SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 333-49459
NEW SOUTH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 63-1132716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Crestwood Boulevard
Birmingham, Alabama 35210
(Address of Principal Executive Offices) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------------------------- ------------------------------
Cumulative Trust Preferred Securities American Stock Exchange
(and the Guarantee with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 1,
2000: 1,255,537.10
DOCUMENTS INCORPORATED BY REFERENCE
None, except Exhibits
Item 1 Business
New South Bancshares, Inc. (the "Company") is a closely held unitary thrift
holding company headquartered in Birmingham, Alabama. Through its financial
institution subsidiary, New South Federal Savings Bank (the "Bank" or "New
South"), the Company operates two full-service retail branch offices in
Birmingham, Alabama, and 38 loan production offices located in 12 states
throughout the southeastern and eastern United States. New South is the largest
thrift and the sixth largest depository institution, based on asset size,
headquartered in the State of Alabama.
The Company's operations principally involve residential mortgage lending,
automobile installment lending, residential construction and land lending,
manufactured housing lending and deposit gathering activities. The Company's
residential mortgage lending efforts involve the origination and purchase of
residential mortgage loans through its loan origination offices and wholesale
sources, the sale of such loans, usually on a pooled or securitized basis, in
the secondary market, and the servicing of residential mortgage loans for
investors and the Company's own loan portfolio. The automobile installment
lending program currently involves indirect lending through 600 automobile
dealers in 6 southern states. The Company's residential construction and land
lending efforts involve making loans to builders for the construction of single
family properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. The manufactured housing lending
program primarily includes the indirect origination of mortgage loans, including
the land and the home, and nonmortgage loans for the home only, in addition to
construction loans that are in place during the preparation phase of the land.
The Company actively funds and purchases commercial real estate loans originated
by Collateral Mortgage, Ltd. ("Collateral"), an affiliate, which may be sold to
investors or held in New South's portfolio.
The Company funds its lending activities primarily with customer deposits
gathered through the sale of a broad range of banking services including
certificates of deposit, individual retirement and other time and demand deposit
accounts, and money market accounts. The Company takes a wholesale approach to
generating deposits, paying high interest rates while keeping deposit gathering
overhead costs low. The Company maintains two retail branch offices, both
located in Birmingham, Alabama, but attracts the majority of its deposits
through telemarketing activities and third parties, primarily brokers.
The Company was established in 1994 for the purpose of acquiring and
holding 100 percent of the capital stock of New South. The Company and New
South are members of a family of financial services companies that are owned
primarily by W. T. Ratliff, Jr. and members of his family. Since W. T. Ratliff
founded Collateral Investment Company in 1933, these companies have been engaged
in virtually all aspects of real estate lending, investment, brokerage and
management, and various other financial services business.
Prior to the formation of the Company, New South was a wholly owned
subsidiary of Collateral. Although Collateral's present emphasis rests on
commercial lending, prior to 1997, Collateral also conducted residential
mortgage lending operations consisting primarily of direct originations of
residential mortgage loans which were generally underwritten and processed in
accordance with the guidelines issued by FNMA, FLHMC, FHA or VA, i.e.,
conforming residential mortgage loans, through 39 retail mortgage origination
offices located in 13 southern states. Effective July 1, 1997, Collateral
transferred all 39 of its loan origination offices to New South (the
"Transfer"). Prior to the Transfer, New South's residential mortgage lending
operations consisted primarily of indirect originations of residential mortgage
loans which were generally not underwritten and processed in accordance with
government or federal agency guidelines, known as nonconforming residential
mortgage loans, through correspondents and mortgage brokers, although it
originated some nonconforming residential mortgage loans on a direct basis
through seven origination offices.
As a result of the Transfer, New South now originates conforming and
nonconforming residential mortgage loans on a direct and indirect basis through
39 origination offices and a network of loan correspondents and mortgage
brokers. New South also originates conforming and nonconforming residential
mortgage loans on an indirect basis through correspondents and mortgage brokers.
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For financial details concerning the Company's business, see the
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Residential Mortgage Lending
Conforming Loans
New South's primary line of business is the origination and subsequent sale
of residential mortgage loans which New South classifies as conforming
residential mortgage loans. These loans are typically single family loans which
generally have been underwritten and processed in accordance with standard
government or federal agency guidelines including FNMA, FHLMC, FHA and VA. The
conforming residential mortgage loans are fixed-rate and adjustable-rate first
mortgage loans with 15 year or 30 year terms generally secured by owner-occupied
residences. New South's adjustable-rate mortgages ("ARMs") generally have
interest rates that adjust semi-annually or annually.
Presently, New South originates conforming residential mortgage loans
primarily on a direct basis through 37 loan production offices located in the
States of Alabama (11), Tennessee (4), Georgia (4), North Carolina (2), Florida
(4), Texas (2), Nevada (2), Kentucky (1), Louisiana (1), Virginia (2),
Mississippi (1), and Arizona (1). These offices originate primarily single-
family residential mortgage loans from a number of sources such as referrals
from realtors, walk-in customers, borrowers, and advertising. New South
augments its direct originations of conforming residential mortgage loans with
indirect originations through over 250 wholesale customers, including
independent mortgage brokers and correspondents, community banks, and other
financial institutions in 14 states. These mortgage brokers and correspondents
originate such loans using New South's underwriting criteria and standards and
close such loans using funds advanced by New South simultaneously with, or
following, closing. In some cases, loans are purchased at some point following
closing in a secondary market transaction.
Nonconforming Loans
New South originates nonconforming residential mortgage loans primarily on
an indirect basis through mortgage brokers and correspondents, although it also
originates nonconforming loans on a direct basis. All nonconforming residential
mortgage loans originated, either on a direct or indirect basis, must conform to
New South's underwriting guidelines for nonconforming residential mortgage loan
products which have been internally developed by New South's management by
analyzing a variety of factors, including the proposed equity in the collateral,
the credit history and debt-to-income ratio of the borrower, the property type,
and the characteristics of the underlying first mortgage, if any. Applying these
guidelines, New South will internally classify a proposed nonconforming
residential mortgage loan product as either Grade AA, A, B or C according to
credit risk and establish the terms of the loan in accordance with such internal
classifications.
New South augments its indirect originations of nonconforming residential
mortgage loans with direct originations through one loan production office in
the State of Alabama. These offices have historically been operated by New South
and were not acquired from Collateral in the Transfer. Like conforming
residential mortgage loans, originations through these offices are derived from
a number of sources such as referrals from realtors, brokers, walk-in customers,
borrowers, and advertising.
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Automobile Installment Lending
New South offers automobile installment loans secured by automobiles,
light-duty trucks, vans, boats, and other vehicles. New South began offering an
automobile installment lending program in 1989 to automobile dealers in the
southern United States. New South has an extensive automobile dealer network
consisting of currently over 600 dealers in the States of Alabama, Florida,
Georgia, Mississippi, Tennessee and Texas. New South's automobile dealer network
consists primarily of new car franchise dealers, with independent car dealers
making up less than 15 percent of the dealer network.
Prime Loans
The majority of New South's automobile installment loans are considered to
be prime loans by industry standards. Generally, the industry classifies prime
and nonprime customers based on the creditworthiness of the consumer. New
South's current guidelines for its prime lending products require an applicant
to have, among other factors, a credit bureau score of at least 650. On used
cars, the terms of the contract are also based, in part, on the actual mileage
of the vehicle. The Company also classifies as prime an immaterial amount of
other non automobile installment loans secured by deposits, boats and
recreational vehicles and some signature loans.
New South purchases prime products, typically fully secured, fixed rate
retail installment contracts, from dealers for 100 percent of the principal
amount of the loan on a non recourse basis.
Nonprime Loans
New South offers a nonprime product to certain qualifying consumers who
report credit bureau scores below the prime threshold due to delinquencies on
certain accounts. Terms of nonprime automobile installment loans are
established by New South underwriters based on a variety of factors in
accordance with New South's underwriting guidelines which have been specifically
designed to evaluate nonprime customers. Importantly, the automobile payment
cannot exceed 15 percent of a nonprime borrower's gross income.
Other Lending
Residential Construction and Land Loans
New South originates residential real estate construction loans as well as
providing construction and land development loans in residential subdivisions to
professional home builders and developers. Residential construction and land
loans are primarily originated on a direct basis through New South's conforming
residential mortgage loan origination offices. New South is active in making
loans to builders for the construction of single family properties and, on a
more limited basis, loans for the acquisition and development of improved
residential lots. These loans are made on a commitment term that generally is a
for a period of one year. New South reviews each individual builder's
experience and reputation, general financial condition, and inventory levels in
order to limit risks. All construction loans are secured by a first lien on the
property and construction in progress. Additionally, the construction status is
reviewed by on-site inspections. The builders' ongoing financial position is
monitored on a periodic basis.
4
Commercial Real Estate Loans
Commercial real estate loans are originated primarily by Collateral on an
indirect basis through mortgage bankers and brokers nationwide. New South funds
and closes in its name certain commercial real estate loans originated by
Collateral. These loans are secured by various types of commercial real estate,
including multifamily properties, retail shopping centers, mobile home parks,
hotels, manufactured home communities and a wise variety of other commercial
properties. Many of these loans may be sold in the secondary market by New
South to investors such as commercial banks, life insurance companies, pension
funds, conduit programs, and government sponsored entities. Many of these loans
have been committed for sale to a third party prior to closing in New South's
name, and providing this interim funding has been a relatively profitable and
low risk activity for New South in recent years. In addition, New South may
hold these loans in its own portfolio.
Commercial Loans
New South makes available to certain independent automobile dealers
automobile floor plan credit lines, which are revolving credit lines used for
financing the used automobile inventory of independent automobile dealerships.
New South develops prospects for commercial loans primarily through its existing
customer base of independent automobile dealers who have sold retail installment
contracts to New South. New South will make advances on a dealer's credit line
when the dealer purchases an automobile and provides New South with proper
evidence of title to the property.
Manufactured Housing
During August 1998, New South began its manufactured housing division to
provide in the Southeast direct and indirect retail financing for home only or
land and home on both new and used products. Manufactured housing loans are
originated on both a direct and indirect basis through dealers and mortgage
brokers.
Funding Activities
The Company funds its lending activities primarily through deposits. In
addition, a significant source of funding for New South is the sale of
residential mortgage loans and automobile installment loans either in the
secondary market or as securitizations and advances from the FHLB. To a lesser
extent, New South receives funds from traditional commercial borrowings as well
as from net interest income, mortgage loan servicing fees, and loan principal
repayments.
Deposits
New South conducts deposit gathering activities in a traditional fashion
through its two full service branches located in Birmingham, Alabama. In
addition, New South operates an active telephone and internet banking center
that handles incoming inquiries and conducts an outgoing telemarketing program
for deposit products. New South has not built an extensive branch network and
does not rely heavily on a local retail deposit base. It has primarily utilized
certificates of deposit to compete for consumer deposits. New South attracts
deposits from throughout the country and several foreign countries by paying
very competitive rates.
New South also distributes its deposit products through brokers to
individuals and institutional purchasers through a brokered certificate of
deposit program which offers certificates of deposits in increments of $1.0
million to $20.0 million through selected brokers who meet New South's
guidelines.
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Sales/Securitizations
New South sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans and through sales
to private investors. With respect to conforming residential mortgage loans, if
a loan meets government or federal agency guidelines and has been originated
through its conforming residential mortgage origination offices, it is typically
sold immediately, either through the FNMA, FHLMC or GNMA programs or to private
investors. With respect to nonconforming residential mortgage loans, New South
generally holds these loans in its portfolio unless New South determines that it
is economically necessary or desirable to sell the loan in light of the existing
prices, capital constraints, liquidity needs, and prepayment risks. Generally,
New South retains a portion of the servicing rights to the loans that it sells.
Loan Servicing
Residential Mortgage Loan Servicing
New South services residential mortgage loans secured by single family
residences for its portfolio and for others including GNMA, FNMA, FHLMC, and
private mortgage investors. Mortgage loan servicing includes collecting
payments of principal and interest from borrowers, remitting aggregate loan
payments to investors, accounting for principal and interest payments, holding
escrow funds for payment of mortgage related expenses such as taxes and
insurance, making advances to cover delinquent payments, inspecting the
mortgaged premises as required, contacting delinquent mortgagors, supervising
foreclosures, and property dispositions in the event of unremedied defaults, and
other miscellaneous duties related to loan administration.
Automobile Installment Loan Servicing
From time to time, New South has sold a portion of its automobile
installment loan originations while retaining servicing for a servicing fee and,
in some instances, a 10 percent participation in the loans themselves. As
servicer, New South collects and posts all payments, responds to inquiries of
customers, investigates delinquencies, sends payment coupons to customers,
oversees the collateral in cases of default and accounts for collections. New
South's collections department takes all actions necessary to maintain the
security interest granted in the financed automobiles, including investigating
delinquencies, communicating with the consumer to ensure timely payments are
made and when required, contracts with third parties to recover and sell the
financed automobile.
Supervision and Regulation
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting New South and the Company. The following
summary of applicable statues and regulations does not purport to be complete
and is qualified in its entirety by reference to such statues and regulations.
The Company is a unitary thrift holding company under the Home Owners' Loan
Act, as amended ("HOLA") and, as such, is subject to Office of Thrift
Supervision ("OTS") regulation, supervision and examination. In addition, the
OTS has enforcement authority over the Company and may restrict or prohibit
activities that are determined to
6
represent a serious risk to the safety, soundness or stability of New South or
any other subsidiary savings institution.
Under the HOLA, a thrift holding company may not (i) acquire, with certain
exceptions, more than 5 percent of a non subsidiary savings institution or a
nonsubsidiary savings and loan holding company; or (ii) acquire or retain
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation ("FDIC").
As a thrift holding company, the Company generally is not subject to any
restriction as to the types of business activities in which it may engage,
provided that New South continues to satisfy the Qualified Thrift Lender Test.
Upon any nonsupervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its noninsured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to the other activities authorized by OTS regulation.
New South is chartered as a federal savings bank which is regulated by the
OTS. As a federal savings bank, New South is subject to regulation, supervision
and regular examination by the OTS. Federal banking laws and regulations
control, among other things, New South's required reserves, investments, loans,
mergers and consolidations, payment of dividends and other aspects of its
operations. The deposits of New South are insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC to the maximum extent provided
by law generally $100,000 for each depositor. In addition, the FDIC has certain
regulatory and examination authority over OTS regulated savings institutions,
such as New South, and may recommend enforcement actions against New South to
the OTS, even though the FDIC is not the primary regulator of New South. The
supervision and regulation of New South is intended primarily for the protection
of the deposit insurance fund and New South's depositors rather than for holders
of the Company's stock or for the Company as the holder of the stock of New
South.
Business Activities. New South derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, New South may invest in residential mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of commercial paper and debt securities, and certain other assets. New
South may also establish service corporations that may engage in activities not
otherwise permissible for New South, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations.
OTS Capital Requirements; Reserve Requirements. Under federal law and OTS
regulations, savings associations are required to comply with each of three
separate capital adequacy standards: a tangible capital requirements; a
leverage ratio; and a risk-based capital requirement. The OTS is authorized to
establish individual capital requirements for a savings association consistent
with these capital standards. The OTS was required by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") to promulgate
additional capital requirements that in certain respects have superseded the
capital requirements discussed immediately below.
Tangible Capital. The OTS capital regulations require tangible capital of
at least 1.5 percent of adjusted total assets, as defined by regulation.
Tangible capital generally includes common shareholders' equity and retained
earnings, noncumulative perpetual preferred stock and related surplus. In
addition, all intangible assets, other than a limited amount of properly valued
mortgage servicing rights ("MSRs"), must be deducted from tangible capital.
Leverage Ratio. The leverage ratio adopted by the OTS requires savings
associations to maintain core capital in an amount equal to at least three
percent of adjusted total assets. Core capital includes common shareholders'
equity, including retained earnings, noncumulative perpetual preferred stock and
any related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, certain goodwill and MSRs less certain intangible
assets, and investments in nonincludable subsidiaries. In general, intangible
assets must be deduced in computing core capital
7
because they are excluded from assets under the OTS's capital rules. There are
exceptions to this rule of deduction, however. MSRs and purchased credit card
relationships ("PCCRs") are limited in the aggregate to the lesser of 100% of
the amount of core capital computed before the deduction of any disallowed
servicing assets and disallowed PCCRs, or the amount of servicing assets and
PCCRs, with PCCRs not exceeding 25 percent of core capital, provided that such
rights must be valued at the lower of 90 percent of fair market value or 100
percent of the remaining unamortized book value of the asset.
Risk-based Capital. The risk-based capital standard for savings
institutions requires the maintenance of total capital, which is defined as core
capital and supplementary capital less certain holdings, to risk-weighted assets
of at least eight percent. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet instruments, are multiplied by a
risk weight of 0 percent to 100 percent, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the three percent leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the general allowance for loan and lease losses. Allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25 percent of risk-adjusted assets. Overall, the amount of
supplemental capital counted toward total capital cannot exceed 100 percent of
core capital.
Federal Deposit Insurance. New South is required to pay assessments based
on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the SAIF.
The FDICIA was enacted to recapitalize the Bank Insurance Fund ("BIF") and
impose certain supervisory and regulatory reforms on insured depository
institutions. Pursuant to the FDICIA, the FDIC established a risk-based
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The assessment rate depends on the capital
category and supervisory category to which an institution is assigned. For the
first 9 months of 1996, the assessment rate for SAIF-insured institutions ranged
from 0.23 percent of deposits for well-capitalized institutions in the highest
supervisory subgroup to 0.31 percent of deposits for undercapitalized
institutions in the lowest supervisory subgroup.
In late 1995, the FDIC amended the risk-based assessment schedule for
depository institutions with deposits insured by the BIF, resulting in a
significant reduction in FDIC assessments for BIF-insured but not SAIF-insured
institutions. In response to this assessment disparity, the Deposit Insurance
Funds Act of 1996 (the "1996 Act"), enacted on September 30, 1996, amended the
Federal Deposit Insurance Act (the "FDI Act") in several ways to recapitalize
the SAIF and reduce the disparity between the assessment rates for the BIF and
the SAIF. The 1996 Act authorized the FDIC to impose a special assessment on
all institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF to the required reserve ratio of 1.25 percent. SAIF-
insured institutions on November 27, 1996 paid a special assessment equal to
65.7 basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995. The 1996 Act provides the amount of the special assessment that
will be deductible for federal income tax purposes for the taxable year in which
the special assessment is paid. Based on the foregoing, New South recorded an
expense for the special assessment in 1996 of $3.2 million, or $1.9 million net
of tax. In view of the recapitalization of the SAIF, in December 1996 the FDIC
reduced the assessment rates for SAIF-assessable deposits for periods beginning
on October 1, 1996. As a result, the insurance assessment rates for SAIF-
insured institutions, like New South, were set at 18 to 27 basis points for the
last quarter of 1996 and zero to 27 basis points for 1997. In addition, SAIF-
insured institutions will be required, until payments on certain bonds issued by
the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period,
BIF member banks will be assessed for payment of the FICO obligations at the
annual rate of 1.29 basis points. After December 31, 1999, BIF and SAIF members
will be assessed at the same rate for FICO obligations.
The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25 percent, except for assessments on
institutions that are not classified as well-capitalized or that have been found
to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. New South is classified as well-capitalized and has
8
not been found by the OTS to have such supervisory weaknesses. Accordingly,
assuming that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, New South, as long as it maintains
its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those it paid in recent years.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
QTL test, as modified by FDICIA, a savings association is required to maintain
at least 65 percent of its portfolio assets, defined as total assets less (i)
specified liquid assets up to 20 percent of total assets, (ii) intangible
assets, including goodwill, and (iii) the value of property used to conduct
business, in certain "qualified thrift investments," such as home residential
mortgage loans and other residential real estate-related assets, on a monthly
average basis in 9 out of every 12 months.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An initial
failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions and a restriction on obtaining
additional advances from its Federal Home Loan Bank. If a savings institution
does not requalify under the QTL test within the three-year period after it
fails the QTL test, it would be required to terminate any activity not
permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution, such as the Company, would similarly be required
to register as a bank holding company with the Federal Reserve Board. See
"Supervision and Regulation--Supervision and Regulation of the Company." At
December 31, 1999, New South qualified as a QTL.
Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10 percent limit on all other loans to households is eliminated by the new law,
and such loans may now be counted toward the QTL test within the 20 percent of
portfolio assets limit. Second, the statute amends the QTL test to provide that
a savings institution may be considered a QTL either (i) by satisfying the
HOLA's QTL requirements or (ii) by qualifying as a "domestic building and loan
association" as defined under the Code.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by banking agencies, would
not have a material effect on the operations of New South.
Limitations on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
9
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A savings association must provide the OTS with a 30
day advance notice of all proposed capital distributions whether or not
supervisory approval is required under OTS regulations.
Real Estate Lending Standards. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. Each institution must monitor conditions in the real
estate market in its lending area to ensure its real estate lending policies
continue to be appropriate for current market conditions. An institution's real
estate lending policy must reflect consideration of Interagency Guidelines for
Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal bank regulators. The Interagency Guidelines, among other
things, call upon depository institutions to establish internal loan-to-value
limits specified in the Interagency Guidelines for the various types of real
estate loans. The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits.
Federal Consumer Credit and Non-Discrimination Regulation. New South's
mortgage lending activities are subject to the provisions of various federal and
state statutes, including among others, the Truth in Lending Act, the Equal
Credit Opportunity Act, the RESPA, the Fair Housing Act and the regulations
promulgated thereunder. These statues and regulations, among other things,
prohibit discrimination on the basis of race, gender or other designated
characteristics, prohibit unfair and deceptive trade practices, require the
disclosure of certain basic information to mortgage borrowers concerning credit
terms and settlement costs, and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. Each of
the foregoing statutes provides for various administrative, civil and, in
limited circumstances, criminal enforcement procedures, and violations thereof
may also lead to class actions seeking actual and/or punitive damages.
New South attempts in good faith to comply with the provisions of these
statutes and their implementing regulations; however, the provisions are complex
and even inadvertent noncompliance could result in liability to New South.
During the past several years, numerous individual claims, purported class
actions and federal enforcement proceedings have been commenced against a number
of financial institutions alleging that one or more of these provisions have
been violated. While New South has incurred no material detriment as a result
of these actions, there can be no assurance that one or more aspects of its
lending program will not be found to have been in violation of these statutes.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take that record into account in its evaluation of certain applications
by the institution. FIRREA amended the CRA to require all institutions to make
public disclosure of their CRA performance using the ratings of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance." New South
received a satisfactory rating in its last CRA examination by the OTS dated
September 8, 1998.
On May 4, 1995, the bank regulatory agencies, including the OTS, adopted
new uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to New
South: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a service
test to evaluate its delivery of services to such areas, and (iii) an investment
test to evaluate its investment in programs
10
beneficial to such areas. The new CRA regulations became effective on July 1,
1995, but reporting requirements were not effective until January 1, 1997.
Evaluation under the regulations was not mandatory until July 1, 1997. New
South's current operations and policies substantially comply with the
regulations.
