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 June 30, 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 - June 30, 2000 and
December 31, 1999..................................................... 2
Consolidated Income Statements - Three months ended
June 30, 2000 and 1999................................................ 3
Consolidated Income Statements - Six months ended
June 30, 2000 and 1999................................................ 4
Consolidated Statements of Cash Flow - Six months ended
June 30, 2000 and 1999................................................ 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 10
Part II. Other Information
Item 1. Legal Proceedings................................................. 22
Item 5. Other Information................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 22
Signatures.......................................................................... 23
Exhibit Index....................................................................... 24
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
---------- ------------
(Unaudited) (Audited)
(In thousands)
ASSETS
Cash and due from banks $ 8,497 $ 6,943
Interest bearing deposits in other banks 5,456 11,732
Investment securities available for sale 166,708 132,482
Interest only strips 10,774 10,790
Loans held for sale 67,141 66,258
Loans, net of unearned income 835,710 748,277
Allowance for loan losses (12,250) (11,114)
----------- -----------
Net loans 823,460 737,163
Premises and equipment, net 9,252 10,249
Mortgage servicing rights, net 16,587 16,101
Other assets 33,522 29,389
----------- -----------
Total Assets $ 1,141,397 $ 1,021,107
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 55,680 $ 47,678
Interest bearing 736,163 697,407
----------- -----------
Total deposits 791,843 745,085
Federal funds purchased and securities sold under
agreements to repurchase 64,033 50,923
Federal Home Loan Bank advances 183,416 128,417
Notes payable 5,080 6,115
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 11,377 8,759
----------- -----------
Total Liabilities 1,090,249 973,799
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,255,537.1 at June 30, 2000 and
December 31, 1999) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 25,217 20,500
Accumulated other comprehensive loss (4,800) (3,923)
----------- -----------
Total Shareholders' Equity 51,148 47,308
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,141,397 $ 1,021,107
=========== ===========
See accompanying notes to consolidated financial statements
2
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the three months
ended June 30,
-------------------------
2000 1999
---------- ----------
(In thousands, except
per share data)
Interest Income:
Interest on securities available for sale $ 3,807 $ 1,629
Interest on loans 20,720 17,825
Interest on other short-term investments 147 414
-------- --------
Total Interest Income 24,674 19,868
Interest Expense:
Interest on deposits 11,045 9,527
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,240 205
Interest on Federal Home Loan Bank advances 2,815 2,156
Interest on notes payable 92 59
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 733 734
-------- --------
Total Interest Expense 15,925 12,681
Net Interest Income 8,749 7,187
Provision for loan losses 1,942 215
-------- --------
Net Interest Income After Provision for Loan Losses 6,807 6,972
Noninterest Income:
Loan administration income 4,548 2,136
Origination fees 2,216 2,786
Gain/(Loss) on sale of investment securities available for sale (124) 39
Gain on sale of loans and mortgage servicing rights 2,337 4,308
Other income 1,282 1,452
-------- --------
Total Noninterest Income 10,259 10,721
Noninterest Expense:
Salaries and benefits 7,781 8,728
Net occupancy and equipment expense 1,533 1,507
Other expense 4,144 5,572
-------- --------
Total Noninterest Expense 13,458 15,807
-------- --------
Income Before Income Taxes 3,608 1,886
Provision for income taxes 229 422
-------- --------
Net Income $ 3,379 $ 1,464
======== ========
Weighted average shares outstanding 1,256 1,256
Earnings per share $ 2.69 $ 1.16
See accompanying notes to consolidated financial statements
3
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the six months
ended June 30,
--------------------------
2000 1999
----------- -----------
(In thousands, except
per share data)
Interest Income:
Interest on securities available for sale $ 6,551 $ 3,641
Interest on loans 39,703 37,722
Interest on other short-term investments 257 584
-------- --------
Total Interest Income 46,511 41,947
Interest Expense:
Interest on deposits 21,665 20,182
Interest on federal funds purchased and securities sold
