclosure  About  Segments  of an
     Enterprise  and  Related  Information"  on October  1,  1998.  SFAS No. 131
     specifies revised guidelines for determining an entity's operating segments
     and the type and  level  of  financial  information  to be  disclosed.  The
     adoption  of SFAS No. 131 did not have a material  effect on the  Company's
     financial  statements,  as management has determined that the bank operates
     in one business segment.

     EMPLOYERS DISCLOSURES ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS

     The Company has adopted the  provisions of Financial  Accounting  Standards
     No. 132,  "Employers  Disclosures  about Pensions and Other  Postretirement
     benefits",  effective for fiscal years  beginning  after December 15, 1997.
     This  Statement  revises  employees'  disclosures  about  pension and other
     postretirement  benefit  plans.  It does  not  change  the  measurement  or
     recognition  of those  plans.  The  adoption of SFAS No. 132 did not have a
     material effect on the Company's financial statements.

     MORTGAGE-BACKED SECURITIES

     Statement  of  Financial  Accounting  Standards  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. This Statement amends existing  classification and accounting
     treatment of mortgage-backed securities, retained after mortgage loans held
     for  sale  are  securitized,  for  entities  engaged  in  mortgage  banking
     activities.  These securities  previously were classified and accounted for
     as   trading   and   now  may  be   classified   as   held-to-maturity   or
     available-for-sale,  also. This Statement is effective for the first fiscal
     quarter  beginning  after  December 15,  1998.  SFAS No. 134 did not have a
     material effect on the Company's financial statements.

                                       23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     NEW ACCOUNTING PRONOUNCEMENTS

     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.  This  Statement  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 the 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 effect on the Company's financial statements.

     USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

2.   SIGNIFICANT ACTIVITIES

     NewSouth  Bancorp,  Inc. was formed for the purpose of becoming the holding
     company for Home Savings  Bank,  SSB. On April 7, 1997,  Home Savings Bank,
     SSB  converted  from a North  Carolina-chartered  mutual  savings bank to a
     North  Carolina-chartered  stock  savings  bank to be known as Home Savings
     Bank, Inc., SSB,  ("Converted  Bank"), in connection with an initial public
     offering of common  stock.  Immediately  following  completion of the stock
     conversion,  the Converted Bank  converted from a North  Carolina-chartered
     stock savings bank to a North Carolina  commercial  bank known as "NewSouth
     Bank." In connection  with the  conversion,  the Company  issued  4,364,250
     shares of $.01 par value per share common stock,  including  349,140 issued
     to the Employee Stock Ownership Plan ("ESOP"),  for $10 per share. The sale
     of common stock generated proceeds of $38,960,736,  net of conversion costs
     of $1,190,364 and ESOP shares of $3,491,400.

     At the time of the conversion,  the Bank established a liquidation  account
     in an amount equal to the Bank's net worth, or  approximately  $19,200,000,
     for the benefit of eligible  account  holders at that time. The liquidation
     account  will be reduced  annually  to the  extent  that  eligible  account
     holders have reduced their eligible deposits,  shall cease upon the closing
     of the  accounts,  and  shall  never  be  increased.  In the  event  of the
     liquidation of the Bank, all remaining  eligible  deposit  account  holders
     shall be entitled,  after all payments to creditors, to a distribution from
     the liquidation account before any distribution to stockholders.  Dividends
     paid by the Company cannot be paid from the liquidation account.

                                       24
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     On August 9, 1999,  the Company signed an Agreement and Plan of Merger with
     Green Street Financial Corp ("Green Street"). The Plan calls for each Green
     Street  share to be  converted  into the right to receive a cash payment of
     $15.25 upon  completion  of the merger.  The merger will be  accounted  for
     using the purchase  method of accounting and is expected to be completed by
     December 31, 1999.  Information related to Green Street as of September 30,
     1999 and for the year then ended is as follows (unaudited):

          Total assets                   $160,819,000
          Total revenue                    11,877,000
          Net income                        2,480,000

     Concurrently  with the Green Street  acquisition,  the Bank will change its
     name to First South Bank.

3.   INVESTMENT SECURITIES

     Investment  securities  at September  30, 1999 and 1998 are  classified  as
     available  for sale  according to  management's  intent and  summarized  as
     follows:

                                          GROSS UNREALIZED     ESTIMATED
                            AMORTIZED   --------------------     MARKET
                              COST         GAINS     LOSSES      VALUE
                           ----------   ----------   -------   ----------
     1999:
     U.S. Treasury Notes   $3,000,155   $   24,376   $    --   $3,024,531
                           ==========   ==========   =======   ==========
     1998:
     U.S. Treasury Notes   $3,000,526   $  107,019   $    --   $3,107,545
                           ==========   ==========   =======   ==========

     U.S. Treasury notes at September 30, 1999 with amortized cost of $3,000,155
     and estimated  market value of $3,024,531  are  contractually  scheduled to
     mature in one year or less.

4.   MORTGAGE-BACKED SECURITIES

     Mortgage-backed securities at September 30, 1999 and 1998 are classified as
     available  for sale  according to  management's  intent and  summarized  as
     follows:

<TABLE>
<CAPTION>
                                                            GROSS UNREALIZED         ESTIMATED
                                          AMORTIZED    -------------------------       MARKET
                                             COST         GAINS         LOSSES         VALUE
                                         -----------   -----------   -----------    -----------
<S>                                      <C>           <C>           <C>            <C>
1999:
     FHLMC participation certificates,
     maturing from years 2003 to 2029    $57,848,801   $    47,196   $(1,570,127)   $56,325,868
                                         ===========   ===========   ===========    ===========

1998:
     FHLMC participation certificates,
     maturing from years 2003 to 2028    $26,323,899   $   692,780   $        --    $27,016,679
                                         ===========   ===========   ===========    ===========
</TABLE>

                                       25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     Mortgage-backed   securities  at  September  30,  1999  are   contractually
     scheduled to mature as follows:

                                                             ESTIMATED
                                               AMORTIZED       MARKET
                                                  COST         VALUE
                                              -----------   -----------

     Due after one year through five years    $ 1,269,296   $ 1,271,842
     Due after five years through ten years     4,760,395     4,704,570
     Due after ten years                       51,819,110    50,349,456
                                              -----------   -----------

                                              $57,848,801   $56,325,868
                                              ===========   ===========

     Expected   maturities  may  differ  from  contractual   maturities  because
     borrowers have the right to call or prepay obligations with or without call
     or prepayment penalties.

