SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 333-49459
NEW SOUTH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 63-1132716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Crestwood Boulevard
Birmingham, Alabama 35210
(Address of Principal Executive Offices) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------------- ------------------------------
Cumulative Trust Preferred Securities American Stock Exchange
(and the Guarantee with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 1,
2001: 1,255,537.1
DOCUMENTS INCORPORATED BY REFERENCE
None, except Exhibits
1
Item 1. Business
New South Bancshares, Inc. (the "Company") is a closely held unitary thrift
holding company headquartered in Birmingham, Alabama. Through its financial
institution subsidiary, New South Federal Savings Bank (the "Bank" or "New
South"), the Company operates two full-service retail branch offices in
Birmingham, Alabama, and 39 loan production offices located in 12 states
throughout the southeastern and eastern United States. New South is the largest
thrift and the sixth largest depository institution, based on asset size,
headquartered in the State of Alabama.
The Company's operations principally involve residential mortgage lending,
automobile installment lending, residential construction and land lending,
manufactured housing lending and deposit gathering activities. The Company's
residential mortgage lending efforts involve the origination and purchase of
residential mortgage loans through its loan origination offices and wholesale
sources, the sale of such loans, usually on a pooled or securitized basis, in
the secondary market, and the servicing of residential mortgage loans for
investors and the Company's own loan portfolio. The automobile installment
lending program currently involves indirect lending through 565 automobile
dealers in 6 southern states. The Company's residential construction and land
lending efforts involve making loans to builders for the construction of single
family properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. The manufactured housing lending
program primarily includes the indirect origination of mortgage loans, including
the land and the home, and nonmortgage loans for the home only, in addition to
construction loans that are in place during the preparation phase of the land.
The Company actively funds and purchases commercial real estate loans originated
by Collateral Mortgage, Ltd. ("Collateral"), an affiliate, which may be sold to
investors or held in New South's portfolio.
The Company funds its lending activities primarily with customer deposits
gathered through the offering of a broad range of banking services including
certificates of deposit, individual retirement and other time and demand deposit
accounts, and money market accounts. The Company takes a wholesale approach to
generating deposits, paying high interest rates while keeping deposit gathering
overhead costs low. The Company maintains two retail branch offices, both
located in Birmingham, Alabama, but attracts the majority of its deposits
through telemarketing activities and third parties, primarily brokers.
The Company was established in 1994 for the purpose of acquiring and
holding 100 percent of the capital stock of New South. The Company and New
South are members of a family of financial services companies that are owned
primarily by W. T. Ratliff, Jr. and members of his family. Since W. T. Ratliff
founded Collateral Investment Company in 1933, these companies have been engaged
in virtually all aspects of real estate lending, investment, brokerage and
management, and various other financial services business.
Prior to the formation of the Company, New South was a wholly owned
subsidiary of Collateral. Although Collateral's present emphasis rests on
commercial lending, prior to 1997, Collateral also conducted residential
mortgage lending operations consisting primarily of direct originations of
residential mortgage loans which were generally underwritten and processed in
accordance with the guidelines issued by Fannie Mae ("FNMA"), Freddie Mac
("FLHMC"), Federal Housing Administration ("FHA") or Veterans Administration
("VA"), i.e., conforming residential mortgage loans, through 39 retail mortgage
origination offices located in 13 southern states. Effective July 1, 1997,
Collateral transferred all 39 of its loan origination offices to New South (the
"Transfer"). Prior to the Transfer, New South's residential mortgage lending
operations consisted primarily of indirect originations of residential mortgage
loans which were generally not underwritten and processed in accordance with
government or federal agency guidelines, known as nonconforming residential
mortgage loans, through correspondents and mortgage brokers, although it
originated some nonconforming residential mortgage loans on a direct basis
through seven origination offices.
As a result of the Transfer, New South now originates conforming and
nonconforming residential mortgage loans on a direct and indirect basis through
its origination offices and a network of loan correspondents and mortgage
brokers. New South also originates conforming and nonconforming residential
mortgage loans on an indirect basis through correspondents and mortgage brokers.
For financial details concerning the Company's business, see the
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Residential Mortgage Lending
Conforming Loans
New South's primary line of business is the origination and subsequent sale
of residential mortgage loans which New South classifies as conforming
residential mortgage loans. These loans are typically single family loans which
generally have been underwritten and processed in accordance with standard
government or federal agency guidelines including FNMA, FHLMC, FHA and VA. The
conforming residential mortgage loans are fixed-rate and adjustable-rate first
mortgage loans with 15 year or 30 year terms generally secured by owner-occupied
residences. New South's adjustable-rate mortgages ("ARMs") generally have
interest rates that adjust semi-annually or annually.
Presently, New South originates conforming residential mortgage loans
primarily on a direct basis through 39 loan production offices located in the
States of Alabama (13), Tennessee (4), Georgia (4), North Carolina (2), Florida
(4), Texas (1), Nevada (3), Kentucky (1), Louisiana (1), Virginia (3),
Mississippi (1), and Arizona (1). These offices originate primarily single-
family residential mortgage loans from a number of sources such as referrals
from realtors, walk-in customers, borrowers, and advertising. New South
augments its direct originations of conforming residential mortgage loans with
indirect originations through over 250 wholesale customers, including
independent mortgage brokers and correspondents, community banks, and other
financial institutions in 14 states. These mortgage brokers and correspondents
originate such loans using New South's underwriting criteria and standards and
close such loans using funds advanced by New South simultaneously with, or
following, closing. In some cases, loans are purchased at some point following
closing in a secondary market transaction.
Nonconforming Loans
New South originates nonconforming residential mortgage loans primarily on
an indirect basis through mortgage brokers and correspondents, although it also
originates nonconforming loans on a direct basis. All nonconforming residential
mortgage loans originated, either on a direct or indirect basis, must conform to
New South's underwriting guidelines for nonconforming residential mortgage loan
products which have been internally developed by New South's management by
analyzing a variety of factors, including the proposed equity in the collateral,
the credit history and debt-to-income ratio of the borrower, the property type,
and the characteristics of the underlying first mortgage, if any. Applying
these guidelines, New South will internally classify a proposed nonconforming
residential mortgage loan product as either Grade AA, A, B or C according to
credit risk and establish the terms of the loan in accordance with such internal
classifications.
New South augments its indirect originations of nonconforming residential
mortgage loans with direct originations through one loan production office in
the State of Alabama. Like conforming residential mortgage loans, originations
through these offices are derived from a number of sources such as referrals
from realtors, brokers, walk-in customers, borrowers, and advertising.
Automobile Installment Lending
New South offers automobile installment loans secured by automobiles,
light-duty trucks and vans. New South began offering an automobile installment
lending program in 1989 to automobile dealers in the southern United States.
New South has an extensive automobile dealer network consisting of 565 dealers
in the States of Alabama, Florida, Georgia, Mississippi, Tennessee and Texas.
New South's automobile dealer network consists primarily of new car franchise
dealers, with independent car dealers making up less than 35 percent of the
dealer network.
Prime Loans
The majority of New South's automobile installment loans are considered to
be prime loans by industry standards. Generally, the industry classifies prime
and nonprime customers based on the creditworthiness of the consumer. New
South's current guidelines for its prime lending products require an applicant
to have, among other
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factors, a credit bureau score of at least 580. On used cars, the terms of the
contract are also based, in part, on the actual mileage of the vehicle. The
Company also classifies as prime an immaterial amount of other non automobile
installment loans secured by deposits.
New South purchases prime products and a limited number of nonprime
products, typically secured, fixed-rate retail installment contracts, from
dealers for 100 percent of the principal amount of the loan on a non recourse
basis.
Nonprime Loans
New South offers a nonprime product to certain qualifying consumers who
report credit bureau scores below the prime threshold due to delinquencies on
certain accounts. Terms of nonprime automobile installment loans are
established by New South underwriters based on a variety of factors in
accordance with New South's underwriting guidelines which have been specifically
designed to evaluate nonprime customers. Importantly, the automobile payment
cannot exceed 20 percent of a nonprime borrower's gross income.
Other Lending
Residential Construction and Land Loans
New South originates residential real estate construction loans as well as
providing construction and land development loans in residential subdivisions to
professional home builders and developers. Residential construction and land
loans are primarily originated on a direct basis through New South's conforming
residential mortgage loan origination offices. New South is active in making
loans to builders for the construction of single family properties and, on a
more limited basis, loans for the acquisition and development of improved
residential lots. These loans are made on a commitment term that generally is a
for a period of one year. New South reviews each individual builder's
experience and reputation, general financial condition, and inventory levels in
order to limit risks. All construction loans are secured by a first lien on the
property and construction in progress. Additionally, the construction status is
reviewed by on-site inspections. The builders' ongoing financial position is
monitored on a periodic basis.
Commercial Real Estate Loans
Commercial real estate loans are originated primarily by Collateral on an
indirect basis through mortgage bankers and brokers nationwide. New South funds
and closes in its name certain commercial real estate loans originated by
Collateral. These loans are secured by various types of commercial real estate,
including multifamily properties, retail shopping centers, mobile home parks,
hotels, manufactured home communities and a wide variety of other commercial
properties. Many of these loans may be sold in the secondary market by New
South to investors such as commercial banks, life insurance companies, pension
funds, conduit programs, and government sponsored entities. Many of these loans
have been committed for sale to a third party prior to closing in New South's
name, and providing this interim funding has been a relatively profitable and
low risk activity for New South in recent years. In addition, New South may
hold these loans in its own portfolio.
Commercial Loans
New South makes available to certain independent automobile dealers
automobile floor plan credit lines, which are revolving credit lines used for
financing the used automobile inventory of independent automobile dealerships.
New South develops prospects for commercial loans primarily through its existing
customer base of independent automobile dealers who have sold retail installment
contracts to New South. New South will make advances on a dealer's credit line
when the dealer purchases an automobile and provides New South with proper
evidence of title to the property.
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Manufactured Housing
During August 1998, New South began its manufactured housing division to
provide retail financing for home only or land and home on both new and used
products. Manufactured housing loans are originated on both a direct and
indirect basis through dealers and mortgage brokers in the Southeast.
Funding Activities
The Company funds its lending activities primarily through deposits. In
addition, a significant source of funding for New South is the sale of
residential mortgage loans and automobile installment loans either in the
secondary market or as securitizations and advances from the Federal Home Loan
Bank ("FHLB"). To a lesser extent, New South receives funds from traditional
commercial borrowings as well as the retention of earning after dividend
distributions to the Company.
Deposits
New South conducts deposit gathering activities in a traditional fashion
through its two full service branches located in Birmingham, Alabama. Deposits
are not accepted at any other location of New South. In addition, New South
operates an active telephone and internet banking center that handles incoming
inquiries and conducts an outgoing telemarketing program for deposit products.
New South does not rely heavily on a local retail deposit base. It has
primarily utilized certificates of deposit to compete for consumer deposits.
New South attracts deposits from throughout the country and several foreign
countries by paying competitive rates.
New South also distributes its deposit products through brokers to
individuals and institutional purchasers through a brokered certificate of
deposit program which offers certificates of deposits in increments of $1.0
million to $20.0 million through selected brokers who meet New South's
guidelines.
Sales/Securitizations
New South sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans and through sales
to private investors. With respect to conforming residential mortgage loans, if
a loan meets government or federal agency guidelines and has been originated
through its conforming residential mortgage origination offices, it is typically
sold immediately, either through the FNMA, FHLMC or Ginnie Mae ("GNMA") programs
or to private investors. With respect to nonconforming residential mortgage
loans, New South generally holds these loans in its portfolio unless it
determines that it is economically necessary or desirable to sell the loan in
light of the existing prices, capital constraints, liquidity needs, and
prepayment risks. Generally, New South retains a portion of the servicing
rights to the loans that it sells.
