SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
---------------------------------
For the Quarterly Period Ended March 31, 2000 Commission file number 333-49459
New South Bancshares, Inc.
(Exact name of registrant as specified in its charter)
----------------------------------------------------
Delaware
(State or other jurisdiction of 63-1132716
incorporation or organization) (I.R.S. Employer Identification No.)
1900 Crestwood Boulevard
Birmingham, Alabama 35210
(Address of Principal Executive Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999.................................... 2
Consolidated Income Statements - Three months ended
March 31, 2000 and March 31, 1999.................... 3
Consolidated Statements of Cash Flow - Three months
ended March 31, 2000 and March 31, 1999.............. 4
Notes to Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
Part II. Other Information
Item 1. Legal Proceedings................................ 19
Item 5. Other Information................................ 19
Item 6. Exhibits and Reports on Form 8-K................. 19
Signatures.......................................................... 20
Exhibit Index....................................................... 21
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
------------ -------------
(Unaudited) (Audited)
(In thousands)
ASSETS
Cash and due from banks $ 9,417 $ 6,943
Interest bearing deposits in other banks 18,128 11,732
Investment securities available for sale 154,790 132,482
Interest only strips 11,046 10,790
Loans held for sale 60,640 66,258
Loans, net of unearned income 782,040 748,277
Allowance for loan losses (11,309) (11,114)
---------- ----------
Net Loans 770,731 737,163
Premises and equipment, net 10,690 10,249
Mortgage servicing rights, net 16,978 16,101
Other assets 32,208 29,389
---------- ----------
Total Assets $1,084,628 $1,021,107
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 52,219 $ 47,678
Interest bearing 725,381 697,407
---------- ----------
Total deposits 777,600 745,085
Federal funds purchased and securities sold under
agreements to repurchase 60,058 50,923
Federal Home Loan Bank advances 148,416 128,417
Notes payable 6,115 6,115
Guaranteed preferred beneficial interests in the
Company's subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other 10,039 8,759
liabilities ---------- ----------
Total Liabilities 1,036,728 973,799
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5
million shares; issued and outstanding: 1,255,537.1
at March 31, 2000 and December 31, 1999) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 21,838 20,500
Accumulated other comprehensive loss (4,669) (3,923)
---------- ----------
Total Shareholders' Equity 47,900 47,308
---------- ----------
Total Liabilities and Shareholders' Equity $1,084,628 $1,021,107
========== ==========
See accompanying notes to consolidated financial statements
2
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the three months
ended March 31,
------------------------------
2000 1999
------------- -----------
(In thousands, except
per share data)
Interest Income:
Interest on securities available for sale $ 2,744 $ 2,012
Interest on loans 18,983 19,897
Interest on other short-term investments 110 170
------- -------
Total Interest Income 21,837 22,079
Interest Expense:
Interest on deposits 10,620 10,655
Interest on federal funds purchased and securities sold
under agreements to repurchase 897 682
Interest on Federal Home Loan Bank advances 2,020 2,213
Interest on notes payable 88 3
Interest expense on guaranteed preferred beneficial
interests in the Company's subordinated debentures 733 733
------- -------
Total Interest Expense 14,358 14,286
Net Interest Income 7,479 7,793
Provision for loan losses 468 1,218
------- -------
Net Interest Income After Provision for Loan Losses 7,011 6,575
Noninterest Income:
Loan administration income 4,346 2,295
Origination fees 1,713 2,524
Gain/(Loss) on sale of investment securities available
for sale 195 (770)
Gain on sale of loans and mortgage servicing rights 1,766 5,663
Other income 1,138 1,404
------- -------
Total Noninterest Income 9,158 11,116
Noninterest Expense:
Salaries and benefits 8,101 8,398
Net occupancy and equipment expense 1,635 1,058
Other expense 5,010 4,332
------- -------
Total Noninterest Expense 14,746 13,788
------- -------
Income Before Income Taxes 1,423 3,903
Provision for income taxes 85 1,610
------- -------
Net Income $ 1,338 $ 2,293
======= =======
Weighted average shares outstanding 1,256 1,254
Earnings per share $ 1.07 $ 1.83
See accompanying notes to consolidated financial statements
3