     Mortgage-backed securities with a carrying value of $5,520,194,  $9,016,982
     and $6,607,924 were sold during the years ended  September 30, 1999,  1998,
     and   1997,   respectively.   Gross   realized   gains  on  the   sales  of
     mortgage-backed  securities  were $138,881,  $272,724 and $688 during 1999,
     1998  and  1997,   respectively.   Gross   realized   losses  on  sales  of
     mortgage-backed  securities  were $15,339 during 1997.  There were no gross
     realized losses during 1999 and 1998.

     Mortgage-backed   securities   with  a  carrying  value  of   approximately
     $2,119,192  and  $3,619,011  were pledged as  collateral  for deposits from
     public entities at September 30, 1999 and 1998, respectively.

5.   LOANS RECEIVABLE

     Loans receivable at September 30, 1999 and 1998 are summarized as follows:

                                           1999             1998

     Mortgage loans                  $  75,508,130    $ 107,280,800
     Consumer loans                     50,846,947       48,385,965
     Commercial loans                   89,509,323       73,303,016
                                     -------------    -------------
               Total                   215,864,400      228,969,781
     Less:
         Allowance for loan losses      (3,297,256)      (3,364,588)
         Deferred loan fees               (513,214)        (606,162)
                                     -------------    -------------

     Loans receivable, net           $ 212,053,930    $ 224,999,031
                                     =============    =============

     The Bank has pledged its eligible real estate loans to collateralize actual
     or  potential  borrowings  from the Federal  Home Loan Bank of Atlanta (See
     Note 10).

     During  1999,  1998 and 1997,  the Bank  exchanged  loans with  outstanding
     principal   balances   of   $45,527,117,   $17,958,559   and   $18,524,209,
     respectively, with the Federal Home Loan Mortgage Corporation ("FHLMC") for
     mortgage-backed securities of equal value.

                                       26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     The Bank originates mortgage loans for portfolio  investment or sale in the
     secondary  market.  During the period of  origination,  mortgage  loans are
     designated as either held for sale or for investment purposes. Transfers of
     loans held for sale to the  investment  portfolio are recorded at the lower
     of cost or market value on the transfer  date.  Loans  receivable  held for
     sale at September 30, 1999 and 1998,  are fixed rate mortgage loans with an
     estimated  market  value of  approximately  $13,500,000  and $  38,400,000,
     respectively.

     Net gains on sales of loans  receivable held for sale amounted to $303,324,
     $523,280 and $138,717  during the years ended  September 30, 1999, 1998 and
     1997, respectively.

     The changes in the allowance for loan losses for the years ended  September
     30, 1999, 1998 and 1997 are as follows:

                                        1999           1998           1997

     Balance at beginning of year   $ 3,364,588    $ 3,249,352    $ 2,351,309
     Provisions for loan losses         120,000        310,000        931,078
     Loans charged off                 (265,384)      (202,543)       (71,904)
     Recoveries                          78,052          7,779         38,869
                                    -----------    -----------    -----------

     Balance at end of year         $ 3,297,256    $ 3,364,588    $ 3,249,352
                                    ===========    ============   ===========

     The following is a summary of the principal balances of loans on nonaccrual
     status and loans past due ninety days or more:

                                                       1999       1998
     Loans contractually past due 90 days or more
        and/or on nonaccrual status:
           Residential                              $486,714   $728,856
           Consumer and commercial                    80,631     73,544
                                                    --------   --------

                                                    $567,345   $802,400
                                                    ========   ========

     During the years ended September 30, 1999,  1998 and 1997,  interest income
     of  approximately  $9,000,  $18,000  and  $48,000,  respectively,  was  not
     recorded related to loans accounted for on a nonaccrual basis.

6.   PREMISES AND EQUIPMENT

     Premises  and  equipment  at  September  30,  1999 and 1998  consist of the
     following:

                                            1999         1998

     Land                                $1,081,952   $1,081,952
     Office buildings                     2,499,579    2,499,579
     Furniture, fixtures and equipment    1,840,334    1,706,207
     Vehicles                               241,061      249,748
                                         ----------   ----------
                                          5,662,926    5,537,486
     Less accumulated depreciation        2,086,952    1,978,650
                                         ----------   ----------

          Total                          $3,575,974   $3,558,836
                                         ----------   ----------

                                       27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

7.   EMPLOYEE BENEFIT PLANS

     The Company  participates in a  multiemployer  defined benefit pension plan
     which  covers  substantially  all  employees.  Expenses of the plan for the
     years ended September 30, 1999,  1998 and 1997 were $133,000,  $168,500 and
     $96,000, respectively.

     The Company participates in a multiemployer defined contribution plan which
     covers   substantially  all  employees.   Under  the  plan,  employees  may
     contribute from 1% to 15% of compensation,  subject to an annual maximum as
     determined  by the  Internal  Revenue  Code.  The  Company  makes  matching
     contributions of 50% of employees' contributions up to 6% of the employees'
     salaries.  The plan provides that employees'  contributions are 100% vested
     at all  times  and the  Bank's  contributions  vest  25% for  each  year of
     service. The expenses related to the Company's contributions to these plans
     for the years ended September 30, 1999, 1998 and 1997 were $76,985, $76,386
     and $52,253, respectively.