Loan Servicing
Residential Mortgage Loan Servicing
New South services residential mortgage loans secured by single family
residences for its portfolio and for others including FNMA, FHLMC, GNMA, and
private mortgage investors. Mortgage loan servicing includes collecting
payments of principal and interest from borrowers, remitting aggregate loan
payments to investors, accounting for principal and interest payments, holding
escrow funds for payment of mortgage related expenses such as taxes and
insurance, making advances to cover delinquent payments, inspecting the
mortgaged premises as required, contacting delinquent mortgagors, supervising
foreclosures, making property dispositions in the event of unremedied defaults,
and other miscellaneous duties related to loan administration.
Automobile Installment Loan Servicing
From time to time, New South has sold a portion of its automobile
installment loan originations while retaining servicing for a servicing fee and,
in some instances, a 10 percent participation in the loans themselves. As
servicer, New
5
South collects and posts all payments, responds to inquiries of customers,
investigates delinquencies, sends payment coupons to customers, oversees the
collateral in cases of default and accounts for collections. New South's
collections department takes all actions necessary to maintain the security
interest granted in the financed automobiles, including investigating
delinquencies, communicating with the consumer to ensure timely payments are
made and when required, contracts with third parties to recover and sell the
financed automobile.
Supervision and Regulation
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting New South and the Company. The following
summary of applicable statues and regulations does not purport to be complete
and is qualified in its entirety by reference to such statues and regulations.
The Company is a unitary thrift holding company under the Home Owners' Loan
Act, as amended ("HOLA") and, as such, is subject to Office of Thrift
Supervision ("OTS") regulation, supervision and examination. In addition, the
OTS has enforcement authority over the Company and may restrict or prohibit
activities that are determined to represent a serious risk to the safety,
soundness or stability of New South or any other subsidiary savings institution.
Under the HOLA, a thrift holding company may not (i) acquire, with certain
exceptions, more than 5 percent of a non subsidiary savings institution or a
nonsubsidiary savings and loan holding company; or (ii) acquire or retain
control of a depository institution that is not insured by the Federal Deposit
Insurance Corporation ("FDIC").
As a thrift holding company, the Company generally is not subject to any
restriction as to the types of business activities in which it may engage,
provided that New South continues to satisfy the Qualified Thrift Lender Test.
Upon any nonsupervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its noninsured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to the other activities authorized by OTS regulation.
New South is chartered as a federal savings bank which is regulated by the
OTS. As a federal savings bank, New South is subject to regulation, supervision
and regular examination by the OTS. Federal banking laws and regulations
control, among other things, New South's required reserves, investments, loans,
mergers and consolidations, payment of dividends and other aspects of its
operations. The deposits of New South are insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC to the maximum extent provided
by law generally $100,000 for each depositor. In addition, the FDIC has certain
regulatory and examination authority over OTS regulated savings institutions,
such as New South, and may recommend enforcement actions against New South to
the OTS, even though the FDIC is not the primary regulator of New South. The
supervision and regulation of New South is intended primarily for the protection
of the deposit insurance fund and New South's depositors rather than for holders
of the Company's stock or for the Company as the holder of the stock of New
South.
Business Activities. New South derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, New South may invest in residential mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of commercial paper and debt securities, and certain other assets. New
South may also establish service corporations that may engage in activities not
otherwise permissible for New South, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations.
OTS Capital Requirements. Under federal law and OTS regulations, savings
associations are required to comply with each of three separate capital adequacy
standards: a tangible capital requirements; a tier 1 capital ratio; and a risk-
based capital requirement. The OTS is authorized to establish individual
capital requirements for a savings association consistent with these capital
standards. The OTS was required by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") to promulgate additional capital requirements
that in certain respects have superseded the capital requirements discussed
immediately below.
6
Tangible Capital. The OTS capital regulations require tangible capital of
at least 1.5 percent of adjusted total assets, as defined by regulation.
Tangible capital generally includes common shareholders' equity and retained
earnings, noncumulative perpetual preferred stock and related surplus and
minority interest in the equity accounts of fully consolidated subsidiaries. In
addition, all intangible assets, other than a limited amount of properly valued
mortgage servicing rights ("MSRs"), must be deducted from tangible capital.
Tier 1 Capital Ratio. The tier 1 capital ratio adopted by the OTS requires
savings associations to maintain core capital in an amount equal to at least
three percent of adjusted total assets. Core capital includes common
shareholders' equity, including retained earnings, noncumulative perpetual
preferred stock and any related surplus, and minority interests in the equity
accounts of fully consolidated subsidiaries, certain goodwill and MSRs less
certain intangible assets, and investments in nonincludable subsidiaries. In
general, intangible assets must be deduced in computing core capital because
they are excluded from assets under the OTS's capital rules. There are
exceptions to this rule of deduction, however. MSRs and purchased credit card
relationships ("PCCRs") are limited in the aggregate to the lesser of 100% of
the amount of core capital computed before the deduction of any disallowed
servicing assets and disallowed PCCRs, or the amount of servicing assets and
PCCRs, with PCCRs not exceeding 25 percent of core capital, provided that such
rights must be valued at the lower of 90 percent of fair market value or 100
percent of the remaining unamortized book value of the asset.
Risk-based Capital. The risk-based capital standard for savings
institutions requires the maintenance of total capital, which is defined as core
capital and supplementary capital less certain holdings, to risk-weighted assets
of at least eight percent. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet instruments, are multiplied by a
risk weight of 0 percent to 100 percent, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the three percent leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the general allowance for loan and lease losses. Allowance
for loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25 percent of risk-adjusted assets. Overall, the amount of
supplemental capital counted toward total capital cannot exceed 100 percent of
core capital.
Federal Deposit Insurance. New South is required to pay assessments based
on a percentage of its insured deposits to the FDIC for insurance of its
deposits by the SAIF.
The FDICIA was enacted to recapitalize the Bank Insurance Fund ("BIF") and
impose certain supervisory and regulatory reforms on insured depository
institutions. Pursuant to the FDICIA, the FDIC established a risk-based
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The assessment rate depends on the capital
category and supervisory category to which an institution is assigned.
In late 1995, the FDIC amended the risk-based assessment schedule for
depository institutions with deposits insured by the BIF, resulting in a
significant reduction in FDIC assessments for BIF-insured but not SAIF-insured
institutions. In response to this assessment disparity, the Deposit Insurance
Funds Act of 1996 (the "1996 Act"), enacted on September 30, 1996, amended the
Federal Deposit Insurance Act (the "FDI Act") in several ways to recapitalize
the SAIF and reduce the disparity between the assessment rates for the BIF and
the SAIF. The 1996 Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF to the required reserve ration of 1.25 percent. In
addition, SAIF-insured institutions will be required, until payments on certain
bonds issued by the Financing Corporation ("FICO"), an agency of the federal
government established to recapitalize the predecessor to the SAIF. During this
period, BIF member banks will be assessed for payment of the FICO obligations at
the annual rate of 1.29 basis points. After December 31, 1999, BIF and SAIF
members will be assessed at the same rate for FICO obligations.
The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25 percent, except for assessments on
institutions that are not classified as well-capitalized or that have been found
to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. New South is classified as well-capitalized and has not
been found by the OTS to have such supervisory weaknesses. Accordingly,
assuming that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, New South, as long as it maintains
its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those it paid in recent years.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
QTL test, as modified by FDICIA, a savings association is required
7
to maintain at least 65 percent of its portfolio assets, defined as total assets
less (i) specified liquid assets up to 20 percent of total assets, (ii)
intangible assets, including goodwill, and (iii) the value of property used to
conduct business, in certain "qualified thrift investments," such as home
residential mortgage loans and other residential real estate-related assets, on
a monthly average basis in 9 out of every 12 months.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An initial
failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions and a restriction on obtaining
additional advances from its FHLB. If a savings institution does not requalify
under the QTL test within the three-year period after it fails the QTL test, it
would be required to terminate any activity not permissible for a national bank
and repay as promptly as possible any outstanding advances from the FHLB. In
addition, the holding company of such an institution, such as the Company, would
similarly be required to register as a bank holding company with the Federal
Reserve Board. See "Supervision and Regulation--Supervision and Regulation of
the Company." At December 31, 2000, New South qualified as a QTL.
Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10 percent limit on all other loans to households is eliminated by the new law,
and such loans may now be counted toward the QTL test within the 20 percent of
portfolio assets limit. Second, the statute amends the QTL test to provide that
a savings institution may be considered a QTL either (i) by satisfying the
HOLA's QTL requirements or (ii) by qualifying as a "domestic building and loan
association" as defined under the Code.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.
Limitations on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A savings association must provide the OTS with a 30
day advance notice of all proposed capital distributions whether or not
supervisory approval is required under OTS regulations.
Real Estate Lending Standards. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. Each institution must monitor conditions in the real
estate market in its lending area to ensure its real estate lending policies
continue to be appropriate for current market conditions. An institution's real
estate lending policy must reflect consideration of Interagency Guidelines for
Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal bank regulators. The Interagency Guidelines, among other
things, call upon depository institutions to establish internal loan-to-value
limits specified in the Interagency Guidelines for the various types of real
estate loans. The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits.
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Federal Consumer Credit and Non-Discrimination Regulation. New South's
mortgage lending activities are subject to the provisions of various federal and
state statutes, including among others, the Truth in Lending Act, the Equal
Credit Opportunity Act, the RESPA, the Fair Housing Act and the regulations
promulgated thereunder. These statues and regulations, among other things,
prohibit discrimination on the basis of race, gender or other designated
characteristics, prohibit unfair and deceptive trade practices, require the
disclosure of certain basic information to mortgage borrowers concerning credit
terms and settlement costs, and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. Each of
the foregoing statutes provides for various administrative, civil and, in
limited circumstances, criminal enforcement procedures, and violations thereof
may also lead to class actions seeking actual and/or punitive damages.
New South attempts in good faith to comply with the provisions of these
statutes and their implementing regulations; however, the provisions are
complex and even inadvertent noncompliance could result in liability to New
South. During the past several years, numerous individual claims, purported
class actions and federal enforcement proceedings have been commenced against a
number of financial institutions alleging that one or more of these provisions
have been violated. While New South has incurred no material detriment as a
result of these actions, there can be no assurance that one or more aspects of
its lending program will not be found to have been in violation of these
statutes.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take that record into account in its evaluation of certain applications
by the institution. FIRREA amended the CRA to require all institutions to make
public disclosure of their CRA performance using the ratings of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance." New South
received a satisfactory rating in its last CRA examination by the OTS dated
September 8, 1998.
On May 4, 1995, the bank regulatory agencies, including the OTS, adopted
new uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to New
South: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a service
test to evaluate its delivery of services to such areas, and (iii) an investment
test to evaluate its investment in programs beneficial to such areas. The new
CRA regulations became effective on July 1, 1995, but reporting requirements
were not effective until January 1, 1997. Evaluation under the regulations was
not mandatory until July 1, 1997. New South's current operations and policies
substantially comply with the regulations.
Agencies. New South's lending activities, including its mortgage banking
operations, are subject to the rules and regulations of the FHA, VA, FNMA, FHLMC
and GNMA and other regulatory agencies with respect to originating, processing,
underwriting, selling and servicing residential mortgage loans. In addition,
there are other federal and state statutes and regulations affecting such
activities. Moreover, lenders such as New South are required annually to submit
audited financial statements to FNMA, FHLMC and GNMA and to comply with each
regulatory entity's own financial requirements. New South's business is also
subject to examination by FNMA, FHLMC and GNMA to assure compliance with
applicable regulations, policies and procedures.