under agreements to repurchase 2,137 887
Interest on Federal Home Loan Bank advances 4,835 4,369
Interest on notes payable 180 62
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 1,466 1,467
-------- --------
Total Interest Expense 30,283 26,967
Net Interest Income 16,228 14,980
Provision for loan losses 2,410 1,433
-------- --------
Net Interest Income After Provision for Loan Losses 13,818 13,547
Noninterest Income:
Loan administration income 8,894 4,431
Origination fees 3,929 5,310
Gain/(Loss) on sale of investment securities available for sale 71 (731)
Gain on sale of loans and mortgage servicing rights 4,103 9,971
Other income 2,420 2,856
-------- --------
Total Noninterest Income 19,417 21,837
Noninterest Expense:
Salaries and benefits 15,882 17,126
Net occupancy and equipment expense 3,168 2,565
Other expense 9,154 9,904
-------- --------
Total Noninterest Expense 28,204 29,595
-------- --------
Income Before Income Taxes 5,031 5,789
Provision for income taxes 314 2,032
-------- --------
Net Income $ 4,717 $ 3,757
======== ========
Weighted average shares outstanding 1,256 1,256
Earnings per share $ 3.76 $ 2.99
See accompanying notes to consolidated financial statements
4
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30,
--------------------------
2000 1999
----------- -----------
(In thousands)
Operating Activities:
Net income $ 4,717 $ 3,757
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of discounts and fees (1,287) (344)
Provision for loan losses 2,410 1,433
Depreciation and amortization 1,356 989
Amortization of mortgage servicing rights 1,487 1,080
(Gain) loss on sale of investment securities available for sale (71) 731
Purchase of mortgage loans held for sale -- (54,703)
Origination of mortgage loans held for sale (255,801) (408,983)
Proceeds from the sale of mortgage loans held for sale and servicing rights 185,475 282,200
Gain on sale of loans and mortgage servicing rights (4,103) (9,971)
Forgiveness of indebtedness (1,035) --
Increase in other assets (5,209) (11,793)
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities 2,618 (10,290)
--------- ---------
Net Cash Used in Operating Activities (69,443) (205,894)
Investing Activities:
Net decrease in interest bearing deposits in other banks 6,276 56,278
Proceeds from sales of investment securities available for sale 51,971 196,142
Proceeds from maturities and calls of investment securities
available for sale 47,985
Purchases of investment securities available for sale (13,449) (15,689)
Net (increase) decrease in loan portfolio (88,415) 121,188
Purchases of premises and equipment (1,396) (3,313)
Proceeds from sale of premises and equipment 1,037 63
Net (investment in) proceeds from sale of real estate owned 106 (1,194)
--------- ---------
Net Cash Provided by (Used in) Investing Activities (43,870) 401,460
Financing Activities:
Net increase in noninterest bearing deposits 8,002 13,324
Net increase (decrease) in interest bearing deposits 38,756 (77,921)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 13,110 (53,800)
Net increase in note payable -- 1,911
Net increase (decrease) of Federal Home Loan Bank Advances 54,999 (80,001)
Proceeds from the issuance of common stock -- 251
--------- ---------
Net Cash Provided by (Used in) Financing Activities 114,867 (196,236)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,554 (670)
Cash and cash equivalents at beginning of period 6,943 9,973
--------- ---------
Cash and cash equivalents at end of period $ 8,497 $ 9,303
========= =========
See accompanying notes to consolidated financial statements
5
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30, 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; however, 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 three wholly owned
subsidiaries, New South Federal Savings Bank ("New South" or the "Bank"),
Collateral Agency of Texas, Inc., and New South Management Services, LLC
("NSMS"), formed during the second quarter of 2000. NSMS will perform certain
loan related functions for the various mortgage lending units of the Bank. New
South has two subsidiaries, Avondale Funding.com, inc. ("Avondale") and New
South Agency, Inc. New South also has a 50 percent interest in two joint
ventures, DPH/Collateral New South Funding Venture, Ltd. and Nationwide New
South Financial Services, LLC, formed during the second quarter of 2000. 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 were placed and which
has operated the national mortgage origination business of AFSB. During the
second quarter of 2000, the Bank sold its operations in Avondale and is
presently in the process of disposing of the remaining assets.