     Directors and certain officers participate in deferred  compensation plans.
     These plans generally  provide for fixed payments  beginning at retirement.
     These payments are earned over service periods of up to ten years,  and can
     include provisions for deferral of current payments. The expense related to
     these  plans  during the years  ended  September  30,  1999,  1998 and 1997
     aggregated  $516,985,  $562,478  and  $515,435,   respectively.  The  plans
     generally  include  provisions  for  forfeitures  of  unvested  portions of
     payments, and vesting in the event of death or disability.

     On  April  8,  1998,  the  Company's  Stockholders  approved  a  Management
     Recognition  Plan ("MRP") for directors and key  employees.  The Company is
     authorized to fund the acquisition of and award up to 174,570 shares (4% of
     shares issued in the stock  conversion) to be awarded by a committee of the
     Board of Directors.  The Company  completed the  acquisition  of MRP shares
     during  fiscal 1998.  On April 8, 1998,  174,570  shares  (market  value of
     $4,029,258  and  aggregate  cost of  $3,275,299)  were  awarded  to certain
     officers and employees.  The vesting schedule  provides that 33-1/3% of the
     shares shall be earned and become  non-forfeitable  on April 8, 1998,  1999
     and 2000.

     The shares issued to the MRP plan have been recorded as outstanding shares,
     and the unvested portion has been recorded as unearned compensation through
     a contra equity account. The consolidated  statements of operations for the
     years ended  September  30, 1999 and 1998 include  compensation  expense of
     $1,342,907 and $1,902,959 relating to the scheduled vesting of MRP shares.

8.   EMPLOYEE STOCK OWNERSHIP PLAN

     The Company's  Board of Directors  adopted an Employee Stock Ownership Plan
     ("ESOP"),  effective  October 1, 1996.  Employees  of the  Company  and its
     subsidiaries who have attained age 21 and completed one year of service are
     eligible to  participate  in the ESOP,  provided  that any employee who was
     employed   full-time   on  the  closing   date  of  the  Stock   Conversion
     automatically  became a participant  on October 1, 1996.  The ESOP is to be
     funded by  contributions  made by the Company or the Bank in cash or shares
     of Common Stock.  Allocations to  participants'  accounts occur annually on
     September 30.  Shares are committed to be released for financial  statement
     purposes  when the Bank makes  scheduled  payments on the ESOP note payable
     and will be  allocated to  employees  for services  rendered in the current
     accounting period. Employees vest

                                       28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     in their  allocated  ESOP  shares  over three  years.  The number of shares
     legally  released  and  allocated  is  based  on the  ratio  of the  actual
     principal payments amount to the remaining total principal payments for the
     ESOP note payable.  The Bank expects to contribute  sufficient funds to the
     ESOP to repay the note  payable  over a  ten-year  period,  plus such other
     amounts  as  the  Company's   Board  of  Directors  may  determine  in  its
     discretion.

     Initially,  the ESOP acquired  349,140 shares of the Company's common stock
     financed by $3,491,400  in  borrowings  by the ESOP from the Company.  This
     loan is  secured  by the  shares of Common  Stock  purchased  and  earnings
     thereon.  At  September  30,  1999 and 1998,  122,790  and  80,431  shares,
     respectively, have been allocated to participants' accounts and 226,350 and
     268,709  shares,   with  an  estimated   market  value  of  $4,031,973  and
     $5,844,420,   remain  unallocated.  All  allocated  shares  are  considered
     outstanding  for earning per share purposes,  while the unallocated  shares
     are not included in the calculation.

     The principal  balance of the ESOP loan was  $2,263,500  and  $2,687,093 at
     September 30, 1999 and 1998, respectively.  The Bank is using the dividends
     declared  on  shares  held by the  ESOP to  reduce  the  outstanding  debt.
     Dividends  on  allocated  shares are  treated as a  reduction  of  retained
     earnings. Dividends on unallocated shares are treated only as debt service,
     and  there is no  reduction  of  retained  earnings.  Compensation  expense
     related to the ESOP is based on the  average  fair  market  value of shares
     during the period since the prior  allocation date through the dates shares
     are committed to be released.  The financial statements for the years ended
     September  30,  1999,  1998  and  1997,  include  compensation  expense  of
     $853,616, $825,865, and $603,429, respectively, related to the ESOP.

9.   STOCK OPTION PLAN

     On April 8, 1998,  the  Shareholders  of the Company  approved the NewSouth
     Bancorp, Inc. 1997 Stock Option Plan (the "Plan"). The purpose of this Plan
     is to advance the interests of the Company through  providing  selected key
     employees and Directors of the Bank and the Company with the opportunity to
     purchase  shares.  The Plan  reserves  436,425  shares for grant within ten
     years of the effective date. The option price is required to be 100% of the
     stock's fair market value as defined, with an exception for any shareholder
     with more than a 10% ownership interest in the Company.  The exercise price
     is required to be 110% of the stock's fair market  value for these  options
     holders.  Vesting is determined on the date of the grant. Options have a 10
     year life, however,  there are additional limitations for shareholders with
     more than a 10%  ownership  interest  in the  Company.  The Plan also has a
     change of control  provision under which all shares  immediately  vest if a
     change of control, as defined, occurs.

     The  Company  has  adopted  SFAS  No.  123,  "Accounting  for  Stock  Based
     Compensation".  As  permitted  by SFAS No.  123,  the Company has chosen to
     apply APB Opinion No. 25,  "Accounting  for Stock Issued to Employees"  and
     related  interpretations.   Accordingly,  no  compensation  cost  has  been
     recognized for options granted under the Option Plan. Had compensation cost
     for the Company's  Option Plan been  determined  based on the fair value at
     the grant dates for awards under the Option Plan consistent with the method
     of SFAS No. 123,  the Plan's net income and net income per share would have
     been reduced to the pro forma amounts  indicated below. The Company did not
     grant any options  during the year ended  September  30,  1997,  therefore,
     there are no pro forma amounts for this period.