Transactions with Affiliates. New South is subject to restrictions imposed
by federal law on extensions of credit to, and certain other transactions with,
the Company and other affiliates and on investments in the stock or other
securities thereof. Such restrictions prevent the Company and such other
affiliates from borrowing from New South unless the loans are secured by
specified collateral, and require such transactions to have terms comparable to
terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by New South are generally limited
in amount as to the Company and as to any other individual affiliate in the
aggregate amount of 10 percent of New South's capital and surplus and as to the
Company and all affiliates to an aggregate of 20 percent
9
of New South's capital and surplus. These regulations and restrictions may limit
the Company's ability to obtain funds from New South for its cash needs,
including funds for acquisitions and for payment of dividends, interest and
operating expenses. New South's ability to extend credit to its directors,
executive officers, and 10 percent shareholders, as well as to entities
controlled by such persons, is governed by the requirements of Section 22(g) and
22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve
thereunder.
Liquidity Requirements. New South is required by OTS regulation to
maintain an average daily balance of liquid assets such as cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations, in each calendar quarter of not
less than four percent of the amount of its liquidity base at the end of the
preceding calendar quarter or the average daily balance of its liquidity base
during its preceding quarter.
Branching. Subject to certain limitations, the HOLA and the OTS
regulations currently permit federally chartered savings institutions such as
New South to establish branches in any state of the United States and its
territories. A savings association must apply with the OTS prior to opening a
branch. The regulations allow the OTS to grant supervisory clearance to an
applicant based on the policies, condition of the applicant including whether
the applicant has adequate capital and its CRA record.
FHLB System. The FHLB System consists of 12 district FHLBs subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"). The
Federal Home Loan Banks provide a central credit facility primarily for member
institutions. As a member of the FHLB, New South is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to one
percent of the aggregate unpaid principal of its home residential mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances, borrowings, from the FHLB, whichever is greater.
Recent Legislation. On November 12, 1999, the Graham-Leach-Bliley Act
("Act") became law, allowing bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. The Act also addressed privacy issues and creates an
obligation for financial institutions to adopt their own privacy policies, to
provide those policies to customers before the time the customer relationship is
established, to periodically redistribute the privacy policy, to adhere to it,
and permit customers to "opt-out" of information sharing with third parties in
most circumstances. In 2000, the federal banking regulators issued final
regulations implementing certain provisions of the act governing privacy of
consumer financial affiliates. Thre regulations, which were effective November
13, 2000, are not mandatory until July 1, 2001. At this time, no predictions
can be made regarding the impact that the Act may have on New South's financial
condition or results of operations.
Competition
New South faces substantial competition in purchasing and originating loans
and in attracting deposits. Competitors include other thrifts, national and
state banks, trust companies, insurance companies, mortgage banking operations,
credit unions, finance companies, money market funds and other financial and
non-financial companies which may offer products similar to those offered by New
South. Many competing providers have greater financial resources than New
South, offer additional services, have wider geographic presence or more
accessible branch and loan production offices. New South's headquarters and its
only two deposit gathering branches are located in Birmingham, Alabama.
Birmingham is served by over 19 commercial banks and thrifts, most of which are
headquartered in the Birmingham area. Four of the 50 largest commercial banks
in the United States are headquartered in Birmingham.
Item 2. Properties
The principal executive offices of the Company are located at 1900
Crestwood Boulevard, Birmingham, Alabama in a 63,000 square foot building owned
by Collateral. New South owns a 42,789 square foot facility located at 215
North 21st Street in Birmingham, Alabama of which 51 percent is occupied by New
South. The remaining space is leased to multiple tenants. New South also owns
an 85,000 square foot building located at 210 Automation Way, Birmingham,
Alabama.
10
In addition, New South leases space at 2000 Crestwood Boulevard,
Birmingham, Alabama in a 15,000 square foot building. New South leases all of
its other physical locations in the normal course of business. At December 31,
2000, New South had 39 offices in 41 cities which were leased. Substantially
all leases are for periods of from one to five years.
Item 3. Legal Proceedings
The Company, from time to time, has been named in ordinary, routine
litigation. Certain of these lawsuits are class actions requesting unspecified
or substantial damages. In each case, a class has not yet been certified.
These matters have arisen in the normal course of business and are related to
lending, collections, servicing and other activities. The Company believes that
it has meritorious defenses to these lawsuits. Management is of the opinion
that the ultimate resolution of these lawsuits will not have a material adverse
effect on the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 2000 to a vote of
the security holders of the Company.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company was held by approximately 57 stockholders
as of March 1, 2001. The common stock of the Company has not been registered
under the Securities Act of 1933 (the "Securities Act"), and the Company is not
aware of the existence of any trading activity in the common stock.
Accordingly, there is no market for such common stock, and no market is expected
to develop in the foreseeable future.
From time to time in the past, the Company has purchased shares of common
stock from Company shareholders who desired to sell their shares. The Company
has never encouraged such sales and has historically paid only the then current
book value. On August 26, 1998, the Company purchased 126,766.50 shares of its
common stock at $77.25 as part of an offer. There have been no other purchases
since that time.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following information summarizes selected consolidated financial data for
the last five years. The summary below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included therein.
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands, except ratios and per share data)
December 31
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
(In thousands, except percentages and per share data)
Summary of Operations Data:
Interest income..................................... $ 98,004 $ 85,356 $ 83,251 $75,491 $65,535
Interest expense.................................... 66,588 53,584 52,299 47,723 43,158
---------- --------- --------- ------- -------
Net interest income................................. 31,416 31,772 30,952 27,768 22,377
Provision for loan losses........................... 5,565 3,638 3,944 2,954 2,492
---------- --------- --------- ------- -------
Net interest income after provision
for loan losses................................... 25,851 28,134 27,008 24,814 19,885
Non interest income:
Loan administration income......................... 11,409 10,348 5,143 4,333 3,994
Gain on sale of loans.............................. 14,599 12,058 12,435 5,661 1,333
Other income....................................... 13,532 15,563 15,992 5,320 2,998
---------- ---------- ---------- -------- --------
Total.............................................. 39,540 37,969 33,570 15,314 8,325
Non interest expense:
Salaries and benefits.............................. 31,005 34,347 26,286 16,024 7,424
Other expense...................................... 23,627 27,759 22,467 15,398 15,742
---------- ---------- ---------- -------- --------
Total.............................................. 54,632 62,106 48,753 31,422 23,166
Income before income taxes......................... 10,759 3,997 11,825 8,706 5,044
Income taxes expense............................... 644 1,406 5,088 3,990 2,482
---------- ---------- ---------- -------- --------
Net Income......................................... $ 10,115 $ 2,591 $ 6,737 $ 4,716 $ 2,562
========== ========== ========== ======== ========
Per Share Data
Earnings per share................................. $ 8.05 $ 2.06 $ 5.05 $ 3.42 $ 1.84
Weighted average shares outstanding................ 1,256 1,255 1,333 1,377 1,391
Selected Year End Balances
Total assets....................................... $1,222,777 $1,021,107 $1,142,622 $994,053 $822,980
Investment securities available for sale........... 168,176 135,703 109,591 197,135 94,451
Loans, net of unearned............................. 895,186 748,277 812,877 727,854 681,730
Allowance for loan income.......................... 13,513 11,114 9,107 7,333 5,904
Deposits........................................... 916,226 745,085 775,448 695,365 660,668
Federal Home Loan Bank Advances.................... 133,415 128,417 198,418 179,420 95,388
Total liabilities.................................. 1,162,769 973,799 1,094,182 941,739 775,039
Shareholders' equity............................... 60,008 47,308 48,440 52,314 47,941
Performance Ratios
Return on average assets........................... 0.89% 0.24% 0.65% 0.51% 0.31%
Return on average equity........................... 19.72 5.44 13.71 9.17 5.22
Interest rate spread............................... 2.48 2.56 2.72 2.74 2.53
Net interest margin................................ 2.89 3.04 3.22 3.21 2.94
Ratio of average interest-earning assets
to average interest-bearing liabilities.......... 106.72 109.40 109.14 108.46 107.19
Ratio of non interest expense to average 4.80 5.71 4.71 3.42 2.84
assets...........................................
Efficiency ratio................................... 76.99 89.05 75.56 72.94 75.45
Average equity to average assets................... 4.51 4.38 4.75 5.59 6.02
Asset Quality Data
Net charge-offs to average loans, net of
unearned income................................. 0.35% 0.18% 0.28% 0.21% 0.18%
Nonperforming assets to average total
assets........................................... 1.52 1.18 0.94 0.93 1.20
Nonperforming loans to average total loans,
net of unearned income............................. 1.73 1.17 1.19 1.12 1.21
Allowance for loan losses to total loans,
net of unearned income........................... 1.51 1.49 1.12 1.01 0.87
Allowance for loan losses to total
nonperforming assets............................. 72.56 92.53 84.57 78.97 59.99
Capital Ratios(1)
Tangible capital (tier 1 to total assets).......... 8.05% 8.64% 7.00% 6.17% 6.89%
Tier 1 capital (to risk weighted assets)........... 10.02 10.86 9.96 9.51 10.27
Total risk-based capital (to risk weighted
assets).......................................... 11.04 12.10 10.38 10.48 11.10
(1) Capital ratio data for all periods presented are for New South only.
12
Quarterly Results of Operations (Unaudited)
The quarterly results of operations for the years ended December 31, 2000 and
1999 are as follows:
2000
--------------------------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
---------- ----------- ------------ ---------- ------------
(In thousands, except per share data)
Interest income.............................. $98,004 $25,789 $25,704 $24,674 $21,837
Interest expense............................. 66,588 18,530 17,775 15,925 14,358
Net interest income.......................... 31,416 7,259 7,929 8,749 7,479
Provision for loan losses.................... 5,565 1,802 1,353 1,942 468
Income before income taxes................... 10,759 2,521 3,207 3,608 1,423
Net income................................... 10,115 2,381 3,017 3,379 1,338
Per common share:
Net income(1)................................ $ 8.05 $ 1.89 $ 2.40 $ 2.69 $ 1.07
Weighted average shares outstanding........ 1,256 1,256 1,256 1,256 1,256
1999
--------------------------------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
---------- ----------- ------------ ---------- ------------
(In thousands, except per share data)
Interest income.............................. $85,356 $23,092 $20,317 $19,868 $22,079
Interest expense............................. 53,584 14,286 12,331 12,681 14,286
Net interest income.......................... 31,772 8,806 7,986 7,187 7,793
Provision for loan losses.................... 3,638 964 1,241 215 1,218
Income/(loss) before income taxes............ 3,997 (2,919) 1,127 1,886 3,903
Net income/(loss)............................ 2,591 (2,729) 1,563 1,464 2,293
Per common share:
Net income/(loss) (1)........................ $ 2.06 $ (2.17) $ 1.24 $ 1.17 $ 1.83
Weighted average shares outstanding........ 1,255 1,256 1,256 1,256 1,254
(1) Per share amounts are computed based on the weighted average shares
outstanding during each quarter. Therefore, due to rounding differences
with the weighted average shares calculation and per share amounts, net
income per share for the quarters may not amount to the annual totals
shown.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis of Presentation
The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto and the other financial data included elsewhere in
this document. The financial information provided has been rounded in order to
simplify its presentation. However, the ratios and percentages contained herein
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. Certain amounts in the prior year's financial information have been
reclassified to conform with the 2000 presentation, with no effect on previously
reported net income.