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
6
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.
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 six months
ended June 30, 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 six month periods ending June 30, 1999 or June 30,
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 tables represent
comprehensive income for the three and six month periods ended June 30, 2000 and
1999.
7
For the three months ended
June 30,
----------------------------------
2000 1999
---------------- ----------------
(In thousands)
Net income ......................................... $ 3,379 $ 1,464
Other comprehensive loss, net of tax:
Unrealized loss on investment securities
available for sale ............................ (131) (1,124)
---------------- ----------------
Comprehensive income ............................... $ 3,248 $ 340
================ ================
For the six months ended
June 30,
----------------------------------
2000 1999
---------------- ----------------
(In thousands)
Net income ......................................... $ 4,717 $ 3,757
Other comprehensive loss, net of tax:
Unrealized loss on investment securities
available for sale ............................ (877) (1,703)
---------------- ----------------
Comprehensive income ............................... $ 3,840 $ 2,054
================ ================
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-use charge to Portfolio
Management. For 2000, Residential Mortgage Banking and Automobile Lending retain
the assets generated by each unit, and is credited with the interest income
generated by those assets unless the asset is actually sold in the secondary
market. The results of such sales also are attributed to each unit for 2000. The
originating unit pays a market-based funds-use 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 six months ended June 30, 1999 and 2000 are included in the
following table.
8
For the six months ended June 30, 2000
--------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------ ---------- ---------- ---------- --------------
(In thousands)
Interest income $ 23,373 $ 5,451 $ 15,060 $ 2,627 $ 46,511
Interest expense -- -- 28,589 1,694 30,283
Intra-company funds (used) / provided (18,531) (3,599) 22,527 (397) --
Provision for loan losses 6 -- 554 1,850 2,410
Noninterest income 15,311 1,461 (1,581) 4,226 19,417
Noninterest expense 16,334 2,424 1,680 7,766 28,204
---------- ---------- ---------- ---------- ----------
Net income before income taxes 3,813 889 5,183 (4,854) 5,031
Provision for income taxes 236 55 321 (298) 314
---------- ---------- ---------- ---------- ----------
Net income after income taxes $ 3,577 $ 834 $ 4,862 $ (4,556) $ 4,717
========== ========== ========== ========== ==========
Depreciation and amortization $ 434 $ 86 $ 16 $ 820 $ 1,356
Total assets $ 574,874 $ 105,637 $ 397,659 $ 63,227 $1,141,397
Capital expenditures $ 290 $ 5 $ 13 $ 1,088 $ 1,396
For the six months ended June 30, 1999
--------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------ ---------- ---------- ---------- --------------
(In thousands)
Interest income $ 6,222 $ 103 $ 34,824 $ 798 $ 41,947
Interest expense 151 21 26,790 5 26,967
Intra-company funds (used) / provided (5,550) (44) 5,724 (130) --
Provision for loan losses -- -- 1,272 161 1,433
Noninterest income 21,342 587 (1,113) 1,021 21,837
Noninterest expense 17,857 2,879 2,099 6,760 29,595
Intra-company loan service fees 923 257 (1,180) -- --
Effects of intra-company loan sales 1,587 483 (2,070) -- --
--------- --------- --------- --------- ---------
Net income before income taxes 6,516 (1,514) 6,024 (5,237) 5,789
Provision for income taxes 2,139 (497) 1,978 (1,588) 2,032
--------- --------- --------- --------- ---------
Net income after income taxes $ 4,377 $ (1,017) $ 4,046 $ (3,649) $ 3,757
========= ========= ========= ========= =========
Depreciation and amortization $ 439 $ 21 $ 143 $ 386 $ 989
Total assets $ 187,344 $ 10,981 $ 714,740 $ 25,085 $ 938,150
Capital expenditures $ 768 $ 55 $ -- $ 2,490 $ 3,313
9
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 June 30, 2000 as
compared to December 31, 1999, in addition to including an analysis of income
and expense for the three months ended June 30, 2000 ("Second Quarter 2000") as
compared to the three months ended June 30, 1999 ("Second Quarter 1999') and for
the six months ended June 30, 2000 ("YTD 2000") as compared to the six months
ended June 30, 1999 ("YTD 1999").