                                       29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            FOR THE YEAR ENDED
                                              SEPTEMBER 30, 1999            SEPTEMBER 30, 1998
                                         ---------------------------   ---------------------------
                                              AS                            AS
                                           REPORTED      PRO FORMA       REPORTED      PRO FORMA
                                         ------------   ------------   ------------   ------------
<S>                                      <C>            <C>            <C>            <C>
Net income                               $  3,196,146   $  3,138,174   $  3,123,358   $  1,829,801
Earnings per common share - basic        $        .91   $        .89   $        .80   $        .47
Earnings per common share - diluted      $        .91   $        .89   $        .80   $        .47
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following weighted-average
     assumptions used for grants in 1999 and 1998, respectively; dividend growth
     rate of 15% and 0%,  expected  volatility  of  20.8%  and  6.1%;  risk-free
     interest rates of 7.1% and 5.3%; and expected lives of 7 years.

     A summary of the status of the Plan as of  September  30, 1999 and 1998 and
     changes during the years then ended is presented below:

                                             1999                  1998
                                     --------------------   -------------------
                                                 WEIGHTED              WEIGHTED
                                                 AVERAGE               AVERAGE
                                                 EXERCISE              EXERCISE
                                      SHARES      PRICE     SHARES      PRICE
                                     --------   ---------   -------   ---------
Outstanding at beginning of year      398,303   $   18.25        --   $      --
Granted                                 6,000   $   17.75   398,303   $   18.25
                                      -------               -------
Outstanding at year end               404,303   $   18.24   398,303   $   18.25
                                      =======               =======

Weighted-average fair value of
   options granted during the year              $    5.04             $     5.59
                                                =========             ==========

     The following table summarizes additional information about the Option Plan


     at September 30, 1999:

                             OPTIONS OUTSTANDING           OPTIONS EXERCISABLE
                    ------------------------------------  ---------------------
                                 WEIGHTED-
                                  AVERAGE      WEIGHTED-              WEIGHTED-
                      NUMBER     REMAINING      AVERAGE     NUMBER     AVERAGE
                   OUTSTANDING  CONTRACTUAL    EXERCISE  EXERCISABLE  EXERCISE
EXERCISE PRICE      AT 9/30/99     LIFE         PRICE     AT 9/30/99    PRICE
--------------      ----------  -----------   ----------  ----------  ---------
$17.75 - 18.25       404,303     8.5 years     $ 18.24     376,053     $ 18.25

10.  BORROWED MONEY

     Borrowed  money  represents  advances  from the  Federal  Home Loan Bank of
     Atlanta and repurchase agreements. Advances from the Federal Home Loan Bank
     had a weighed average rate of 6.00% and totaled $9,500,000 at September 30,
     1998. There were no advances outstanding from the Federal Home Loan Bank at
     September 30, 1999.

     At  September  30, 1999 and 1998,  repurchase  agreements  outstanding  had
     average  rates of 3.13% and 3.33% and totaled  $1,318,340  and  $2,432,919,
     respectively.

                                       30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     At September 30, 1999,  repurchase  agreements were  collateralized by U.S.
     government agency  obligations with a principal balance of $3,000,000.  The
     Company  has  pledged  all of its  stock in the  Federal  Home Loan Bank of
     Atlanta  and  certain  loans  secured  by one to  four  family  residential
     mortgages as collateral for actual or potential  borrowings  from the FHLB.
     At September 30, 1999, the Company had an additional  $65,000,000 of credit
     available with the Federal Home Loan Bank of Atlanta.

11.  INCOME TAXES

     The  components  of  income  tax  expense  (benefit)  for the  years  ended
     September 30, 1999, 1998 and 1997 are as follows:

                       1999           1998           1997
     Current:
        Federal    $ 2,712,909    $ 1,422,845    $ 1,908,576
        State          565,552        344,617        576,146
                   -----------    -----------    -----------
                     3,278,461      1,767,462      2,484,722
                   -----------    -----------    -----------

     Deferred:
        Federal       (719,993)       115,458       (617,976)
        State         (105,755)        16,980       (147,396)
                   -----------    -----------    -----------
                      (825,748)       132,438       (765,372)
                   -----------    -----------    -----------

     Total         $ 2,452,713    $ 1,899,900    $ 1,719,350
                   ===========    ===========    ===========

     A reconciliation of the expected income tax expense at statutory tax rates,
     with income tax expense  reported in the  statements of operations  for the
     years ended September 30, 1999, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                   1999          1998           1997

<S>                                            <C>           <C>            <C>
Expected income tax expense at 34%             $ 1,920,612   $ 1,707,908    $ 1,353,873
State income taxes net of federal income tax       270,298       239,220        147,000
Non-deductible ESOP, other expenses and
   other adjustments                               261,803       (47,228)       218,477
                                               -----------   -----------    -----------

                                               $ 2,452,713   $ 1,899,900    $ 1,719,350
                                               ===========   ===========    ===========
</TABLE>

                                       31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     The  components  of  deferred  income  tax assets  and  liabilities  are as
     follows:

                                                              1999         1998
Deferred income tax assets:
   Deferred directors' fees                             $  379,283   $  365,384
   Allowance for loan losses                             1,000,686      931,514
   Employee benefits                                       878,390      483,382
   Unrealized losses on securities available for sale      606,025           --
   Other                                                    79,602      108,765
                                                        ----------   ----------
                                                         2,943,986    1,889,045
                                                        ----------   ----------
Deferred income tax liabilities:
   Loans mark-to-market                                    266,793      665,254
   Depreciation and amortization                           173,055      134,905
   Unrealized gains on securities available for sale            --      313,553
   Deferred loan origination fees and costs                 90,696      106,379
   FHLB stock                                               98,512       99,350
                                                        ----------   ----------
                                                           629,056    1,319,441
                                                        ----------   ----------

Net deferred income tax asset                           $2,314,930   $  569,604
                                                        ==========   ==========

     Retained earnings at September 30, 1999 includes  approximately  $1,850,000
     for which no deferred income tax liability has been recognized. This amount
     represents an allocation  of income to bad debt  deductions  for income tax
     purposes  only.  Reductions of the amount so allocated  for purposes  other
     than for tax bad debt losses or  adjustments  arising from carryback of net
     operating losses could create taxable income,  in certain remote instances,
     which would be subject to the then current corporate income tax rate.