New South Bancshares, Inc. ("Bancshares" or 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"). NSMS was formed during the second quarter of 2000. NSMS performs
certain loan related functions for the various
13
mortgage lending units of the Bank. New South has two subsidiaries, Avondale
Funding.com, inc. ("Avondale") and New South Agency, Inc. and significant
interest in four joint ventures (the "New South Joint Ventures"). 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 Corporation ("AFC") to hold
the acquired assets and the assumed acquisition liabilities and related
operations. In July 1999, AFC's name was changed to Avondale. On May 31, 2000,
New South sold its operations in Avondale and is currently in the process of
disposing of the remaining assets (the "Divestiture").
Effective January 1, 1999, Collateral Mortgage, Ltd. ("Collateral"), an
affiliated company, transferred its residential mortgage servicing operations to
New South (the "Servicing Transfer") under a subservicing agreement. The
servicing portfolio totaled $2.6 billion, of which New South already owned the
servicing rights for $1.4 billion. As a result of the Servicing Transfer, all
related direct costs are now incurred by New South.
General
The Company's operations principally involve residential mortgage lending,
automobile installment lending, residential construction and land lending,
manufactured housing lending, and deposit gathering activities. The Company's
residential mortgage lending efforts involve the origination and purchase of
residential mortgage loans through its loan origination offices and wholesale
sources, the sale of such loans, usually on a pooled or securitized basis, in
the secondary market, and the servicing of residential mortgage loans for
investors and the Company's own loan portfolio. The automobile installment
lending program involves indirect lending through approximately 565 automobile
dealers in 6 southern states. The Company's residential construction and land
lending efforts involve making loans to builders for the construction of single
family properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. The manufactured housing lending
program primarily includes the indirect origination of mortgage loans, including
the land and the home, and nonmortgage loans for the home only, in addition to
construction loans that are in place during the preparation phase of the land.
The Company conducts deposit gathering activities in a traditional fashion
through its two full service branches located in Birmingham, Alabama, through
its telephone banking center, and via the internet. See "Business."
The Company's net income results primarily from New South's operations.
Net interest income is the difference between interest earned on interest-
earning assets and interest paid on interest-bearing liabilities. Variations in
the volume and mix of interest-earning assets and interest-bearing liabilities
and their relative sensitivity to interest rate movements determine changes in
net interest income. Net income is further affected by the provision for loan
losses, noninterest income and noninterest expense. Noninterest income consists
primarily of loan administration income and origination fees related to mortgage
banking operations, net gains or losses on the sale of investment securities
available for sale, gain on the sale of loans and mortgage servicing rights, and
other income. Noninterest expense consists primarily of salaries and benefits,
net occupancy and equipment expense, and other expenses.
Loans are the single largest component of the Company's earning assets and
generally have a more favorable return than other categories of earning assets.
Average loans, net of unearned income, were $898.4 million during 1999 and
$894.7 million during 2000, totaling 86.0 percent and 82.4 percent,
respectively, of total average earning assets.
Deposits are New South's largest source of funds used to support earning
assets. New South's average deposits were $793.1 million during 1999 and $812.6
million during 2000, totaling 83.0 percent and 79.9 percent, respectively, of
total average interest-bearing liabilities. The Company has generally been able
to attract and retain deposits by offering nationally competitive rates.
The Company also continued its use of Federal Home Loan Bank ("FHLB")
advances as an alternative funding source. Average advances increased from
$158.8 million in 1999 to $160.4 million in 2000.
14
New South is required by the Office of Thrift Supervision ("OTS") to meet
certain capital requirements. Among these are minimum tier 1 capital, tangible,
and risk-based capital ratios. New South has consistently exceeded these
minimum guidelines. At December 31, 2000, New South's capital ratios place it
in the regulatory defined "well capitalized" category.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net income increased $7.5 million, or 290.4 percent, from $2.6 million, or
$2.06 per share, in 1999, to $10.1 million, or $8.05 per share, in 2000.
Net interest income decreased $.4 million, or 1.2 percent, from $31.8
million in 1999 to $31.4 million in 2000. The decrease resulted from both
faster growth in interest-bearing liabilities compared with earning assets and a
lower net interest rate spread as a result of a generally rising interest rate
environment. In 2000, interest-bearing liabilities increased $61.9 million,
from $955.3 million in 1999 to $1.02 billion in 2000, compared with an increase
of $40.3 million in earning assets, from $1.05 billion in 1999 to $1.09 billion
in 2000. The decline in the net interest rate spread, which decreased from 2.56
percent in 1999 to 2.48 percent in 2000, primarily resulted from faster growth
in the cost of interest-bearing liabilities compared with the growth in the
yield on earning assets. The cost of interest-bearing liabilities increased by
94 basis points, from 5.61 percent in 1999 to 6.55 percent in 2000, while the
yield on earning assets increased only 86 basis points, from 8.17 percent in
1999 to 9.03 percent in 2000. Generally, the Company is liability sensitive.
See "--Net Interest Income."
The provision for loan losses increased $2.0 million, or 53.0 percent, from
$3.6 million in 1999 to $5.6 million in 2000. This increase resulted from a
$146.9 million, or 19.6 percent increase in loans from $748.3 million at
December 31, 1999 to $895.2 million at December 31, 2000 and an increase of $6.8
million, or 77.7 percent in nonperforming loans, from $8.7 million at year-end
1999 to $15.5 million at year-end 2000. The allowance for loan losses as a
percentage of total nonperforming assets was 92.5 percent and 72.6 percent at
December 31, 1999 and 2000, respectively. See "--Provision and Allowance for
Loan Losses."
Noninterest income increased $1.6 million, or 4.1 percent, from $38.0
million in 1999 to $39.5 million in 2000. Loan administration income increased
from $10.3 million in 1999 to $11.4 million, an increase of $1.1 million, or
10.3 percent, as a result of increases in the loan servicing portfolio. The
increase in loan administration income was partially offset by a decrease in
origination fees of $1.6 million, from $9.8 million in 1999 to $8.2 million in
2000, attributable to a decline in the number of residential mortgage loans
originated. Gain on the sale of loans and mortgage servicing rights increased
$2.5 million from $12.1 million in 1999 to $14.6 million in 2000. See
"--Noninterest Income and Expense."
Noninterest expense decreased $7.5 million, or 12.0 percent, from $62.1
million in 1999 to $54.6 million in 2000. Salaries and benefits totaled $34.3
million in 1999 and $31.0 million in 2000, a decrease of $3.3 million, or 9.7
percent. The decrease resulted from a $2.1 million decrease in salaries and
benefits resulting from the Divestiture, and from reduction in commissions
related to the decline in mortgage origination volume during 2000. Net
occupancy and equipment expense was $6.2 million in 1999 and $6.0 million in
2000, a decrease of $.2 million, or 3.7 percent. Other expenses were $21.6
million in 1999 and $17.7 million in 2000, a decrease of $3.9 million, or 18.1
percent. The decreases in other expenses attributable to the Divestiture was
$1.7 million, with the remainder primarily resulting from the decline in
mortgage origination volume during 2000. See "--Noninterest Income and
Expense."
The Company elected S Corporation treatment under the Internal Revenue Code
on January 1, 1999. Generally, corporations electing such treatment are not
subject to federal corporate taxation. The provision for income taxes was $.6
million in 2000, an effective rate of 6.0 percent, attributable only to the
taxes in states which do not conform to federal S Corporation treatment. The
provision for income taxes, in 1999, included the write off of the Company's
federal deferred tax asset of $1.3 million, a direct result of the January 1,
1999 S Corporation election, and was $1.4 million, an effective rate of 35.2
percent.
15
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net income decreased $4.1 million, or 61.5 percent, from $6.7 million, or
$5.05 per share, in 1998, to $2.6 million, or $2.06 per share, in 1999.
Net interest income increased $.8 million, or 2.6 percent, from $31.0
million in 1998 to $31.8 million in 1999. The increase resulted from a higher
level of average earning assets, partially offset by a decrease in the net
interest rate margin. The decline in the net interest rate margin, which
decreased from 3.22 percent in 1998 to 3.04 percent in 1999, primarily resulted
from lower rates earned on loans. This results, in part, from changes in the
mix of the loan portfolio, specifically a decrease in the average balance of
nonconforming residential mortgage loans coupled with lesser reductions in
funding costs. The growth in average earning assets, which increased from
$960.9 million in 1998 to over one billion dollars in 1999, resulted primarily
from volume generated by the Acquisition and increases in loan production within
nonconforming lending areas. See "--Net Interest Income."
The provision for loan losses decreased $.3 million, or 7.8 percent, from
$3.9 million in 1998 to $3.6 million in 1999. This decrease was facilitated by
a $64.6 million, or 7.9 percent decrease in loans from $812.9 million at
December 31, 1998 to $748.3 million at December 31, 1999 resulting from
securitization of loans in December 1999. The allowance for loan losses as a
percentage of total loans, net of unearned income, increased from 1.1 percent at
December 31, 1998 to 1.5 percent at December 31, 1999. The allowance for loan
losses as a percentage of total nonperforming assets was 84.6 percent and 92.5
percent at December 31, 1998 and 1999, respectively. See "--Provision and
Allowance for Loan Losses."
Noninterest income increased $4.4 million, or 13.1 percent, from $33.6
million in 1998 to $38.0 million in 1999. Loan administration income increased
from $5.1 million in 1998 to $10.3 million, an increase of $5.2 million, or
101.2 percent, as a result of the Servicing Transfer. The increase in loan
administration income was partially offset by a decrease in origination fees of
$1.6 million, from $11.4 million in 1998 to $9.8 million in 1999, attributable
to a decline in the number of residential mortgage loans originated. Gain on
sale of loans declined by $.3 million from $12.4 million in 1998 to $12.1
million in 1999, which reflected continued conservatism in the recognition of
gains resulting from the securitization and sale of approximately $656.4 million
of loans during 1999. See "--Noninterest Income and Expense."
Noninterest expense increased $13.3 million, or 27.4 percent, from $48.8
million in 1998 to $62.1 million in 1999. Salaries and benefits totaled $26.3
million in 1998 and $34.3 million in 1999, an increase of $8.0 million, or 30.7
percent. Net occupancy and equipment expense was $4.0 million in 1998 and $6.2
million in 1999, an increase of $2.2 million, or 53.9 percent. Other expenses
were $18.4 million in 1998 and $21.6 million in 1999, an increase of $3.2
million, or 16.9 percent. These increases are directly attributable to the
Acquisition and the Servicing Transfer. The increase in noninterest expenses
resulting from the Acquisition were: Salaries and Benefits: $3.0 million; Net
Occupancy: $1.1 million; Other Expenses: $2.7 million; totaling $6.8 million.
Overall, the Acquisition accounted for 50.8 percent of the Company's increase in
noninterest expenses. Loan servicing fees paid to affiliates were $4.5 million
in 1998 and $.4 million in 1999, a decrease of $4.1 million, or 92.1 percent,
another result of the Servicing Transfer. See "--Noninterest Income and
Expense."
The provision for income taxes was $1.4 million in 1999, an effective rate
of 35.2 percent, compared with $5.1 million in 1998, an effective rate of 43.0
percent, a direct result of the decline in income before income taxes.
Net Interest Income
General
Net interest income is determined by the yields earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch in the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
Net interest income divided by average earning assets represents the Company's
net interest rate margin.