Agencies. New South's lending activities, including its mortgage banking
operations, are subject to the rules and regulations of the FHA, VA, FNMA, FHLMC
and GNMA and other regulatory agencies with respect to originating, processing,
underwriting, selling and servicing residential mortgage loans. In addition,
there are other federal and state statutes and regulations affecting such
activities. Moreover, lenders such as New South are required annually to submit
audited financial statements to FNMA, FHLMC and GNMA and to comply with each
regulatory entity's own financial requirements. New South's business is also
subject to examination by FNMA, FHLMC and GNMA to assure compliance with
applicable regulations, policies and procedures.
Transactions with Affiliates. New South is subject to restrictions imposed
by federal law on extensions of credit to, and certain other transactions with,
the Company and other affiliates and on investments in the stock or other
securities thereof. Such restrictions prevent the Company and such other
affiliates from borrowing from New South unless the loans are secured by
specified collateral, and require such transactions to have terms comparable to
terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by New South are generally limited
in amount as to the Company and as to any other individual affiliate in the
aggregate amount of 10 percent of New South's capital and surplus and as to the
Company and all affiliates to an aggregate of 20 percent of New South's capital
and surplus. These regulations and restrictions may limit the Company's ability
to obtain funds from New South for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses. New
South's ability to extend credit to its directors, executive officers, and 10
percent shareholders, as well as to entities controlled by such persons, is
governed by the requirements of Section 22(g) and 22(h) of the Federal Reserve
Act and Regulation O of the Federal Reserve thereunder.
Liquidity Requirements. New South is required by OTS regulation to
maintain an average daily balance of liquid assets such as cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations, in each calendar quarter of not
less than four percent of the amount of its liquidity base at the end of the
preceding calendar quarter or the average daily balance of its liquidity base
during its preceding quarter.
Branching. Subject to certain limitations, the HOLA and the OTS
regulations currently permit federally chartered savings institutions such as
New South to establish branches in any state of the United States and its
territories. A savings association must apply with the OTS prior to opening a
branch. The regulations allow the OTS to grant supervisory clearance to an
applicant based on the policies, condition of the applicant including whether
the applicant has adequate capital and its CRA record.
Recent Legislation. On November 12, 1999, President Clinton signed into law
the Graham-Leach-Bliley Act ("Act"), which allows bank holding companies to
engage in a wider range of nonbanking activities, including greater authority to
engage in securities and insurance activities. The Graham-Leach-Bliley Act also
addressed privacy issues and creates an obligation for financial institutions to
adopt their own privacy policies, to provide those policies to customers before
the time the customer relationship is established, to periodically redistribute
the privacy policy, to adhere to it, and permit customers to "opt-out" of
information sharing with third parties in most circumstances. At this time, no
predictions can be made regarding the impact that the Act may have on New
South's financial condition or results of operations.
Federal Home Loan Bank System. The Federal Home Loan Bank System consists
of 12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB, New South is required to acquire and hold shares of capital stock in the
FHLB in an amount at least equal to one percent of the aggregate unpaid
principal of its home residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, or 1/20 of its advances,
borrowings, from the FHLB, whichever is greater.
11
Competition
New South faces substantial competition in purchasing and originating loans
and in attracting deposits. Competitors include other thrifts national and
state banks, trust companies, insurance companies, mortgage banking operations,
credit unions, finance companies, money market funds and other financial and
non-financial companies which may offer products similar to those offered by New
South. Many competing providers have greater financial resources than New
South, offer additional services, have wider geographic presence or more
accessible branch and loan production offices. New South's headquarters and its
only two deposit gathering branches are located in Birmingham, Alabama.
Birmingham is served by over 17 commercial banks and thrifts, most of which are
headquartered in the Birmingham area. Four of the 100 largest commercial banks
in the United States are headquartered in Birmingham.
Capital
The OTS requires thrift financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0 percent to 100 percent. Under the
risk-based standard, capital is classified into two tiers. Tier 1 capital of
New South consists of common shareholders' equity, excluding the unrealized gain
or loss on securities available for sale, minus certain intangible assets. New
South's Tier 2 capital consists of the general reserve for possible loan losses
subject to certain limitations. Consolidated regulatory capital requirements do
not apply to thrift holding companies. New South has consistently exceeded
regulatory minimum guidelines. New South's current ratios place New South in
the well capitalized category.
Item 2. Properties
The principal executive offices of the Company are located at 1900
Crestwood Boulevard, Birmingham, Alabama in a 63,000 square foot building owned
by Collateral. New South owns a 42,789 square foot facility located at 215
North 21st Street in Birmingham, Alabama of which 51 percent is occupied by New
South. The remaining space is leased to multiple tenants. New South also owns an
85,000 square foot building located at 210 Automation Way, Birmingham, Alabama.
12
In addition, New South leases space at 2000 Crestwood Boulevard,
Birmingham, Alabama in a 15,000 square foot building. New South leases all of
its other physical locations in the normal course of business. At December 31,
1999, New South had 38 offices in 30 cities which were leased. Substantially
all leases are for periods of from one to five years.
Item 3. Legal Proceedings
The Company, from time to time, has been named in ordinary, routine
litigation. These matters have arisen in the normal course of business and are
related to lending, collections, servicing and other activities. Management is
of the opinion that the ultimate resolution of these lawsuits will not have a
material adverse effect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 1999 to a vote of
the security holders of the Company.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company was held by approximately 57 stockholders
as of March 1, 2000. The common stock of the Company has not been registered
under the Securities Act of 1933 (the "Securities Act"), and the Company is not
aware of the existence of any trading activity in the common stock.
Accordingly, there is no market for such common stock, and no market is expected
to develop in the foreseeable future.
From time to time in the past, the Company has purchased shares of common
stock from Company shareholders who desired to sell their shares. The Company
has never encouraged such sales and has historically paid only the then current
book value. On August 26, 1998, the Company purchased 126,766.50 shares of its
common stock at $77.25 as part of an offer. There have been no other purchases
since that time.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following information summarizes selected consolidated financial data
for the last five years. The summary below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included therein.
December 31
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(In thousands, except percentage and per share data)
Summary of Operations Data
Interest income $ 85,356 $ 83,251 $ 75,491 $ 65,535 $ 55,064
Interest expense 53,584 52,299 47,723 43,158 37,523
---------- ---------- -------- -------- --------
Net interest income 31,772 30,952 27,768 22,377 17,541
Provision for loan losses 3,638 3,944 2,954 2,492 572
---------- ---------- -------- -------- --------
Net interest income after
provision for loan losses 28,134 27,008 24,814 19,885 16,969
Noninterest income
Loan administration income 12,427 6,191 4,915 4,870 4,547
Gain on sale of loan 9,979 11,387 5,079 457 629
Other income 15,563 15,992 5,320 2,998 1,490
---------- ---------- -------- -------- --------
Total 37,969 33,570 15,314 8,325 6,666
Noninterest expense:
Salaries and benefits 34,347 26,286 16,024 7,424 5,371
Other expense 27,759 22,467 15,398 15,742 12,633
---------- ---------- -------- -------- --------
Total 62,106 48,753 31,422 23,166 18,004
Income before income taxes 3,997 11,825 8,706 5,044 5,631
Income taxes expense 1,406 5,088 3,990 2,482 2,265
---------- ---------- -------- -------- --------
Net Income $ 2,591 $ 6,737 $ 4,716 $ 2,562 $ 3,366
========== ========== ======== ======== ========
Per Share Data
Earnings per share $ 2.06 $ 5.05 $ 3.42 $ 1.84 $ 2.42
Weighted average shares
outstanding 1,255 1,333 1,377 1,391 1,393
Selected Year End Balances
Total assets $1,021,107 $1,142,622 $994,053 $822,980 $746,518
Investment securities
available for sale 132,482 109,591 197,135 94,451 96,678
Loans, net of unearned
income 748,277 812,877 727,854 681,730 561,611
Allowance for loan losses 11,114 9,107 7,333 5,904 4,562
Deposits 745,085 775,448 695,365 660,668 539,011
Federal Home Loan Bank
Advances 128,417 198,418 179,420 95,388 104,000
Total liabilities 973,799 1,094,182 941,739 775,039 700,738
Shareholders' equity 47,308 48,440 52,314 47,941 45,780
Performance Ratios
Return on average assets 0.24% 0.65% 0.51% 0.31% 0.47%
Return of average equity 5.44 13.71 9.17 5.22 7.75
Interest rate spread 2.56 2.72 2.74 2.53 2.28
Net interest margin 3.04 3.22 3.21 2.94 2.65
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 109.40 109.14 108.46 107.19 106.56
Ratio of noninterest expense
to average assets 5.71 4.71 3.42 2.84 2.52
Efficiency ratio 89.05 75.56 72.94 75.45 74.38
Average equity to
average assets 4.38 4.75 5.59 6.02 6.08
Asset Quality Data
Net charge-offs to average
loans, net of unearned income 0.18% 0.28% 0.21% 0.18% 0.22%
Nonperforming assets to
total assets 1.25 0.94 0.93 1.20 0.78
Nonperforming loans to
total loans, net of
unearned income 1.26 1.19 1.12 1.21 0.69
Allowance for loan losses to
total loans, net of
unearned income 1.49 1.12 1.01 0.87 0.81
Allowance for loan losses
to total nonperforming
assets 87.37 84.57 78.97 59.99 78.43
Capital Ratios(1)
Tangible capital (tier 1
to total assets) 8.64% 7.00% 6.17% 6.89% 7.24%
Tier 1 capital (to risk
weighted assets) 11.87% 9.96% 9.51% 10.27% 11.12%
Total risk-based capital
(to risk weighted assets) 12.10% 10.38% 10.48% 11.10% 11.78%
(1) Capital ratio data for all period presented are for New South only
14
Quarterly Results of Operations (Unaudited)
The quarterly results of operations for the years ended December 31, 1999 and
1998 are as follows:
1999
------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
(In thousands, except per share data)
Interest income $85,356 $23,092 $20,317 $19,868 $22,079
Interest expense 53,584 14,286 12,331 12,681 14,286
Net interest income 31,772 8,806 7,986 7,187 7,793
Provision for loan losses 3,638 964 1,241 215 1,218
Income before income taxes 3,997 (2,919) 1,127 1,886 3,903
Net income 2,591 (2,729) 1,563 1,464 2,293
Per common share:
Net income(1) $ 2.06 $ (2.17) $ 1.24 $ 1.17 $ 1.83
Weighted average shares outstanding 1.255 1.256 1.256 1.256 1.254
1998
------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
(In thousands, except per share data)
Interest income $83,251 $21,294 $21,422 $20,218 $20,317
Interest expense 52,299 13,751 13,167 12,523 12,858
Net interest income 30,952 7,543 8,255 7,695 7,459
Provision for loan losses 3,944 877 1,543 875 649
Income before income taxes 11,825 1,906 3,931 3,969 2,019
Net income 6,737 953 2,269 2,251 1,264
Per common share:
Net income(1) $ 5.05 $ 0.76 $ 1.71 $ 1.63 $ 0.92
Weighted average shares outstanding 1.333 1.250 1.327 1.377 1.377
(1) Per share amount are computed based on the weighted average shares
outstanding during each quarter. Therefore, due to rounding differences with
the weighted average shares calculation and per share amounts, net income
per share for the quarters may not amount to the annual totals shown.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation
The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto and the other financial data included elsewhere in
this document. The financial information provided below has been rounded in
order to simplify its presentation. However, the ratios and percentages provided
below are calculated using the detailed financial information contained in the
Consolidated Financial Statements, the Notes thereto, and the other financial
data included elsewhere in this document. All tables, graphs, and financial
statements included in this report should be considered an integral part of this
analysis.
New South Bancshares, Inc. (the "Company") is a unitary thrift holding
company formed in November of 1994. The Company has two wholly owned
subsidiaries, New South Federal Savings Bank ("New South" or the "Bank") and
Collateral Agency of Texas, Inc. New South has two subsidiaries, Avondale
Funding.com, inc. ("Avondale" or "AFC") and New South Agency, Inc. and a 50
percent interest in a joint venture, DPH/Collateral New South Funding Venture,
Ltd. ("DPH"). On February 17, 1999, New South acquired the assets associated
with the national mortgage origination activities of Avondale Federal Savings
Bank (the "Acquisition"). The Acquisition was recorded under the purchase
method; accordingly, the purchase price was allocated to the assets acquired
based upon their fair value, with no goodwill being recorded. Concurrent with
the Acquisition, New South organized Avondale Funding Corporation, in which the
purchased assets and the assumed Acquisition liabilities are held and which
continues to operate the national mortgage origination business. In July 1999,
Avondale Funding Corporation's name was changed to Avondale Funding.com, inc.
Subsequent to year end, the Bank began the cessation of operations of AFC for
business reasons. See Item 8, Note 25, Subsequent Event for further details.
In July 1997, Collateral Mortgage, Ltd. ("Collateral"), an affiliate of the
Company, transferred 39 loan origination offices to New South (the "Transfer").
Effective January 1, 1999, Collateral transferred its residential mortgage
servicing operations to New South (the "Servicing Transfer") under a
subservicing agreement. The servicing portfolio totaled $2.6 billion. On $1.4
billion of the servicing portfolio New South already owned the servicing rights.
As a result of the Transfer and the Servicing Transfer, all direct costs
associated with these operations are now incurred by New South.
General
The Company's operations principally involve residential mortgage lending,
automobile installment lending, residential construction and land lending,
manufactured housing lending, and deposit gathering activities. The Company's
residential mortgage lending efforts involve the origination and purchase of
residential mortgage loans through its loan origination offices and wholesale
sources, the sale of such loans, usually on a pooled or securitized basis, in
the secondary market, and the servicing of residential mortgage loans for
investors and the Company's own loan portfolio. The automobile installment
lending program currently involves indirect lending through approximately 600
automobile dealers in 6 southern states. The Company's residential construction
and land lending efforts involve making loans to builders for the construction
of single family properties and, on a more limited basis, loans for the
acquisition and development of improved residential lots. The manufactured
housing lending program primarily includes the indirect origination of mortgage
loans, including the land and the home, and nonmortgage loans for
15
the home only, in addition to construction loans that are in place during the
preparation phase of the land. The Company conducts deposit gathering activities
in a traditional fashion through its two full service branches located in
Birmingham, Alabama, and through its telephone banking center. See "Business."
The Company's net income results primarily from New South's operations. Net
interest income is the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities. Variations in the
volume and mix of interest-earning assets and interest-bearing liabilities and
their relative sensitivity to interest rate movements determine changes in net
interest income. Net income is further affected by the provision for loan
losses, noninterest income and noninterest expense. Noninterest income consists
primarily of loan administration income and origination fees related to mortgage
banking operations, net gains on the sales of loans, and other income.
Noninterest expense consists primarily of salaries and benefits, net occupancy
and equipment expense, and other expenses.
Loans are the single largest component of the Company's earning assets and
generally have a more favorable return than other categories of earning assets.
Average loans, net of unearned income, increased 17.2 percent from $766.8
million during 1998 to $898.4 million during 1999.
Deposits are New South's largest source of funds used to support earning
assets. New South's average deposits increased $43.5 million, or 5.8 percent,
from $749.6 million during 1998 to $793.1 million during 1999. This increase in
funding facilitated increased loan originations within several of the Bank's
lending areas. The Company has generally been able to attract deposits by
offering nationally competitive rates.
The Company also increased its use of Federal Home Loan Bank ("FHLB")
advances as an alternative funding source. Average advances increased from
$151.5 million in 1998 to $158.8 million in 1999.
New South is required by the Office of Thrift Supervision ("OTS") to meet
certain capital requirements. Among these are minimum leverage, tangible, and
risk-based capital ratios. New South has consistently exceeded these minimum
guidelines. At December 31, 1999, New South's capital ratios placed it within
the regulatory definition of a "well capitalized" institution.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net interest income increased $820,000, or 2.6 percent, from $31.0 million
in 1998 to $31.8 million in 1999. The increase resulted from a higher level of
average earning assets, partially offset by a decrease in the net interest rate
margin. The decline in the net interest rate margin, which decreased from 3.22
percent in 1998 to 3.04 percent in 1999, primarily resulted from lower rates
earned on loans. This results, in part, from changes in the mix of the loan
portfolio, specifically a decrease in the average balance of nonconforming
residential mortgage loans coupled with lesser reductions in funding costs. The
growth in average earning assets, which increased from $960.9 million in 1998 to
over one billion dollars in 1999, resulted from volume generated by the
Acquisition, continued loan originations resulting from the Transfer, and
increases in loan production within nonconforming lending areas.
The provision for loan losses decreased $306,000, or 7.8 percent, from $3.9
million in 1998 to $3.6 million in 1999. This decrease was facilitated by a
$64.6 million, or 7.9 percent decrease in loans from $812.9 million at December
31, 1998 to $748.3 million at December 31, 1999 resulting from securitization of
loans in December 1999. The allowance for loan losses as a percentage of total
loans, net of unearned income, increased from 1.1 percent at December 31, 1998
to 1.5 percent at December 31, 1999. The allowance for loan losses as a
percentage of total nonperforming assets was 84.6 percent and 87.4 percent at
December 31, 1998 and 1999, respectively. See "--Provision and Allowance for
Loan Losses."
Noninterest income increased $4.4 million, or 13.1 percent, from $33.6
million in 1998 to $38.0 million in 1999. Loan administration income increased
from $6.2 million in 1998 to $12.4 million, an increase of $6.2 million, or
100.7 percent, as a result of the Servicing Transfer. The increase in loan
administration income was partially offset by a decrease in origination fees of
$1.6 million, from $11.4 million in 1998 to $9.8 million in 1999, attributable
to a decline in the number of residential mortgage loans originated. This was
further offset by a decline in gains on sale of loans of $1.4 million from $11.4
million in 1998 to $10.0 million in 1999, resulting from the securitization and
sale of approximately $656.4 million of loans during 1999. See "--Noninterest
Income and Expense."
Noninterest expense increased $13.4 million, or 27.4 percent, from $48.8
million in 1998 to $62.1 million in 1999. Salaries and benefits totaled $26.3
million in 1998 and $34.3 million in 1999, an increase of $8.1 million, or 30.7
percent. Net occupancy and equipment expense was $4.0 million in 1998 and $6.2
million in 1999, an increase of $2.2 million, or 53.9 percent. Other expenses
were $18.4 million in 1998 and $21.6 million in 1999, an increase of $3.1
million, or 16.9 percent. These increases are directly attributable to the
Acquisition and the Servicing Transfer. The increases in noninterest expenses
resulting from the Acquisition were: Salaries and Benefits: $3.0 million; Net
Occupancy: $1.1 million; Other Expenses: $2.6 million; totaling $6.8 million.
Overall, the Acquisition accounted for 50.8 percent of the Company's increase in
noninterest expeses. Loan servicing fees paid to affiliates were $4.5 million in
1998 and $354,000 in 1999, a decrease of $4.1 million, or 92.1 percent, another
result of the Servicing Transfer. See "--Noninterest Income and Expense."
The provision for income taxes was $1.4 million in 1999, an effective rate
of 35.2 percent, compared with $5.1 million in 1998, an effective rate of 43.0
percent, partially a result of the decline in income before income taxes and the
elimination of the valuation allowance. Effective January 1, 1999, the Company
elected S corporation status. Corporations electing such treatment under the
Internal Revenue Code are not generally subject to Federal corporate taxation.
However, the elimination of Federal deferred tax assets established prior to the
election resulted in a higher effective tax rate. After 1999, the effective rate
of income taxes, applicable to only states that do not recognize S corporations,
will be significantly lower.
Net income decreased $4.1 million, or 61.5 percent, from $6.7 million, or
$5.05 per share, in 1998, to $2.6 million, or $2.06 per share, in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net interest income increased $3.2 million, or 11.5 percent, from $27.8
million in 1997 to $31.0 million in 1998. The increase resulted from a slight
improvement in the net interest rate margin and a higher level of average
earning assets. The
16
improvement in the net interest rate margin, which increased from 3.21 percent
in 1997 to 3.22 percent in 1998, primarily resulted from higher rates earned on
loans, resulting in part from changes in the mix of the loan portfolio,
specifically increases in the average balances of nonconforming residential
mortgage and nonprime automobile installment loans coupled with stable funding
costs. The growth in average earning assets, which increased from $866.1 million
in 1997 to $960.9 million in 1998, primarily resulted from loan volume generated
by the Transfer.
The provision for loan losses increased $990,000, or 33.5 percent, from
$3.0 million in 1997 to $3.9 million in 1998. This was due, in part, to a
$528,000 increase in net charge-offs of automobile installment loans. The
allowance for loan losses as a percentage of total loans, net of unearned
income, increased from 1.0 percent at December 31, 1997 to 1.1 percent at
December 31, 1998. Continued loan growth, especially in the nonconforming
residential mortgage loan portfolio and in residential construction and land
lending, were the primary factors contributing to the increased allowance. An
increase in nonperforming loans from $8.1 million at December 31, 1997 to $9.6
million at December 31, 1998 also necessitated the increase. The allowance for
loan losses as a percentage of total nonperforming assets was 79.0 percent and
84.6 percent at December 31, 1997 and 1998, respectively. See "--Provision and
Allowance for Loan Losses."
Noninterest income increased $18.3 million, or 119.2 percent, from $15.3
million in 1997 to $33.6 million in 1998. The most substantial contributing
factors to the increase in noninterest income were increases in origination fees
and the gain on sale of loans, which increased $7.7 million and $6.3 million,
respectively. Another significant contributor to the increase in noninterest
income was the increase in other income of $3.3 million. This category is
primarily comprised of management fees paid by affiliates, underwriting fees,
and other income that includes miscellaneous loan income. All of these
increases were the result of a full year of operations after the Transfer and
the overall increase in total loan originations from 1997 to 1998. See "--
Noninterest Income and Expense."
Noninterest expense increased $17.3 million, or 55.2 percent, from $31.4
million in 1997 to $48.8 million in 1998. Significant contributors to this
increase were increases in salaries and benefits of $10.3 million and increases
in net occupancy and equipment expense of $2.1 million. These increases are
attributable to the Transfer and the 104.1 percent increase in total loan
originations in 1998. Another significant contributor to the increase in
noninterest expense was a $5.0 million increase in other expense, including $2.3
million in 1998 related to the branch purchase fee expense due Collateral as a
part of the Transfer agreement. Other expenses were $13.4 million in 1997 and
$18.4 million in 1998. See "--Noninterest Income and Expense."
Net income increased $2.0 million, or 42.9 percent, from $4.7 million, or
$3.42 per share, in 1997, to $6.7 million, or $5.05 per share, in 1998.
Increased net interest income and the net decline in all noninterest categories
were the primary reasons for the growth in earnings.
Net Interest Income
General
Net interest income is determined by the yields earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch in the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
Net interest income divided by average earning assets represents the Company's
net interest rate margin.
Average Balances, Income, Expenses and Rates
The following table sets forth, for the periods indicated, certain
information related to the Company's average balance sheet and its average
yields on assets and average costs of liabilities. Such yields or costs are
derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from the
daily balances throughout the periods indicated.