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------------
2000 1999
--------------- -------------
(In thousands)
Operating Activities:
Net income $ 1,338 $ 2,293
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of discounts and fees (115) (92)
Provision for loan losses 468 1,218
Depreciation and amortization 665 366
Amortization of mortgage servicing rights 919 494
(Gain) loss on sale of investment securities available for sale (195) 770
Origination of mortgage loans held for sale (103,522) (209,880)
Proceeds from the sale of mortgage loans held for sale and
servicing rights 79,565 130,781
Gain on sale of loans and mortgage servicing rights (1,766) (5,663)
(Increase) decrease in other assets (5,162) 538
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities 1,280 (1,032)
--------- ---------
Net Cash Used in Operating Activities (26,525) (80,207)
Investing Activities:
Net (increase) decrease in interest bearing deposits in other banks (6,396) 51,845
Proceeds from sales of investment securities available for sale 13,947 130,112
Proceeds from maturities and calls of investment securities
available for sale - 24,433
Purchases of investment securities available for sale (5,465) (9,363)
Net increase in loan portfolio (33,968) (77,814)
Purchases of premises and equipment (1,114) (2,577)
Proceeds from sale of premises and equipment 8 14
Net (investment in) proceeds from sale of real estate owned 338 (579)
--------- ---------
Net Cash Provided by (Used in) Investing Activities (32,650) 116,071
Financing Activities:
Net increase in noninterest bearing deposits 4,541 4,357
Net increase in interest bearing deposits 27,974 44,473
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 9,135 (65,800)
Net increase in note payable - 5,226
Net increase (decrease) of Federal Home Loan Bank Advances 19,999 (20,000)
Proceeds from the issuance of common stock - 251
Net Cash Provided by (Used in) Financing Activities 61,649 (31,493)
--------- ---------
Net increase in cash and cash equivalents 2,474 4,371
Cash and cash equivalents at beginning of year 6,943 9,973
--------- ---------
Cash and cash equivalents at end of year $ 9,417 $ 14,344
========= =========
See accompanying notes to consolidated financial statements
4
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2000
1. General
The consolidated financial statements conform to generally accepted
accounting principles. The accompanying interim financial statements are
unaudited; however, in the opinion of management, all adjustments necessary for
the fair presentation of the consolidated financial statements have been
included. All such adjustments are of a normal recurring nature. Certain
amounts in the prior year financial statements have been reclassified to conform
with the 2000 presentation. These reclassifications had no effect on net income
and were not material to the balance sheet. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto contained in the Annual Report on Form 10-K for the year ended December
31, 1999.
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. ("AFC") and New South Agency, Inc. and a 50 percent interest
in a joint venture, DPH/Collateral New South Funding Venture, Ltd. ("DPH"). All
significant intercompany transactions have been eliminated upon consolidation.
On February 17, 1999, New South acquired the assets associated with the national
mortgage origination activities of Avondale Federal Savings Bank ("AFSB"), (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.com, inc., in which the
purchased assets and the assumed Acquisition liabilities are held and which has
operated the national mortgage origination business.
In March 2000, the Company reached a decision to cease AFC production
operations and pursue alternatives to sell AFC, or portions thereof, or exercise
putback provisions of the Acquisition agreement to return AFC's assets to AFSB
or its successor, MB Financial, Inc. This process is continuing and should be
finalized during the second quarter of 2000.
2. Recent Accounting Pronouncements
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
5
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.
3. S Corporation Election
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. Due to the S corporation election,
the Company charged off $1,189,000 in deferred tax assets in the three months
ended March 31, 1999.
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 the three month periods ending March 31, 1999 or March 31,
2000, such dividends are generally not subject to tax since they result from S
Corporation income on which shareholders have previously been taxed.