16
Net interest income decreased $.4 million, or 1.1 percent, from $31.8
million in 1999 to $31.4 million in 2000. During 2000, compared with 1999, a
3.9 percent increase in average interest-earning assets along with a 86 basis
point increase in the yield were negated by the combined effect of a 6.5 percent
increase in interest-bearing liabilities along with a 94 basis point increase in
the rate. For most of 2000, a generally higher interest rate environment
prevailed.
Average Balances, Income, Expenses and Rates
The following table sets forth, for the periods indicated, certain
information related to the Company's average balance sheet and its average
yields on assets and average costs of liabilities. Such yields or costs are
derived by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from
the daily balances throughout the periods indicated.
Average Balances, Income, Expense, and Rates
Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------- -------------------------- --------------------------
Assets
Loans, net of unearned income(1)......... $ 894,681 $84,113 9.40% $ 898,379 $76,829 8.55% $ 766,780 $70,844 9.24%
Federal funds sold....................... 7,095 519 7.32 17,131 823 4.80 6,109 424 6.94
Investment securities available for sale 109,328 7,711 7.05 71,469 4,128 5.78 141,751 9,098 6.42
Other investments........................ 74,338 5,661 7.62 58,133 3,576 6.15 46,255 2,885 6.24
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total earning assets................... 1,085,442 98,004 9.03 1,045,112 85,356 8.17 960,895 83,251 8.66
Securities under repurchase agreements... - - 39
Allowance for loan losses................ (12,020) (10,077) (8,072)
Other assets............................. 64,988 52,440 82,995
---------- ---------- ----------
Total Assets.......................... $1,138,410 $1,087,475 $1,035,857
========== ========== ==========
Liabilities and Shareholders' Equity
Other interest-bearing deposits.......... $ 3,845 156 4.06 $ 3,689 150 4.07 $ 3,020 118 3.91
Savings deposits......................... 73,858 3,481 4.71 83,035 3,811 4.59 61,657 2,691 4.36
Time deposits............................ 677,502 44,219 6.53 629,829 35,872 5.70 593,775 35,915 6.05
Other borrowings......................... 67,036 4,886 7.29 45,443 2,358 5.19 51,964 3,151 6.06
Federal Home Loan Bank advances.......... 160,397 10,914 6.80 158,782 8,461 5.33 151,476 8,851 5.84
Guaranteed preferred beneficial interests
in the Company's subordinated debt.... 34,500 2,932 8.50 34,500 2,932 8.50 18,555 1,573 8.48
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities.... 1,017,138 66,588 6.55 955,278 53,584 5.61 880,447 52,299 5.94
Noninterest-bearing deposits............. 57,385 76,507 91,125
Accrued expenses and other liabilities... 12,599 8,061 15,131
Shareholders' equity..................... 51,288 47,629 49,154
---------- ---------- ----------
Total Liabilities and Shareholders'
Equity................................ $1,138,410 $1,087,475 $1,035,857
========== ========== ==========
Net interest rate spread................. 2.48% 2.56% 2.72%
==== ==== ====
Net interest income...................... $31,416 $31,772 $30,952
======= ======= =======
Net interest rate margin................. 2.89% 3.04% 3.22%
==== ==== ====
(1) Loans classified as nonaccrual are included in the average volume
classification. Loan fees for all years presented are included in the
interest amounts for loans.
17
Analysis of Changes in Net Interest Income
The following table sets forth the effect that the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income from 1998 to 1999 and 1999 to
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
Years Ended December 31,
--------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
Change Attributable to Change Attributable to
--------------------------------------------------------------------------
Volume Rate Mix Volume Rate Mix
--------------------------------------------------------------------------
(In thousands)
Earning Assets
Total loans, net of unearned
income(1)............................ $ (316) $7,632 $ (32) $12,159 $(5,269) $(905)
Federal funds sold...................... (482) 430 (252) 765 (131) (235)
Investment securities available for
sale................................. 2,187 913 483 (4,511) (911) 452
Other investments....................... 997 851 237 741 (40) (10)
------- ------ ----- ------- ------- -----
Total interest income................... 2,386 9,826 436 9,154 (6,351) (698)
Interest Bearing Liabilities
Other interest bearing deposits......... 6 (0) (0) 26 5 1
Savings deposits........................ (421) 103 (12) 933 139 48
Time deposits........................... 2,715 5,235 397 2,181 (2,096) (128)
Other borrowings........................ 1,120 954 454 (395) (455) 57
Federal Home Loan Bank advances......... 86 2,343 24 427 (779) (38)
Guaranteed preferred beneficial
interests in the Company's
subordinated debt.................... - - - 1,352 4 3
------- ------ ----- ------- ------- -----
Total interest expense.................. 3,506 8,635 863 4,524 (3,182) (57)
------- ------ ----- ------- ------- -----
Net interest income..................... $(1,120) $1,191 $(427) $ 4,630 $(3,169) $(641)
======= ====== ===== ======= ======= =====
(1) Loans, net of unearned income includes nonaccrual loans for all years
presented.
Interest Sensitivity and Market Risk
Interest Sensitivity
Through policies established by the Bank's Asset/Liability Management
Committee ("ALCO"), the Company monitors and manages the repricing and maturity
of its assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on its net interest income. The ALCO
uses a combination of earnings and market value sensitivity analyses and
traditional gap analysis. These analyses compare the repricings, maturities,
and prepayments, as applicable, of New South's interest-earning assets and
interest-bearing liabilities and off balance sheet instruments in order to
measure, monitor, and manage interest rate risk. The differences in the various
maturities or repricings, known as GAP, are summarized in the analysis below for
December 31, 2000:
18
Summary Gap Report
As of December 31, 2000
---------------------------------------------------------------------------
Immediate Over Three Over One Over Five Over
to Three Months Year Through Years Through Ten
Months to One Year Five Years Ten Years Years Total
---------------------------------------------------------------------------
(In thousands)
Interest-bearing deposits in other banks....... $ 11,033 $ - $ - $ - $ - $ 11,033
Investment securities available for sale....... 23,406 49,540 63,415 15,920 15,895 168,176
Residual interests in loan
securitizations................................ 267 2,142 5,850 - - 8,259
Loans available for sale....................... 74,449 - - - - 74,449
Loans net of unearned income................... 271,520 150,115 274,561 134,686 64,304 895,186
--------- --------- --------- -------- -------- ----------
Total Assets............................... $ 380,675 $ 201,797 $ 343,826 $150,606 $80,199 $1,157,103
========= ========= ========= ======== ======= ==========
Interest-bearing deposits...................... $ 444,068 $ 199,226 $ 124,669 $ 68,023 $17,203 $ 853,189
Federal funds purchased and securities
sold under agreement to repurchase........... 53,213 - - - - 53,213
Federal Home Loan Bank advances................ 90,000 28,388 15,000 - 27 133,415
Notes payable.................................. 11,599 - - - - 11,599
Guaranteed preferred beneficial interest in
the Company's subordinated debentures.......... - - - - 34,500 34,500
--------- --------- --------- -------- ------- ----------
Total Liabilities......................... $ 598,880 $ 227,614 $ 139,669 $ 68,023 $51,730 $1,085,916
========= ========= ========= ======== ======= ==========
Periodic Gap................................... $(218,205) $ (25,817) $ 204,157 $ 82,583 $28,469
Cumulative Gap................................. (218,205) (244,022) (39,865) 42,718 71,187
Impact of Rate Caps............................. 306,350 - - - -
Impact of Swaps................................ 85,000 (25,000) (130,000) 45,000 -
Hedged Periodic Gap............................ 173,145 (50,817) 74,157 127,583 28,469
Hedged Cumulative Gap.......................... 173,145 122,328 196,485 324,068 352,537
The Company's interest rate sensitivity analysis evaluates interest rate
risk based on the impact of various interest rate scenarios on the net interest
income and the market value of the portfolio equity ("MVPE"). The MVPE analysis
is required quarterly by the OTS. The Company also uses an earnings simulation
model to determine the effects of several interest rate scenarios on the
Company's net interest income. ALCO meets semi-monthly to monitor and evaluate
the interest rate risk position of New South and to formulate and implement
strategies for mitigating the interest rate risk and increasing the net interest
rate margin and net income.
Brokered deposits, or deposits received through third party depositor
representatives, are considered to be highly interest rate sensitive and are
reflected in interest rate risk analyses reviewed by ALCO. Additionally, both
the Committee and New South's Board of Directors are apprised of the level of
brokered deposits on an ongoing basis.
For relatively short-term rate changes, the impact on income would be
insignificant. However, a significant, sustained change in rates could have a
significant impact on earnings, depending upon the magnitude and direction of
the change. As of December 31, 2000, the Company's interest rate risk
management model indicated that projected net interest income would decrease by
14.93 percent assuming an instantaneous increase in interest rates of 200 basis
points, or increase by 12.14 percent assuming an instantaneous decrease of 200
basis points. All measurements of interest rate risk sensitivity fall within
guidelines established by New South's Board of Directors.
New South uses interest rate contracts, primarily interest rate swaps and
caps, to reduce or modify interest rate risk. The impact of these instruments
is incorporated into the interest rate risk management model. The Company
manages the credit risk of its interest rate swaps and caps through a review of
the creditworthiness of the counterparties to such contracts, Board established
credit limits for each counterparty, and monitoring by ALCO.
19
At December 31, 2000, New South had interest rate swap contracts with
notional amounts totaling $195 million. Of these, $140 million were variable-
for-fixed swap contracts which effectively convert $140 million in fixed rate
loans and mortgage-backed securities to variable rate earning assets, thus
reducing the impact of an upward movement in interest rates on the net interest
rate margin. Additionally, the Company has entered into $55 million in fixed-
for-variable swaps concurrent with the issuance of $55 million in brokered
certificates of deposit. These swaps reduce the current cost of these
liabilities and convert them to an adjustable rate. These swaps are callable at
the option of the counterparty. If called, the Company has the right to call the
certificates of deposit. New South also had $306.4 million in interest rate cap
contracts outstanding at December 31, 2000. The Company is exposed to rising
liability costs due to the short-term nature of its liability portfolio as noted
in the Summary Gap Report. The interest rate cap contracts serve to mitigate
the Company's risk against increases in the costs of liabilities.
The following table sets forth notional values of the Company's interest
rate contract activity for the years 1998, 1999 and 2000.
Interest Rate Swaps
Interest Rate Swaps
--------------------------
Received Pay Interest
Fixed Fixed Rate Cap Total
--------- --------- --------- ---------
(In thousands)
Balance at January 1, 1998 .......................... $ 45,000 $ 80,000 $ 305,000 $ 430,000
Additions............................................ 10,000 40,000 40,000 90,000
Maturities........................................... - (40,000) (40,000) (80,000)
Calls ............................................... (15,000) - - (15,000)
Terminations......................................... - - - -
-------- --------- --------- ---------
Balance at December 31, 1998......................... 40,000 80,000 305,000 425,000
Additions............................................ 25,000 100,000 30,000 155,000
Maturities........................................... - (15,000) (105,000) (120,000)
Calls ............................................... (30,000) - - (30,000)
Terminations......................................... - (100,000) - (100,000)
-------- --------- --------- ---------
Balance at December 31, 1999......................... 35,000 65,000 230,000 330,000
Additions............................................ 20,000 100,000 126,350 246,350
Maturities........................................... - (25,000) (50,000) (75,000)
Calls ............................................... - - - -
Terminations......................................... - - - -
-------- --------- --------- ---------
Balance at December 31, 2000......................... $ 55,000 $ 140,000 $ 306,350 $ 501,350
======== ========= ========= =========
20
The following table sets forth the relative maturities and interest rates
related to interest rate contracts outstanding at December 31, 2000.