12.  REGULATORY CAPITAL REQUIREMENTS

     Dividend   payments   made  by  the  Company  are  subject  to   regulatory
     restrictions  under Federal  Reserve Board policy as well as to limitations
     under applicable  provisions of Virginia corporate law. The Federal Reserve
     Board may prohibit a bank holding  company from paying any dividends if the
     holding  company's  bank  subsidiary is  classified as  "undercapitalized".
     Under Virginia law, dividends may be paid out of surplus or, if there is no
     surplus,  out of net profits  for the fiscal year in which the  dividend is
     declared  and  for the  preceding  fiscal  year.  Furthermore,  under  FDIC
     regulations,  the Bank is prohibited from making any capital  distributions
     if  after  making  the  distribution,  the  Bank  would  have:  (i) a total
     risk-based  capital  ratio  of less  than  8.0%;  (ii) a Tier 1  risk-based
     capital  ratio of less than 4.0%;  or (iii) a leverage  ratios of less than
     4.0%.

     The Bank is subject to various regulatory capital requirements administered
     by the federal and state banking agencies.  Failure to meet minimum capital
     requirements  can  initiate  certain  mandatory,  and  possibly  additional
     discretionary,  actions by  regulators  that, if  undertaken,  could have a
     direct material  effect on the Bank's  financial  statements.  Quantitative
     measures  established by regulation to ensure capital  adequacy require the
     Bank to maintain  minimum  amounts  and  ratios,  as set forth in the table
     below.  Management believes,  as of September 30, 1999, that the Bank meets
     all capital adequacy requirements to which it is subject.

                                       32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     As of  September  30,  1999,  the most  recent  notification  from the FDIC
     categorized the Bank as well capitalized under the regulatory framework for
     prompt  corrective  action.  To be categorized as well capitalized the Bank
     must maintain minimum amounts and ratios,  as set forth in the table below.
     There are no conditions or events since that  notification  that management
     believes have changed the Bank's category.

     The Bank's actual  capital  amounts and ratios as of September 30, 1999 and
     1998 are presented in the table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                  TO BE WELL CAPITALIZED
                                                                   FOR CAPITAL         UNDER PROMPT
                                                 ACTUAL         ADEQUACY PURPOSE    ACTION PROVISIONS
                                           -----------------    ----------------    -----------------
                                            AMOUNT     RATIO     AMOUNT    RATIO     AMOUNT     RATIO
                                           -------     -----    -------    -----    -------     -----
<S>                                        <C>         <C>      <C>         <C>     <C>         <C>
1999:
Total Capital (to Risk Weighted Assets)    $51,989     24.8%    $16,750     8.0%    $20,938     10.0%
Tier I Capital (to Risk Weighted Assets)    48,691     23.3%      8,375     4.0%     12,563      6.0%
Tier I Capital (to Average Assets)          48,691     16.2%     12,041     4.0%     15,052      5.0%

1998:
Total Capital (to Risk Weighted Assets)    $58,169     28.9%    $16,125     8.0%    $20,156     10.0%
Tier I Capital (to Risk Weighted Assets)    55,650     27.6%      8,063     4.0%     12,094      6.0%
Tier I Capital (to Average Assets)          55,650     20.2%     11,066     4.0%     13,758      5.0%
</TABLE>

13.  EARNINGS PER SHARE

     The Company  adopted SFAS No. 128  "Earnings Per Share" on October 1, 1997.
     As  required,  all prior period  earnings  per share have been  restated to
     conform with the provisions of the statement.

     The following table provides a reconciliation of income available to common
     stockholders  and the average number of shares  outstanding  (less unearned
     ESOP shares,  unearned  deferred stock awards and treasury  shares) for the
     years ended  September 30, 1999 and 1998.  Options to purchase  404,303 and
     398,303  shares of common  stock were  outstanding  during the years  ended
     September  30, 1999 and 1998,  respectively,  but were not  included in the
     computation of diluted EPS because the options'  exercise price was greater
     than the average market price of common shares for each of the years.

                                         1999         1998         1997

Net income (numerator)                $3,196,146   $3,123,358   $1,395,900 (1)
                                      ==========   ==========   ==========

Weighted average shares outstanding
   for basic EPS (denominator)         3,530,811    3,876,813    3,961,933 (1)
Dilutive effect of stock options              --           --           --
                                      ----------   ----------   ----------

Adjusted shares for diluted EPS        3,530,811    3,876,813    3,961,933
                                      ==========   ==========   ==========

(1)  Calculated from date of conversion, April 7, 1997.


                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

14.  MORTGAGE BANKING ACTIVITIES

     Mortgage  loans  serviced for others are not  included in the  accompanying
     consolidated  statements  of  financial  condition.  The  unpaid  principal
     balances  of  mortgage  loans  serviced  for  others was  $275,255,000  and
     $250,202,000 at September 30, 1999 and 1998, respectively.  Servicing loans
     for others generally consists of collecting mortgage payments,  maintaining
     escrow   accounts,   disbursing   payment  to  investors  and   foreclosure
     processing.  Loan  servicing  income is recorded  on the accrual  basis and
     includes  servicing fees from investors and certain charges  collected from
     borrowers, such as late payment fees.

     At September 30, 1999 and 1998,  mortgage  servicing rights reported in the
     consolidated statements of financial condition,  net of amortization,  were
     $209,090 and $184,433, respectively.