Net Income and Key Performance Ratios
New South reported net income of $3.4 million for Second Quarter 2000, a
130.8 percent increase from net income of $1.5 million for Second Quarter 1999.
On a per share basis, earnings were $2.69 and $1.16, respectively, for the same
periods. During Second Quarter 2000 the return on average assets was 1.23
percent and the return on average equity was 25.8 percent compared to 0.56
percent and 12.34 percent, respectively, for Second Quarter 1999.
Net income totaled $4.7 million for YTD 2000, a 25.6 percent increase from
net income of $3.8 million for YTD 1999. On a per share basis, earnings were
$3.76 and $2.99, respectively, for the same periods. For YTD 2000, the return on
average assets was 0.89 percent and the return on average equity was 19.3
percent compared to 0.68 percent and 15.65 percent, respectively, for YTD 1999.
Net Interest Income
Net interest income for Second Quarter 2000 was $8.7 million, a 21.7
percent increase from net interest income of $7.2 million for Second Quarter
1999. Net interest income for YTD 2000 was $16.2 million, an 8.3 percent
increase from net interest income of $15.0 million for YTD 1999. These increases
are primarily attributable to the yield on interest earning assets growing at a
faster rate than the cost of interest bearing liabilities by 52 and 34 basis
points during the Second Quarter 2000 and YTD 2000, respectively, compared with
the same periods in 1999. Overall, the movement in volumes and rates resulted in
increases in the net interest rate margin of 45 and 29 basis points during the
Second Quarter 2000 and YTD 2000, respectively, compared with the same periods
in 1999.
The following tables show certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities for the periods noted. Such yields or costs are derived by dividing
income or expense by the average balance
10
of the corresponding assets or liabilities. Average balances have been derived
from the daily balances throughout the periods indicated.
Average Balances, Income, Expense, and Rates
For the three months ended June 30,
--------------------------------------------------------------------------
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) ................ $ 852,219 $ 20,720 9.78% $ 836,690 $ 17,825 8.55%
Federal funds sold .............................. 8,745 147 6.76 34,818 414 4.77
Investment securities available for sale......... 110,067 2,011 7.35 52,111 898 6.91
Other investments ............................... 65,548 1,796 11.02 58,274 731 5.03
----------- --------- ----------- ---------
Total earning assets .......................... 1,036,579 24,674 9.57 981,893 19,868 8.12
Allowance for loan losses ....................... (11,744) (9,909)
Other assets .................................... 81,522 84,321
----------- -----------
Total Assets .................................. $ 1,106,357 $ 1,056,305
=========== ===========
Liabilities and Shareholders' Equity
Other interest bearing deposits ................. $ 6,175 66 4.30 $ 3,810 51 5.37
Savings deposits ................................ 73,809 840 4.58 86,003 978 4.56
Time deposits ................................... 635,040 10,139 6.42 606,077 8,498 5.62
Other borrowings ................................ 69,254 1,332 7.74 14,048 264 7.54
Federal Home Loan Bank advances ................. 174,735 2,815 6.48 176,528 2,156 4.90
Guaranteed preferred beneficial interests
in the Company's subordinated debt ......... 34,500 733 8.55 34,500 734 8.53
----------- --------- ----------- --------
Total interest bearing liabilities ............ 993,513 15,925 6.45 920,966 12,681 5.52
Noninterest bearing deposits .................... 49,726 80,096
Accrued expenses and other liabilities .......... 10,450 7,671
Shareholders' equity ............................ 52,668 47,572
----------- -----------
Total Liabilities and Shareholders' Equity...... $ 1,106,357 $ 1,056,305
=========== ===========
----- -----
Net interest rate spread ....................... 3.12% 2.60%
===== =====
--------- --------
Net interest income ............................ $ 8,749 $ 7,187
========= ========
Net interest rate margin ....................... 3.39% 2.94%
===== =====
(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.