Maturities of Caps and Interest Rates Exchanged on Swaps
Year of Maturity
---------------------------------------------------------------------
2005 and
2001 2002 2003 2004 Thereafter Total
-------- -------- --------- ------- ---------- -------
(In thousands, except percentages)
Notional amount of receive fixed swap.... $ - $10,000 $ - $ - $45,000 $ 55,000
Received rate fixed.................... - 5.30% - - 7.20% 6.85%
Pay rate variable...................... - 6.61 - - 6.67% 6.66%
Notional amount of pay fixed swaps....... $ - $ - $ 70,000 $ - $70,000 $140,000
Received rate variable................. - - 6.71% - 6.71% 6.71%
Pay rate fixed......................... - - 6.77 - 6.74 6.75
Notional amount of caps.................. $70,000 $40,000 $171,350 $ - $25,000 $306,350
The Company also enters into forward commitments and optional commitments
to sell loans based on the interest rates of loans currently in the Company's
pipeline. This reduces the impact of future changes in market rates on the
value of those loans upon delivery. Forward commitments on mortgage loans
available for sale are considered in the lower of cost or market valuation and
are monitored by the ALCO along with other off-balance sheet instruments.
Market Risk
The Company's earnings are dependent on its net interest income, which is
the difference between interest income earned on all earning assets, primarily
loans and securities, and interest paid on all interest-bearing liabilities,
primarily deposits and FHLB borrowings. Market risk is the risk of loss from
adverse changes in market prices and rates. The Company's market risk arises
primarily from inherent interest rate risk in its lending, investing and deposit
gathering activities. The Company seeks to reduce its exposure to market risk
through actively monitoring and managing its interest rate risk. Management
relies upon a variety of analyses to monitor and manage its interest rate risk,
primarily earnings simulation analysis, market value analysis, and static GAP
analysis. Earnings simulation analysis addresses the impact of changes in the
level of prevailing interest rates upon the Bank's earnings by considering the
effect of changes in the structure of rates, the relationships between rates,
and the resulting changes in the Bank's operating income. Market value analysis
evaluates the impact of instantaneous, parallel rate shocks on the Bank's MVPE.
Static GAP analysis calculates the degree of mismatch between the maturity,
repricing, and prepayments of the assets and the maturity and repricing of the
deposits and interest-bearing liabilities.
The primary earning assets, loans and securities, contain certain features
within individual types of loans and specific securities that create uncertainty
as to expected performance at varying levels of interest rates. In some cases,
options exist whereby the borrower may elect to repay the obligation at any
time. These prepayment options make anticipating the performance of those
instruments difficult in a changing rate environment. At December 31, 2000,
mortgage backed securities and loans available for sale amounting to $184.2
million, or 15.1 percent of total assets, have prepayment risks, in addition to
a significant portion of the total loan portfolio. Management believes that
assumptions used in its simulation on the performance of financial instruments
with such risks are appropriate. However, the actual performance of these
financial instruments may differ from management's estimates due to several
factors, including the diversity and sophistication of the customer base, the
general level of prevailing interest rates and the relationship to their
historical levels, and general economic conditions. The difference between
those assumptions and actual results, if significant, could cause the actual
results to differ materially from those indicated by the simulation analysis.
Deposits totaled $916.2 million, or 74.9 percent of assets, at December 31,
2000. Since deposits are the primary funding source for earning assets, the
associated market risk is considered by management in its simulation analysis.
Generally, it is anticipated deposits will be sufficient to support funding
requirements. However, the rates paid for deposits at varying levels of
prevailing interest rates have a significant impact on net interest income and,
therefore, must be quantified by the Company in its simulation analysis.
Generally, the Company is considered to be liability sensitive, meaning that
earnings will tend to decrease as rates increase, and rise in a decreasing rate
21
environment. However, changes in the relationship between rates can also have
an impact on earnings, depending upon the direction and magnitude of the change.
The following table illustrates the results of simulation analysis used by
the Company to determine the extent to which market risk would have affected the
net interest rate margin if prevailing interest rates differed from actual rates
during 2000 and 1999. Because of the inherent use of estimates and assumptions
in the simulation model used to derive this information, the actual results for
2000 and the future impact of market risk on the Company's net interest rate
margin may differ from that found in the table.
Market Risk
(In thousands, except percentages)
Year ended December 31, 2000 Year ended December 31, 1999
Change in --------------------------------- -------------------------------
Prevailing Net Interest Change from Net Interest Change from
Interest Rates Income Amount Income Amount Income Amount Income Amount
-------------- ------------- ------------- ------------- -------------
+200 basis points.......... $ 26,726 (14.93)% $ 27,555 (13.27)%
+100 basis points.......... 29,584 (5.83) 28,860 (9.17)
+0 basis points............ 31,416 - 31,772 -
- -100 basis points.......... 33,272 5.91 34,917 9.90
- -200 basis points.......... 35,230 12.14 37,752 18.82
It is worth noting that the analysis above ignores any changes to the balance
sheet resulting from normal operations.
Provision and Allowance for Loan Losses
General
Management establishes allowances for the purpose of absorbing losses that
are inherent within the loan portfolio and that are expected to occur based on
management's review of historical losses, underwriting standards, changes in the
composition of the loan portfolio, changes in the economy, and other factors.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses as determined by management's continuing review and
evaluation of the loans and its judgment as to the impact of economic conditions
on the portfolio. Charges are made to the allowance for loan losses that are
charged-off during the year while recoveries of these amounts are credited to
the account. The Company follows a policy of charging off loans determined to
be uncollectible by management.
The Company's allowance for loan losses is based upon management's judgment
and assumptions regarding risk elements in the portfolio, future economic
conditions and other factors affecting borrowers. The evaluation of the
allowance for loan losses includes management's identification and analysis of
loss inherent in various portfolio segments using a credit grading process and
specific reviews and evaluations of certain significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general economic conditions in the
service area with residential mortgage and automobile installment loan
portfolios each being evaluated collectively for impairment. The adequacy of
the allowance for loan losses and the effectiveness of the Company's monitoring
and analysis system are also reviewed periodically by the banking regulators.
In general, during the later part of 2000, the Company's delinquency levels
and nonperforming loans increased as the economy slowed. At December 31, 2000,
the allowance for loan losses increased to $13.5 million from $11.1 million at
year end 1999. The allowance for loan losses to total loans, net of unearned
income, was 1.51 percent and 1.49 percent at December 31, 2000 and 1999,
respectively. The allowance for loan losses to nonperforming loans was 127.4
percent at December 31, 1999 and 87.2 percent at December 31, 2000. Net loan
charge-offs were $2.2 million, $1.6 million, and $3.2 million for 1998, 1999,
and 2000, respectively. The provision for loan losses totaled $3.9 million,
$3.6 million, and $5.6 million for 1998, 1999, and 2000, respectively. The
22
increase in the provision for loan losses and the allowance for loan losses is
attributabe to increases in both the level of loan charge-offs and amount of
nonperforming loans.
Based on present information and an ongoing evaluation, management
considers the allowance for loan losses to be adequate to meet presently known
and inherent risks in the loan portfolio. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about future
events that it believes to be reasonable but which may or may not be valid.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required.
23
The following table sets forth certain information with respect to the
Company's allowance for loan losses and the composition of charge-offs and
recoveries for each of the last five reporting periods.
Allowance for Loan Losses
As of and for the Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------- ------------- ------------ -------------
(In thousands, except percentages)
Loans, net of unearned income, outstanding
as of December 31, ......................... $ 895,186 $ 748,277 $ 812,877 $ 727,854 $ 681,730
========= ========= ========= ========= =========
Average loans, net of unearned income......... $ 894,681 $ 898,379 $ 766,780 $ 713,935 $ 654,607
========= ========= ========= ========= =========
Balance of allowance for loan losses
at beginning of period...................... $ 11,114 $ 9,107 $ 7,333 $ 5,904 $ 4,562
Loans charged off:
Residential mortgage........................ (897) (1,206) (186) (41) (131)
Installment................................. (3,875) (1,980) (3,019) (2,159) (1,479)
Commercial real estate...................... (4) - - - -
--------- --------- --------- --------- ---------
Total charge-offs....................... (4,776) (3,186) (3,205) (2,200) (1,610)
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off:
Residential mortgage........................ 143 140 43 15 8
Installment ................................ 1,467 1,415 992 660 400
Commercial real estate...................... - - - - 52
--------- --------- --------- --------- ---------
Total recoveries........................ 1,610 1,555 1,035 675 460
--------- --------- --------- --------- ---------
Net recoveries/(charge-offs).................. (3,166) (1,631) (2,170) (1,525) (1,150)
Provision charged to expense.................. 5,565 3,638 3,944 2,954 2,492
--------- --------- --------- --------- ---------
Balance of allowance for loan losses
as of December 31,.......................... $ 13,513 $ 11,114 $ 9,107 $ 7,333 $ 5,904
========= ========= ========= ========= =========
Allowance for loan losses to loans, net of
unearned income............................. 1.51% 1.49% 1.12% 1.01% 0.87%
Allowance for loan losses to
nonperforming loans........................ 87.18% 127.41% 94.48% 90.23% 71.51%
Net charge-offs to average loans, net of
unearned income............................... 0.35% 0.18% 0.28% 0.21% 0.18%
24
The following table sets forth the components of the allowance for loan
losses related to the primary segments of the Company's loan portfolio. All
loan amounts are net of unearned income.
Allocation of the Allowance for Loan Losses
As of December 31,
----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ --------------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(In thousands, except percentages)
Residential mortgage........... $ 5,107 41.10% $ 3,245 41.81% $2,326 56.03% $2,373 52.66% $1,385 61.08%
Automobile and other
installment.................. 4,000 21.28 4,509 19.43 3,472 6.49 1,651 13.29 1,310 10.38
Residential construction and
land......................... 1,665 18.81 550 18.33 499 17.81 499 12.09 499 6.96
Commercial real estate......... 2,741 17.61 2,810 19.57 2,810 19.11 2,810 21.76 2,710 21.52
Commercial..................... - 1.20 - 0.86 - 0.56 - 0.20 - 0.06
------- ------ ------- ------ ------ ------ ------ ------ ------ ------
Total.......................... $13,513 100.00% $11,114 100.00% $9,107 100.00% $7,333 100.00% $5,904 100.00%
======= ====== ======= ====== ====== ====== ====== ====== ====== ======
Nonperforming Assets
The following table sets forth the Company's nonperforming assets for the
periods indicated.
Nonperforming Assets
As of December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- ------
(In thousands, except percentages)
Nonaccrual loans(1)....................... $13,621 $ 5,813 $ 7,629 $6,065 $6,168
Restructured loans........................ 1,879 2,910 2,010 2,062 2,088
------- ------- ------- ------ ------
Total nonperforming loans................. 15,500 8,723 9,639 8,127 8,256
Foreclosed properties..................... 3,124 3,288 1,129 1,159 1,585
------- ------- ------- ------ ------
Total nonperforming assets................ $18,624 $12,011 $10,768 $9,286 $9,841
======= ======= ======= ====== ======
Nonperforming assets
to period end loans, net of unearned
income, and foreclosed properties....... 2.07% 1.60% 1.32% 1.27% 1.44%
- ----------------
(1) Includes all loans contractually past due 90 days or more as to principal
or interest.