15.  FINANCIAL  INSTRUMENT WITH  OFF-BALANCE  SHEET RISK AND  SIGNIFICANT  GROUP
     CONCENTRATION OF CREDIT RISK

     The Company is a party to financial instruments with off-balance sheet risk
     in the  normal  course  of  business  to meet  the  financing  needs of its
     customers and to reduce its own exposure to fluctuations in interest rates.
     These  financial  instruments  include  commitments  to extend  credit  and
     involve,  to varying degrees,  elements of credit and interest rate risk in
     excess of the amount recognized in the balance sheet.

     The Company's  exposure to credit loss in the event of  non-performance  by
     the other  party to the  financial  instrument  for  commitments  to extend
     credit is represented by the contractual amount of those  instruments.  The
     Company uses the same credit policies in making commitments and conditional
     obligations as it does for on-balance sheet instruments.

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses  and may  require  payment of a fee.  The  Company  evaluates  each
     customer's   creditworthiness  on  a  case-by-case  basis.  The  amount  of
     collateral  obtained,  if deemed necessary by the Company upon extension of
     credit, is based on management's credit evaluation of the borrower.

     A  summary  of  the  contractual  amounts  of  the  Company's  exposure  to
     off-balance sheet risk as of September 30, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                               1999          1998
<S>                                                        <C>           <C>
Commitments to extend credit:
   Commitments to originate loans                          $33,769,607   $14,887,234
   Undrawn balances on lines of credit and undrawn
      balances on credit reserves (overdraft protection)    28,341,602    18,626,163
                                                           -----------   -----------

                                                           $62,111,209   $33,513,397
                                                           ===========   ===========
</TABLE>

                                       34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     Included in the commitments to originate loans as of September 30, 1999 and
     1998 are fixed interest rate loan commitments of $9,118,636 and $5,821,488,
     respectively.  The shorter duration of interest-sensitive  liabilities,  to
     the extent they are used to fund these fixed-rate loans, indicates that the
     Company  is  exposed  to  interest  rate  risk  because,  in a rising  rate
     environment, liabilities will be repricing faster at higher interest rates,
     thereby  reducing the market value of fixed-rate  long-term  assets and net
     interest income.

     The Company's lending is concentrated primarily in Beaufort,  Craven, Nash,
     Lenoir, Pasquotank, Pitt and surrounding counties in North Carolina. Credit
     has been extended to certain of the Company's  customers  through  multiple
     lending transactions.

     Since many of the  commitments  are expected to expire  without being drawn
     upon,   amounts   reported  do  not  necessarily   represent   future  cash
     requirements.

16.  PARENT COMPANY FINANCIAL INFORMATION

     The Company's  principal  asset is its  investment  in the Bank.  Condensed
     financial  statements  of the parent  company as of September  30, 1999 and
     1998 and for the three years ended September 30, 1999 are as follows:

                                                         1999            1998

CONDENSED BALANCE SHEET
Cash                                                 $ 1,151,744     $   959,617
Due from subsidiary                                    5,368,089      13,485,534
Investment in wholly-owned subsidiary                 42,563,204      41,960,610
Other assets                                              12,115         579,311
                                                     -----------     -----------
   Total assets                                      $49,095,152     $56,985,072
                                                     ===========     ===========

Other liabilities                                    $   332,119     $   271,102
Shareholders' equity                                  48,763,033      56,713,970
                                                     -----------     -----------
   Total liabilities and shareholders' equity        $49,095,152     $56,985,072
                                                     ===========     ===========

<TABLE>
<CAPTION>
                                                         1999            1998            1997
<S>                                                 <C>             <C>             <C>
CONDENSED STATEMENT OF INCOME
Interest income, net                                $    234,242    $    291,950    $    159,006
Equity in earnings of subsidiary                       3,121,370       3,007,978       1,570,050
Miscellaneous expenses                                   159,466         176,570         333,156
                                                    ------------    ------------    ------------
   Net income                                       $  3,196,146    $  3,123,358    $  1,395,900
                                                    ============    ============    ============

                                       35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                                                         1999            1998            1997
CONDENSED STATEMENT OF CASH FLOWS
Operating activities:
   Net income                                       $  3,196,146    $  3,123,358    $  1,395,900
   Adjustments to reconcile net income to net
      cash provided by operating activities:
   Equity in undistributed earnings of subsidiary     (3,121,370)     (3,007,978)     (1,570,050)
   Deferred income taxes                                      --         (57,800)         57,800
   ESOP compensation                                     853,616         825,865         603,429
   MRP compensation                                    1,342,907       1,902,959              --
   Other operating activities                            628,213        (589,308)      1,870,996
                                                    ------------    ------------    ------------
      Net cash provided by operating activities        2,899,512       2,197,096       2,358,075
                                                    ------------    ------------    ------------
Investing activities:
   Investment in, and advances to, subsidiary                 --              --     (38,980,323)
   Repayments of advances to subsidiary                9,257,445       5,910,220              --
                                                    ------------    ------------    ------------
      Net cash provided by investing activities        9,257,445       5,910,220     (38,980,323)
                                                    ------------    ------------    ------------
Financing activities:
   Net proceeds from issuance of stock                        --              --      38,960,736
   MRP funding                                                --      (1,224,768)     (2,050,531)
   Purchase of treasury shares                       (10,875,208)     (4,895,754)             --
   Cash paid for fractional shares                            --          (4,652)             --
   Dividends paid                                     (1,089,622)     (1,045,908)       (264,574)
                                                    ------------    ------------    ------------

      Net cash used in financing activities          (11,964,830)     (7,171,082)     36,645,631
                                                    ------------    ------------    ------------

Net increase in cash                                     192,127         936,234          23,383
Cash at beginning of the year                            959,617          23,383              --
                                                    ------------    ------------    ------------
Cash at the end of year                             $  1,151,744    $    959,617    $     23,383
                                                    ============    ============    ============
</TABLE>

17.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized unaudited quarterly financial data for the years ended September
     30, 1999 and 1998 is as follows (in thousands):