11
Average Balances, Income, Expense, and Rates
For the six months ended June 30,
-----------------------------------------------------------------------
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) ............... $ 824,335 39,703 9.69% $ 867,919 37,722 8.76%
Federal funds sold ............................. 8,236 257 6.28 25,638 584 4.59
Investment securities available for sale ....... 105,898 3,761 7.14 63,836 2,132 6.73
Other investments .............................. 61,648 2,790 9.10 61,013 1,509 4.99
----------- ----------- ----------- -----------
Total earning assets ......................... 1,000,117 46,511 9.35 1,018,406 41,947 8.31
Allowance for loan losses ...................... (11,530) (9,609)
Other assets ................................... 80,933 100,063
----------- -----------
Total Assets ................................. $1,069,520 $1,108,860
=========== ===========
Liabilities and Shareholders' Equity
Other interest bearing deposits ................ $ 4,981 130 5.25 $ 3,669 102 5.61
Savings deposits ............................... 75,475 1,694 4.51 79,111 1,773 4.52
Time deposits .................................. 639,556 19,841 6.24 651,089 18,307 5.67
Other borrowings ............................... 64,602 2,317 7.21 33,938 949 5.64
Federal Home Loan Bank advances ................ 142,565 4,835 6.82 163,255 4,369 5.40
Guaranteed preferred beneficial interests
in the Company's subordinated debt ........ 34,500 1,466 8.55 34,500 1,467 8.57
----------- ----------- ----------- -----------
Total interest bearing liabilities ........... 961,679 30,283 6.33 965,562 26,967 5.63
Noninterest bearing deposits ................... 48,257 78,668
Accrued expenses and other liabilities ......... 10,340 16,227
Shareholders' equity ........................... 49,244 48,403
------------ -----------
Total Liabilities and Shareholders' Equity...... $1,069,520 $1,108,860
============ ===========
-------- --------
Net interest rate spread ....................... 3.02% 2.68%
======== ========
----------- -----------
Net interest income ............................ $ 16,228 $ 14,980
=========== ===========
Net interest rate margin ....................... 3.26% 2.97%
======== ========
(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.
12
The following table indicates the effect of the varying levels of interest
earning assets and interest bearing liabilities and the applicable rates on
changes in net interest income for the second quarter and year-to-date periods
ending June 30, 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
For the three months ended June 30,
2000 Compared to 1999
----------------------------------------
Change Attributable to
----------------------------------------
Volume Rate Mix
------------ ------------ ------------
(In thousands)
Earning Assets
- --------------
Total loans, net of unearned income(1) ............... $ 330 $ 2,566 $ (1)
Federal funds sold ................................... (309) 172 (130)
Investment securities available for sale.............. 996 57 60
Other investments .................................... 91 868 106
------------ ------------ ------------
Total interest income ................................ 1,108 3,663 35
Interest Bearing Liabilities
- ----------------------------
Other interest bearing deposits ...................... 32 (10) (7)
Savings deposits ..................................... (138) 3 (3)
Time deposits ........................................ 405 1,202 34
Other borrowings ..................................... 1,035 7 26
Federal Home Loan Bank advances ...................... (22) 694 (13)
Guaranteed preferred beneficial interests
in the Company's subordinated debt .............. -- -- (1)
------------ ------------ ------------
Total interest expense ............................... 1,312 1,896 36
------------ ------------ ------------
Net interest income .................................. $ (204) $ 1,767 $ (1)
============ ============ ============
(1) Loans, net of unearned income includes nonaccrual loans for all periods
presented.