Management closely monitors loans and other assets which are classified as
nonperforming assets. Nonperforming assets include nonaccrual loans,
restructured loans, and foreclosed properties. Management utilizes tracking and
monitoring systems to identify potential problem assets within all lending
portfolios. It is the Company's policy to place on nonaccrual status any loan
that is contractually 90 days or more past due with respect to principal or
interest. When a loan is placed in nonaccrual status, all accrued but unpaid
interest is reversed and deducted from interest income. No additional interest
is accrued on the loan balance until collection of both principal and interest
is reasonably certain.
25
The amount of interest income earned in 2000 on the $13.6 million of
nonaccruing loans outstanding at year-end was approximately $.5 million. If
these loans had been current in accordance with their original terms,
approximately $1.3 million would have been earned on these loans in 2000.
Total nonperforming assets as a percentage of loans, net of unearned
income, and foreclosed properties has increased from 1.60 percent at December
31, 1999 to 2.07 percent at December 31, 2000. This increase is due to an
increase in delinquencies in the Company's residential mortgage and automobile
and other installment loan portfolios partially attributable to economic slowing
in the fourth quarter.
The following tables set forth nonperforming loans by portfolio for the
periods presented.
Nonperforming Loans
As of December 31,
-------------------------------------------------------------------
2000 1999
------------------------------- -----------------------------
% of % of
Average Average
Loans per Loans per
Balance Category Balance Category
--------- ------------ --------- ----------
(In thousands, except percentages)
Residential mortgage.......................... $12,658 2.10% $5,377 1.17%
Automobile and other installment.............. 963 0.86 436 0.27
Commercial real estate........................ 1,879 1.02 2,910 2.21
------- ---- ------ ----
Total nonperforming loans(1).................. $15,500 1.73 $8,723 0.97
======= ======
(1) There were no nonperforming loans in the residential construction and land
portfolio or the commercial portfolios for periods presented above.
Total nonperforming loans increased from $8.7 million at December 31, 1999
to $15.5 million at December 31, 2000. The increase resulted from growth in
delinquencies in the residential and automobile and other installment loan
portfolios. The decline in nonperforming commercial loans resulted from
repayment.
26
The following table sets forth, for the periods indicated, loan
originations by significant category.
Loan Originations
For the Year Ended December 31,
---------------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
Residential
Conforming............................ $ 542,550 $ 709,418 $ 985,630
Nonconforming......................... 169,259 248,375 246,581
Automobile and other installment:
Prime................................. 76,188 134,687 111,349
Non-prime............................. 18,468 10,131 12,241
Manufactured housing
Mortgage.............................. 2,702 17,173 1,556
Non-mortgage.......................... 25,787 82,963 12,420
Residential construction and land........ 261,329 233,629 230,453
Commercial real estate (1)............... 119,192 59,064 135,431
Commercial............................... 1,901 8,532 4,600
---------- ---------- ----------
$1,217,376 $1,503,972 $1,740,261
========== ========== ==========
(1) Consists primarily of commercial real estate loans generated by Collateral,
for which Collateral earns an origination fee. The loans are funded by New
South and closed in New South's name.
Noninterest Income and Expense
Noninterest Income
Noninterest income consists primarily of fees from mortgage banking
activities, including origination fees, loan administration fees, gains or
losses on sales of loans, and gains or losses on investment securities available
for sale. Total noninterest income increased $1.5 million, or 4.1 percent, from
$38.0 million in 1999 to $39.5 million in 2000. The following table sets forth,
for the periods indicated, the principal components of noninterest income.
Noninterest Income
For The Year Ended
December 31,
----------------------------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Loan administration income........................ $11,409 $10,348 $ 5,143
Origination fees.................................. 8,190 9,758 11,376
Gain/(loss) on sale of investment
securities available for sale................... (639) 381 (942)
Gain on sale of loans and mortgage
servicing rights................................ 14,599 12,058 12,435
Other income...................................... 5,981 5,424 5,558
------- ------- -------
Total noninterest income.................... $39,540 $37,969 $33,570
======= ======= =======
Loan administration fees increased $1.1 million, from $10.3 million during
1999 to $11.4 million during 2000 due to an increase in the average amount of
loans serviced for others. In 1999, loan administration fees increased $5.2
million, or 101.2 percent, from $5.1 million in 1998. The primary component of
loan administration income is servicing fee income received from various outside
investors.
27
Loans serviced for others are set forth in the following table:
Loans Serviced for Others
As of December 31,
-------------------------------------------
2000 1999 1998
----------- ------------ ------------
(In thousands)
Governmental National Mortgage Association.......... $ 302,618 $ 328,564 $ 336,427
Freddie Mac......................................... 692,141 709,402 696,194
Fannie Mae.......................................... 130,711 138,637 122,401
Other investors..................................... 882,294 937,747 495,458
----------- ----------- -----------
Total loans serviced for others............... $ 2,007,764 $ 2,114,350 $ 1,650,480
=========== =========== ===========
Origination fees decreased $1.6 million, from $9.8 million for 1999 to
$8.2 million for 2000, compared to the $1.6 million decrease between 1998 to
1999. The decreases resulted from fewer residential conforming mortgage loan
originations.
An increase of $2.5 million was experienced in the gain on sales of loans
and mortgage servicing rights between 1999 and 2000, as compared to a $.3
million decrease in this same category between 1998 and 1999. The primary
reason for the noted fluctuations were losses recorded in 1999 on the Company's
two public securitization transactions.
Noninterest Expense
Noninterest expense consists primarily of salaries and benefits, occupancy
and equipment costs, servicing fee expense, and other noninterest expenses.
Total noninterest expense decreased $7.5 million, or 12.0 percent, from $62.1
million in 1999 to $54.6 million in 2000. Total noninterest expense increased
$13.3 million, or 27.4 percent, from $48.8 million in 1998 to $62.1 million in
1999. The following table sets forth, for the periods indicated, the principal
components of noninterest expense:
Noninterest Expense
For the Year Ended
December 31,
-----------------------------------------------------
2000 1999 1998
------- -------- -------
(In thousands)
Salaries and benefits.................................. $31,005 $34,347 $26,286
Net occupancy and equipment expense.................... 5,962 6,193 4,024
Loan servicing fees paid to affiliates................ 366 354 4,480
Supplies and printing.................................. 1,099 1,247 916
Legal and professional................................. 1,772 2,274 1,484
Telephone.............................................. 1,291 1,431 1,129
Advertising............................................ 599 1,429 792
Computer service....................................... 1,542 1,722 849
Branch purchase fee.................................... 184 906 2,305
Other expense.......................................... 10,812 12,203 6,488
------- ------- -------
Total noninterest expense $54,632 $62,106 $48,753
======= ======= =======
28
During 2000, salaries and benefits totaled $31.0 million, a decrease of
$3.3 million, or 9.7 percent from $34.3 million during 1999. The decrease
resulted from a $2.1 million decrease in salaries and benefits resulting from
the Divestiture, and from the decline in mortgage origination volume during
2000. The increase in salaries and benefits of $8.0 million, or 30.7 percent,
from $26.3 million in 1998 to $34.3 million in 1999 is primarily attributable to
the addition of approximately 130 employees attributable to the Acquisition and
the Servicing Transfer.
Net occupancy and equipment expense was $6.2 million in 1999 and $6.0
million in 2000, a decrease of $.2 million, or 3.7 percent. Net occupancy and
equipment expense was $4.0 million in 1998 and $6.2 million in 1999, an increase
of $2.2 million, or 53.9 percent. Approximately $1.1 million of the increase
during 1999 resulted from the Acquisition and approximately $.5 million is
associated with the Servicing Transfer.
Servicing fees are paid to Collateral for the commercial loans it services
for New South. All other loan servicing for New South's portfolio was moved to
New South as part of the Servicing Transfer. Loan servicing fees paid to others
totaled $4.5 million in 1998, $.4 million in both 1999 and 2000. The decrease
of $4.1 million, or 92.1 percent, during 1999 resulted from the Servicing
Transfer.
Legal and professional expenses totaled $2.3 million in 1999 and $1.8
million in 2000, a decrease of $.5 million, or 22.1 percent. The 2000 decline
resulted from the Divestiture and a decrease in the number of loan
securitizations. Legal and professional expenses totaled $1.5 million in 1998
and $2.3 million in 1999, an increase of $.8 million, or 53.2 percent, most of
which is attributable to the Acquisition and to the loan securitizations.
Advertising decreased $.8 million, or 58.1 percent, from $1.4 million in
1999 to $.6 million in 2000 due to a changed marketing strategy, including the
discontinued use of an outside agency. Advertising increased $.6 million, or
80.4 percent, from $.8 million in 1998 to $1.4 million in 1999 due in part to a
change in marketing emphasis utilizing an independent advertising agency to lead
its deposit gathering efforts on a nationwide basis.
The decrease in computer services resulted primarily from the savings
resulting from the Divestiture and decreased $.2 million, or 10.3 percent, from
$1.7 million in 1999 to $1.5 million in 2000. The 1999 increase in computer
services resulted primarily from the Servicing Transfer and increased $.9
million, or 102.8 percent, from $.8 million in 1998 to $1.7 million in 1999. A
smaller portion of the 1999 increase was the result of efforts relating to the
Company's Year 2000 readiness effort.
Branch purchase fees were paid to Collateral resulting from the transfer of
39 loan origination offices to New South in 1997. The payment of branch
purchase fees ended in June 2000 and totaled only $.2 million. Branch purchase
fees were $2.3 million in 1998 and $.9 million in 1999, a decline of $1.4
million, or 60.7 percent, a result of lower residential origination volume
coupled with a reduction in the rate specified in the agreement with Collateral.
Other noninterest expense decreased from $12.2 million in 1999 to $10.8
million in 2000, a decrease of $1.4 million, or 11.4 percent. The decrease
during 2000 resulted from savings resulting from the Divestiture. Other
noninterest expense increased from $6.5 million in 1998 to $12.2 million in
1999, an increase of $5.7 million, or 96.9 percent. The increase in other
resulted from the Acquisition and the Servicing Transfer.
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 $146.9 million, or 19.6 percent, from $748.3 million at
December 31, 1999 to $895.2 million at December 31, 2000, reflecting the absence
of loan securitization activity for nonconforming residential mortgages in 2000.
29
The following table sets forth the composition of the loan portfolio by
category at the dates indicated:
Loans By Category
As of December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
Residential mortgage
Conforming................................ $200,651 $268,377 $127,765 $252,568 $214,865
Nonconforming............................. 181,410 45,513 328,721 132,700 203,405
-------- -------- -------- -------- --------
Total residential mortgage loans.... 382,061 313,890 456,486 385,268 418,270
Automobile and other Installment
Prime..................................... 163,588 140,268 52,232 84,769 61,323
Non-prime................................. 18,036 10,010 1,436 12,147 9,668
-------- -------- -------- -------- --------
Total installment loans............. 181,624 150,278 53,668 96,916 70,991
Residential construction and land.............. 168,390 136,831 144,771 87,889 47,423
Commercial real estate......................... 157,977 146,072 155,765 158,377 146,700
Commercial..................................... 10,689 6,417 4,579 1,467 403
-------- -------- -------- -------- --------
Total loans......................... 900,741 753,488 815,269 729,917 683,787
Less unearned income........................... 5,555 5,211 2,392 2,063 2,057
-------- -------- -------- -------- --------
Loans net of unearned income....... $895,186 $748,277 $812,877 $727,854 $681,730
======== ======== ======== ======== ========
The principal component of the Company's loan portfolio is residential
mortgage loans. Residential mortgage loans comprised 42.7 percent and 41.9
percent of the total loan portfolio, net of unearned income, at December 31,
2000 and 1999, respectively. Residential mortgage loans consist of conforming
loans, which are originated primarily through the Company's loan production
offices, and nonconforming loans, which are originated primarily through
correspondent relationships or through the Company's retail branch network.