4. 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, nonowner transactions consist entirely of changes in unrealized gains and
losses on securities available for sale. The following table represents
comprehensive income for the three months ended March 31, 2000 and 1999.
6
Three Months Ended
March 31,
--------------------------
2000 1999
------------ ----------
Net income............................... $1,338 $2,293
Other comprehensive loss, net of tax:
Unrealized loss on investment securities
available for sale....................... (746) (579)
------ ------
Comprehensive income ...................... $ 592 $1,714
====== ======
5. Segment Reporting
Reportable segments consist of Residential Mortgage Banking, Automobile
Lending, and Portfolio Management.
Residential Mortgage Banking 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. For 1999, Residential Mortgage Banking and
Automobile Lending sold permanent, marketable loans to Portfolio Management at
market-based prices. Portfolio Management then sold, securitized, or retained
the loans based on the Company's needs and market conditions. Certain short-
term and floating rate loans were retained by the originating unit, which was
credited with the interest income generated by those loans. The originating
unit paid a market-based funds-used charge to Portfolio Management. For 2000,
Residential Mortgage Banking and Automobile Lending retain the assets generated
by each unit, which is credited with the interest income generated by those
assets. The originating unit pays a market-based funds-used charge to Portfolio
Management. All other allocations remain unchanged from 1999. The segment
results include certain other overhead allocations. The results for the
reportable segments of the Company for the three months ended March 31, 1999 and
2000 are included in the following table.
7
For the three months ended March 31, 2000
---------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------ ----------- ---------- ------- ------------
Interest income $ 10,719 $ 2,543 $ 7,147 $ 1,428 $ 21,837
Interest expense 355 79 13,726 198 14,358
Intra-company funds (used)/provided (9,351) (2,091) 11,706 (264) -
Provision for loan losses 3 - 98 367 468
Noninterest income 7,565 657 (1,602) 2,538 9,158
Noninterest expense 8,036 1,283 828 4,599 14,746
-------- -------- -------- ------- ----------
Net income before income taxes 539 (253) 2,599 (1,462) 1,423
Provision for income taxes 33 (15) 155 (88) 85
-------- -------- -------- ------- ----------
Net income after income taxes $ 506 $ (238) $ 2,444 $(1,374) $ 1,338
======== ======== ======== ======= ==========
Depreciation and amortization, net $ 212 $ 43 $ 9 $ 401 $ 665
Total assets $559,341 $101,890 $370,814 $52,583 $1,084,628
Capital expenditures $ 171 $ 2 $ - $ 941 $ 1,114
For the three months ended March 31, 1999
---------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------ ----------- ---------- -------- ------------
Interest income $ 3,245 $ 28 $ 18,572 $ 234 $ 22,079
Interest expense 181 10 14,063 32 14,286
Intra-company funds (used)/provided (2,598) (6) 2,664 (60) -
Provision for loan losses - - 1,210 8 1,218
Noninterest income 11,391 313 (1,018) 430 11,116
Noninterest expense 8,940 1,449 825 2,574 13,788
Intra-company loan service fees 215 65 (280) - -
Effects of intra-company loan sales 1,717 387 (2,104) - -
-------- -------- -------- ------- ----------
Net income before income taxes 4,849 (672) 1,736 (2,010) 3,903
Provision for income taxes 1,800 (249) 644 (585) 1,610
-------- -------- -------- ------- ----------
Net income after income taxes $ 3,049 $ (423) $ 1,092 $(1,425) $ 2,293
======== ======== ======== ======= ==========
Depreciation and amortization, net $ 179 $ 63 $ 12 $ 112 $ 366
Total assets $253,395 $ 7,894 $820,262 $30,260 $1,111,811
Capital expenditures $ 528 $ 21 $ - $ 2,028 $ 2,577
8
Item 2. 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 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.
The purpose of this discussion is to provide an analysis of significant
changes in the Company's assets, liabilities, and capital at March 31, 2000 as
compared to December 31, 1999, in addition to including an analysis of income
for the three months ended March 31, 2000 ("First Quarter 2000") as compared to
the three months ended March 31, 1999 ("First Quarter 1999").