13
Analysis of Changes in Net Interest Income
For the six months ended June 30,
2000 Compared to 1999
----------------------------------------
Change Attributable to
----------------------------------------
Volume Rate Mix
------------ ------------ ------------
(In thousands)
Earning Assets
- --------------
Total loans, net of unearned income(1)............. $ (1,889) $ 3,954 $ (84)
Federal funds sold ................................ (395) 213 (145)
Investment securities available for sale .......... 1,401 129 99
Other investments ................................. 16 1,241 24
------------ ------------ ------------
Total interest income ............................. (867) 5,537 (106)
Interest Bearing Liabilities
- ----------------------------
Other interest bearing deposits ................... 36 (6) (2)
Savings deposits .................................. (81) (2) 4
Time deposits ..................................... (323) 1,831 26
Other borrowings .................................. 855 264 249
Federal Home Loan Bank advances ................... (552) 1,149 (131)
Guaranteed preferred beneficial interests
in the Company's subordinated debt ........... -- -- (1)
------------ ------------ ------------
Total interest expense ............................ (65) 3,236 145
------------ ------------ ------------
Net interest income ............................... $ (802) $ 2,301 $ (251)
============ ============ ============
(1) Loans, net of unearned income includes nonaccrual loans for all periods
presented.
Noninterest Income and Noninterest Expenses
Noninterest income totaled $10.3 million during Second Quarter 2000
compared to $10.7 million for the same period in 1999, a decrease of $462,000,
or 4.3 percent. Noninterest income totaled $19.4 million during YTD 2000
compared to $21.8 million for the same period in 1999, a decrease of $2.4
million, or 11.1 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 $4.5 million in the Second Quarter 2000, compared
with $2.1 million during Second Quarter 1999, an increase of $2.4 million, or
112.9 percent. The increase resulted from an increase in the loan servicing
portfolio related to loan securitizations and sales completed in 1999 and
continuing into 2000. These sales impacted the 2000 year to date results by an
increase of $4.5 million, or 100.7 percent when compared to 1999. Origination
fees reflect reduced production volume characteristic of relatively higher
interest rates in the general economy and amounted to $2.2 million and $3.9
million for Second Quarter 2000 and YTD 2000, a decrease of $570,000, or 20.5
percent, and $1.4 million, or 26.0 percent, over the same periods in 1999,
respectively. Overall, production in the Bank's residential mortgage lending
business declined 22.8 percent from Second Quarter 1999 compared to Second
Quarter 2000 and 38.1 percent from YTD 2000 compared with YTD 1999. Gain on the
sales of loans and mortgage servicing rights during Second Quarter 2000
14
totaled $2.3 million compared with $4.3 million during Second Quarter 1999, a
decrease of $2.0 million, or 45.8 percent. Gain on the sales of loans and
mortgage servicing rights during YTD 2000 totaled $4.1 million compared with
$10.0 million during YTD 1999, a decrease of $5.9 million, or 58.9 percent.
Virtually all of the gain recorded in Second Quarter 1999 and YTD 1999 related
to increased loan sales and the related mortgage servicing rights during both
periods.
Noninterest expenses totaled $13.5 million during Second Quarter 2000, a
$2.3 million, or 14.9 percent, decrease compared to $15.8 million for the same
period in 1999. Salaries and benefits were $7.8 million for Second Quarter 2000,
a $947,000 decrease compared to $8.7 million for the same period in the prior
year. The decrease is attributable to lower compensation resulting from a
decline in the residential loan production volume during 2000 and the sale of
the Avondale business. Occupancy and equipment expense was $1.5 million in
Second Quarter 2000, unchanged from Second Quarter 1999. Other noninterest
expenses totaled $4.1 million in Second Quarter 2000 and $5.6 million in Second
Quarter 1999, a decrease of $1.4 million, or 25.6 percent. These changes
resulted from lower residential loan production volumes during Second Quarter
2000 compared with the same period in 1999 along with decreases associated with
the Avondale sale.