17
Average Balances, Income, Expense, and Rates
Year Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- -----------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ------ ---------- ------- ------ -------- ------- ------
(In thousands, except percentages)
Assets
Loans, net of unearned
income(1) $ 898,379 $76,829 8.55% $ 766,780 $70,844 9.24% $713,935 $64,831 9.08%
Federal funds sold 17,131 811 4.73 6,109 424 6.94 6,512 381 5.85
Investment securities
available for sale 71,469 4,128 5.78 141,751 9,098 6.42 105,536 7,436 7.05
Other investments 58,133 3,588 6.17 46,255 2,885 6.24 40,129 2,843 7.08
---------- ------- ---- ---------- ------- ---- -------- ------- ----
Total earning assets 1,045,112 85,356 8.17 960,895 83,251 8.66 866,112 75,491 8.72
Securities under repurchase
agreements 39 2,129
Allowance for loan losses (10,077) (8,072) (6,489)
Other assets 52,440 82,995 57,875
---------- ---------- --------
Total Assets $1,087,475 $1,035,857 $919,627
========== ========== ========
Liabilities and Shareholders'
Equity
Other interest-bearing
deposits $ 3,689 150 4.07 $ 3,020 118 3.91 $ 3,095 126 4.07
Savings deposits 83,035 3,811 4.59 61,657 2,691 4.36 59,085 2,595 4.39
Time deposits 629,829 35,872 5.70 593,775 35,915 6.05 571,221 35,011 6.13
Other borrowings 45,443 2,358 5.19 51,964 3,151 6.06 51,624 3,149 6.10
Federal Home Loan Bank advances 158,782 8,461 5.33 151,476 8,851 5.84 113,512 6,842 6.03
Guaranteed preferred beneficial
interests in the Company's
subordinated debt 34,500 2,932 8.50 18,555 1,573 8.48 - - -
---------- ------- ---- ---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 955,278 53,584 5.61 880,447 52,299 5.94 798,537 47,723 5.98
Noninterest-bearing liabilities 76,507 91,125 57,037
Accrued expenses and other
liabilities 8,061 15,131 12,611
Shareholders' equity 47,629 49,154 51,442
---------- ---------- --------
Total Liabilities and
Shareholders' Equity $1,087,475 $1,035,857 $919,627
========== ---- ========== ---- ======== ----
Net interest rate spread 2.56% 2.72% 2.74%
------- ==== ------- ==== ------- ====
Net interest income $31,772 $30,952 $27,768
======= ======= =======
Net interest rate margin 3.04% 3.22% 3.21%
==== ==== ====
(1) Loans classified as nonaccrual are included in the average volume
classification. Loan fees for all years presented are included in the
interest amounts for loans.
Analysis of Changes in Net Interest Income
The following table sets forth the effect that the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income from 1997 to 1998 and 1998 to
1999. Changes not solely attributable to a change in rate or volume are
attributable to a mixture of each.
18
Analysis of Changes in Net Interest Income
Years Ended December 31,
----------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Change Attributable to Change Attributable to
------------------------ -----------------------
Volume Rate Mix Volume Rate Mix
------- ------ ----- ------- ------ -----
(In thousands)
Earning Assets
Total loans, net of unearned income (1) $12,159 $(5,269) $(905) $4,799 $1,131 $ 83
Federal funds sold 765 (135) (243) (24) 71 (4)
Investment securities available for sale (4,511) (911) 452 2,552 (662) (228)
Other investments 741 (30) (8) 434 (340) (52)
------- ------- ----- ------ ------ -----
Total interest income 9,154 (6,345) (704) 7,761 200 (201)
Interest Bearing Liabilities
Other interest bearing deposits 26 5 1 (3) (5) -
Savings deposits 933 139 48 113 (16) (1)
Time deposits 2,181 (2,096) (128) 1,382 (460) (18)
Other borrowings (395) (455) 57 21 (19) -
Federal Home Loan Bank advances 427 (779) (38) 2,288 (209) (70)
Guaranteed preferred beneficial interests in the Company's
subordinated debt 1,352 4 3 1,573 - -
------- ------- ----- ------ ------ -----
Total interest expense 4,524 (3,182) (57) 5,374 (709) (89)
------- ------- ----- ------ ------ -----
Net interest income $ 4,630 $(3,163) $(647) $2,387 $ 909 $(112)
======= ======= ===== ====== ====== ====
- ----------
(1) Loans, net of unearned income includes nonaccrual loans for all years
presented.
Interest Sensitivity and Market Risk
Interest Sensitivity
Through policies established by the Bank's Asset/Liability Management
Committee ("ALCO"), the Company monitors and manages the repricing and maturity
of its assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on its net interest income. ALCO uses
a combination of earnings and market value sensitivity analyses and traditional
gap analysis. These analyses compare the repricings, maturities, and
prepayments, as applicable, of New South's interest-earning assets and interest-
bearing liabilities and off balance sheet instruments in order to measure,
monitor, and manage interest rate risk. The differences in the various
maturities or repricings, known as GAP, are summarized in the analysis below for
December 31, 1999:
19
Summary Gap Report
As of December 31, 1999
---------------------------------------------------------------------------------------
Immediate Over Three Over One Over Five
to Three Months Year Through Years Through Over Ten
Months to One Year Five Years Ten Years Years Total
------------ ------------ ------------- ------------- -------- ---------
(In thousands)
Interest-bearing deposits in other banks $ 11,732 $ - $ - $ - $ - $ 11,732
Investment securities available for sale 14,707 43,904 65,719 1,940 6,212 132,482
Loans held for sale 66,258 - - - - 66,258
Loans, net of unearned income 249,848 104,711 224,923 116,785 52,010 748,277
--------- --------- -------- -------- -------- --------
Total Assets $ 342,545 $ 148,615 $290,642 $118,725 $ 58,222 $958,749
========= ========= ======== ======== ======== ========
Interest-bearing deposits $ 420,996 $ 156,819 $ 84,728 $ 34,861 $ - $697,407
Federal funds purchased and securities sold
under agreement to repurchase 50,923 - - - - 50,923
Federal Home Loan Bank advances 85,000 25,000 18,387 - 30 128,417
Notes payable 6,115 - - - - 6,115
Guaranteed preferred beneficial interest in
the Company's subordinated debentures - - - - 34,500 34,500
--------- --------- -------- -------- -------- --------
Total Liabilities $ 563,034 $ 181,819 $103,115 $ 34,861 $ 34,530 $917,362
========= ========= ======== ======== ======== ========
Periodic Gap $(220,489) $ (33,204) $187,527 $ 83,861 $ 23,692
Cumulative Gap $(220,489) $(253,693) $(66,166) $ 17,695 $ 41,387
Impact of Rate Gaps $ 230,000 $ - $ - $ - $ -
Impact of Swaps $ 30,000 $ (25,000) $(30,000) $ 25,000 $ -
Hedged Periodic Gap $ 39,511 $ (58,204) $157,527 $108,861 $ 23,692
Hedged Cumulative Gap $ 39,511 $ (18,693) $138,834 $247,695 $271,387
The Company's interest rate sensitivity analysis evaluates interest rate
risk based on the impact of various interest rate scenarios on the net interest
income and the market value of the portfolio equity ("MVPE"). The MVPE analysis
is required quarterly by the OTS. The Company also uses an earnings simulation
model to determine the effects of several interest rate scenarios on the
Company's net interest income. ALCO meets semi-monthly to monitor and evaluate
the interest rate risk position of New South and to formulate and implement
strategies for increasing and protecting the interest rate margin and net
income.
Brokered deposits, or deposits received through third party depositor
representatives, are considered to be highly interest rate sensitive and are
reflected in interest rate risk analyses reviewed by ALCO. Additionally, both
the Committee and New South's Board of Directors are apprised of the level of
brokered deposits on an ongoing basis.
The Company uses interest rate contracts, primarily interest rate swaps and
caps, to reduce or modify interest rate risk. The impact of these instruments is
incorporated into the interest rate risk management model. The Company manages
the credit risk of its interest rate swaps and caps through a review of the
creditworthiness of the counterparties to such contracts, Board established
credit limits for each counterparty, and monitoring by ALCO.
At December 31, 1999, New South had interest rate swap contracts with
notional amounts totaling $100 million. Of these, $65 million were variable-for-
fixed swap contracts which effectively convert $65 million in variable rate
funding to fixed rate funding, thus reducing the impact of an upward movement in
interest rates on the net interest rate margin. Additionally, the Company has
entered into $35 million in fixed-for-variable swaps concurrent with the
issuance of $35 million in brokered certificates of deposit. These swaps reduce
the current cost of these liabilities and convert them to an adjustable rate.
These swaps are callable at the option of the counterparty. If called, the
Company has the right to call the certificates of deposit. New South also had
$230 million in interest rate cap contracts outstanding at December 31, 1999.
The Company is exposed to rising liability costs due to the short-term nature of
its liability portfolio as noted in the Summary Gap Report. The interest rate
cap contracts serve as hedges against increases in the costs of liabilities.
20
The following table sets forth the Company's interest rate contract
activity for the years 1997, 1998 and 1999.
Interest Rate Swaps and Caps
Interest Rate Swaps
-------------------
Received Pay Interest
fixed fixed Rate Caps Total
-------- ----- --------- ---------
(In thousands)
Balance at December 31, 1996 $ - $ 120,000 $ 215,000 $ 335,000
Additions 45,000 - 90,000 135,000
Maturities - (40,000) - (40,000)
Calls - - - -
Terminations - - - -
-------- --------- --------- ---------
Balance at December 31, 1997 45,000 80,000 305,000 430,000
Additions 10,000 40,000 40,000 90,000
Maturities - (40,000) (40,000) (80,000)
Calls (15,000) - - (15,000)
Terminations - - - -
-------- --------- --------- ---------
Balance at December 31, 1998 40,000 80,000 305,000 425,000
Additions 25,000 100,000 30,000 155,000
Maturities - (15,000) (105,000) (120,000)
Calls (30,000) - - (30,000)
Terminations - (100,000) - (100,000)
-------- --------- --------- ---------
Balance at December 31, 1999 $ 35,000 $ 65,000 $ 230,000 $ 330,000
======== ========= ========= =========
The following table sets forth the relative maturities and interest rates
related to interest rate contracts outstanding at December 31, 1999.
Maturities on Caps and Interest Rates Exchanged on Swaps
Year of Maturity
-----------------------------------------------------------------
2004
2000 2001 2002 2003 Thereafter Total
------- ------- ------- ------- ---------- -------
(In thousands, except percentages)
Notional amount of receive fixed swap $ - $ - $10,000 $ - $25,000 $ 35,000
Received rate fixed - - 5.30% - 6.96% 6.49%
Pay rate variable - - 5.91 - 6.08% 6.03%
Notional amount of pay fixed swaps $25,000 $ - $ - $20,000 $20,000 $ 65,000
Received rate variable 6.11% - - 6.18% 6.18% 6.15%
Pay rate fixed 5.99 - - 5.87 5.92 5.93
Caps
Notional amount $50,000 $70,000 $40,000 $70,000 $ 0 $230,000
The Company also enters into forward commitments and optional commitments
to sell loans based on the interest rates of loans currently in the Company's
pipeline. This reduces the impact of future changes in market rates on the value
of those loans upon delivery. Forward commitments on mortgage loans held for
sale are considered in the lower of cost or market valuation and are monitored
by ALCO along with other off-balance sheet instruments.
Market Risk
The Company's earnings are dependent on its net interest income, which is
the difference between interest income earned on all earning assets, primarily
loans and securities, and interest paid on all interest-bearing liabilities,
primarily deposits and FHLB borrowings. Market risk is the risk of loss from
adverse changes in market prices and rates. The Company's market risk arises
primarily from inherent interest rate risk in its lending, investing and deposit
gathering activities. The Company seeks to reduce its exposure to market risk
through actively monitoring and managing its interest rate risk. Management
relies upon a variety of analyses to monitor and manage its interest rate risk,
primarily earnings simulation analysis, market value analysis, and static GAP
analysis. Earnings simulation analysis addresses the impact of changes in the
level of prevailing interest rates upon the Bank's earnings by considering the
affect of changes in the structure of rates, the relationships between rates,
and the resulting changes in the Bank's operating income. Market value analysis
evaluates the impact of instantaneous, parallel rate shocks on the Bank's MVPE.
Static GAP analysis calculates the degree of mismatch between the maturity,
repricing, and prepayments of the assets and the maturity and repricing of the
deposits and interest-bearing liabilities.
21
The primary earning assets, loans and securities, contain certain features
within individual types of loans and specific securities that create uncertainty
as to expected performance at varying levels of interest rates. In some cases,
options exist whereby the borrower may elect to repay the obligation at any
time. These prepayment options make anticipating the performance of those
instruments difficult in a changing rate environment. At December 31, 1999,
mortgage backed securities and loans held for sale amounting to $154.1 million,
or 15.1 percent of total assets, have prepayment risks, in addition to a
significant portion of the total loan portfolio. Management believes that
assumptions used in its simulation on the performance of financial instruments
with such risks are appropriate. However, the actual performance of these
financial instruments may differ from management's estimates due to several
factors, including the diversity and sophistication of the customer base, the
general level of prevailing interest rates and the relationship to their
historical levels, and general economic conditions. The difference between
those assumptions and actual results, if significant, could cause the actual
results to differ from those indicated by the simulation analysis.
Deposits totaled $745.1 million, or 73.0 percent of assets, at December 31,
1999. Since deposits are the primary funding source for earning assets, the
associated market risk is considered by management in its simulation analysis.
Generally, it is anticipated deposits will be sufficient to support funding
requirements. However, the rates paid for deposits at varying levels of
prevailing interest rates have a significant impact on net interest income and,
therefore, must be quantified by the Company in its simulation analysis.
Generally, the Company is considered to be liability sensitive, meaning that
earnings will tend to decrease as rates increase, and rise in a decreasing rate
environment. However, changes in the relationship between rates can also have
an impact on earnings, depending upon the direction and magnitude of the change.
For relatively short-term rate changes, the impact on income would be
insignificant. However, a significant, sustained change in rates could have a
significant impact on earnings, depending upon the magnitude and direction of
the change. As of December 31, 1999, the Company's interest rate risk
management model indicated that projected net interest income would decrease by
13.27 percent assuming an instantaneous increase in interest rates of 200 basis
points, or increase by 18.28 percent assuming an instantaneous decrease of 200
basis points. All measurements of interest rate risk sensitivity fall within
guidelines established by New South's Board of Directors.
The following table illustrates the results of simulation analysis used by
the Company to determine the extent to which market risk would have affected the
net interest rate margin if prevailing interest rates differed from actual rates
during 1999 and 1998. Because of the inherent use of estimates and assumptions
in the simulation model used to derive this information, the actual results for
1999 and the future impact of market risk on the Company's net interest rate
margin may differ from that found in the table.
Market Risk
Year ended December 31, 1999 Year ended December 31, 1998
Change in -------------------------------- ---------------------------------
Prevailing Net Interest Change from Net Interest Change from
Interest Rates Income Amount Income Amount Income Amount Income Amount
-------------- ------------- ------------- ------------- -------------
(In thousands, except percentages)
+ 200 basis points $27,555 (13.27)% $30,775 (0.57)%
+ 100 basis points 28,860 (9.17)% 30,757 (0.63)%
+ 0 basis points 31,772 - % 30,952 - %
- - 100 basis points 34,917 9.90 % 29,743 (3.91)%
- - 200 basis points 37,752 18.82 % 29,601 (4.36)%
It is worth noting that the analysis above ignores any changes to the
balance sheet resulting from normal operations.
Provision and Allowance for Loan Losses
General
Management establishes allowances for the purpose of absorbing losses that
are inherent within the loan portfolio and that are expected to occur based on
management's review of historical losses, underwriting standards, changes in the
composition of the loan portfolio, changes in the economy, and other factors.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses as determined by management's continuing review and
evaluation of the loans and its judgment as to the impact of economic conditions
on the portfolio. Charges are made to the allowance for loans that are charged
off during the year while recoveries of these amounts are credited to the
account. The Company follows a policy of charging off loans determined to be
uncollectible by management.
The Company's allowance for loan losses is based upon management's judgment
and assumptions regarding risk elements in the portfolio, future economic
conditions and other factors affecting borrowers. The evaluation of the
allowance for loan losses includes management's identification and analysis of
loss inherent in various portfolio segments using a credit grading process and
specific reviews and evaluations of certain significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general economic conditions in the
service area with residential mortgage and automobile installment loan
portfolios each being evaluated collectively for impairment. The adequacy of the
allowance for loan losses and the effectiveness of the Company's monitoring and
analysis system are also reviewed periodically by the banking regulators and the
Company's independent auditors.
Based on present information and an ongoing evaluation, management
considers the allowance for loan losses to be adequate to meet presently known
and inherent risks in the loan portfolio. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about future
events that it believes to be reasonable but which may or may not be valid.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and the composition of charge-offs and
recoveries for each of the last five reporting periods.
22
Allowance for Loan Losses
As of and for the Year Ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(In thousands, except percentages)
Loans, net of unearned income, outstanding as of December 31 $748,277 $812,877 $727,854 $681,730 $561,611
======== ======== ======== ======== ========
Average loans, net of unearned income $898,379 $766,780 $713,935 $654,607 $552,698
======== ======== ======== ======== ========
Balance of allowance for loan losses at beginning of period $ 9,107 $ 7,333 $ 5,904 $ 4,562 $ 5,189
Loans charged off:
Residential mortgage (1,206) (186) (41) (131) (175)
Installment (1,980) (3,019) (2,159) (1,479) (448)
Commercial Real Estate - - - - (813)
-------- -------- -------- -------- --------
Total charge-offs (3,186) (3,205) (2,200) (1,610) (1,436)
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Residential mortgage 140 43 15 8 62
Installment 1,415 992 660 400 173
Commercial Real Estate - - - 52 2
-------- -------- -------- -------- --------
Total recoveries 1,555 1,035 675 460 237
-------- -------- -------- -------- --------
Net recoveries/(charge-offs) (1,631) (2,170) (1,525) (1,150) (1,199)
Addition to allowance charged to expense 3,638 3,944 2,954 2,492 572
-------- -------- -------- -------- --------
Balance of allowance for loan losses as of December 31 $ 11,114 $ 9,107 $ 7,333 $ 5,904 $ 4,562
======== ======== ======== ======== ========
Allowance for loan losses to loans, net of unearned income 1.49% 1.12% 1.01% 0.87% 0.81%
Net charge-offs to average loans, net of unearned income 0.18% 0.28% 0.21% 0.18% 0.22%
The following table sets forth the components of the allowance for
loan losses related to the primary segment of the Company's loan portfolio. All
loan amounts are net of unearned income.
Allocation of the Allowance for Loan Losses
As of December 31,
------------------- ------------------- ------------------- ------------------- -------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
(In thousands, except percentages)
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Residential Mortgage $ 3,245 41.81% $2,326 56.03% $2,373 52.66% $1,385 61.08% $ 875 62.95%
Automobile Installment 4,509 19.43 3,472 6.49 1,651 13.29 1,310 10.38 535 6.32
Residential Construction
and Land 550 18.33 499 17.81 499 12.09 499 6.96 - 5.51
Commercial Real Estate 2,810 19.57 2,810 19.11 2,810 21.76 2,710 21.52 3,152 25.14
Commercial - 0.86 - 0.56 - 0.20 - 0.06 - 0.08
------- ------ ------ ------- ------ ------ ------ ------ ------ ------
Total $11,114 100.00% $9,107 100.00% $7,333 100.00% $5,904 100.00% $4,562 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
23
Nonperforming Assets
The following table sets forth the Company's nonperforming assets for the
periods indicated.
Nonperforming Assets
As of December 31,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------ ------- -------
(In thousands, except percentages)
Nonaccrual loans(1) $ 5,813 $ 7,629 $6,065 $6,168 $1,639
Restructured loans 3,619 2,010 2,062 2,088 2,241
------- ------- ------ ------ ------
Total nonperforming loans 9,432 9,639 8,127 8,256 3,880
Foreclosed properties and repossessed assets 3,288 1,129 1,159 1,585 1,937
------- ------- ------ ------ ------
Total nonperforming assets $12,720 $10,768 $9,286 $9,841 $5,817
======= ======= ====== ====== ======
Nonperforming assets to period end loans, net of
unearned income, and foreclosed properties 1.69% 1.32% 1.27% 1.44% 1.03%
(1) Includes all loans contractually past due 90 days or more as to principal or
interest
Management closely monitors loans and other assets which are classified as
nonperforming assets. Nonperforming assets include nonaccrual loans,
restructured loans, foreclosed properties, and repossessions. Management
utilizes tracking and monitoring systems to identify potential problem assets
within all lending portfolios. It is the Company's policy to place on nonaccrual
status any loan that is contractually 90 days or more past due with respect to
principal or interest. When a loan is placed in nonaccrual status, all accrued
but unpaid interest is reversed and deducted from interest income. No additional
interest is accrued on the loan balance until collection of both principal and
interest is reasonably certain.
The amount of interest income earned in 1999 on the $5.8 million of
nonaccruing loans outstanding at year-end was approximately $xxx,xxx. If these
loans had been current in accordance with their original terms, approximately
$xxx,xxx would have been earned on these loans in 1999. Additional interest
income of approximately $xx,xxx would have been earned in 1999 under the
original terms of the $3.6 million in restructured loans outstanding at December
31, 1999. Approximately $xxx,xxx in interest income was actually earned in 1999
on these loans, due in part to recognition of interest foregone in prior years.
Total nonperforming assets as a percentage of loans, net of unearned
income, and foreclosed properties has increased from 1.32 percent at December
31, 1998 to 1.69 percent at December 31, 1999. This increase is due to
additional foreclosures in the nonconforming residential mortgage loan
portfolio, as this portfolio continues to grow and mature. The percentage
increase at year end 1999 was also due to a lower level of outstanding loans in
the nonconforming category as a result of securitizations during 1999.
24
The following tables set forth nonperforming loans by portfolio for the
periods presented.
Nonperforming Loans
As of December 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
% of % of
Average Average
Loans per Loans per
Balance Category Balance Category
------- --------- ------- ---------
(In thousands, except percentages)
Residential mortgage 8,996 1.49% $7,074 1.68%
Automobile installment 339 .30 555 0.51
Commercial real estate 97 .05 2,010 1.62
------ ------
Total Loans(1) $9,432 1.05 $9,639 1.26
===== ======
(1) There were no nonperforming loans or net charge-offs in the residential
construction and land portfolio or the commercial portfolios for periods
presented above.
Total nonperforming loans decreased from $9.6 million at December 31, 1998
to $9.4 million at December 31, 1999. The decline is attributable to decreases
in commercial real estate.
The following table sets forth, for the periods indicated, loan
originations by significant category.
Loan Originations
For the Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
Residential
Conforming(1) $ 709,418 $ 985,630 $304,508
Nonconforming 248,375 246,581 186,150
Automobile installment
Prime(2) 134,687 111,349 67,926
Nonprime 10,131 12,241 7,856
Manufactured housing
Mortgage 17,173 1,556 -
Nonmortgage 82,963 12,420 -
Residential construction and land 233,629 230,453 129,277
Commercial real estate(3) 59,064 135,431 155,025
Commercial 8,532 4,600 1,846
---------- ---------- --------
$1,503,972 $1,740,261 $852,588
========== ========== ========
(1) Includes only those loans originated from July 1, 1997, the effective date
of the Transfer.
(2) Includes certain other nonautomobile loans.
(3) Consists primarily of commercial real estate loans generated by Collateral,
for which Collateral earns an origination fee. The loans are funded by New
South and closed in New South's name.
Noninterest Income and Expense
Noninterest Income
Noninterest income consists primarily of fees from mortgage banking
activities, including origination fees, loan administration fees, gains or
losses on sales of loans, and gains or losses on securities sales. Total
noninterest income increased $4.4 million, or 13.1 percent, from $33.6 million
in 1998 to $38.0 million in 1999. The following table sets forth, for the
periods indicated the principal components of noninterest income.