Net Income and Key Performance Ratios
New South reported net income of $1.3 million for First Quarter 2000, a
41.6 percent decrease from net income of $2.3 million for First Quarter 1999.
On a per share basis, earnings were $1.07 and $1.83, respectively, for the same
periods. During First Quarter 2000 the return on average assets was 0.52
percent and the return on average equity was 11.74 percent compared to 0.80
percent and 18.88 percent, respectively, for First Quarter 1999.
Net Interest Income
Net interest income for First Quarter 2000 was $7.5 million, a four percent
decrease from net interest income of $7.8 million for First Quarter 1999. This
decrease is primarily attributable to a decrease in the average earning asset
base due to loan securititizations in late 1999 and continuing into 2000. The
impact of the decrease in earning assets was partially offset with comparable
decreases in the level of interest-bearing liabilities and by the yield on
earning assets increasing faster than the cost of interest-bearing liabilities
by 15 basis points. Overall, this movement in volumes and rates resulted in an
increase in the net interest rate margin of 13 basis points over the same period
in 1999.
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.
9
Average Balances, Income, Expense, and Rates
Three Months Ended March 31,
---------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------ ---------- --------- ----------- ---------- --------
(In thousands, except percentages)
Assets
Loans, net of unearned income(1)........... $ 796,451 $18,983 9.59% $ 899,495 $ 19,897 8.97%
Federal funds sold......................... 7,727 110 5.73 16,357 170 4.21
Investment securities available for sale.... 101,729 1,750 6.92 75,691 1,234 6.61
Other investments.......................... 57,748 994 6.92 63,782 778 4.95
---------- ------- ---- ---------- -------- ----
Total earning assets..................... 963,655 21,837 9.11 1,055,325 22,079 8.48
Allowance for loan losses.................. (11,316) (9,306)
Other assets............................... 80,344 115,979
---------- ----------
Total Assets............................. $1,032,683 $1,161,998
========== ==========
Liabilities and Shareholders' Equity
Other interest-bearing deposits............ $ 3,787 64 6.80 $ 3,526 51 5.87
Savings deposits........................... 77,141 854 4.45 72,143 795 4.47
Time deposits.............................. 644,072 9,702 6.06 696,602 9,809 5.71
Other borrowings........................... 59,950 985 6.61 54,050 685 5.14
Federal Home Loan Bank advances............ 110,395 2,020 7.36 149,835 2,213 5.99
Guaranteed preferred beneficial interests
in the Company's subordinated debt........ 34,500 733 8.55 34,500 733 8.62
---------- ------- ---------- --------
Total interest-bearing liabilities....... 929,845 14,358 6.21 1,010,656 14,286 5.73
Noninterest-bearing deposits.............. 46,788 77,224
Accrued expenses and other liabilities..... 10,230 24,875
Shareholders' equity....................... 45,820 49,243
---------- ----------
Total Liabilities and Shareholders'
Equity.................................... $1,032,683 $1,161,998
========== ---- ========== ----
Net interest rate spread................... 2.90% 2.75%
==== ====
------- ---------
Net interest income........................ $ 7,479 $ 7,793
======= =========
Net interest rate margin................... 3.12% 2.99%
==== ====
(1) Loans classified as nonaccrual are included in the average volume classification. Loan fees for all periods
presented are included in the interest amounts for loans.
10
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 for three months ending March
31, 1999 and 2000. Changes not solely attributable to a change in rate or
volume are attributable to a mixture of each.