                                     FOURTH    THIRD   SECOND    FIRST
                                     ------   ------   ------   ------
1999:
Interest income                      $5,918   $5,935   $5,629   $5,647
Interest expense                      2,610    2,500    2,450    2,419
Provision for loan losses                70       --       --       50
Noninterest income                      644      685      735      810
Noninterest expense                   2,546    2,574    2,553    2,582
Income tax expense                      532      762      561      598
                                     ------   ------   ------   ------

Net income                           $  804   $  784   $  800   $  808
                                     ======   ======   ======   ======

Net income per common share:
   Basic and diluted                 $  .24   $  .23   $  .22   $  .22
                                     ======   ======   ======   ======

                                       36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                                     FOURTH    THIRD   SECOND    FIRST
                                     ------   ------   ------   ------
1998:
Interest income                      $5,694   $5,603   $5,330   $5,240
Interest expense                      2,417    2,357    2,262    2,204
Provision for loan losses               100      110       --      100
Noninterest income                      647      678      732      589
Noninterest expense                   2,524    2,564    2,558    2,294
Income tax expense                      483      467      476      474
                                     ------   ------   ------   ------

Net income                           $  817   $  783   $  766   $  757
                                     ======   ======   ======   ======

Net income per common share:
   Basic and diluted                 $  .21   $  .20   $  .20   $  .19
                                     ======   ======   ======   ======

18.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about
     Fair  Value  of  Financial   Instruments"  (SFAS  No.  107),  requires  the
     disclosure  of  estimated  fair values for  financial  instruments.  Quoted
     market prices, if available,  are utilized as an estimate of the fair value
     of  financial  instruments.  Because no quoted  market  prices  exist for a
     significant part of the Company  financial  instruments,  the fair value of
     such  instruments has been derived based on management's  assumptions  with
     respect to future economic conditions, the amount and timing of future cash
     flows  and  estimated  discount  rates  with  respect  to  future  economic
     conditions,  the  amount  and  timing of future  cash  flows and  estimated
     discount rates.  Different  assumptions  could  significantly  affect these
     estimates.  Accordingly,  the net  realizable  value  could  be  materially
     different from the estimates  presented  below. In addition,  the estimates
     are only indicative of individual financial  instruments' values and should
     not be considered an indication of the fair value of the Company taken as a
     whole.

     Fair values have been estimated  using data which  management  considers as
     the best available,  and estimation  methodologies  deemed suitable for the
     pertinent category of financial instrument.  The estimation  methodologies,
     resulting fair values,  and recorded carrying amounts at September 30, 1999
     and 1998, were as follows:

     Cash and cash  equivalents are by definition  short-term and do not prevent
     any  unanticipated  credit  issues.  Therefore,  the  carrying  amount is a
     reasonable  estimate of fair value. The estimated fair values of investment
     securities and mortgage backed  securities are provided in Notes 3 and 4 to
     the financial  statements.  These are based on quoted market  prices,  when
     available.  If a  quoted  market  price  is not  available,  fair  value is
     estimated using quoted market prices for similar securities.

                                       37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

     The fair  value of the net loan  portfolio  has been  estimated  using  the
     present  value of expected  cash  flows,  discounted  at an  interest  rate
     adjusted  for  servicing  costs  and  giving   consideration  to  estimated
     prepayment risk and credit loss factors, as follows:

<TABLE>
<CAPTION>
                                         1999                          1998
                             ---------------------------   ---------------------------
                              ESTIMATED       CARRYING      ESTIMATED       CARRYING
                              FAIR VALUE       AMOUNT       FAIR VALUE       AMOUNT
                             ------------   ------------   ------------   ------------

<S>                          <C>            <C>            <C>            <C>
1 - 4 family mortgages       $ 74,868,715   $ 74,822,333   $107,101,833   $105,059,149
Consumer                       49,641,554     50,263,344     47,905,877     48,414,917
Non-residential                86,968,253     86,968,253     71,524,965     71,524,965
                             ------------   ------------   ------------   ------------

                             $211,478,522   $212,053,930   $226,532,675   $224,999,031
                             ============   ============   ============   ============
</TABLE>

     The fair value of deposit  liabilities  with no stated  maturities has been
     estimated  to equal the  carrying  amount (the  amount  payable on demand),
     totaling  $60,745,568  and  $50,271,086  at  September  30 1999  and  1998,
     respectively.  The fair value  estimates for these  products do not reflect
     the benefits that the Bank receives  from the low-cost,  long-term  funding
     they provide. These benefits are considered significant.

     The fair value of  certificates  of deposits and advances  from the Federal
     Home Loan Bank is estimated by discounting  the future cash flows using the
     current  rates  offered for similar  deposits  and  advances  with the same
     remaining  maturities.  The  carrying  value and  estimated  fair values of
     certificates  of deposit and Federal  Home Loan Bank  advances at September
     30, 1999 and 1998 are as follows:

                                                1999           1998
     Certificates of deposits:
        Carrying amount                     $173,872,427   $155,363,999
        Estimated fair value                $174,479,131   $156,426,259

     Advances for Federal Home Loan Bank:
        Carrying amount                     $         --   $  9,500,000
        Estimated fair value                $         --   $  9,500,000

     The carrying amount of repurchase  agreements  approximates the fair value.
     The  interest  rate on these  agreements  is a  floating  rate based on the
     Federal funds daily rate.

     There is no material  difference  between the carrying amount and estimated
     fair value of  off-balance  sheet items  totaling  $62,111,209  in 1999 and
     $33,513,397  in 1998,  which  are  primarily  comprised  of  unfunded  loan
     commitments.

     The Company's remaining assets and liabilities are not considered financial
     instruments.