25
Noninterest Income
For The Year Ended
December 31,
-----------------------------
1999 1998 1997
-----------------------------
(In thousands)
Loans administration income $12,427 $ 6,191 $ 4,915
Origination fees 9,758 11,376 3,722
Gain/(loss) on sale of investment
securities available for sale 381 (942) (645)
Gain on sale of loans 9,979 11,387 5,079
Other income 5,424 5,558 2,243
-------- ------- -------
Total noninterest income $37,969 $33,570 $15,314
======== ======= =======
Loan administration fees increased $6.2 million, from $6.2 million during
1998 to $12.4 million during 1999. In 1998, loan administration fees increased
$1.3 million, or 26.0 percent, from $4.9 million in 1997. The primary component
of loan administration income is service fee income received from various
outside investors. This increase in service fee income is attributable to the
volume of loans serviced for others and set forth in the following table.
Loans Serviced for Others
As of December 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
Government National Mortgage Association $ 328,564 $ 336,427 $261,581
Freddie Mac 709,402 696,194 386,543
Fannie Mae 138,637 122,401 88,038
Other Investors 1,201,332 332,598 263,451
---------- ---------- --------
Total loans serviced for others $2,377,935 $1,487,620 $999,613
========== ========== ========
Origination fees decreased $1.6 million, from $11.4 million for 1998 to
$9.8 million for 1999, as compared to a $7.7 million increase between 1997 to
1998. The decrease in 1999 resulted from fewer residential conforming mortgage
loan originations, while the increase in 1998 resulted from the Transfer.
Generally, New South retains all of the servicing rights on loans that are
securitized. These periodic sales have been used to build a servicing portfolio,
generate capital to sustain specific capital levels, and to achieve continued
growth through the funding of new loan originations. Mortgage servicing rights
("MSRs") are capitalized based on fair value when mortgages are sold. MSRs
increased $9.1 million from 1998 to 1999, as compared to a $5.7 million increase
from 1997 to 1998. This increase is included as a part of the gain on sale of
loans. The increase is attributable to the greater volume of securitizations
during 1999 over prior years.
A decrease of $1.4 million was experienced in the gain on sales of loans
between 1998 and 1999, as compared to a $6.3 million increase in this same
category between 1997 and 1998. Securitizations, however, were significant to
each year. During 1999, losses on securitizations of $656.4 million in loans
totaled $961,000, compared with gains of $2.6 million on securitizations of
$340.0 million during 1998. Otherwise, the increase during 1998 relates to the
increased loan sales made possible by volumes resulting from the Transfer.
Other noninterest income decreased $134,000, or 2.4 percent, from $5.6
million in 1998 to $5.4 million in 1999. Other noninterest income increased
$3.3 million, from $2.2 million during 1997 to $5.6 million for 1998. One
component of the other noninterest income category is management fees received
from affiliates for general management and other services provided by New South.
Management fee income was $315,000, $1.1 million, and $453,000 for the years
ended December 31, 1997, 1998, and 1999, respectively. The significant increase
between 1997 and 1998 was due to the transfer of senior management from
Collateral to New South during 1998, which was effected in conjunction with the
Transfer. The decrease from 1998 to 1999 was a result of the Servicing
Transfer. Other primary components contributing to the increase in noninterest
income relate to other loan fee income generated as a result of the Transfer.
Underwriting fees are a significant component of these fees which were $392,000,
$1.1 million, and $967,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Noninterest Expense
Noninterest expense consists primarily of salaries and benefits, occupancy
and equipment costs, servicing fee expense, and other noninterest expenses.
Total noninterest expense increased $13.4 million, or 27.4 percent, from $48.8
million in 1998 to $62.1 million in 1999. Total noninterest expense increased
$17.3 million, or 55.2 percent, from $31.4 million in 1997 to $48.8 million in
1998. The following table sets forth, for the periods indicated, the principal
components of noninterest expense.
26
Noninterest Expense
For The Year Ended
December 31,
--------------------------
1999 1998 1997
------- ------ -------
(In thousands)
Salaries and benefits $34,347 $26,286 $16,024
Net occupancy and equipment expense 6,193 4,024 1,955
Loan servicing fees paid to affiliates 354 4,480 3,642
Loss on loans serviced 209 398 1,423
Supplies and printing 1,247 916 459
Legal and professional 2,274 1,484 851
Telephone 1,431 1,129 692
Advertising 1,429 792 489
Computer service 1,722 849 589
Branch purchase fee 906 2,305 891
Other expense 11,994 6,090 $ 4,407
------- ------- -------
Total noninterest expense $62,106 $48,753 $31,422
======= ======= =======
During 1999, salaries and benefits totaled $34.3 million, an increase of
$8.1 million, or 30.7 percent from $26.3 million during 1998. The primary
reason for this increase is the addition of approximately 130 employees
attributable to the Acquisition and the Servicing Transfer. The increase in
salaries and benefits of $10.3 million, or 64.0 percent, from $16.0 million in
1997 to $26.3 million in 1998 is primarily attributable to approximately 300
employees added as a result of the Transfer, and, to a lesser degree, the
increase in the volume of loan originations during 1998.
Net occupancy and equipment expense was $4.0 million in 1998 and $6.2
million in 1999, an increase of $2.2 million, or 53.9 percent. Approximately
$1.1 million of the increase resulted from the Acquisition and approximately
$494,000 is associated with the Servicing Transfer and the purchase of a new
operation center during 1999. The 1998 increase of $2.1 million, or 105.8
percent, from $2.0 million in 1997 to $4.0 in 1998 is attributable to the
Transfer.
During 1999, servicing fees were paid to Collateral for the commercial
loans it services for New South. All other loan servicing for New South's
portfolio was moved to New South as part of the Servicing Transfer. As a
result, loan servicing fees paid to others, which totaled $4.5 million in 1998
and $354,000 in 1999, decreased by $4.1 million, or 92.1 percent. Loan servicing
fees paid to Collateral prior to the Servicing Transfer increased $838,000, or
23.0 percent, from $3.6 million in 1997 to $4.5 million in 1998. That increase
was directly related to a $488.0 million increase in the servicing portfolio
owned by the New South in 1998.
Supplies and printing expense was $916,000 in 1998 and $1.2 million in
1999, an increase of $331,000, or 36.1 percent, of which $119,000 was
attributable to the Acquisition and the rest primarily resulting from the
Servicing Transfer. The increase of $457,000, or 99.6 percent, from $459,000 in
1997 to $916,000 in 1998 resulted from the Transfer.
Legal and professional expenses totaled $1.5 million in 1998 and $2.3
million in 1999, an increase of $790.000, or 53.2 percent, $298,000 of which is
attributable to the Acquisition and with the rest attributable primarily to the
loan securitizations. The increase of $633,000, or 74.4 percent, from $851,000
in 1997 to $1.5 million in 1998 was due to the Transfer.
Telephone and related communications expense was $1.1 million in 1998 and
$1.4 million in 1999, representing an increase of $302,000, or 26.7 percent. In
1997, these expenses were $692,000, an increase of $437,000, or 63.2 percent, to
$1.1 million in 1998. The increases generally resulted from the Transfer, the
Servicing Transfer, and $264,000 was attributble to the Acquisition.
Advertising increased $637,000, or 80.4 percent, from $792,000 in 1998 to
$1.4 million in 1999 due to continued deposit gathering efforts on a nationwide
basis. The increase of $303,000, or 62.0 percent, from $489,000 in 1997 to
$792,000 in 1998 resulted from the Transfer.
The increase in computer services resulted primarily from the Servicing
Transfer and increased $873,000, or 102.8 percent, from $849,000 in 1998 to $1.7
million in 1999. A smaller portion of the increase was the result of efforts
relating to the Company's Year 2000 readiness effort. The Transfer resulted in
the increase from $589,000 in 1997 to $849,000 in 1998 of $260,000, or 44.1
percent.
Branch purchase fees are paid to Collateral under terms of the Transfer.
Branch purchase fees were $2.3 million in 1998 and $906,000 in 1999, a decline
of $1.4 million, or 60.7 percent, a result of lower residential origination
volume coupled with a reduction in the rate specified in the Transfer. Because
the Transfer was effective for only 6 months in 1997, branch purchase fees were
$891,000 in 1997, which increased $1.4 million, or 158.7 percent, to the $2.3
million in 1998, which represented 12 months and higher origination volume.
Other noninterest expense increased from $6.1 million in 1998 to $12.0
million in 1999, an increase of $5.9 million, or 96.9 percent. The overall
increase in other noninterest expense resulted from, in part, the Acquisition,
$2.0 million, the Servicing Transfer, $1.6 million, dealer incentives of
$665,000 associated with manufacture housing lending, and losses and expenses
relating to foreclosed real estate of $298,000. Other noninterest expense
increased $1.7 million, or 38.2 percent, from $4.4 million in 1997 to $6.1
million in 1998. A significant portion of the increase is due to the additional
loan production offices added as a part of the Transfer.
27
Earning Assets
Loans
Loans are the single largest category of earning assets and typically
provide higher yields than other categories. Total loans, net of unearned
income, decreased, $64.6 million, or 9.21 percent, from $812.9 million at
December 31, 1998 to $748.3 million at December 31, 1999.
The following table sets forth the composition of the loan portfolio by
category at the dates indicated.
Loans By Category
As of December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(In thousands)
Residential mortgage
Conforming............................................... $268,377 $127,765 $252,568 $214,865 $278,749
Nonconforming............................................ 45,513 328,721 132,700 203,405 77,106
-------- -------- -------- -------- --------
Total residential mortgage loans..................... 313,890 456,486 385,268 418,270 355,855
Automobile and other Installment
Prime.................................................... 140,268 52,232 84,769 61,323 29,769
Non-prime................................................ 10,010 1,436 12,147 9,668 5,749
-------- -------- -------- -------- --------
Total installment loans.............................. 150,278 53,668 96,916 70,991 35,518
Residential construction and land.......................... 136,831 144,771 87,889 47,423 30,941
Commercial real estate..................................... 146,072 155,765 158,377 146,700 141,196
Commercial................................................. 6,417 4,579 1,467 403 408
-------- -------- -------- -------- --------
Total loans.......................................... 753,488 815,269 729,917 683,787 563,918
Less unearned income....................................... 5,211 2,392 2,063 2,057 2,307
-------- -------- -------- -------- --------
Loans net of unearned income......................... $748,277 $812,877 $727,854 $681,730 $561,611
======== ======== ======== ======== ========
The principal component of the Company's loan portfolio is residential
mortgage loans. At December 31, 1999, residential mortgage loans comprised 41.9
percent of the total loan portfolio, net of unearned income, compared to 56.2
percent of the total loan portfolio at December 31, 1998. The reduction is
attributable to loan securitizations in 1999 totaling $656.4 million.
Residential mortgage loans consist of conforming loans, which are originated
primarily through the Company's loan production offices, and nonconforming
loans, which are originated primarily through correspondent relationships or
through the Company's retail branch network. Generally, conforming residential
mortgage loans adhere to Federal National Mortgage Association ("FNMA"), Freddie
Mac ("FHLMC"), Federal Housing Association or Veterans Administration
underwriting requirements. Nonconforming residential mortgage loans typically do
not exceed the standard agency maximum loan size guidelines, but the borrower
may fail to meet one or more other guidelines relating to creditworthiness, such
as acceptable debt ratios and acceptable consumer loan payment delinquencies.
See "Business--Residential Mortgage Lending."
Automobile Installment loans consists almost exclusively of automobile
lending. Most of these loans are originated on an indirect basis through a
network of over 600 automobile dealers located in Alabama, Georgia, Florida,
Tennessee, Mississippi, and Texas. Dealers are selected based on their
financial history and other references. The majority of New South's automobile
installment loans are considered to be prime loans by industry standards. New
South does offer a nonprime product to certain qualifying consumers who report
credit bureau scores below the prime threshold due to delinquencies on certain
accounts or other factors. See "Business--Automobile Installment Lending."
As a percentage of loans, net of unearned income, total automobile
installment loans increased from 6.6 percent at December 31, 1998 to 20.0
percent at December 31, 1999. The 1999 increase in the portfolio follows a 1998
decrease resulting from a $125.0 securitization of automobile installment loans.
Growth in originations is the result of the Company's commitment to increase
production for this portfolio through additional relationships with new dealers
in new markets and the marketing of its nonprime lending program to the dealer
network.
The Company originates and purchases some residential mortgage and
automobile installment loans that are available to be sold should liquidity
needs, loan portfolio mix, or other asset/liability strategies arise. Loans may
be securitized or sold directly into the secondary market. The composition of
the Company's loan portfolio may be significantly changed by the timing and
amount of these sales.
The Company also makes residential construction and land development loans.
As a percentage of loans, net of unearned income, these loans were 17.8 percent
at December 31, 1998 compared to 18.3 percent at December 31, 1999. All loans
in this category mature in one year or less and have a variable interest rate.
See "Business--Other Lending."
The Company maintains a minimal amount of commercial loans to certain
independent automobile dealers to finance such dealers' used automobile
inventory. Referred to as Floor Plan Loans, all are revolving in maturity and
have a variable interest rate. See "Business--Other Lending."
The Company initiated a manufactured housing loan program in August 1998.
The program primarily includes the indirect origination of mortgage loans, for
the land and home, and nonmortgage loans for the home only, in addition to
construction loans which are in place during the preparation phase of the land.
As a percentage of loans, net of unearned income, manufactured housing loans
comprised 1.7 percent of the portfolio at December 31, 1998 and 11.6 percent of
the portfolio at December 31, 1999. It is the Company's intention to continue
to build its presence in the origination of manufactured housing loans.
28
The amounts of total gross loans, excluding residential mortgage and
automobile installment, outstanding at December 31, 1998 and at December 31,
1999 and based on remaining scheduled repayments of principal due in one year or
less, more than one year but less than five years, and more than five years are
shown in the following tables. Amounts are classified according to sensitivity
to changes in interest rates.
Maturity and Interest Rate Sensitivity of Selected Loan Categories
As of December 31, 1999
---------------------------------------------------------------------------------------
Due After One Year But
Due in One Year or Less Within Five Years Due After Five Years
---------------------------- --------------------------- --------------------------
Fixed Variable Sub- Fixed Variable Sub- Fixed Variable Sub-
Rate Rate Total Rate Rate Total Rate Rate Total Total
------ -------- -------- ------- ------- -------- ------- ------ ------- --------
(In thousands)
Residential construction
and land $ - $136,831 $136,831 $ - $ - $ - $ - $ - $ - $136,831
Commercial real estate 2,545 67,652 70,197 24,798 3,196 27,994 47,881 - 47,881 146,072
Commercial - 6,417 6,417 - - - - - - 6,417
------ -------- -------- ------- ------ ------- ------- ----- ------- --------
$2,545 $210,900 $213,445 $24,798 $3,196 $27,994 $47,881 $ - $47,881 $289,320
====== ======== ======== ======= ====== ======= ======= ===== ======= ========
As of December 31, 1998
---------------------------------------------------------------------------------------
Due After One Year But
Due in One Year or Less Within Five Years Due After Five Years
---------------------------- --------------------------- --------------------------
Fixed Variable Sub- Fixed Variable Sub- Fixed Variable Sub-
Rate Rate Total Rate Rate Total Rate Rate Total Total
------ -------- -------- ------- ------- ------- ------- ------ ------- --------
(In thousands)
Residential construction
and land $ - $144,771 $144,771 $ - $ - $ - $ - $ - $ - $144,771
Commercial real estate 7,484 9,462 16,946 24,330 52,211 76,541 60,504 1,774 62,278 155,765
Commercial - 4,579 4,579 - - - - - - 4,579
------ -------- -------- ------- ------- ------- ------- ------ ------- --------
$7,484 $158,812 $166,296 $24,330 $52,211 $76,541 $60,504 $1,774 $62,278 $305,115
====== ======== ======== ======= ======= ======= ======= ====== ======= ========
Investment Securities
Investment securities are a significant component of the Company's total
earning assets. Total investment securities averaged $129.6 million for 1999,
compared to $188.0 million in 1998. At December 31, 1999, all investment
securities were classified as available for sale and recorded at market value.
The Company elected to classify its entire securities portfolio as available for
sale in order to maximize flexibility in meeting funding requirements.
The following table sets forth the book value of the securities held by the
Company for the dates indicated.
Securities Available For Sale
As of December 31,
------------------------
1999 1998
-------- --------
(In thousands)
Mortgage-backed securities $ 87,864 $ 54,067
U.S. Treasury and federal agency securities 37,529 43,905
Other securities 7,089 11,619
-------- --------
Total securities available for sale $132,482 $109,591
======== ========
The following table sets forth the scheduled maturities and average yields
of securities held at December 31, 1999.
Available For Sale Securities
Relative Contractual Maturities and Weighted Average Yields
Due After One Due After Five
Due Within But Within But Within Due After
One Year Five Years Ten Years Ten Years
---------------- ----------------- ---------------- ---------------- Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount(2)
------ ----- ------- ----- ------ ----- ------- ----- ---------
(In thousands, except percentages)
Mortgage-backed securities(1) $ - $ 3 6.88% $ 16 6.66% $87,845 7.08% $ 87,864
U.S. Treasury and federal agency 4,970 6.40 32,559 6.82 - - - - 37,529
Other securities - - 10 18.65 - - 30 8.60 40
------ ------- ----- ------- --------
Total $4,970 6.40% $32,572 9.76% $ 16 6.66 $87,875 7.11% $125,433
====== ======= ===== ======= ========
Percentage of total portfolio 3.96% - 25.97% - 0.01% - 70.06 -
(1) Maturity of MBS was determined based on contractual maturity.
(2) Federal Home Loan Bank Stock of $7,049,000 is not included.
At December 31, 1999, 66.3 percent of the securities portfolio consisted of
mortgage-backed securities. Generally, these securities consist of pooled,
homogeneous residential mortgage loans originated or purchased by New South and
securitized with Government National Mortgage Association, FNMA, or FHLMC
guarantees. These securities are subject to the risk of prepayment on
29
the underlying mortgages. At December 31, 1999, 28.3 percent of the securities
portfolio consisted of United States Treasury and federal agency securities,
which are backed by the full faith and credit of the United States government or
its agencies.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $74.8 million, or 8.5
percent, to $955.3 million in 1999 from $880.4 million in 1998. This increase
was due to an increase in average interest-bearing deposits, which increased
$58.1 million, or 8.8 percent, to $716.6 million in 1999 from $658.5 million in
1998.
Deposits
Deposits are a significant source of funding for the Company. The Company's
loan-to-deposit ratio was 100.4 percent at December 31, 1999 and 104.8 percent
at December 31, 1998. The Company has been able to attract deposits throughout
the United States by consistently paying nationally competitive rates.
The following table sets forth the deposits of the Company by category for
the dates indicated.
Average Deposits
As of December 31,
-------------------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
Time $629,829 $593,775 $571,221
Savings 83,035 61,657 59,085
Noninterest bearing 76,507 91,125 57,037
Interest-bearing demand 3,689 3,020 3,095
-------- -------- --------
Total average deposits $793,060 $749,577 $690,438
-------- -------- --------
The increase in average deposits is primarily due to the increase in
average time deposits, which increased $36.1 million, or 6.1 percent, from
$593.8 million in 1998 to $629.8 million in 1999. At December 31, 1999, brokered
deposits totaled $217.5 million, or 29.2 percent of total deposits, compared
with $195.9 million at December 31, 1998, or 25.3 percent of total deposits. The
Company has relied upon brokered deposits as a significant funding source
through out 1998 and 1999 and is expected to maintain reliance on such funding
in the future. Contributing to the 1999 increase in average time deposits was
the Company's advertising campaign designed to increase its reputation in the
Birmingham, Alabama, market as a provider of nationally competitive interest
rates on certificates of deposit.
Savings accounts, including money market accounts, averaged $61.7 million
in 1998 and $83.0 million in 1999, an increase of $21.4 million, or 34.7
percent. In particular, the Super Money Market account, which is a highly
competitive, high balance, tiered-rate account, averaged $27.6 million, or 33.3
percent of total savings accounts.
There was a decrease in average noninterest-bearing demand deposits of
$14.6 million, or 16.0 percent, from $91.1 million at December 31, 1998 to $76.5
million at December 31, 1999. This decrease is due primarily from a decline in
the number and dollar volume of residential mortgage loan originations and their
effect on outstanding official checks used to fund such loans.
The maturity distribution of the Company's time deposits over $100,000 as
of December 31, 1999 is set forth in the following table.
Certificates of Deposits Greater Than $100,000
Maturity Schedule
(In thousands)
Three months or less $ 148,659
Over three months through six months 14,641
Over six months through twelve months 11,305
Over twelve months 45,240
---------
$ 219,845
---------
Approximately 67.6 percent of the Company's time deposits over $100,000 had
scheduled maturities within 3 months. These deposits are primarily obtained
through the broker network.
Borrowed Funds
Borrowed funds consist primarily of federal funds purchased, securities
sold under agreements to repurchase, and advances from the FHLB. The following
table sets forth information regarding the Company's borrowings over the periods
indicated.
30
Short-Term Borrowings
Weighted Average Average
Average Maximum Ending Interest Rate at Rate
Balance Outstanding Balance Year-End Paid
---------- ----------- --------- ---------------- -------
(In thousands, except percentages)
As of and for the year ending December 31, 1997
Federal funds purchased and securities sold
under agreement to repurchase $ 41,624 $ 73,100 $ 40,800 7.10% 7.57%
Federal Home Loan Bank advances 113,572 179,420 179,420 6.07% 6.03%
As of and for the year ending December 31, 1998
Federal funds purchased and securities sold
under agreement to repurchase $ 47,827 $ 85,573 $ 68,800 5.52% 4.85%
Federal Home Loan Bank advances 151,476 231,418 198,418 5.38% 5.84%
As of and for the year ending December 31, 1999
Federal funds purchased and securities sold
under agreement to repurchase $ 42,132 $ 73,054 $ 50,923 6.09% 5.29%
Federal Home Loan Bank advances 158,782 218,418 128,417 5.87% 5.33%
Average FHLB advances for 1999 were $158.8 million compared to $151.5
million for 1998, an increase of $7.3 million. The Company intends to continue
to use these advances as a significant funding source. Total advances were
$128.4 million at December 31,1999.
Capital
The OTS requires thrift financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0 percent to 100 percent. Under the risk-
based standard, capital is classified into two tiers. Tier 1 capital of New
South consists of common shareholder's equity, excluding the unrealized gain or
loss on securities available for sale, minus certain intangible assets. New
South's Tier 2 capital consists of the general reserve for possible loan losses
subject to certain limitations. Consolidated regulatory capital requirements
generally do not apply to thrift holding companies. The following table sets
forth the specific capital amounts and ratios for the indicated periods:
Analysis of Capital
As of December 31,
--------------------------
1999 1998
-------- --------
(In thousands, except percentages)
Tier 1 capital $ 88,537 $ 79,891
Tier 2 capital 1,716 3,430
-------- --------
Total qualifying capital $ 90,253 $ 83,321
======== ========
Risk-weighted assets (including off-balance
sheet exposure) $745,723 $802,409
Tier 1 leverage ratio 8.64% 7.01%
Total risk-based capital ratio 12.10% 10.38%
Tier 1 risk-based capital ratio 11.87% 9.96%
New South has consistently exceeded regulatory minimum guidelines and it is
the intention of management to continue to monitor these ratios to ensure
regulatory compliance and maintain adequate capital for New South. New South's
current capital ratios place New South in the regulatory defined well-
capitalized category as defined by OTS regulations, confirmed by the OTS on
August 31, 1999.