Analysis of Changes in Net Interest Income
Three months ended March 31,
2000 Compared to 1999
-------------------------------------------
Change Attributable to
-------------------------------------------
Volume Rate Mix
------------ ------- -------
Earning Assets
- --------------
Total loans, net of unearned income(1)............. $(2,298) $1,376 $ 8
Federal funds sold................................. (90) 61 (31)
Investment securities available for sale........... 428 58 30
Other investments.................................. (74) 313 (23)
------- ------ -----
Total interest income.............................. (2,034) 1,808 (16)
Interest Bearing Liabilities
- ----------------------------
Other interest bearing deposits.................... 4 8 1
Savings deposits................................... 56 (3) 6
Time deposits...................................... (746) 602 37
Other borrowings................................... 75 197 28
Federal Home Loan Bank advances.................... (587) 510 (116)
Guaranteed preferred beneficial interests
in the Company's subordinated debt............... - - -
------- ------ -----
Total interest expense............................. (1,198) 1,314 (44)
------- ------ -----
Net interest income................................ $ (836) $ 494 $ 28
======= ====== =====
(1) Loans, net of unearned income includes nonaccrual loans for all periods presented.
Noninterest Income and Noninterest Expenses
Year-to-date noninterest income totaled $9.1 million during First Quarter
2000 compared to $11.1 million for the same period in the prior year, a decrease
of $2.0 million, or 17.6 percent. Significant components of noninterest income
include loan administration income, origination fees, and gains or losses
resulting from the sales of investment securities, loans, and mortgage servicing
rights. Loan administration income totaled $4.3 million in First Quarter 2000
compared with $2.3 million during First Quarter 1999, an increase of $2.0
million, or 89.4 percent. This increase resulted from an increase in the loan
servicing portfolio related to loan securitizations and sales completed in 1999
and First Quarter 2000. Origination fees reflect reduced production volume
characteristic of relatively higher interest
11
rates in the general economy and amounted to $1.7 million and $2.5 million for
First Quarter 2000 and First Quarter 1999, respectively, a decrease of $811,000,
or 32.1 percent. Overall, production in the Bank's residential line of business
declined 36.2% from First Quarter 1999 compared to First Quarter 2000. Gain on
the sales of loans and mortgage servicing rights during First Quarter 2000
totaled $1.8 million compared with $5.7 million during First Quarter 1999, a
decrease of $3.9 million, or 68.8 percent. Virtually all of the gain recorded in
First Quarter 1999 related to increased loan sales and the related mortgage
servicing rights during the period.
Year-to-date noninterest expenses totaled $14.7 million during First
Quarter 2000, a $958,000, or 6.9 percent, increase compared to $13.8 million for
the same period in 1999. Salaries and benefits were $8.1 million for First
Quarter 2000, a $297,000 decrease compared to $8.4 million for the same period
in the prior year. The relatively small change in salaries and benefits was the
combined effect of a $635,000 increase attributable to AFC because it operated
for the full quarter in 2000 compared with its startup and operation for
approximately one-half of the first quarter of 1999 and lower compensation
resulting from a decline in the loan production volume during 2000. Occupancy
and equipment expense was $1.6 million in First Quarter 2000 and $1.1 million in
First Quarter 1999, an increase of $577,000, or 54.5 percent. AFC's operations
accounted for $261,000 of the increase with the remainder primarily resulting
from the relocation to and operation of a new operations center during early
2000. Other noninterest expenses totaled $5.0 million in First Quarter 2000 and
$4.3 million in First Quarter 1999, an increase of $678,000, or 15.7 percent,
resulting from a decrease of $499,000 attributable to lower production volumes
during First Quarter 2000 compared with the same period in 1999, which was
offset by an AFC increase of $1.2 million, $701,000 of which related to
foreclosure costs and provisions for anticipated loan settlements.
Interest Sensitivity and Market Risk
Interest Sensitivity
Through policies established by the Asset/Liability Management Committee
("ALCO") formed by New South's Board of Directors, 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 traditional gap analysis,
which compares the repricings, maturities, and prepayments, as applicable, of
New South's interest-earning assets, interest-bearing liabilities and off
balance sheet instruments, and interest rate sensitivity analysis to manage
interest rate risk.
The Company's interest rate sensitivity analysis evaluates interest rate
risk based on the impact on the net interest income and market value of
portfolio equity ("MVPE") of various interest rate scenarios. The MVPE analysis
is required quarterly by the Office of Thrift Supervision ("OTS") by virtue of
the Company's asset size. The Company also uses an earnings simulation model to
determine the effect 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 net interest rate margin and net income.