Noninterest expenses totaled $28.2 million during YTD 2000, a $1.4
million, or 4.7 percent, decrease compared to $30.0 million for the same period
in 1999. Salaries and benefits were $15.9 million YTD 2000, a $1.2 million
decrease compared to $17.1 million for the same period in the 1999. YTD 2000
occupancy and equipment expense was $3.2 million compared to $2.6 million YTD
1999, an increase of $603,000 or 23.5 percent. The increase in occupancy and
equipment expense reflects the acquisition of a new operations center in late
1999. Other noninterest expenses totaled $9.2 million in YTD 2000 and $9.9
million YTD 1999, a decrease of $750,000, or 7.6 percent. These changes resulted
from lower residential loan production volumes during YTD 2000 compared with the
same period in 1999.
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.
15
Due to the Bank's historical method of acquiring deposits without multiple
deposit gathering branches, brokered deposits are a significant tool used to
secure funding for the Bank's asset base. Brokered deposits, however, are
considered to be highly interest-sensitive and are, therefore, reflected in
interest rate risk analyses reviewed by ALCO. Additionally, both ALCO and New
South's Board of Directors are apprised of the level of brokered deposits on an
ongoing basis to monitor the Bank's use of this deposit gathering tool.
As of December 31, 1999, the Company's interest rate risk management model
used by ALCO 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. While such instantaneous and simultaneous
changes are highly unlikely, ALCO nevertheless monitors closely the Bank's
relative position in order to both minimize risk and maximize the Bank's
results.
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 June 30, 2000, New South had interest rate swap contracts with notional
amounts totaling $160 million. Of these, $125 million were variable-for-fixed
swap contracts designated as hedges against New South's loan portfolio. These
contracts effectively convert $125 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 $305 million in interest rate cap contracts
outstanding at June 30, 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, thus decreasing the impact.
Asset Quality
The following table summarizes nonperforming assets as of June 30, 2000
and December 31, 1999.
16
Nonperforming Assets
June 30, December 31,
2000 1999
----------- ------------
(In thousands, except percentages)
Nonaccrual loans ................................... $ 7,192 $ 5,813
Restructured loans ................................. 2,883 2,910
---------- ----------
Total nonperforming loans ..................... 10,075 8,723
Foreclosed properties .............................. 3,182 3,288
---------- ----------
Total nonperforming assets .................... $ 13,257 $ 12,011
========== ==========
Allowance for loan losses to period-end loans ...... 1.47% 1.49%
Allowance for loan losses to period-end
nonperforming loans ........................... 121.59% 127.41%
Allowance for loan losses to period-end
nonperforming assets .......................... 92.40% 92.53%
Nonperforming assets to period-end loans
and foreclosed properties ..................... 1.58% 1.60%
Nonperforming loans to period-end loans ............ 1.21% 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 losses incurred 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
trends in delinquencies, charge-offs, and general economic conditions in the
service area with residential mortgage and automobile installment loan
portfolios each being evaluated
17
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
YTD 2000.
Analysis of the Allowance for Loan Losses
For the six months ended June 30, 2000
(In thousands, except percentages)
Average loans, net of unearned income ..... $824,335
========
Balance of allowance for loan losses
at beginning of period ............... $ 11,114
Loans charged off:
Residential mortgage ................. 777
Installment .......................... 1,393
Commercial real estate ............... --
--------
Total charge-offs ............... 2,170
--------
Recoveries of loans previously charged off:
Residential mortgage ................. 192
Installment .......................... 704
Commercial real estate ............... --
--------
Total recoveries ................ 896
--------
Net charge-offs ........................... 1,274
Addition to allowance charged to expense .. 2,410
--------
Balance of allowance for loan losses
at end of period ..................... $ 12,250
========
Net charge-offs to average loans, net of
unearned income, annualized .......... 0.31%
18
At June 30, 2000, the allowance for loan losses was $12.3 million, a 10.2
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 1.47 percent
and 1.49 percent at June 30 2000 and December 31, 1999, respectively.