Liquidity Management and Capital Resources
Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of a company to convert assets into
cash or cash equivalents without significant loss and to raise additional funds
by increasing liabilities. Without proper liquidity management, the Company
would not be able to perform the primary function of a financial intermediary
and would, therefore, not be able to meet the needs of the customers it serves.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities in the investment securities available for sale
portfolio is predictable and is, therefore, subject to a high degree of control
at the time investment decisions are made. However, net deposit inflows and
outflows are less predictable and are not subject to the same degree of control.
New South is required by OTS regulations to maintain minimum levels of
liquid assets. This requirement, which may be changed at the discretion of the
OTS depending upon economic conditions and net deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently four percent. New South management monitors liquidity closely and
continues to ensure liquidity ratios are in excess of the minimum requirements.
The Company depends on deposits, including brokered certificates of
deposit, FHLB advances, and repurchase agreements as primary sources of
liquidity. Brokered deposits approximated 29.2 percent of total deposits as of
December 31, 1999. These brokered deposits are either deposits solicited by the
Company from national and regional brokerage firms, which accounted for
approximately $217.5 million of deposits at December 31, 1999, or are
unsolicited and are brought to New South by the Company's competitive rates. The
solicited brokered deposits are utilized as alternative funding sources that are
often
31
cheaper than retail deposits or other funding sources. However, this funding
source is highly interest rate sensitive and, as such, the Bank never considers
brokered deposits, either singly or as a whole, to be a permanent funding
source. In the unlikely event that the Company is unable to replace or maintain
a current level of brokered certificate of deposit funding, the Company can
either increase efforts in the retail deposit market or can utilize any of the
various alternative funding sources available. As of December 31, 1999,
alternative funding sources included $50.0 million of unused credit for Federal
funds purchases, $3.6 million of unused revolving credit facilities,
and $195 million in unused FHLB borrowing capacity. The Company also had $6.5
million mortgage-backed securities available to serve as security for
borrowings. Reliance on all funding sources is monitored on an ongoing basis to
insure no reliance upon a single source and to insure that adequate reserve
sources are available, if needed.
Accounting Rule Changes
The American Institute of Certified Public Accountants has issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement requires capitalization of external
direct costs of materials and services, payroll and payroll-related costs for
employees directly associated, and interest costs during development of
computer software for internal use with planning and preliminary costs to be
expensed. In addition, capitalized costs of computer software developed or
obtained for internal use should be amortized on a straight-line basis unless
another systematic and rational basis is more representative of the software's
use. The adoption of this statement in 1999 did not have a material effect on
the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement replaces existing
pronouncements and practices with a single, integrated accounting framework for
derivatives and hedging activities requiring companies to formally record at
fair value all derivatives and to document, designate, and assess the
effectiveness of transactions that receive hedge accounting. During 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Standard No. 133 - an
amendment of FASB Standard 133. SFAS No. 137 defers the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. Presently the Company has
not yet quantified the effect adoption will have on the consolidated financial
statements; however, the effect could be material.
During 1999, the Company implemented SFAS No. 134, Accounting for Mortgage-
Backed Securities Retained After The Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise. This statement, an amendment to SFAS No.
65, Accounting for Certain Mortgage Banking Activities, requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability to sell or hold those investments.
The implementation of this statement did not have a material impact on the
presentation of the Company's consolidated financial condition or results of
operations.
Year 2000 Project
The year 2000 issue, which was common to most organizations, concerned the
inability of certain computer and operational systems to properly perform
calculations and process information containing four-digit date fields. New
South developed and implemented an enterprise-wide strategy that addressed and
mitigated potential risks resulting from the year 2000 issue.
Because of the nature of operations, the primary external customers of the
Company would be considered its borrowers and depositors. Although there was a
level of inherent risk that a borrower might be unable to meet its obligation to
the Company due to a year 2000 related problem, this risk was mitigated because
the Company did not have any loans that, by themselves, would have materially
impacted the Company's loan portfolio. The risk was further diminished in light
of the fact that the Company's loan portfolio is primarily secured by asset-
based collateral where the fair market value of such property is typically equal
to or greater than the outstanding loan balance.
The Company estimated its total internal costs for the year 2000 project to
be between $750,000 and $2.0 million, of which $150,000 was incurred in 1998 and
$901,000 was incurred in 1999. The Company does not expect any problems or
issues related to year 2000 going forward. However, the Company continues to
have a comprehensive plan in place to monitor and address the issue throughout
the year 2000.
Forward Looking Statements
This management discussion and analysis contains certain forward looking
information with respect to the financial condition, results of operations, and
business of the Company, including the Notes to Consolidated Financial
Statements and statements contained in the discussion above with respect to
security maturities, loan maturities, loan growth, expectations for and the
impact of interest rate changes, the adequacy of the allowance for loan losses,
expected loan losses, and the impact of inflation, unknown trends, or regulatory
action. The Company cautions readers that forward looking statements, including
without limitation those noted above, are subject to risks and uncertainties
that could cause actual results to differ materially from those indicated in the
forward looking statements. Factors that may cause actual results to differ
materially from those contemplated include, among others, the stability of
interest rates, the rate of growth of the economy in the Company's market area,
the success of the Company's marketing efforts, the ability to expand into new
segments of the market area, competition, changes in technology, the strength of
the consumer and commercial credit sectors, levels of consumer confidence, the
impact of regulation applicable to the Company, and the performance of stock and
bond markets.
32
Item 8. Financial Statements and Supplementary Data.
New South Bancshares, Inc.
Consolidated Financial Statements
December 31, 1999 and 1998
33
New South Bancshares, Inc.
Consolidated Financial Statements
December 31, 1999 and 1998
Contents
Report of Independent Auditors...................... 34
Audited Financial Statements
Consolidated Balance Sheets...................... 35
Consolidated Income Statements................... 36
Consolidated Statements of Shareholders' Equity.. 37
Consolidated Statements of Cash Flows............ 38
Notes to Consolidated Financial Statements....... 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New South Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of NEW SOUTH
BANCSHARES, INC. AND SUBSIDIARIES (a Delaware corporation) as of December 31,
1999 and 1998 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 in accordance with auditing standards generally accepted
in the United States. These standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New South Bancshares, Inc. and
Subsidiaries, as of December 31, 1999 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Birmingham, Alabama
March 3, 2000
34
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1999 1998
---------- ----------
(In thousands)
ASSETS
Cash and due from banks $ 6,943 $ 9,973
Interest bearing deposits in other banks 11,732 57,037
Investment securities available for sale 132,482 109,591
Interest only strips 10,790 7,371
Loans held for sale 66,258 115,279
Loans, net of unearned income 748,277 812,877
Allowance for loan losses (11,114) (9,107)
---------- ----------
Net Loans 737,163 803,770
Premises and equipment, net 10,249 7,860
Mortgage servicing rights, net 16,101 7,041
Other assets 29,389 24,700
---------- ----------
Total Assets $1,021,107 $1,142,622
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 47,678 $ 73,873
Interest bearing 697,407 701,575
---------- ----------
Total deposits 745,085 775,448
Federal funds purchased and securities sold under
agreements to repurchase 50,923 68,800
Federal Home Loan Bank advances 128,417 198,418
Notes payable 6,115 -
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 8,759 17,016
---------- ----------
Total Liabilities 973,799 1,094,182
Commitments and contingencies (see Note 22)
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,255,537.1 at December 31, 1999 and
1,250,189.5 at December 31, 1998) 1,256 1,250
Surplus 29,475 29,230
Retained earnings 20,500 17,909
Accumulated other comprehensive income (loss) (3,923) 51
---------- ----------
Total Shareholders' Equity 47,308 48,440
---------- ----------
Total Liabilities and Shareholders' Equity $1,021,107 $1,142,622
========== ==========
See accompanying notes to consolidated financial statements.
35
NEW SOUTH BANCSHARES, INC
CONSOLIDATED INCOME STATEMENTS
Years ended December 31,
-----------------------------------
1999 1998 1997
------- ------- ---------
(In thousands, except per share data)
Interest Income:
Interest on securities available for sale $ 7,704 $11,927 $10,077
Interest on loans 76,829 70,844 64,831
Interest on other short-term investments 823 480 583
------- ------- -------
Total Interest Income 85,356 $83,251 $75,491
Interest Expense:
Interest on deposits 39,833 $38,724 $37,732
Interest on federal funds purchased and securities sold
under agreements to repurchase 2,232 2,785 2,370
Interest on Federal Home Loan Bank advances 8,461 8,851 6,842
Interest on notes payable 126 366 779
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 2,932 1,573 -
------- ------- -------
Total Interest Expense 53,584 52,299 47,723
Net Interest Income 31,772 30,952 27,768
Provision for loan losses 3,638 3,944 2,954
------- ------ -------
Net Interest Income After Provision for Loan Losses 28,134 27,008 24,814
Noninterest Income:
Loan administration income 12,427 6,191 4,915
Origination fees 9,758 11,376 3,722
Gain/(Loss) on sale of investment securities available for sale 381 (942) (645)
Gain on sale of loans and mortgage servicing rights 9,979 11,387 5,079
Other income 5,424 5,558 2,243
------- ------- -------
Total Noninterest Income 37,969 33,570 15,314
Noninterest Expense:
Salaries and benefits 34,347 26,286 16,024
Net occupancy and equipment expense 6,193 4,024 1,955
Other expense 21,566 18,443 13,443
------- ------- -------
Total Noninterest Expense 62,106 48,753 31,422
------- ------- -------
Income Before Income Taxes 3,997 11,825 8,706
Provision for income taxes 1,406 5,088 3,990
------- ------- -------
Net Income $ 2,591 $ 6,737 $ 4,716
======= ======= =======
Weighted average shares outstanding 1,255 1,333 1,377
Earnings per share $ 2.06 $ 5.05 $ 3.42
See accompanying notes to consolidated financial statements.
36
NEW SOUTH BANCSHARES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Surplus Earnings Income (Loss) Equity
-------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1996 $1,389 $39,119 $ 6,456 $ 977 $47,941
Comprehensive Income:
Net income - - 4,716 - 4,716
Change in unrealized loss on securities
available for sale, net of tax - - - (108) (108)
------ ------- ------- ------- -------
Total comprehensive income - - 4,716 (108) 4,608
Stock repurchase and retirement (12) (223) - - (235)
------ ------- ------- ------- -------
Balance at December 31, 1997 1,377 38,896 11,172 869 52,314
Comprehensive Income:
Net income - - 6,737 - 6,737
Change in unrealized loss on securities
available for sale, net of tax - - - (818) (818)
------ ------- ------- ------- -------
Total comprehensive income - - 6,737 (818) 5,919
Stock repurchase and retirement (127) (9,666) - - (9,793)
------ ------- ------- ------- -------
Balance at December 31, 1998 1,250 29,230 17,909 51 48,440
Comprehensive Loss:
Net income - - 2,591 - 2,591
Change in unrealized loss on securities
available for sale, net of tax - - - (3,974) (3,974)
------ ------- ------- ------- -------
Total comprehensive loss - - 2,591 (3,974) (1,383)
Issuance of common stock 6 245 - - 251
------ ------- ------- ------- -------
Balance at December 31, 1999 $1,256 $29,475 $20,500 $(3,923) $47,308
====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
37
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
(In thousands)
Operating Activities:
Net income $ 2,591 $ 6,737 $ 4,716
Adjustments to reconcile net income to net cash used in operating activities:
Provision for (benefit of) deferred taxes 1,552 890 (748)
Accretion of discounts and fees (676) (423) (449)
Provision for loan losses 3,638 3,944 2,954
Depreciation and amortization 2,456 1,182 473
Amortization of mortgage servicing rights 2,387 635 104
(Gain) loss on sale of investment securities available for sale (381) 942 645
Purchase of mortgage loans held for sale (3,997) (2,756) (1,820)
Origination of mortgage loans held for sale (633,384) (1,013,667) (290,631)
Proceeds from the sale of mortgage loans held for sale and servicing rights 452,322 424,335 103,502
Loss on sale of premises and equipment 26 - -
Gain on sale of loans and mortgage servicing rights (9,979) (11,387) (5,079)
Increase in other assets (20,931) (12,281) (1,554)
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities (8,257) 862 5,183
--------- ----------- ---------
Net Cash Used in Operating Activities (212,633) (600,987) (182,704)
Investing Activities:
Net (increase) decrease in interest bearing deposits in other banks 45,305 (46,733) 10,023
Proceeds from sales of investment securities available for sale 214,951 674,201 167,772
Proceeds from maturities and calls of investment securities
available for sale 43,879 88,120 55,986
Purchases of investment securities available for sale (39,381) (49,026) (168,737)
Net (increase) decrease in loan portfolio 63,754 (197,886) (47,200)
Purchases of premises and equipment (4,962) (6,099) (1,054)
Proceeds from sale of premises and equipment 91 25 949
Net (investment in) proceeds from sale of real estate owned (2,159) (269) 210
--------- ----------- ---------
Net Cash Provided by Investing Activities 321,478 462,333 17,949
Financing Activities:
Net increase (decrease) in noninterest bearing deposits (26,195) 2,976 32,014
Net increase (decrease) in interest bearing deposits (4,168) 77,107 2,683
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (17,877) 28,000 40,800
Net increase (decrease) in note payable 6,115 (10,000) -
Proceeds from the issuance of guaranteed preferred beneficial
interests in the Company's subordinated debentures - 34,500 -
Net increase (decrease) of Federal Home Loan Bank Advances (70,001) 18,998 84,032
Proceeds from the issuance of common stock 251 - -
Repurchase and retirement of common stock - (9,793) (235)
--------- ----------- ---------
Net Cash Provided by (Used in) Financing Activities (111,875) 141,788 159,294
--------- ----------- ---------
Net increase (decrease) in cash and cash equivalents (3,030) 3,134 (5,461)
Cash and cash equivalents at beginning of year 9,973 6,839 12,300
--------- ----------- ---------
Cash and cash equivalents at end of year $ 6,943 $ 9,973 $ 6,839
========= =========== =========
Supplemental information:
Interest paid $ 54,152 $ 54,458 $ 45,916
Income taxes paid (received) $ (140) $ 5,649 $ 4,082
See accompanying notes to consolidated financial statements.
38
New South Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. Summary of Significant Accounting Policies
------------------------------------------
New South Bancshares, Inc. ("Bancshares"or the "Company"), formed in November
1994, is a unitary thrift holding company. The Company has two wholly owned
subsidiaries, New South Federal Savings Bank ("New South" or "the Bank") and
Collateral Agency of Texas, Inc. New South has two subsidiaries, Avondale
Funding.com, inc. and New South Agency, Inc. as well as a 50 percent interest in
a joint venture, DPH/Collateral New South Funding Venture, Ltd. ("DPH").
Through its subsidiaries the Company provides loan and savings products
primarily in the Southeast, with a concentration in residential mortgage banking
services. The consolidated financial statements presented primarily represent
the accounts of Bancshares and New South. DPH is controlled by New South and is
consolidated with its minority interest included in other accrued expenses,
deferred revenues, and other liabilities. All significant intercompany accounts
or transactions have been eliminated upon consolidation. Certain accounting
principles which significantly affect the determination of financial position,
results of operations and cash flows are summarized below. Certain amounts in
the prior year's financial statements have been reclassified to conform with the
1999 presentation. These reclassifications had no effect on previously reported
net income.
Use of Estimates in the Preparation of Financial Statements
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 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.
Material estimates that are particularly susceptible to significant changes
in the near term relate to the estimate of prepayment speeds in connection with
the valuation of mortgage servicing rights and the estimation of the allowance
for loan losses. For the valuation of mortgage servicing rights, management
obtains external information, evaluates overall portfolio characteristics and
monitors economic conditions to arrive at appropriate prepayment speeds and
other assumptions.
Cash and Due From Banks
For the purpose of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks.
Investment Securities
Investment securities consist of bonds, notes, debentures and certain equity
securities which are classified as available for sale and are carried at fair
value. Any unrealized gains or losses are reported as a net amount in other
comprehensive income or loss, net of any tax effect. Realized gains and losses
on the sales of investment securities are determined using the specific
identification method and are included in noninterest income. Any premiums and
discounts are recognized in interest income using the effective interest method
over the period to maturity.
39
Interest Only Strips
Interest only strips ("IOs") are financial investments which represent the
right to receive earnings from assets that contain excess interest income which
is stripped from the underlying interest earning asset. IOs are recorded as
assets by determining the net present value of the excess interest income stream
generated by the assets. To determine the fair value of IOs, the Company uses
market prices from closely comparable assets and a valuation model that
calculates the present value of the estimated cash flows.
IOs are classified as available for sale securities and are carried at
estimated fair value. The unrealized gains and losses on securities available
for sale are reported, net of tax, as a component of accumulated other
comprehensive income or loss within shareholders' equity. Interest income is
recorded on these securities based on their expected internal rate of return,
which is reevaluated periodically. A quarterly impairment analysis is performed
using discounted cash flow methodology comparable to yields on similarly termed
U.S. Treasury securities. Declines in value judged to be other than temporary
as well as realized gains and losses are reported in noninterest income.
Specific assumptions used in the valuation and impairment analyses relate to
prepayment speeds, discount rates, and loss experience.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market, as
determined in the aggregate. Gains or losses on the sale of these assets are
included in noninterest income while interest collected on these assets is
included in interest income.
Loans
All loans are stated at principal balances outstanding, adjusted for any
amounts charged off, discounts or premiums on loans purchased from others, and
discount points collected at origination. Interest income on loans is credited
to income based upon the principal amount of the loans outstanding using
appropriate rates of interest. Amortization of discounts and premiums on loans
is calculated using the interest method and included in interest income over the
period to maturity.
Certain impaired loans are reported at the present value of expected future
cash flows using the loan's effective interest rate. Others are reported at the
loan's observable market price or the fair value of the collateral, if the loan
is collateral dependent. Residential mortgage loans and installment loans,
primarily automobile, are evaluated collectively for impairment. At December
31, 1999 and 1998, the recorded investment in loans that were considered to be
impaired under Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS No. 5
and 15, were $1,276,000 and $1,681,000, respectively, all of which were carried
on a non-accrual basis. The related allowances for loan losses on impaired
loans were $997,000 and $1,022,000 at December 31, 1999 and 1998, respectively.
It is the policy of New South to stop accruing interest income and place the
recognition of interest on a cash basis when any loan is past due more than 90
days as to principal or interest or if the ultimate collection of either is in
doubt. Any interest previously accrued but not collected is reversed against
current income
40
when a loan is placed on a nonaccrual basis. Generally, New South has a mortgage
lien on all property on which mortgage loans are made in order to protect New
South's interest in both the principal amounts outstanding and interest
collections. Additionally, portions of certain mortgage loan balances are
insured by private or government guaranty or insurance policies. Loans
collateralized by savings accounts are secured by savings account balances in
excess of the outstanding loan amount. The amount of interest income earned
during 1999 on nonaccrual loans outstanding at year-end was approximately
$217,000. If these loans had been current in accordance with their original
terms, approximately $606,000 would have been earned on these loans during
1999.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for losses inherent in the portfolio. The provision for loan losses
charged to income is determined by various factors including actual loss
experience, the current volume and condition of loans in the portfolio, changes
in the composition of the portfolio, known and inherent risks in the portfolio,
and current and expected economic conditions. Such provisions, less net loan
charge-offs, comprise the allowance for loan losses and is available for future
loan charge-offs. New South follows a policy of charging off loans which
management determines to be uncollectible. Subsequent recoveries are credited
to the allowance.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the double-declining balance method
over the estimated useful lives of the properties or equipment. Estimated
useful lives are generally as follows:
Building 29-40 years
Leasehold improvements 7-40 years
Furniture and equipment 3-7 years
Mortgage Servicing Rights
The Company sells a substantial portion of its originated loans into the
secondary market by securitizing pools of loans and sales to private investors.
Generally, New South retains the servicing rights on loans that it sells. These
periodic sales have been used to build a servicing portfolio, generate capital
to sustain specific capital levels and to achieve continued growth through the
funding of new loan originations. Mortgage servicing rights ("MSRs") are
capitalized based on fair value when mortgages are sold.
41
The fair values of MSRs are based on an analysis of various loan
characteristics, including interest rates, maturities, and product types. These
characteristics are used to stratify the servicing portfolio on which MSRs have
been recognized to determine valuation and impairment. Impairment is recognized
for the amount by which MSRs for a stratum exceed their fair value. The Company
amortizes MSRs over the estimated lives of the underlying loans in proportion to
resultant servicing income stream.
Foreclosed Real Estate Owned
Real estate owned arises from loan foreclosure or deed in lieu of foreclosure
and is reported at the lower of cost or net realizable value. Any resultant
writedown at the time of foreclosure is charged to the allowance for loan
losses. Subsequent gains or losses on the sale or losses from valuation of these
properties are credited or charged to income. Costs of improvements made to
facilitate sale are capitalized while costs of holding the property are charged
to expense. Allowances, if any, are recorded for any anticipated costs to
dispose.
Real estate owned, which is included in Other assets at December 31, 1999
and 1998, totaled $3,288,000 and $1,129,000, respectively.
Recognition of Income
Loan administration income primarily represents fees earned in connection
with the servicing of real estate mortgage loans for investors. Such income is
recognized concurrent with the receipt of the related mortgage payments and is
usually based on the outstanding principal balances of the loans serviced.
Gains or losses on sales of mortgages are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loan sold.
Income Taxes
Effective January 1, 1999, the Company elected S corporation status.
Corporations electing such treatment under the Internal Revenue Code generally
are not subject to Federal corporate taxation. Certain states, however, do not
recognize S corporation status; therefore, the Company incurs state income taxes
for those jurisdictions. Profits and losses flow through to the S corporation
shareholders directly in proportion to their per share ownership in the entity.
Accordingly, shareholders will be required to include profits and losses from
the Company on their individual income tax returns for federal, and state and
local, if applicable, income tax purposes.
Typically S corporations declare dividends to shareholders in an amount
sufficient to enable shareholders to pay the tax on any S corporation income
included in the shareholder's individual income. Although the Company did not
declare dividends in 1999, such dividends are generally not subject to tax since
they result from S corporation income on which shareholders have previously been
taxed.
The consolidated financial statements have been prepared on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes and for purposes of computing income taxes
currently payable, deferred taxes are provided on such temporary differences.
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. As changes in the
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes in the period of enactment.
Bancshares and the Bank have entered into a tax sharing agreement by which a
consolidated return is filed each calendar year.
Earnings Per Share
Effective December 31, 1997, New South adopted SFAS No. 128, Earnings Per
Share. This standard requires dual presentation of basic and diluted earnings
per share for companies with potentially dilutive securities. There are no
dilutive securities issued or outstanding for the years ended December 31, 1999,
42
1998 and 1997 and, therefore, basic and diluted presentations are the same.
Weighted average shares outstanding at December 31, 1999, 1998 and 1997 were
1,255,000, 1,333,000, and 1,377,000, respectively.