12
Brokered deposits are considered to be highly interest-sensitive and are
reflected in interest rate risk analyses reviewed by ALCO. Additionally, both
ALCO and the New South's Board of Directors are apprised of the level of
brokered deposits on an ongoing basis.
As of December 31, 1999, the Company's interest rate risk management model
indicated that projected net interest income would decrease by 18.82 percent
assuming an instantaneous and simultaneous increase in all interest rates of 200
basis points, or increase by 13.27 percent, assuming an instantaneous and
simultaneous decrease of 200 basis points. All measurements of interest rate
risk sensitivity are evaluated based upon guidelines established by New South's
Board of Directors.
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, caps, and forward contracts through
a review of creditworthiness of the counterparties to such contracts, Board
established credit limits for each counterparty, and monitoring by ALCO.
At March 31, 2000, New South had interest rate swap contracts with notional
amounts totaling $100 million. Of these, $65 million were variable-for-fixed
swap contracts designated as hedges against New South's loan portfolio. These
contracts effectively convert $65 million in variable rate funding to a fixed
rate, 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 of fixed-for-
variable swaps related to certain brokered certificates of deposit utilized in
the Company's overall funding. 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.
In addition, New South had $280 million in interest rate cap contracts
outstanding at March 31, 2000. As discussed above, the Company is exposed to
rising liability costs due to the relatively short-term nature of its liability
portfolio. The interest rate cap contracts serve as hedges against increases in
the costs of liabilities.
Asset Quality
The following table summarizes nonperforming assets as of March 31, 2000
and December 31, 1999.
13
Nonperforming Assets
(In thousands, except percentages)
March 31, December 31,
2000 1999
-----------------------------------
Nonaccrual loans........................................... $ 5,494 $ 5,813
Restructured loans......................................... 2,900 2,910
------- -------
Total nonperforming loans............................... 8,394 8,723
Foreclosed properties...................................... 2,950 3,288
------- -------
Total nonperforming assets.............................. $11,344 $12,011
======= =======
Allowance for loan losses to period-end loans............. 1.45% 1.49%
Allowance for loan losses to period-end
nonperforming loans..................................... 134.73% 127.41%
Allowance for loan losses to period-end
nonperforming assets.................................... 99.69% 92.53%
Nonperforming assets to period-end loans
and foreclosed properties .............................. 1.45% 1.60%
Nonperforming loans to period-end loans................... 1.07% 1.17%
Provision and Allowance for Loan Losses
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.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the inherent risk in the loan portfolio. The amount of
the provision is a function of the level of loans outstanding, the mix of the
outstanding loan portfolio, the levels of classified assets and nonperforming
loans, and current and anticipated economic conditions.
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
14
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 which 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 analyzes activity in the allowance for loan losses for
First Quarter 2000.
Analysis of the Allowance for Loan Losses
For the three months ended March 31, 2000
(In thousands, except percentages)
Average loans, net of unearned income................... $796,451
========
Balance of allowance for loan losses
at beginning of period................................ $ 11,114
Loans charged off:
Residential mortgage.................................. 102
Installment........................................... 480
Commercial real estate................................ -
--------
Total charge-offs................................... 582
--------
Recoveries of loans previously charged off:
Residential mortgage.................................. -
Installment .......................................... 309
Commercial real estate................................ -
--------
Total recoveries.................................... 309
--------
Net charge-offs......................................... 273
Addition to allowance charged to expense ............... 468
--------
Balance of allowance for loan losses
at end of period...................................... $ 11,309
========
Net charge-offs to average loans, net of
unearned income, annualized........................... 0.14%
15
At March 31, 2000, the allowance for loan losses was $11.3 million, a 1.8
percent increase compared to $11.1 million at December 31, 1999. As a
percentage of loans, net of unearned income, the allowance for loan losses was
1.45 percent and 1.49 percent at March 31 2000 and December 31, 1999,
respectively.