                                       38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEWSOUTH BANCORP, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

19.  SUPPLEMENTAL CASH FLOW INFORMATION

     Supplemental  cash flow information for the years ended September 30, 1999,
     1998, and 1997 is as follows:

<TABLE>
<CAPTION>
                                                     1999          1998          1997

<S>                                           <C>           <C>           <C>
Real estate acquired in settlement of loans   $   764,023   $   458,061   $   960,221
Exchange of loans for mortgage-backed
   securities                                 $45,527,117   $17,958,559   $18,524,209
Cash paid for interest                        $ 9,960,689   $ 9,268,840   $ 8,322,252
Cash paid for income taxes                    $ 2,787,000   $ 2,637,000   $ 1,673,000
Dividends declared, not paid                  $   332,119   $   271,102   $   262,457
</TABLE>

                                       39
<PAGE>

                               BOARD OF DIRECTORS

DR. FREDERICK H. HOWDY        LINLEY H. GIBBS, JR.        EDMUND T. BUCKMAN, JR.
CHAIRMAN                      VICE CHAIRMAN               Retired
President                     Retired                     Washington, NC
Drs. Freshwater and           Washington, NC
   Howdy, P.A.
Washington, NC

FREDERICK N. HOLSCHER         CHARLES E. PARKER, JR.      MARSHALL T. SINGLETON
Partner                       Vice President              Co-Owner
Rodman, Holscher, Francisco   Robinson Insurance Agency   B. E. Singleton & Sons
   & Peck, P.A.               New Bern, NC                Washington, NC
Washington, NC
                              THOMAS A. VANN
                              President
                              NewSouth Bank
                              Washington, NC

                               EXECUTIVE OFFICERS

THOMAS A. VANN              JACK L. ASHLEY              JOSEPH C. DUNN
President                   Executive Vice President    Executive Vice President
                            Branch Administration and   Credit Administration
                            Operations

WALTER P. HOUSE             WILLIAM L. WALL             MARY R. BOYD
Executive Vice President    Executive Vice President    Senior Vice President
Mortgage Operations         Chief Financial Officer     Loan Servicing
                            and Secretary

SHERRY L. CORRELL           KRISTIE W. HAWKINS          WILLIAM R. OUTLAND
Senior Vice President       Treasurer                   Senior Vice President
Deposit Administration      Controller                  Consumer Lending

                         NEWSOUTH BANK OFFICE LOCATIONS

BANKING OFFICES

CHOCOWINITY                    NEW BERN                  WASHINGTON
2999 Highway 17 South          202 Craven Street         1311 Carolina Avenue
252-946-4178                   252-636-2997              252-946-4178

ELIZABETH CITY                 1725 Glenburnie Road      300 North Market Street
604 East Ehringhaus Street     252-636-2997              252-946-4178
252-335-0848

GREENVILLE                     ROCKY MOUNT               Corporate Office
301 East Arlington Blvd        300 Sunset Avenue         1311 Carolina Avenue
252-321-2600                   252-972-9661              252-946-4178

KINSTON                                                  Operations Center
827 Hardee Road                                          239 West Main Street
252-522-9466                                             252-946-4178

                                       40
<PAGE>

                             STOCKHOLDER INFORMATION

CORPORATE HEADQUARTERS
     NewSouth Bancorp, Inc.                        Telephone:  252-946-4178
     1311 Carolina Avenue                          Fax:  252-946-3873
     Washington,  NC  27889                        E-mail: Info@NewSouthBank.Com

STOCK LISTING INFORMATION
The  Company's  common  stock trades on the Nasdaq Stock Market under the symbol
NSBC.

STOCK PRICE INFORMATION
The  following  table sets forth the high and low trade  price  information  and
dividends declared per share for the periods indicated.

     Quarter Ended                     High          Low        Dividends
     -------------                     ----          ---        ---------
     December 31, 1997   (1)         $22.417       $19.25        $  .067
     March 31, 1998      (1)          23.167        19.333          .067
     June 30, 1998       (1)          23.667        21.333          .067
     September 30, 1998  (1)          23.333        21.25           .07

     December 31, 1998                22.00         16.50           .07
     March 31, 1999                   18.25         17.00           .07
     June 30, 1999                    18.50         17.00           .07
     September 30, 1999               18.625        16.00           .10

     (1) Adjusted for three-for-two stock split on August 19, 1998.

REGISTRAR AND TRANSFER AGENT
Inquiries regarding stock transfer,  registration,  lost certificates or changes
in name and  address  should be  directed to the stock  registrar  and  transfer
agent:

     Registrar and Transfer Company
     10 Commerce Drive
     Cranford,  New Jersey  07016
     (800) 866-1340

FORM 10-K
The Company's annual report on Form 10-K, filed with the Securities and Exchange
Commission,  is available to shareholders without charge by writing:  William L.
Wall,  Chief  Financial  Officer,  NewSouth  Bancorp,  Inc.,  P.  O.  Box  2047,
Washington, NC 27889.

INVESTOR INFORMATION
Shareholders,  investors,  and analysts interested in additional information may
contact William L. Wall, Chief Financial Officer, NewSouth Bancorp, Inc.

ANNUAL MEETING
The Annual  Meeting of  shareholders  of  NewSouth  Bancorp,  Inc.  will be held
Thursday,  February 17, 2000 at 11:00 a.m., at the main office of NewSouth Bank,
1311 Carolina Avenue, Washington, North Carolina.

GENERAL COUNSEL             SPECIAL COUNSEL         INDEPENDENT ACCOUNTANTS
Rodman, Holscher,           Housley, Kantarian &    PricewaterhouseCoopers LLP
   Francisco & Peck, P.A.      Bronstein, P.C.      Suite 2300
320 North Market Street     Suite 700               150 Fayetteville Street Mall
Washington,  NC  27889      1220 19th Street, N.W.  Raleigh,  NC  27601
                            Washington,  DC  20036

                                       41

<PAGE>
                                NEWSOUTH BANCORP
                                ================
                              1311 Carolina Avenue
                                 P.O. Box 2047
                              Washington, NC 27889
                        (252)946-4178 Fax (252)946-3873