Off-Balance Sheet Financial Instruments
Interest Rate Swaps and Caps
New South has from time to time utilized various off-balance sheet
instruments, such as interest rate swaps and caps, which are designated to hedge
imbalances in the Bank's sensitivity to fluctuating interest rates for
designated assets and liabilities. To qualify as a hedge used to manage
interest rate risk, the following criteria must be met: (1) the asset or
liability to be hedged exposes the institution, as a whole, to the interest rate
risk, (2) the instrument alters or reduces sensitivity to interest rate changes,
and (3) the instrument is designated and effective as a hedge. If the
designated asset or liability being hedged is terminated, matures or is sold,
any realized or unrealized gain or loss from the related off-balance sheet
product would be recognized in noninterest income coincident with the
extinguishment or termination. Any changes in market value are recognized in
other operating revenues.
New South has entered into interest rate swap agreements to modify the
interest rate characteristics of some of its mortgage loans and certificates of
deposit. These agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
agreement without an exchange of the notional amount upon which the payments are
based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest income or expense related to
the assets or liabilities being hedged. The related amounts payable to or
receivable from counterparties are included in other liabilities or assets.
Typically, there are no up-front costs involved in these agreements.
New South has purchased interest rate cap agreements to modify the interest
rate characteristics of designated liabilities. The strike price of these
agreements exceeded the current market levels at the date of inception. The
interest rate indices specified by the agreements have been, and are expected to
be, highly correlated with the interest rates New South incurs on its
liabilities. Payments to be received as a result of the specified interest rate
index exceeding the strike price are accrued in other assets and are recognized
as an adjustment of interest expense. The costs of these agreements are
amortized to expense over the life of the agreement.
Other Off-Balance Sheet Instruments
In the ordinary course of business New South has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit, letters
of credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
Recent Accounting Standards
The American Institute of Certified Public Accountants has issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement requires capitalization of external
direct costs of materials and services, payroll and payroll-related costs for
employees directly associated, and interest costs during development of
computer software for internal use with planning and preliminary costs to be
expensed. In addition, capitalized costs of computer software
43
developed or obtained for internal use should be amortized on a straight-line
basis unless another systematic and rational basis is more representative of the
software's use. The adoption of this statement in 1999 did not have a material
effect on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement replaces existing pronouncements and practices with a single,
integrated accounting framework for derivatives and hedging activities requiring
companies to formally record at fair value all derivatives and to document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. During 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Standard No. 133 - an amendment of FASB Standard 133. SFAS No. 137 defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
Presently the Company has not yet quantified the effect adoption will have on
the consolidated financial statements; however, the effect could be material.
During 1999, the Company implemented SFAS No. 134, Accounting for Mortgage-
Backed Securities Retained After The Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise. This statement, an amendment to SFAS No.
65, Accounting for Certain Mortgage Banking Activities, requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability to sell or hold those investments. The
implementation of this statement did not have a material impact on the
presentation of the Company's consolidated financial condition or results of
operations.
2. Business Combination
--------------------
On February 17, 1999, New South entered into an Asset Purchase Agreement
(the "Agreement") to acquire the assets associated with the national mortgage
origination activities of Avondale Federal Savings Bank ("AFSB"). Concurrent
with the Agreement, New South organized Avondale Funding Corporation, ("AFC"),
to hold the acquired assets and assume acquisition liabilities and related
operations. In July 1999, Avondale Funding Corporation's name was changed to
Avondale Funding.com, inc. The acquisition was recorded under the purchase
method; accordingly, the purchase price was allocated to the assets acquired
based upon their fair value. No goodwill was recorded. The results of operations
of AFC since the date of the Agreement are included in the Company's results of
operations. See Note 25.
3. Cash and Due From Banks
-----------------------
New South maintains cash balances with the Federal Reserve when required. As
of December 31, 1999 and 1998, reserve requirements amounted to $1,321,000 and
$4,769,000, respectively.
4. Investment Securities Available for Sale
----------------------------------------
The fair value and amortized cost of securities available for sale and the
related unrealized gains and losses for each category are presented below:
44
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- ----------------- -------- ---------- ---------- ---------
(In thousands)
Mortgage-backed securities $ 90,465 $130 $2,731 $ 87,864
U.S. Treasury and Federal
agency securities 38,876 -- 1,347 37,529
Other 7,278 -- 189 7,089
-------- ---- ------ --------
$136,619 $130 $4,267 $132,482
======== ==== ====== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ----------------- -------- ---------- ---------- ---------
(In thousands)
Mortgage-backed securities $ 54,064 $256 $ 253 $ 54,067
U.S. Treasury and Federal
agency securities 43,860 136 91 43,905
Other 11,587 46 14 11,619
-------- ---- ------ --------
$109,511 $438 $ 358 $109,591
======== ==== ====== ========
The contractual maturities of the securities available for sale are presented
in the following table for 1999 and 1998:
1999 1998
---------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- --------- -------- ---------
(In thousands)
Due in one year or less $ 5,001 $ 4,970 $ 3,706 $ 3,715
Due after one year through five years 34,037 32,572 48,725 48,793
Due after five years through ten years 16 16 42 43
Due after ten years 90,516 87,875 46,794 46,796
Equity securities 7,049 7,049 10,244 10,244
-------- -------- -------- --------
$136,619 $132,482 $109,511 $109,591
======== ======== ======== ========
Net unrealized losses on investment securities available for sale at December
31, 1999 amounted to $4,137,000. Net unrealized gains on investment securities
available for sale at December 31, 1998 amounted to $80,000. Deferred tax
benefits relating to the net unrealized losses at December 31, 1999 amounted to
$214,000. Deferred taxes relating to the net unrealized gains at December 31,
1998 amounted to $29,000.
Gross realized gains on securities available for sale for 1999, 1998 and 1997
were $4,784,000, $4,619,000, and $1,464,000, respectively. Gross realized
losses on securities available for sale for 1999, 1998 and 1997 were $4,403,000,
$5,561,000, and $2,109,000, respectively.
At December 31, 1999 and 1998, New South had securities of $126,002,000 and
$30,400,000, respectively, pledged to secure certain Federal Home Loan Bank
("FHLB") advances, arrangements for the
45
sale of securities under agreements to repurchase, interest rate swap contracts,
and state and municipal deposits.
There were no securities classified as trading securities during 1999, 1998
or 1997; therefore, no gains or losses on this security classification have been
included in income.
5. Comprehensive Income
--------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income is the change in equity during a period from transactions
and other events and circumstances from nonowner sources. For New South,
changes in other nonowner transactions consist entirely of changes in unrealized
gains and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as part
of net income and other comprehensive income during that or earlier periods.
The following table reflects the reclassification amounts and the related tax
effect for the three years ended December 31:
46
1999
----------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------
Net unrealized losses arising during the period $(5,927) $(1,710) $(4,217)
Less reclassification adjustments for net
gains included in net income (381) (138) (243)
------- ------- -------
$(5,546) $(1,572) $(3,974)
======= ======= =======
1998
----------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------
Net unrealized losses arising during the period $ (356) $ (131) $ (225)
Less reclassification adjustments for net
losses included in net income 942 349 593
------- ------- -------
$(1,298) $ (480) $ (818)
======= ======= =======
1997
----------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------
Net unrealized losses arising during the period $ (816) $ (302) $ (514)
Less reclassification adjustments for net
losses included in net income 645 239 406
------- ------- -------
$ (171) $ (63) $ (108)
======= ======= =======
6. Loans
-----
New South's primary line of business is the origination of residential
mortgage loans which New South classifies as either conforming or nonconforming.
Conforming loans are typically single family loans which generally have been
underwritten and processed in accordance with standard government or federal
agency guidelines including FNMA, FHLMC, FHA and VA. Conforming residential
mortgage loans are fixed-rate and adjustable-rate residential first mortgage
loans with 15 year or 30 year terms generally secured by owner-occupied
residences. Nonconforming loans typically do not exceed the standard agency
maximum loan size guidelines but may fail to meet one or more other guidelines
relating to creditworthiness, such as acceptable debt ratios and acceptable
consumer loan payment delinquencies. New South originates only fixed rate
products in the nonconforming residential mortgage area.
The majority of New South's automobile installment loans are considered to
be prime loans by industry standards. Generally, the industry classifies prime
and nonprime customers based on the creditworthiness of the consumer. The
Company also classifies as prime an immaterial amount of other non-automobile
installment loans secured by deposits, boats and recreational vehicles, and some
unsecured signature loans.
47
The terms of nonprime automobile installment loans are established by New South
underwriters based on a variety of factors in accordance with New South's
underwriting guidelines which have been specifically designed to evaluate
nonprime customers.
Commercial loans are generally multi-family real estate. An immaterial number
of commercial loans relate to operating loans to commercial entities and may be
secured by inventories or other assets. Most commercial loans carry variable
interest rates with maturities consistent with industry standards for the type
of instrument, typically 30 years for the real estate related loans.
New South's residential construction and land lending efforts involve making
loans to builders for the construction of single family properties and, on a
more limited basis, loans for the acquisition and development of improved
residential lots. The manufactured housing lending program primarily includes
the indirect origination of mortgage loans including both the land and home and
nonmortgage loans for the home only, in addition to construction loans which are
in place during the preparation phase of the land.
The composition of the loan portfolio as of December 31, 1999 and 1998 was as
follows:
1999 1998
-------- --------
(In thousands)
Residential Mortgage:
Conforming $268,377 $127,765
Nonconforming 45,513 328,721
-------- --------
313,890 456,486
Installment (automobile and other)
Prime 140,268 52,232
Nonprime 10,010 1,436
-------- --------
150,278 53,668
Residential construction and land 136,831 144,771
Commercial real estate 146,072 155,765
Commercial 6,417 4,579
-------- --------
753,488 815,269
Less unearned income 5,211 2,392
-------- --------
$748,277 $812,877
======== ========
The undisbursed portion of mortgage and construction loans was $72,221,000,
and $86,237,000 at December 31, 1999 and 1998, respectively.
7. Allowance for Loan Losses
-------------------------
A summary of the activity in the allowance for loan loss accounts for the
years ended December 31, 1999, 1998 and 1997 is presented below:
48
1999 1998 1997
------- ------ ------
(In thousands)
Balance at beginning of year $ 9,107 $7,333 $5,904
Provision for loan losses 3,638 3,944 2,954
Loans charged off 3,186 3,205 2,200
Loan recoveries (1,555) (1,035) (675)
------- ------ ------
Net charge-offs 1,631 2,170 1,525
------- ------ ------
Balance at end of year $11,114 $9,107 $7,333
======= ====== ======
8. Premises and Equipment
----------------------
Major classifications of premises and equipment as of December 31, 1999 and
1998 are summarized as follows:
1999 1998
------- -------
(In thousands)
Land $ 100 $ 100
Building 6,674 5,759
Leasehold improvements 64 23
Furniture and equipment 8,619 4,826
------- -------
15,457 10,708
Less accumulated depreciation and amortization 5,208 2,848
------- -------
$10,249 $ 7,860
======= =======
9. Mortgage Servicing Rights
-------------------------
A summary of activity in the mortgage servicing rights accounts for the years
ended December 31, 1999 and 1998 is presented below:
49
1999 1998
------- -------
(In thousands)
Balance at beginning of year $ 7,041 $ 1,381
Originated mortgage servicing rights 13,633 6,295
Sale of mortgage servicing rights (2,186) -
Amortization expense (2,387) (635)
------- -------
Balance at end of year $16,101 $ 7,041
======= =======
Estimated fair value at end of year $21,110 $10,988
======= =======
10. Deposits
--------
The composition of the deposit base as of December 31, 1999 and 1998 is
summarized in the following table:
1999 1998
--------------------- -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(In thousands)
Noninterest bearing demand $ 47,678 6.4% $ 73,873 9.5%
Interest bearing transaction accounts 4,322 0.6 3,712 0.5
Money market accounts 74,332 10.0 61,544 7.9
Statement savings 5,512 0.7 4,337 0.6
Certificates of deposit
3% to 3.99% 35 0.0 44 0.0
4% to 4.99% 27,761 3.7 30,355 3.9
5% to 5.99% 429,687 57.7 430,289 55.5
6% to 6.99% 106,653 14.3 103,446 13.3
7% to 8.99% 48,211 6.5 65,030 8.4
More than 9% 894 0.1 2,818 0.4
-------- ----- -------- -----
$745,085 100.0% $775,448 100.0%
======== ===== ======== =====
The aggregate amounts of certificates of deposit in denominations greater
than $100,000 were approximately $219,845,000 and $140,618,000 as of
December 31, 1999 and 1998, respectively
The scheduled maturities of certificates of deposit as of December 31, 1999
were as follows (in thousands):
50
2000 $492,161
2001 36,390
2002 38,148
2003 7,914
2004 and thereafter 38,628
--------
$613,241
========
The following table notes the breakdown of interest expense on deposits for
the years ended December 31, 1999, 1998, and 1997:
1999 1998 1997
------- -------- -------
(In thousands)
Interest bearing transaction accounts $ 150 $ 82 $ 126
Money market accounts 3,600 2,543 2,350
Statement savings 211 184 245
Certificates of deposit 35,872 35,915 35,011
------- -------- -------
$39,833 $38,724 $37,732
======= ======= =======
11. Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
--------------------------------------------------------------------------
At December 31, 1999, New South maintained federal funds agreements with five
commercial banks which provided unused, available credit of $50,000,000. The
table below provides information relating to federal funds purchased and
securities sold under agreements to repurchase for the years ended December 31,
1999 and 1998:
1999 1998
-------- --------
(In thousands)
Activity for the year:
Average outstanding balance $42,132 $47,827
Maximum outstanding at any month-end $73,054 $85,573
Ending balance $50,923 $68,800
Average interest rate at period-end 6.09% 5.52%
Average interest rate paid during the year 5.29% 4.85%
12. Federal Home Loan Bank Advances, Lines of Credit and Note Payable
-----------------------------------------------------------------
As of December 31, 1999 and 1998, FHLB advances amounted to $128,417,000 and
$198,418,000, respectively. The advances outstanding at December 31, 1999 bear
interest at rates ranging from 5.53 percent to 7.89 percent. The advances are
collateralized by stock in the FHLB, a blanket assignment of mortgage loans, and
the pledge of certain investment securities available for sale. Scheduled
maturities for the advances outstanding as of December 31, 1999 are as follows
(in thousands):
51
2000 $ 85,000
2001 3,388
2003 30,000
2005 10,000
2017 and thereafter 29
--------
$128,417
========
The table below provides information relating to FHLB advance activity for
the years ending December 31, 1999 and 1998.
1999 1998
--------- ---------
(In thousands)
Activity for the year:
Average outstanding balance $158,782 $151,476
Maximum outstanding at any month-end $218,418 $231,418
Ending balance $128,417 $198,418
Average interest rate at period-end 5.87% 5.38%
Average interest rate paid during the year 5.33% 5.84%
New South issued a promissory note (the "Note") in the amount of $1,947,000
to AFSB as consideration for the purchased assets of AFC. Beginning April 10,
1999, under terms of the Note, New South was to make four quarterly payments of
principal and interest to AFSB equal to 20 basis points of both the aggregate
original principal balance of all mortgage loans originated and the outstanding
balance of all home equity lines of credit originated through the purchased
systems subsequent to the purchase by New South. Any amount remaining after the
first four installments are due in four equal installments beginning on April
10, 2000, with the final installment due January 10, 2001. Interest on the note
accrues at six percent annually. As of December 31, 1999, $1,615,000 was
outstanding on the note. In addition, the Agreement contains a provision by
which New South can exercise an option to put back the assumed assets and the
Note within a specified time frame. This time frame expires in May 2000.
During 1999, Bancshares entered into a credit facilities agreement from a
commercial bank consisting of a $8,125,000 line of credit. As of December 31,
1999, $4,500,000 was outstanding on the line of credit.
13. Employee Benefit Plan
---------------------
Substantially all full-time employees with six months of service are
eligible to participate in New South's 401(k) Defined Contribution Plan. Under
the plan, an employee may elect to defer a portion of their wages with New South
matching deferrals up to three percent of the first eight percent of the
employee's salary deferred. New South contributed $486,000, $323,000, and
$138,000, to the plan for the years ended December 31, 1999, 1998 and 1997,
respectively.
14. Income Taxes
------------
The provisions for (benefit of) income taxes included in the consolidated
statements of income are summarized below:
52
Current Deferred Total
------- -------- ------
(In thousands)
1999
Federal $ - $1,316 $1,316
State (146) 236 90
------ ------ ------
$ (146) $1,552 $1,406
====== ====== ======
1998
Federal $3,740 $ 792 $4,532
State 458 98 556
------ ------ ------
$4,198 $ 890 $5,088
====== ====== ======
1997
Federal $4,225 $ (621) $3,604
State 513 (127) 386
------ ------ ------
$4,738 $ (748) $3,990
====== ====== ======
At December 31, 1999 and 1998, deferred income taxes reflects the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The valuation allowances for net deferred tax was eliminated during
1999.
Significant components of New South's deferred tax assets and liabilities as
of December 31, 1999 and 1998 are listed below.
53
1999 1998
------ ------
(In thousands)
Deferred tax asset:
Loan loss allowance $ 610 $3,955
REMIC income 327 2,388
Unrealized loss on securities
available for sale 214 -
Other 283 793
------ ------
1,434 7,136
Deferred tax liability:
Tax deferred dividends 10 469
Originated mortgage servicing rights 642 2,539
Unrealized gain on securities
available for sale - 29
Servicing asset 307 -
Other 560 887
------ ------
1,519 3,924
------ ------
Net deferred tax asset (liability)
before valuation allowance (85) 3,212
Valuation allowance - 1,988
------ ------
Net deferred tax asset (liability) $ (85) $1,224
====== ======
Applicable income taxes for financial reporting purposes differs from the
amount computed by applying the applicable income tax rate of 6 percent, the
blended tax rate for states in which the Company operates, for 1999 and 34
percent for 1998 and 1997 for the reasons below:
1999 1998 1997
------ ------ ------
(In thousands)
Tax computed at statutory
applicable income tax rate $ 240 $4,020 $2,960
Reversal of Federal net deferred tax asset 3,145 - -
Elimination of valuation allowance (1,988) - -
Increase in taxes resulting from:
State income tax, net of Federal benefit - 320 255
Other, net 9 748 775
------ ------ ------
$1,406 $5,088 $3,990
====== ====== ======
54
15. Other Noninterest Expense
-------------------------
The following table sets forth the principal components of other noninterest
expense for the years ended December 31:
1999 1998 1997
------- ------- -------
(In thousands)
Loan servicing fees paid to affiliates $ 354 $ 4,480 $ 3,642
Loss on loans serviced 209 398 1,423
Supplies and printing 1,247 916 459
Legal and professional 2,274 1,484 851
Telephone 1,431 1,129 692
Advertising 1,429 792 489
Computer service 1,722 849 589
Branch purchase fee 906 2,305 891
Other expense 11,994 6,090 4,407
------- ------- -------
$21,566 $18,443 $13,443
======= ======= =======
16. Capital
-------
Various regulatory capital measures used within the banking industry are
indicators of capital adequacy. Among these are leverage, tangible, and risk-
based capital ratios. These ratios adjust reported asset and capital amounts by
various nonqualifying regulatory assets such as certain mortgage servicing
rights and certain nonqualifying intangibles. Regulatory authorities set these
minimum ratio standards for banking institutions in order to monitor the capital
strength of the institutions. Should the Bank's capital ratios decline below
these minimum standards, it would become subject to a series of increasingly
restrictive regulatory actions. The Bank has consistently exceeded these
minimum guidelines and it is the intention of management to continue to monitor
these ratios to insure regulatory compliance and maintain adequate capital for
the Bank. The Bank's current regulatory ratios place the Bank in the regulatory
defined well capitalized category. The capital levels for the Bank under these
various measures are noted in the table for December 31, 1999 and 1998. On
August 31, 1999, the OTS confirmed the Bank was well capitalized. Management
believes, as of December 31, 1999, that the Bank meets all capital adequacy
guidelines to which it is subject.
55
Minimum To Be Well
Requirement Actual Capitalized
-------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In thousands, except percentages)
As of December 31, 1999:
Tier I capital
Tier 1 to total adjusted assets $30,747 3.00% $88,537 8.64% $51,245 5.00%
Tangible capital
Tangible capital to total adjusted assets $15,374 1.50% $88,537 8.64% N/A N/A
Total risk-based capital
to risk weighted assets $59,658 8.00% $90,253 12.10% $74,572 10.00%
Tier 1 capital
Tier 1 to risk weighted assets N/A N/A $88,537 11.87% $44,743 6.00%
As of December 31, 1998:
Tier I capital
Tier 1 to total adjusted assets $34,219 3.00% $79,891 7.00% $57,031 5.00%
Tangible capital
Tangible capital to total adjusted assets $17,109 1.50% $79,891 7.00% N/A N/A
Total risk-based capital
to risk weighted assets $64,193 8.00% $83,321 10.38% $80,241 10.00%
Tier 1 capital
Tier 1 to risk weighted assets N/A N/A $79,891 9.96% $48,145 6.00%
56
The following table is a reconciliation of the Bank's shareholder's equity to
tangible capital as required by the Office of Thrift Supervision.
1999 1998
---------- ----------
(In thousands)
Shareholder's equity $ 84,518 $ 81,166
Minority interests in consolidated subsidiaries 96 -
Deferred tax asset - (1,224)
Unrealized (gains) losses on securities
available for sale 3,923 (51)
---------- ----------
Tangible and Tier 1 capital 88,537 79,891
Allowance for loan losses, general 9,321 8,732
Equity investments in land (36) (112)
Low level recourse deduction (7,569) (5,190)
---------- ----------
Total risk based capital $ 90,253 $ 83,321
========== ==========
Total adjusted assets $1,024,905 $1,140,619
========== ==========
Total risk weighted assets $ 745,723 $ 802,409
========== ==========
While the Company presently intends to declare dividends in an amount
sufficient to enable shareholders to pay income tax at the highest marginal
federal, state and local income tax rate of any shareholder of the Company for
the applicable period, and since the Company is dependent upon dividends from
the Bank, there is no assurance that dividends to shareholders can be timely
made. The Bank also presently intends to declare dividends in an amount
sufficient to pay such dividends to shareholders; however, the Bank is subject
to strict regulatory and legal guidelines regarding capital adequacy, dividend
policies and other restrictions and rules designed to assure the safety and
soundness of the Bank and the Company. As of December 31, 1999, the Bank could
declare dividends in the amount of $16,976,000 without the prior consent of the
Office of Thrift Supervision.
17. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, Disclosures about Fair Value of Financial Instruments requires
the disclosure of estimated fair values for all financial instruments, both
assets and liabilities, on and off-balance sheet, for which it is practicable to
estimate their value along with pertinent information on those financial
instruments for which such values are not available.
Fair value estimates are made at a specific point in time and are based on
relevant market information which is continuously changing. Because no quoted
market prices exist for a significant portion of New
57
South's financial instruments, fair values for such instruments are based on
management's assumptions with respect to future economic conditions, estimated
discount rates, estimates of the amount and timing of future cash flows,
expected loss experience, and other economic factors. These estimates are
subjective in nature involving uncertainties and matters of significant
judgement; therefore, they cannot be determined with precision. Changes in the
assumptions could significantly affect the estimates.
For purposes of this disclosure, the carrying value approximates, or is equal
to, the fair value of financial instruments for the balance sheet lines
captioned: cash and due from banks, time deposits in other banks, accrued
interest receivable and payable, federal funds purchased and securities sold
under agreements to repurchase, and note payable.