Net charge-offs totaled $273,000 during the three months ended March 31,
2000. As a percentage of average loans, net of unearned income, net charge-offs
were 0.14 percent during the first quarter of 2000.
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, increased $33.8 million, or 4.5 percent, from $748.3 million at December
31, 1999 to $782.1 million at March 31, 2000.
Investment Securities
Investment securities are a significant component of the Company's total
earning assets. Total investment securities were $154.8 million at March 31,
2000, a 16.8 percent increase compared to $132.5 million at December 31, 1999.
Funding Sources
Deposits are New South's largest source of funds used to support earning
assets. The Company has been able to attract deposits by offering nationally
competitive rates. New South's deposits increased $32.5 million, or 4.4 percent,
from $745.1 million at December 31, 1999 to $777.6 million at March 31, 2000.
The increase in deposits was used to support asset growth.
The Company also uses Federal Home Loan Bank ("FHLB") advances as an
alternative low cost funding source. FHLB advances are secured by a pledge of
most of the Company's residential mortgage portfolio or its investment
securities available for sale. These advances were $148.4 million at March 31,
2000, a $20.0 million, or 15.6 percent, increase compared to $128.4 million at
December 31, 1999. The increase in the period-end balances were used to support
asset growth.
Capital
At March 31, 2000 shareholders' equity of the Company totaled $47.9
million, or 4.4 percent of total assets, compared to $47.3 million, or 4.6
percent of total assets at December 31, 1999. The increase is attributable to
the net income of $1.3 million earned during First Quarter 2000, reduced by a
$746,000 increase in accumulated other comprehensive loss resulting from a
decline in the market value of investment securities available for sale during
the period.
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 zero to 100 percent. Under the risk-based
standard, capital is classified into two tiers. Tier 1 capital of the Bank
consists of common shareholder's equity, excluding the
16
unrealized gain or loss on securities available for sale, plus minority interest
in consolidated subsidiaries, and minus certain intangible assets. The Bank's
Tier 2 capital consists of the general reserve for loan losses subject to
certain limitations. Consolidated regulatory capital requirements 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
(In thousands, except percentages)
As of As of
March 31, December 31,
2000 1999
------------ -------------
Tier 1 capital................................... $ 89,836 $ 88,537
Tier 2 capital.................................... 1,846 1,716
-------- --------
Total qualifying capital.......................... $ 91,682 $ 90,253
======== ========
Risk-weighted assets (including off-balance
sheet exposure)................................. $792,638 $745,723
Tier 1 leverage ratio............................. 8.26% 8.64%
Tier 1 risk-based capital ratio................... 11.33% 11.87%
Total risk-based capital ratio.................... 11.57% 12.10%
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 the Bank in the well capitalized regulatory
category.
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.
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 on
issues related to year 2000 going forward. However, the Company continues to
have a solid plan in place to 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
17
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.
18
Part II
Other Information
Item 1. 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
operation.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
ITEM 6(A)--EXHIBITS
The exhibits listed in the Exhibit Index at page 21 of this Form 10-Q are
filed herewith or are incorporated by reference herein.
ITEM 6(B)--REPORTS on Form 8-K
No report on Form 8-K was filed by the Company during the period January 1,
2000 to March 31, 2000.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, New
South Bancshares, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
May 12, 2000 By: /s/ ROBERT M. COUCH
-----------------------
Robert M. Couch
Executive Vice President
May 12, 2000 By: /s/ CHERYL R. STONE
-------------------
Cheryl R. Stone
Vice President and Acting Controller
20
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference:
*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
**10 Material Contracts
*****24.1 Power of Attorney
27. Financial Data Schedule
- ------------
* Filed with Registration Statement on Form S-1, filed April 6, 1999,
registration No.333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1,
filed May 13, 1999
*** Filed with Amendment No. 2 to the Registration Statement on Form S-1,
filed May 26, 1999
***** Filed with Report on Form 10-K, filed March 30, 2000
21