Net charge-offs totaled $1.3 million during YTD 2000 and $500,000 during
YTD 1999. As a percentage of average loans, net of unearned income, net
charge-offs were 0.31 percent during YTD 2000 and were 0.12 percent during YTD
1999.
Earning Assets
Loans
Loans are the Company's largest category of earning assets and typically
provide higher yields than other categories. Total loans, net of unearned
income, increased $87.4 million, or 11.7 percent, from $748.3 million at
December 31, 1999 to $835.7 million at June 30, 2000 as the Bank continued to
hold certain loans in portfolio rather than securitize during the period. Loans
represented 77.0 percent of earning assets at June 30, 2000 and 77.2 percent at
December 31, 1999.
Investment Securities
Investment securities are a significant component of the Company's total
earning assets, representing 15.4 percent and 13.7 percent of earning assets at
June 30, 2000 and December 31, 1999, respectively. Total investment securities
were $166.7 million at June 30, 2000, a 25.8 percent increase from $132.5
million at December 31, 1999. Investment securities increased as the Bank's
management utilized excess available funds not used for loan production during
the period to manage the Bank's interest rate position.
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 $46.8 million, or 6.3 percent,
from $745.1 million at December 31, 1999 to $791.8 million at June 30, 2000. The
increase in deposits was used to support asset growth, primarily in the loan
categories.
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 $183.4 million at June 30,
2000, a $55.0 million, or 42.8 percent, increase from $128.4 million at December
31, 1999. The increase in the period-end balances were also used to support the
growth of loans.
Federal funds purchased and securities sold under agreements to repurchase
("Federal funds") also provides funding for the Bank's assets albeit at a much
smaller level than deposits or FHLB advances. Federal funds amounted to $64.0
million at June 30, 2000 versus $50.9 million at December 31, 1999, an increase
of $13.1 million, or 25.7 percent. These sources provide daily access to funds
quickly, thereby allowing the Bank to capitalize on asset growth opportunities.
19
Capital
At June 30, 2000 shareholders' equity of the Company totaled $51.1
million, or 4.5 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 $4.7 million earned during YTD 2000, reduced by a $877,000
increase in accumulated other comprehensive loss resulting from a decline in the
market value of investment securities available for sale during the period.
In addition to maintaining adequate liquidity for various financial
purposes, 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 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, however, do not apply to thrift
holding companies. The following table details the specific capital amounts and
ratios for the indicated periods for the Bank.
Analysis of Capital
As of As of
June 30, December 31,
2000 1999
---------- ------------
(In thousands, except percentages)
Tier 1 capital ............................ $ 93,542 $ 88,537
Tier 2 capital ............................ 2,711 1,716
-------- --------
Total qualifying capital .................. $ 96,253 $ 90,253
======== ========
Risk-weighted assets (including off-balance
sheet exposure) ...................... $833,013 $745,723
Tier 1 leverage ratio ..................... 8.17% 8.64%
Tier 1 risk-based capital ratio ........... 10.31% 10.86%
Total risk-based capital ratio ............ 11.55% 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.
20
The Company estimated its total internal costs for the year 2000 project
to be between $750,000 and $2.0 million, of which $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 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.
21
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 April
1, 2000 to June 30, 2000.
22
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.
August 8, 2000 By: /s/ ROBERT M. COUCH
-------------------
Robert M. Couch
Executive Vice President
August 8, 2000 By: /s/ CHERYL R. STONE
-------------------
Cheryl R. Stone
Vice President and Acting Controller
23
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, 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 on Form S-1,
filed May 26, 1998
***** Filed with Report on Form 10-K, filed March 30, 2000
24