The carrying amount and estimated fair values of other financial
instruments is summarized as follows:
December 31,
-------------------------------------------------
1999 1998
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial Assets:
Investment securities available for sale $132,482 $132,482 $109,591 $109,591
Loans held for sale $ 66,258 $ 66,258 $115,279 $115,279
Loans, net of unearned income $748,277 $744,985 $812,877 $832,386
Financial Liabilities:
Deposits $745,085 $746,161 $775,448 $786,304
FHLB advances $128,417 $128,751 $198,418 $201,196
Off-balance sheet financial instruments:
Unrealized gains/(losses):
Interest rate swap agreements $ - $ 607 $ - $ (556)
Interest rate cap agreements $ - $ 17 $ - $ 123
Commitments to extend credit $ - $ 96,029 $ - $ 98,481
Undisbursed loan commitments $ - $ 72,221 $ - $ 86,237
Letters of credit $ - $ 6,866 $ - $ 20,362
The following methods and assumptions were used by New South in estimating
its fair value disclosures for financial instruments:
Investment Securities Available for sale and Loans Held for Sale - Fair
----------------------------------------------------------------
values for securities and loans held for sale are based on quoted market prices
where available. Where quoted market prices are not available, fair values are
based on quoted market prices of similar instruments, adjusted for any
significant differences between the quoted instruments and the instruments being
valued.
Loans - The fair values of variable rate loans that reprice frequently
-----
and have no significant change in credit risk are assumed to approximate
carrying amounts. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality and estimates of
maturity based on New South's historical experience.
Deposits - The fair value of deposits with no stated maturity, such as
--------
noninterest-bearing demand deposits, savings accounts, and money market and
interest-bearing checking accounts is, by definition, equal
58
to the amount payable on demand or the carrying amount. Fair values for fixed
rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
of deposit to a schedule of aggregated expected monthly maturities on time
deposits.
Federal Home Loan Bank Advances - The fair values of these advances are
-------------------------------
determined using discounted cash flow analyses which apply interest rates
currently offered.
Off-Balance Sheet Instruments - Fair values for New South's off-balance
-----------------------------
sheet instruments are determined using various methods. Fair values of
interest rate swaps and caps are determined with the use of pricing models or
formulas using current assumptions if there are no relevant market comparables.
Commitments to Extend Credit and Standby Letters of Credit - The value of
----------------------------------------------------------
these unrecognized financial instruments is estimated based on the fee income
associated with the commitments which, in the absence of credit exposure, is
considered to approximate their settlement value. As no significant credit
exposure exists and because such fee income is not material to New South's
financial statements at December 31, 1999 and 1998, the fair value of these
commitments is not presented.
18. Off-Balance Sheet Risk and Commitments
--------------------------------------
New South is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The financial
instruments may include commitments to extend credit, standby letters of credit,
interest rate caps and floors, interest rate swaps, forward and futures
contracts, and commitments to purchase loans. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the financial statements. The contract, or notional,
amounts of these instruments reflect the extent of involvement New South has in
the particular class of financial instrument.
New South's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. New South uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. For
interest rate caps, floors, and swap agreements and for forward and futures
contracts, the contract, or notional, amounts do not represent exposure to
credit loss. New South controls the credit risk of its interest rate swap
agreements and forward and futures contracts through credit approvals, limits,
and monitoring procedures. Generally, New South will require collateral, margin
deposits or other security to support financial instruments with credit or
interest risk.
Commitments to extend credit ("Mortgage Pipeline") are agreements to lend to
customers 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. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Mortgage Pipeline consists of both fixed rate commitments and floating rate
obligations. The fixed rate commitments result in market risk, while floating
rate commitments contain no market risk. New South controls this market risk
through mandatory forward commitments to sell loans and other financial
instruments designed to hedge this type of interest rate exposure. The market
risk associated with these mandatory forward commitments exists to the extent
loans are not available at appropriate rates. New South's mandatory forward
commitments on loans held for sale are considered in the
59
lower of cost or market calculation. The total Mortgage Pipeline was $11,177,000
and $18,434,000 as of December 31, 1999 and 1998, respectively. Of the 1999
Mortgage Pipeline, $7,712,000 were fixed rate commitments with market risk and
$3,465,000 were adjustable commitments with no market risk. For 1998, $9,404,000
were fixed rate commitments and $9,030,000 were adjustable commitments. Adequate
sources of funds were available at December 31, 1999 to fund anticipated
closings from the Mortgage Pipeline.
Commitments to purchase loans are agreements to buy mortgage loans on a
specified date at an amount stated as a percentage of the note amount of the
loans to be purchased. On these commitments, New South uses the same policies
to control credit and interest rate risk as it does for other commitments to
extend credit.
Standby letters of credit are conditional commitments issued by New South to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, such as a
bond financing. While some of the guarantees are short-term in nature, most
extend for more than one year and expire in decreasing amounts. The credit risk
in standby letters of credit is substantially the same as that for extending
loan facilities to customers. New South holds various assets as collateral,
including real estate and mortgage-backed securities, supporting those
commitments for which collateral is deemed necessary.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. One party to the transaction will pay a fixed
rate of interest to the other party and receive from that party a floating rate
of interest, both based on the same notional value, at specified intervals.
Whether New South enters the agreement as the party to pay either the fixed rate
or the floating rate is determined by management's assessment of New South's
obligations and overall interest rate risk exposure and, consequently, can vary
greatly over time.
Entering into interest rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the contracts
but also the interest rate risk associated with unmatched positions. Notional
principal amounts are often used to express the volume of these transactions;
however, the amounts potentially subject to credit risk are much smaller.
Generally, New South will enter into interest rate swap agreements with firms
that are rated investment grade or better by a nationally recognized investment
rating service.
The effective notional amounts outstanding at December 31, 1999 and 1998 were
$100,000,000 and $120,000,000, respectively. During 1999, the average notional
amount of rate swaps was $107,500,000; the average rate received under the
contracts was 5.70 percent and the average rate paid was 5.81 percent, resulting
in an increase in net interest income of $329,000. During 1998, the average
notional outstanding amount was $140,000,000 and the average rates received and
paid were 6.01 percent and 5.80 percent, respectively, and increased net
interest income by $760,000. At December 31, 1999 and 1998, the net accrued
receivables were $612,000 and $600,000, respectively. At December 31, 1999, the
effective notional amounts and contractual maturities of rate swaps were as
follows:
60
Effective
Notional Liabilities/Assets
Amount Expiration Year Hedged
-------------- --------------- ------------------
(In thousands)
$ 25,000 2000 Loans
10,000 2002 Deposits
20,000 2003 Loans
20,000 2005 Loans
10,000 2008 Deposits
15,000 2009 Deposits
--------
$100,000
========
Interest rate cap and floor agreements are used to modify and/or reduce New
South's interest rate risk. As of December 31, 1999 and 1998, New South had
interest rate cap agreements with commercial banks and major investment banking
firms covering New South's interest rate exposure on short-term liabilities. The
effective notional amounts outstanding were $230,000,000 at December 31, 1999
and 305,000,000 at December 31, 1998. The results of the rate caps were an
increase in expense of $712,000, $824,000, and $782,000 in 1999, 1998 and 1997,
respectively. The estimated fair value of the rate caps were $17,000 and
$123,000 at December 31, 1999 and 1998, respectively. The weighted average
maturity of the rate caps were 2 years at both December 31, 1999 and 1998.
The following table summarizes the contract or notional amounts of the
various off-balance sheet instruments and commitments as of December 31, 1999
and 1998:
1999 1998
------- -------
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $96,029 $98,481
Standby letters of credit $ 6,866 $20,362
19. Loan Servicing
--------------
Mortgage and installment loans serviced for others are not recorded on New
South's books and, accordingly, are not reflected in the accompanying financial
statements. New South is obligated to service the unpaid principal balances of
these loans. See Note 20 for a discussion of the servicing arrangement New
South has with Collateral Mortgage, Ltd. ("Collateral"), an affiliated company.
New South, as a servicer for all FHA/VA loans, is required to advance from
its own funds, escrow and foreclosure costs on the loans it services. Portions
of these advances are not recoverable for loans serviced for the Government
National Mortgage Association ("GNMA").
The average GNMA FHA/VA loss resulting from these advances and relating to
loans that subsequently went into foreclosure amounted to approximately $990 per
loan in 1999, $2,300 per loan in 1998, and $850
61
per loan in 1997. Total losses of this nature for 1999, 1998 and 1997 amounted
to $150,000, $89,000, and $71,000, respectively.
The outstanding mortgage and installment loan amounts serviced for others as
of December 31, 1999 and 1998 are summarized below:
1999 1998
-------- --------
(In thousands)
Government National Mortgage Association $328,564 $336,427
Freddie Mac $709,402 $696,194
Federal National Mortgage Association $138,637 $122,401
Other investors $1,201,332 $332,598
Custodial escrow balances maintained in connection with loan servicing were
approximately $6,093,000 and $5,837,000 at December 31, 1999 and 1998,
respectively. These are included with noninterest bearing deposits.
The automobile installment loans serviced for others at December 31, 1999 and
1998 were $154,366,000 and $162,860,000, respectively.
20. Related Party Transactions
--------------------------
Due to the nature of their businesses, the operations of New South and
Collateral, an affiliate, are closely involved. Management, systems, and
facilities are shared, and, accordingly, there are numerous intercompany
transactions. Management monitors all activity to ensure that all transactions
are made in a fair and equitable manner to both New South and Collateral.
Senior management and other support functions, for which management fees were
assessed and which had previously been a part of Collateral, transferred to New
South during 1997. As a result, New South collected $269,000, $971,000 and
$222,000 in management fees from Collateral in 1999, 1998, and 1997,
respectively, which are paid monthly. Additionally, management fees were
received during 1999, 1998, and 1997 in the amounts of $105,000, $64,000 and
$60,000 from Triad Guaranty Insurance Corporation, an affiliate, for services
provided. These fees are due quarterly and bear no interest. New South paid
Collateral monthly management fees for services provided, including facilities
management, $146,000, $68,000, and $14,000 during 1999, 1998, and 1997,
respectively.
In connection with its residential loan servicing activities, Collateral is
required to maintain escrow accounts as trustee for investors and mortgagors.
At December 31, 1998, Collateral had on deposit with New South approximately
$54,338,000, respectively, in noninterest bearing accounts. For 1999, these
deposits represented escrows on the commercial servicing and amounted to
$18,369,000.
Prior to 1999, Collateral performed the servicing activities on behalf of New
South for New South's investor servicing obligations and New South's owned
portfolio. Effective January 1, 1999, New South began servicing these assets.
In addition, New South began servicing on behalf of Collateral all of
Collateral's residential servicing obligations to third parties and Collateral's
owned portfolio. Collateral paid $1,732,000 in 1999 to New South for these
servicing activities under a subservicing agreement based upon industry
servicing fee standards.
62
Collateral and its affiliates maintain normal business checking and money
market accounts at New South. At December 31, 1999 and 1998, these accounts
totaled approximately $5,327,000 and $1,236,000, respectively.
During the third quarter of 1999, New South sold an interest only strip to
Collateral for $4,846,000, the net book value as of the date of sale. No gains
or losses were recognized since net book value approximated the fair value of
the asset sold.
During the third quarter of 1999, New South sold $2,186,000 in servicing
rights for $2,646,000. This servicing was combined with the concurrent sale of
servicing rights by Collateral in order for Collateral and New South to achieve
a more effective execution of the servicing sale.
During the first quarter of 2000, New South as a continuation of the
Bank's building of it's servicing portfolio, purchased $840,000 in
servicing rights from Collateral for fair value.
New South, prior to June 1997, purchased a portion of its mortgage loans
from Collateral at cost. In addition, Collateral serviced these mortgage loans,
and subserviced loans which New South was obligated to service for third party
investors, until the servicing change noted above in January 1999. Servicing
fees paid to Collateral during 1999, 1998 and 1997 amounted to $354,000,
$4,480,000 and $3,642,000, respectively. The amounts paid in 1999 related solely
to Collateral's subservicing of New South's owned commercial loan portfolio. For
an additional discussion of the subservicing agreement with Collateral, see Note
19.
New South purchased $55,831,000 in mortgage loans from Collateral during
1997, and sold $20,571,000 in mortgage loans to Collateral during the same
period. During 1999 and 1998, no mortgage loans were sold to or purchased from
Collateral. All transactions were recorded at cost with no gains or losses.
New South's Trust Department acted as document custodian for Collateral's
mortgage banking activities for 1998 and 1997, holding various securities on
behalf of mortgage investors and warehousing banks. Management believes the fees
received from Collateral for these services are comparable to those charged by
third parties. The Trust Department continues to hold various securities and
commercial loan files on behalf of Collateral's commercial lending area. Trust
fees were $22,000, $191,000, and $196,000 during 1999, 1998, and 1997,
respectively.
On December 31, 1998, New South sold a mobile home park acquired through
foreclosure to Collateral Agency, Inc. ("CAI"), an affiliate, at market value
and realized a gain of $203,000 on the transaction. In June 1997, New South
sold an office rental property which had been acquired through foreclosure to
CAI. The property was sold at market price, and New South realized a gain of
$158,000 on the transaction.
New South had $73,000 and $457,000 in loans outstanding to senior
officers at December 31, 1999 and 1998, respectively. During 1999 and
1998, there were no advances on loans to senior officers, and paydowns were
$384,000 and $140,000, respectively.
In July 1997, the loan production operations of the residential mortgage
banking unit of Collateral were transferred into New South. As a result of this
change, New South assumed responsibility for 39 residential loan production
offices, associated employees, and related operating lease obligations. Under
the terms of an agreement with Collateral, a fee is payable semi-annually in
installments over a three year period based on a decreasing percentage ranging
from .35 percent to .10 percent of the aggregate original principal balances of
certain residential mortgage loans originated by New South through June 30,
2000. The fee for 1998 was $2,305,000 and the fee for 1999 was $906,000. In
1999 and 1998, New South paid $7,440 and $622,000 respectively, to Collateral
for the use of furniture and equipment in the origination and support areas.
63
In September 1998, New South entered into a joint venture known as DPH. In
accordance with the agreement, the joint venture will originate residential
mortgage loans which will subsequently be purchased by New South at market.
During 1999 and 1998, New South purchased $15,260,000 and $810,000,
respectively, of residential mortgage loans from the joint venture.
64
21. Parent Only Financial Information
---------------------------------
Financial information and operating results for New South Bancshares, Inc.,
parent only, is presented as follows:
As of December 31,
------------------
1999 1998
------------------
(In thousands)
Balance Sheets:
- ---------------
Assets:
Cash $ 67 $ 52
Investment in subsidiaries:
New South Federal Savings Bank 84,518 81,166
Collateral Agency of Texas 185 189
Other assets 1,510 1,561
Accounts receivable-intercompany 312 -
------- -------
Total Assets $86,592 $82,968
======= =======
Liabilities:
Notes payable $ 4,500 $ -
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses and other liabilities 284 -
Accounts payable-intercompany - 28
------- -------
Total Liabilities 39,284 34,528
------- -------
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,255,537.1 at December 31, 1999
and 1,250,189.5 at December 31, 1998) 1,256 1,250
Surplus 29,475 29,230
Retained earnings 20,500 17,909
Accumulated other comprehensive income (loss) (3,923) 51
------- -------
Total Shareholders' Equity 47,308 48,440
------- -------
Total Liabilities and Shareholders' Equity $86,592 $82,968
======= =======
65
Year ended December 31,
-----------------------------------------
1999 1998 1997
------- -------- --------
(In thousands)
Income Statement:
Income:
Dividends from subsidiaries $ 1,805 $ 900 $1,125
Interest on other short-term investments 5 175 8
Other income - - 10
------- ------ ------
Total Income 1,810 1,075 1,143
------- ------ ------
Expenses:
Interest on notes payable 92 366 779
Interest expense on guaranteed preferred beneficial
interests in the Company's subordinated debentures 2,932 1,573 -
Other expense 110 114 46
------- ------ ------
Total Expenses 3,134 2,053 825
------- ------ ------
Income (loss) before equity in undistributed earnings
of subsidiaries (1,324) (978) 318
Equity in undistributed earnings of subsidiaries 3,722 7,715 4,398
------- ------ ------
Income before income tax benefit 2,398 6,737 4,716
Income tax benefit 193 - -
------- ------ ------
Net Income $ 2,591 $6,737 $4,716
======= ====== ======
66
Year ended December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Statements of Cash Flows:
Operating activities:
Net income $ 2,591 $ 6,737 $ 4,716
Equity in undistributed earnings of subsidiaries (3,722) (7,715) (4,398)
(Increase) decrease in other assets 51 (1,560) -
Increase in accounts receivable-intercompany (312) - -
Increase (decrease) in accrued expenses and other liabilities 284 (6) -
Increase (decrease) in accounts payable-intercompany (28) (18) 37
------- -------- -------
Net cash provided by (used in) operations (1,136) (2,562) 355
------- -------- -------
Investing activities:
Capital contributions to subsidiaries (3,600) (12,174) (194)
------- -------- -------
Financing activities:
Net increase (decrease) in notes payable 4,500 (10,000) -
Proceeds from the issuance of common stock 251 - -
Purchase and retirement of common stock - (9,793) (235)
Issue of guaranteed preferred beneficial interests in
the Company's subordinated debentures - 34,500 -
------- -------- -------
Net cash provided by (used in) financing activities 4,751 14,707 (235)
------- -------- -------
Net increase (decrease) in cash and cash equivalents 15 (29) (74)
Cash and cash equivalents at beginning of year 52 81 155
------- -------- -------
Cash and cash equivalents at end of year $ 67 $ 52 $ 81
======= ======== =======
22. Commitments and Contingencies
------------------------------
Various legal proceedings are pending against New South. These actions arise
in the ordinary course of New South's business and include actions relating to
its lending and servicing activities. Although the outcome of any litigation
cannot be predicted with certainty, management considers that any potential
liability resulting from the proceedings would not have a material adverse
impact on the financial condition of New South. Consequently, no amounts have
been accrued relating to these matters.
The Company leases its executive offices, other corporate office space, and
its mortgage production branches. Rent expense is included in net occupancy
and equipment expense and totaled $2,309,000, $1,317,000, and $555,000 for the
years ended December 31, 1999, 1998, and 1997, respectively. Amounts
67
paid to Collateral for New South's executive office and other office space
totaled $1,013,000, $566,000, and $137,000 for the years ended December 31,
1999, 1998, and 1997, respectively. Amounts received from subleases totaled
$288,000, $437,000, and $353,000 for the years ended December 31, 1999, 1998,
and 1997, respectively. Minimum rental payments due as of December 31, 1999 are
summarized below (in thousands).
2000 $ 617
2001 436
2002 175
2003 33
2004 4
------
$1,265
======
23. Segment Reporting
-----------------
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in 1998. Reportable segments consist of Residential
Mortgage Lending, Automobile Lending, and Portfolio Management. The accounting
policies for each segment are the same as those used by the Company as described
in Note 1 - Significant Accounting Policies.
Residential Mortgage Lending originates and services single-family mortgage
loans. These loans are originated through the Company's network of retail loan
origination offices and through brokers and correspondents. Automobile Lending
consists of originating and servicing loans on automobiles. These loans are
primarily acquired on an indirect basis through automobile dealers. Portfolio
management oversees the Company's overall portfolio of marketable assets as well
as the Bank's funding needs. Residential Mortgage Lending and Automobile
Lending sell permanent, marketable loans to Portfolio Management at market-based
prices. Portfolio Management then sells, securitizes, or retains the loans
based on the Company's needs and market conditions. Certain short-term and
floating rate loans are retained by the originating unit, which is credited with
the interest income generated by those loans. The originating unit pays a
market-based, funds-used charge to Portfolio Management. The segment results
include certain other overhead allocations. The results for the three
reportable segments of the Company are included in the following table.
68
For the year ended December 31, 1999
-----------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
-----------------------------------------------------------------------------
(In thousands)
Interest income $ 18,109 $ 221 $ 63,660 $ 3,366 $ 85,356
Interest expense 39 37 52,463 1,045 53,584
Intra-company funds used / provided (11,831) (167) 12,300 (302) -
Provision for loan losses 61 - 2,626 951 3,638
Noninterest income 38,133 798 (4,380) 3,418 37,969
Noninterest expense 35,530 5,783 5,102 15,691 62,106
Intra-company loan service fees 1,695 812 (2,507) - -
Effects of intra-company loan sales 1,157 1,655 (2,812) - -
-------- ------- -------- -------- ----------
Net income before income taxes 11,633 (2,501) 6,070 (11,205) 3,997
Provision for income taxes 4,093 (880) 2,135 (3,942) 1,406
-------- ------- -------- -------- ----------
Net income after income taxes $ 7,740 $(1,621) $ 3,935 $ (7,263) $ 2,591
======== ======= ======== ======== ==========
Depreciation and amortization (net) $ 1,504 $ 288 $ 6 $ 658 $ 2,456
Total assets $264,339 $12,057 $800,363 $(55,652) $1,021,107
Capital expenditures $ 3,186 $ 147 $ - $ 1,629 $ 4,962
For the year ended December 31, 1998
------------------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------------------------------------------------------------------------------
(In thousands)
Interest income $ 14,461 $ 486 $ 67,677 $ 627 $ 83,251
Interest expense 475 27 51,974 (177) 52,299
Intra-company funds used / provided (8,657) (192) 9,027 (178) -
Provision for loan losses - - 3,944 - 3,944
Noninterest income 29,690 913 780 2,187 33,570
Noninterest expense 33,237 5,522 3,130 6,864 48,753
Intra-company loan service fees 1,130 1,045 (2,175) - -
Effects of intra-company loan sales 3,714 2,685 (6,399) - -
-------- ------- -------- -------- ----------
Net income before income taxes 6,626 (612) 9,862 (4,051) 11,825
Provision for income taxes 2,877 (266) 4,281 (1,804) 5,088
-------- ------- -------- -------- ----------
Net income after income taxes $ 3,749 $ (346) $ 5,581 $ (2,247) $ 6,737
======== ======= ======== ======== ==========
Depreciation and amortization (net) $ 607 $ 249 $ 4 $ 322 $ 1,182
Total assets $301,131 $ 8,178 $747,620 $ 85,693 $1,142,622
Capital expenditures $ 1,610 $ 427 $ - $ 4,062 $ 6,099
Due to the Transfer of the 39 residential mortgage production branches, along
with the related support operations and executive management, presentation of
comparable information for the period ended December 31, 1997 is not
practicable.
69
24. Trust Preferred Securities
--------------------------
In June 1998, the Company sold $34,500,000 of 8.5 percent cumulative
preferred securities issued by New South Capital Trust I (the "Trust"). These
preferred securities are collateralized by subordinated debentures issued by the
Company and are presented on the balance sheet as a separate line entitled
"Guaranteed preferred beneficial interests in the Company's subordinated
debentures". The debentures have a stated maturity of June 30, 2028 and are
subject to early redemption after June 30, 2003.
The sole assets of the Trust are $35,567,010 in subordinated debentures which
have the same interest rate and maturity characteristics as the trust preferred
securities. The Company owns all of the common securities of the Trust which
amount to $1,067,010.
The Company will, through the guarantee, the trust agreement, the
subordinated debentures and the indenture, taken together, fully, irrevocably
and unconditionally guarantee all of the Trust's obligations with respect to the
preferred securities. The guarantee of the Company guarantees the payment of
distributions and payments on liquidation or redemption of the preferred
securities, but only in each case to the extent of funds held by the Trust. The
guarantee does not cover payment of distributions when the Trust has
insufficient funds to pay such distributions. If the Company does not make
interest payments on the subordinated debentures held by the Trust, the Trust
will have insufficient funds to pay distributions on the preferred securities.
In such event, a holder of preferred securities may institute a legal proceeding
directly against the Company pursuant to the terms of the guarantee to enforce
payment of amounts equal to such distributions to such holder.
The Company's subordinated debentures and its guarantee are unsecured and
subordinated to all senior debt. Accordingly, the subordinated debentures and
the guarantee will rank junior in right of payment to all present and future
senior debt of the Company and rank pari passu with obligations to or rights of
the Company's other general unsecured creditors. In the case of a bankruptcy or
insolvency proceeding involving the Company, the Company's obligations under the
guarantee will rank subordinate and junior in right of payment to all
liabilities of the Company, but senior to any obligation in respect of any class
of capital stock of the Company.
The preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the subordinated debentures at their stated maturity or
their earlier redemption. The subordinated debentures are redeemable prior to
their stated maturity at the option of the Company on or after June 30, 2003, in
whole at any time or in part from time to time, or at any time, in whole, but
not in part, upon the occurrence of a special event as defined in the preferred
securities agreements.
The Company will have the right at any time to terminate the Trust and cause
the subordinated debentures to be distributed to the holders of the trust
securities in liquidation of the Trust. In the event of the termination of the
Trust, after satisfaction of liabilities to creditors of the Trust as required
by applicable law, the holders of the preferred securities will be entitled to
receive a liquidation amount of $10.00 per preferred security plus accumulated
and unpaid distributions thereon to the date of payment, which may be in the
form of a distribution of such amount in subordinated debentures, subject to
certain exceptions.
70
25. Subsequent Event
----------------
During March 2000, the Company decided to cease AFC production operations
due to business reasons. AFC is no longer accepting new business but will
continue to meet loan commitments amounting to approximately $5.2 million. Most
of the assets of AFC will be returned to the Seller and the related note will be
cancelled. Some of the technology related assets will be assigned to the Company
in return for a one-time cash payment of $250,000.
71
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable
72
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors ("Board of Directors") is divided into
three classes, and each of the Company's five directors is elected into one of
these three classes to hold office for a term of three years or until their
successors have been elected and qualified. Executive officers serve at the
pleasure of the Board of Directors and directors are elected in the annual
meeting of stockholders. The directors, executive officers and other key
employees of the Company and their ages as of March 31, 1999, are as follows:
Name Age Position
- ---- --- --------
Directors elected to serve until annual meeting in 2002 (Class I)
William T. Ratliff, Jr. 75 Director and Vice President of the Company;
Director of New South
Director elected to serve until annual meeting in 2001 (Class II)
J.K.V. Ratliff 70 Director and Vice President of the Company
Director elected to serve until annual meeting in 1999 (Class III)
William T. Ratliff, III 46 Chairman of the Board and President
of the Company;
Chairman of the Board and Chief
Executive Officer of New South
Robert M. Couch 42 Director and Executive Vice President
of the Company;
Director, President and Chief
Operating Officer of New South
David W. Whitehurst 50 Director of the Company and New South
Executive Officers Who Are Not Also Directors
David E. Mewbourne 50 Executive Vice President of New South
Roger D. Murphree 53 Senior Vice President of New South
David A. Roberts 46 Director and Senior Vice President of
New South
Larry A. Nelson 50 Senior Vice President of New South
Lizabeth R. Nichols 44 Vice President of the Company and Senior
Vice President and General Counsel
of New South
Cheryl R. Stone 46 Vice President and Acting Controller
of the Company and New South
The business experience of each of the persons named above during the past
five years is discussed below.
Mr. William T. Ratliff, Jr. has been a Director and Vice President of the
Company since its organization in 1994. He has been a Director of New South
since its organization in 1985. He served as Chief Executive Officer of
Collateral (or its predecessor Collateral investment Company) for 31 years until
1986. Mr. Ratliff, Jr. is the father of Mr. Ratliff, III, the Chairman and
President of the Company, and the brother of Mr. J.K.V. Ratliff, a Director and
Vice President of the Company.
Mr. J.K.V. Ratliff has been a Director and Vice President of the Company
since its organization in 1994. He has been a director and Vice President of
Collat, Inc., an affiliate, since 1986. Mr. J.K.V. Ratliff has been Assistant
to the President and a Director of Collateral Agency, Inc., an affiliate, since
its inception in 1956. Mr. Ratliff has also served as a director and Vice
President of Collateral Investment Corp., an affiliate, since September 1990.
Mr. J.K.V. Ratliff is the brother of Mr. Ratliff, Jr., a Director and Vice
President of the Company, and the uncle of Mr. Ratliff, III, the Chairman and
President of the Company.
73
Mr. William T. Ratliff, III has been President and a Director of the
Company since its organization in October 1994 and Chairman of the Board and
Chief Executive Officer of New South since 1985. Mr. Ratliff, III, has been the
Chairman of the Board of Triad Guaranty, Inc., an affiliate, since its inception
in 1993 and Chairman of the Board of Triad Guaranty Insurance Corporation, an
affiliate, since 1989. He has been President of Collateral Investment Corp., an
affiliate, since 1990 and was President and an individual General Partner of
Collateral from 1987 to 1995. From March 1994 until December 1996, Mr. Ratliff
served as President of Southwide Life Insurance Corp., an affiliate. He served
as Executive Vice President of Southwide Life Insurance Corp., an affiliate,
from 1986 to 1993. Mr. Ratliff, III joined Collateral in 1981. Mr. Ratliff,
III is the son of Mr. Ratliff, Jr., a Director and Vice President of the
Company, and the nephew of Mr. J.K.V. Ratliff, a Director and Vice President of
the Company.
Mr. Robert M. Couch has been Executive Vice President of the Company since
1994, and a Director since July 1998. Mr. Couch is responsible for the day-to-
day operations of the Company. He has been President and Chief Operating
Officer of New South since June 1997 and a Director since January 1995. From
March 1995 to June 1997, he served as Vice Chairman of New South. Mr. Couch has
been Managing Director of Collateral since November 1999. From August 1995 to
November 1999, Mr. Couch was President of Collateral. From October 1993 to
August 1995, Mr. Couch served as Executive Vice President of Collateral.
Mr. David W. Whitehurst has been a Director of the Company since July of
1998. He was Executive Vice President, Chief Financial Officer, and a Director
of Triad Guaranty, Inc. from 1993 to 1999, and served as Secretary of Triad
Guaranty, Inc. from 1993 until 1996. He has been Executive Vice President of CIC
since 1995 (Vice President from 1990 to 1995), was Chief Financial Officer of
CIC from 1990 through 1995, was Executive Vice President of Southwide Life
Insurance Corp. from 1992 until 1996 and has been a director of New South since
1989. Since January 1997, Mr. Whitehurst has been the President, Treasurer and a
Director of Southland National Insurance Corp. and its subsidiaries, all of
which are affiliates. Mr. Whitehurst joined Collateral in 1989 and served as
Vice President of Collateral and its affiliates until 1992, when he began
devoting all of his time to CIC and its affiliates.
Mr. David E. Mewbourne has been Executive Vice President of New South since
July 1997. Mr. Mewbourne is responsible for the day to day operations of
residential mortgage loan production, underwriting and servicing. From 1995 to
June 1997, he was Senior Vice President of New South. Mr. Mewbourne has been
Senior Vice President of Collateral, since March 1, 1995. From June 1987 to
March 1995, he served as Executive Vice President of AmSouth Mortgage Company.
Mr. Roger D. Murphree has been Senior Vice President of New South since
December 1997. Mr. Murphree is responsible for secondary marketing sales,
securitizations, and portfolio trading for the Company. From 1995 to December
1997, he served as Vice President of New South. Mr. Murphree has been employed
by New South since 1985. Mr. Murphree has served as Senior Vice President of
Collateral since June 1995.
Mr. David A. Roberts has been a Director of New South since September 1997
and Senior Vice President since July 1997. Mr. Roberts is responsible for New
South's commercial real estate lending activities. Mr. Roberts has also served
as Executive Vice President and Chief Operating Officer of Collateral since
August 1997. From February 1995 to July 1997, he served as Senior Vice
President of Collateral. From June 1990 to February 1995, he served as Vice
President of Collateral.
Mr. Larry A. Nelson has been Senior Vice President of New South since
December 1997. Mr. Nelson is responsible for the day-to-day operations of
automobile installment lending. From 1989 to 1997, he served as Vice President
of New South.
74
Ms. Lizabeth R. Nichols has been Vice President of the Company since August
1998 and has been Senior Vice President and General Counsel of New South since
November 1998. From February 1998 to November 1998 Ms. Nichols served as Vice
President and General Counsel. From January 1997 to January 1998, Ms. Nichols
served as Vice President and Legal Counsel of New South. Ms. Nichols has served
as Vice President of Collateral since January 1997. From October 1993 to
September 1996, Ms. Nichols was Vice President and Associate General Counsel of
Protective Life Corporation, an insurance holding company and was an employee
until January 1997.
Ms. Cheryl R. Stone has been Acting Controller of the Company since January
2000 and a Vice President since November 1994. Ms. Stone also serves as Acting
Controller of New South since January 2000 and as a Vice President since July
1997. Previously, Ms. Stone served as a Vice President and Controller of New
South from 1992 to July 1997. Ms. Stone has been a Vice President of Collateral
since July 1997. From 1992 until July 1997, she served as Vice President and
Controller of Collateral.
Item 11. Executive Compensation.
The following table sets forth the compensation earned by the named
Executive Officers of New South during the last two fiscal years.
Summary Compensation Table
Name and All other
Principal Position Year Salary Bonus Compensation(1)
- ----------------------------------------- ---- ------ --------- ---------------
William T. Ratliff, III
President of the Company............ 1999 127,000 96,252 0
1998 127,000 225,000 0
Robert M. Couch
Executive Vice President of the
Company............................ 1999 216,000 80,000 0
1998 216,000(2) 180,000 0
David E. Mewbourne
Executive Vice President of New
South.............................. 1999 190,000 90,000 0
1998 190,000 150,000 0
Roger D. Murphree
Senior Vice President of New South.. 1999 108,626 40,000 0
1998 98,916 35,000 0
Lizabeth R. Nichols
Vice President of Company........... 1999 105,833 40,000 0
1998 89,583 35,096 0
- --------------------------
(1) Does include amounts contributed by the Company to the Executive Officer's
401(k) plan, the maximum amount which will be contributed to one individual
is $4,900.
(2) Includes $39,600 reimbursed by Collateral under the Administrative Services
Agreement (as defined herein) for services rendered by Mr. Couch to
Collateral. See "Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of March 1, 2000 (unless
otherwise noted) with respect to (i) persons the Company believes to be the
beneficial owners of 5 percent or more of the Company's common stock, (ii) each
current director and each of the executive officers named in the Summary
Compensation Table contained herein, and (iii) all directors and executive
officers of the Company, as a group:
75
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership(1) Beneficially Owned(1)
- ------------------------------------ ----------------------- ---------------------
Mary R. Johnson-Butterworth
4731 Old Leeds Road
Birmingham, Alabama 35213 104,512(2) 8.32 percent
W.T. Ratliff, Jr.
2621 Altadena Road
Birmingham, Alabama 35243 233,293 18.58 percent
J.K.V. Ratliff
46 Greenway Road
Birmingham, Alabama 35213 180,507 14.38 percent
William T. Ratliff, III
3944 Forest Glen Drive
Birmingham, Alabama 35213 137,678(3) 10.97 percent
Amelie L. Ratliff
5 Fuller Street, #1
Brookline, Massachusetts 02446-2452 98,860 7.87 percent
Daniel T. Ratliff
31315 Pine Run Drive
Ono Island
Orange Beach, Alabama 36561 109,444(4) 8.72 percent
Carlton McCoy Ray
9949 Southwind Drive
Indianapolis, Indiana 46256 98,360 7.83 percent
Thomas E. Gester
3020 Briarcliff Road
Birmingham, Alabama 35223 22,390 1.78 percent
Robert M. Couch
8 Club View Drive
Birmingham, Alabama 35223 5,347.60 *
All current directors and
executive officers as a group
(12 individuals) 990,394.60 78.88 percent
- ---------------------------------------
* Less than one percent
(1) Unless otherwise indicated, the persons named above have the sole power to
vote or direct the voting and to dispose or direct the disposition of any
security.
(2) Includes 5,542 shares held by Mrs. Johnson-Butterworth as custodian for the
benefit of her minor children.
(3) Includes 24,406 shares held by Mr. Ratliff, III as custodian for the
benefit of his minor children, nieces and nephews.
(4) Includes 11,054 shares held by Mr. Daniel T. Ratliff as custodian for the
benefit of his minor children.
76
Item 13. Certain Relationships and Related Transactions
Certain affiliated corporations and limited partnerships in which Messrs.
Ratliff, Jr., J.K.V. Ratliff and Ratliff, III are majority owners have been
customers of New South in the ordinary course of business. These affiliated
corporations and limited partnerships include Collateral, Safemate Life
Insurance Company, Collateral Agency, Inc., Triad Guaranty, Inc., and Southland
National Insurance Corporation. Outside of normal customer relationships, no
directors or officers of the Company, no shareholders holding over five percent
of the Company's voting securities, and no corporations or limited partnerships
with which such persons or entities were associated, maintain or have maintained
since December 31, 1997, any significant business or personal relationship with
the Company or New South, except as described below. The terms of each of the
transactions presented herein are similar to those that could have been obtained
through negotiations with unaffiliated third parties.
Transfer. New South assumed 39 residential loan production offices,
associated employees, and related assets and liabilities from Collateral in July
1997 under the terms of two separate agreements. As a result of the Transfer,
New South added approximately 300 employees to its payroll, with associated
increases of expenses of $8.6 million. In connection with the Transfer, New
South agreed to make semi-annual payments to Collateral through June 30, 2000
based on a percentage of the aggregate principal balance of all residential
mortgage loans originated through the 39 loan production offices. The
percentage for the 12 month periods ending June 30, 1998, 1999, and 2000 are
0.35 percent, 0.20 percent and 0.10 percent respectively.
Subservicing Agreement. Collateral has entered into a Subservicing
Agreement with New South to service certain conforming residential mortgage
loans for Collateral. The Subservicing Agreement has an indefinite term but
may be terminated by Collateral with 60 days notice, provided Collateral pays
New South a penalty equal to 1 percent of the aggregate amount of servicing
outstanding on the date of termination. New South has the right to terminate
the Subservicing Agreement with 30 days notice without penalty. Under the terms
of the Subservicing Agreement, Collateral is required to reimburse New South for
any non recoverable losses.
Trust and Banking Services. New South's Trust Department acts as document
custodian under the terms of a Custodial Agreement dated December 30, 1990 and
Safekeeping Agreement dated April 12, 1994 for certain of Collateral's
commercial mortgage banking activities. Under the terms of the Custodial
Agreement, New South serves as custodian of documents evidencing and relating to
mortgages to be pooled under contracted agreements associated with GNMA, FNMA
and FHLMC mortgage backed securities programs. The fees payable under the
Custodial Agreement are calculated on a per file basis. The Custodial Agreement
may be terminated by either party with 30 days prior notice. Under the
Safekeeping Agreement, New South serves as custodian for safekeeping certain
commercial real estate loan files. The Safekeeping Agreement is for an
indefinite term, and may be terminated by either party with 30 days notice. The
fees to be paid to New South under the Safekeeping Agreement are calculated on a
per file basis.
Collateral maintains deposits with New South in the normal course of
business.
Lease Agreements. New South leases furnished office space from certain
affiliates. The Commercial Lease Agreements are each for terms of one year and
are automatically renewable. Either party may terminate same with 60 days
notice.
Administrative Services Agreement. New South provides data processing,
legal, management, corporate accounting, human resources, mail,
telecommunications and public relations services to certain affiliated companies
under the terms of an Agreement for Administrative Services effective January 1,
1991 (the "Administrative Services Agreement"). The Administrative Services
Agreement is for a term of one year, and is automatically renewable. The
Administrative Services Agreement may be terminated by any party with sixty days
notice. Administrative services are provided at actual costs, with fees being
due quarterly. The percentage allocation of New South's total operating costs
assessed each affiliate for these services are indicated below.
77
Executive officers of New South also serve as executive officers and/or
directors of one or more affiliate companies. Certain compensation allocations
are made as to certain individuals' time devoted to duties as an executive
officer of New South and its affiliates, and New South receives reimbursement
for compensation paid to such executive officers which is allocable to these
other affiliates. Of the amounts of compensation shown in the Summary
Compensation Table approximately 25 percent of Mr. Couch's total
compensation is attributable to services performed for or on behalf of
affiliates.
Investment Advisory Agreements. In 1998, Collateral received fees from Triad
Guaranty Insurance Corporation and Southland National Insurance Corporation
under the terms of Investment Advisory Agreements dated January 1, 1996. These
Agreements have an indefinite term and may be terminated by either party with 60
days notice. For investment advisory services rendered, Collateral receives a
fee based on the value of the assets actively managed. Collateral's advisory
services are provided by New South personnel in the Capital Markets department
who also serve as officers of Collateral. Approximately 20 percent of New
South's Capital Markets department time is expended on these investment advisory
services.
Real Estate Purchase Agreement. New South sold a mobile home park to
Collateral Agency, Inc., an affiliate, at market value.
Other. In September 1998, New South entered into a joint venture with a
developer to form DPH Mortgage, Ltd. ("DPH"). In accordance with the agreement,
DPH will originate residential mortgage loans which will subsequently be
purchased by New South at fair market value.
On September 30, 1999, Collateral purchased from New South a New South Home
Equity Trust, Home Equity Asset Backed Certificate, Series 1999-1, Class Z-10
("Certificate").
On September 30, 1999, New South in an agreement with Collateral, sold its
servicing rights on approximately 1,600 loans with total outstanding principal
balances of $171.8 million from its servicing portfolio. The related amount of
the servicing asset associated with the loans included in this sale totled $2.2
million. The resulting gain on the sale of New South's servicing rights totaled
$460,000.
The following table summarizes transactions between the Company and related
parties during the year ended December 31, 1999:
Summary of Related Transactions
Parties to Transaction Service or Product Amount
---------------------- ------------------ ------
Received by New South from:
- --------------------------
Collateral Loan servicing and sub-servicing $1,732,000
Collateral Sale of IO strip 4,846,000
Collateral Safekeeping and custodial 22,000
Collateral Management fee 269,000
Triad Guaranty
Insurance Corporation Management fee 105,000
Collateral Investment
Corporation Management fee 79,000
Paid by New South to:
- --------------------
Collateral Loan sub-servicing 354,000
Collateral Branch purchase fee 906,000
Collateral Rent 1,013,000
Collateral Management fee 146,000
DPH Purchase of mortgage loans 15,260,000
Indebtedness of Management
Certain directions and executive officers of New South and its affiliates are
currently indebted to New South for mortgage loans. These loans (i) were made
in the ordinary course of business, (ii) were made on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions with other persons, and (iii) did not involve more than
the normal risk of collectibility or present other unfavorable features.
78
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 23 of this Form
10-K are filed herewith or are incorporated herein by reference. No
management contract or compensatory plan or arrangement is required
to be filed as an exhibit to this form. The Registrant will furnish
a copy of any of the exhibits listed upon the payment of $5.00 per
exhibit to cover the cost of the Registrant in furnishing the
exhibit.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEW SOUTH BANCSHARES, INC.
/s/ Robert M. Couch
---------------------------------------
By: Robert M. Couch
Executive Vice President
79
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
CAPACITY IN WHICH
SIGNATURE SIGNED DATE
- ------------------------------ Chairman and President March 30, 2000
William T. Ratliff, III *
/s/ Cheryl R. Stone
- ------------------------------ Acting Controller March 30, 2000
Cheryl R. Stone
- ------------------------------ Director and Vice President March 30, 2000
William T. Ratliff, Jr. *
- ------------------------------ Director and Vice President March 30, 2000
J. K. V. Ratliff *
- ------------------------------ Director March 30, 2000
David W. Whitehurst*
* Lizabeth R. Nichols hereby signs this Report on March 30, 2000 on behalf of
each of the indicated persons for whom she is attorney-in-fact pursuant to
powers of attorney duly executed by such persons and filed with the
Securities and Exchange Commission.
/s/ Lizabeth R. Nichols
--------------------------------
Lizabeth R. Nichols
Attorney-In-Fact
80
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of New South Bancshares, Inc.
*3.2 By-Laws of New South Bancshares, Inc.
*4.1 Certificate of Trust of New South Capital Trust I
*4.2 Initial Trust Agreement of New South Capital Trust I
**4.3 Form of Junior Subordinated Indenture between the Company and Bankers Trust Company, as Debenture Trustee
**4.4 Form of Amended and Restated Trust Agreement of New South Capital Trust I
**4.5 Form of Preferred Security Certificate for New South Capital Trust I (included as Exhibit A-1 of Exhibit 4.4)
*4.6 Form of Guarantee Agreement for New South Capital Trust I
**5.1 Opinion of Balch & Bingham LLP as to legality of the Junior Subordinated Debentures and the Guarantees to be issued
by the Company
**5.2 Opinion of Richards, Layton & Finger, P.A. as to legality of the Preferred Securities to be issued by New South
Capital Trust I
***8.1 Opinion and consent of Balch S& Bingham LLP regarding certain federal income tax matters
**10.1 Asset Purchase Agreement dated July 1, 1997
**10.2 Lease Agreement dated July 1, 1997
**10.3 Sub Servicing Agreement dated December 31, 1986
**10.4 Loan/Mortgage -- Securities Master Participation Agreement dated March 30, 1988
**10.5 Commercial Lease Agreement dated April 20, 1993
**10.6 Commercial Lease Agreement dated January 1, 1998
**10.7 Administrative Services Agreement dated January 1, 1991
**10.8 Real Estate Purchase Agreement dated June 6, 1997
**10.9 Loan Participation Agreement dated November 25, 1997
***10.10 Stock Purchase Agreement dated December 31, 1997
**12.1 Computation of ratio of earnings to fixed charges
****16 Letter from Ernst & Young, LLP
21 List of Subsidiaries of New South Bancshares, Inc.
***23.2 Consent of Balch & Bingham (included in the opinion in Exhibit 8.1)
**23.3 Consent of Richards, Layton & Finger, P.A. (included in the opinion in Exhibit 5.2)
24.1 Power of Attorney
**25.1 Form T-1 Statement of Eligibility of Bankers Trust Company to act as trustee under (i) the Junior Subordinated
Indenture (ii) the Amended and Restated Trust Agreement of New South Capital Trust I and (iii) the Guarantee for
the benefit of the holders of Preferred Securities of New South Capital Trust I
27.1 Financial Data Schedule
- ------------------------------------------------------------------------------------------------------------------------------------
* Filed with Registration Statement on Form S-1, filed April 6, 1998, registration No. 333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1, filed May 13, 1998
*** Filed with Amendment No. 2 to the Registration Statement of Form S-1, filed My 26, 1998
**** Filed with Amendment to Form 8-K, filed November 19, 1998