Generally, conforming residential mortgage loans adhere to Fannie Mae ("FNMA"),
Freddie Mac ("FHLMC"), Federal Housing Administration or Veterans Administration
underwriting requirements. Nonconforming residential mortgage loans typically
do not exceed the standard agency maximum loan size guidelines, but the borrower
may fail to meet one or more other guidelines relating to creditworthiness, such
as acceptable debt ratios and acceptable consumer loan payment histories. See
"Business--Residential Mortgage Lending."
Automobile and other installment loans consists primarily of automobile and
manufactured housing loans, for the purchase of the home only. Most of the
automobile installment loans are originated on an indirect basis through a
network of approximately 565 automobile dealers located in Alabama, Georgia,
Florida, Tennessee, Mississippi, and Texas. Dealers are selected based on their
financial strength and references. The majority of New South's automobile
installment loans are considered to be prime loans by industry standards. New
South does offer a nonprime product to certain qualifying consumers who report
credit bureau scores below the prime threshold due to delinquencies on certain
accounts or other factors. The Company initiated a manufactured housing loan
program in August 1998 which provides for direct and indirect origination of
loans. See "Business--Automobile Installment Lending."
As a percentage of loans, net of unearned income, total automobile and
other installment loans were 20.0 percent at December 31, 1999 and 20.2 percent
at December 31, 2000. The 1999 increase in the portfolio follows a 1998
decrease resulting from a $125.0 million securitization of automobile
installment loans.
The Company originates and purchases some residential mortgage and
automobile installment loans that are available to be sold should liquidity
needs, loan portfolio mix, or other asset/liability management needs arise.
Loans may be securitized or sold directly into the secondary market. The
composition of the Company's loan portfolio may be significantly changed by the
timing and amount of these sales.
30
The Company also makes residential construction and land development loans.
As a percentage of loans, net of unearned income, these loans were 18.3 percent
at December 31, 1999 compared to 18.8 percent at December 31, 2000. All loans
in this category mature in one year or less and have a variable interest rate.
See "Business--Other Lending."
The Company maintains a minimal amount of commercial loans to certain
independent automobile dealers to finance such dealers' used automobile
inventories. Referred to as Floor Plan Loans, all are revolving in maturity
and have a variable interest rate. See "Business--Other Lending."
The amounts of total gross loans, excluding residential mortgage and
automobile installment, outstanding at December 31, 1999 and December 31, 2000,
based on remaining scheduled repayments of principal due in one year or less,
more than one year but less than five years, and more than five years are shown
in the following tables. Amounts are classified according to sensitivity to
changes in interest rates.
Maturity and Interest Rate Sensitivity of Selected Loan Categories
As of December 31, 2000
--------------------------------------------------------------------------------------------
Due After One Year But
Due in One Year or Less Within Five Years Due After Five Years
--------------------------- ------------------------- -------------------------
Fixed Variable Sub- Fixed Variable Sub- Fixed Variable Sub-
Rate Rate Total Rate Rate Total Rate Rate Total Total
----- -------- -------- -------- ------- ------ ------- ------- ------ -------
(In thousands)
Residential construction and land.. $ - $168,390 $168,390 $ - $ - $ - $ - $ - $ - $168,390
Commercial real estate............. 3,877 10,075 13,952 30,452 57,253 87,705 50,747 5,573 56,320 157,977
Commercial......................... - 10,689 10,689 - - - - - - 10,689
------ -------- -------- ------- ------ ------ ------ ------ ------- --------
$3,877 $189,154 $193,031 $30,452 $57,253 $87,705 $50,747 $5,573 $56,320 $337,056
====== ======== ======== ======= ======= ======= ======= ====== ======= ========
As of December 31, 2000
--------------------------------------------------------------------------------------------
Due After One Year But
Due in One Year or Less Within Five Years Due After Five Years
--------------------------- ------------------------- -------------------------
Fixed Variable Sub- Fixed Variable Sub- Fixed Variable Sub-
Rate Rate Total Rate Rate Total Rate Rate Total Total
----- -------- -------- -------- ------- ------ ------- ------- ------ -------
(In thousands)
Residential construction and land.. $ - $136,831 $136,831 $ - $ - $ - $ - $ - $ - $136,831
Commercial real estate............. 2,545 67,652 70,197 24,798 3,196 27,994 47,881 - 47,881 146,072
Commercial......................... - 6,417 6,417 - - - - - - 6,417
------ -------- -------- ------- ------- ------- ------- ------ ------- --------
$2,545 $210,900 $213,445 $24,798 $ 3,196 $27,994 $47,881 $ - $47,881 $289,320
====== ======== ======== ======= ======= ======= ======= ====== ======= ========
Investment Securities
Investment securities are a significant component of the Company's total
earning assets. Total investment securities averaged $183.7 million for 2000,
compared to $129.6 million in 1999. At December 31, 2000, all investment
securities were classified as available for sale and recorded at market value.
The Company elected to classify its entire securities portfolio as available for
sale in order to maximize flexibility in meeting funding requirements.
31
The following table sets forth the book value of the securities held by the
Company for the dates indicated.
Securities Available For Sale
As of December 31,
------------------------
2000 1999
-------- --------
(In thousands)
Mortgage-backed securities ("MBS").................. $109,705 $ 87,864
U. S. Treasury and federal agency securities........ 47,808 37,529
Other securities.................................... 10,663 10,310
-------- --------
Total securities available for sale............... $168,176 $135,703
======== ========
The following table sets forth the scheduled maturities and average yields
of securities held at December 31, 2000.
Available For Sale Securities
Relative Contractual Maturities and Weighted Average Yields
Due After One Due After Five
Due Within But Within But Within Due After
One Year Five Years Ten Years Ten Years
----------------- ---------------- ------------------ ---------------- Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount(2)
------ ------ ------ ----- ------ ----- ------ ----- ------
(In thousands, except percentages)
Mortgage-backed securities(1)....... $ - - % $ 26 6.72% $ 12 6.21% $109,667 6.68% $109,705
U. S. Treasury and federal agency... 6,968 5.90 34,843 5.91 5,997 6.33 - - 47,808
------ ------- ------ -------- --------
Total............................ $6,968 5.90% $34,869 5.91% $6,009 6.33% $109,667 6.68% $157,513
====== ======= ====== ======== ========
Percentage of total portfolio....... 4.42% - 22.14% - 3.81% - 69.63% -
(1) Maturity of MBS was determined based on contractual maturity.
(2) FHLB Stock of $7.7 million and interest only strip of $3.0 million are not
included.
At December 31, 1999 and 2000, 66.3 percent and 66.4 percent, respectively
of the securities portfolio consisted of mortgage-backed securities. Generally,
these securities consist of pooled, homogeneous residential mortgage loans
originated or purchased by New South and securitized with Governmental National
Mortgage Association ("GNMA"), FNMA, or FHLMC guarantees. These securities are
subject to the risk of prepayment on the underlying mortgages. At December 31,
1999 and 2000, 28.3 percent and 28.9 percent, respectively of the securities
portfolio consisted of United States Treasury and federal agency securities,
which are backed by the full faith and credit of the United States government or
its agencies.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $61.9 million, or 6.5
percent, to $1.02 billion in 2000 from $955.3 million in 1999. The primary
reason for the increase is attributable to growth in average interest-bearing
deposits, which increased $38.7 million, or 5.4 percent, to $755.2 million in
2000 from $716.6 million in 1999. To a lesser extent, other borrowed funds,
primarily securities sold under agreements to repurchase, increased by $21.6
million, or 47.5 percent from $45.4 million in 1999 to $67.0 million in 2000.
32
Deposits
Deposits are a significant source of funding for the Company. The
Company's loan-to-deposit ratio was 98.0 percent at December 31, 2000 and 100.4
percent at December 31, 1999. The Company has been able to attract deposits
throughout the United States by consistently paying nationally competitive
rates.
The following table sets forth the average deposits of the Company by
category for the dates indicated.
Average Deposits
As of December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Time............................... $677,502 $629,829 $593,775
Savings............................ 73,858 83,035 61,657
Non-interest bearing............... 57,385 76,507 91,125
Interest-bearing demand............ 3,845 3,689 3,020
-------- -------- --------
Total average deposits...... $812,590 $793,060 $749,577
======== ======== ========
The increase in average deposits is primarily due to the increase in
average time deposits, which increased $47.7 million, or 7.6 percent, from
$629.8 million in 1999 to $677.5 million in 2000. At December 31, 2000, brokered
deposits totaled $290.9 million, or 31.8 percent of total deposits, compared
with $217.5 million at December 31, 1999, or 29.2 percent of total deposits. The
Company has relied upon brokered deposits as a significant funding source during
1999 and 2000 and is expected to maintain reliance on such funding in the
future.
Savings accounts, including money market accounts, averaged $83.0 million
in 1999 and $73.9 million in 2000, a decrease of $9.1 million, or 11.1 percent.
There was a decrease in average noninterest-bearing demand deposits of
$19.1 million, or 25.0 percent, from $76.5 million at December 31, 1999 to $57.4
million at December 31, 2000. This decrease is due primarily from a decline in
the number and dollar volume of residential mortgage loan originations and their
effect on outstanding official checks used to fund such loans.
The maturity distribution of the Company's time deposits over $100,000 as
of December 31, 2000 is set forth in the following table.
Certificates of Deposits Greater Than $100,000
Maturity Schedule
(In thousands)
Three months or less.............................. $202,308
Over three months through six months.............. 42,427
Over six months through twelve months............. 24,123
Over twelve months................................ 71,717
--------
$340,575
========
Approximately 67.6 percent of the Company's time deposits over $100,000 had
scheduled maturities within 3 months. These deposits are primarily obtained
through the broker network.
Borrowed Funds
Borrowed funds consist primarily of federal funds purchased, securities
sold under agreements to repurchase, and advances from the FHLB. The following
table sets forth information regarding the Company's borrowings over the periods
indicated.
33
Short-Term Borrowings
Weighted Average Average
Average Maximum Ending Interest Rate at Rate
Balance Outstanding Balance Year-End Paid
--------- ----------- -------- ---------------- -------
(In thousands, except percentages)
As of and for the year ending December 31, 2000
Federal funds purchased and securities sold under
agreement to repurchase................................ $ 60,132 $ 83,808 $ 53,213 6.66% 6.80%
FHLB advances............................................ 160,397 193,416 133,415 6.80% 6.37%
As of and for the year ending December 31, 1999
Federal funds purchased and securities sold under
agreement to repurchase................................ $ 42,132 $ 73,054 $ 50,923 6.09% 5.29%
FHLB advances............................................ 158,782 218,418 128,417 5.87% 5.33%
As of and for the year ending December 31, 1998
Federal funds purchased and securities sold under
agreement to repurchase................................ $ 47,827 $ 85,573 $ 68,800 5.52% 4.85%
FHLB advances............................................. 151,476 231,418 198,418 5.38% 5.84%
Average FHLB advances for 2000 were $160.4 million compared to $158.8
million for 1999, an increase of $1.6 million. The Company intends to continue
to use these advances as a significant funding source. Total advances were
$133.4 million at December 31,2000.
Capital
The OTS requires thrift financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0 percent to 100 percent. Under the
risk-based standard, capital is classified into two tiers. Tier 1 capital of
New South consists of common shareholder's equity, excluding the unrealized gain
or loss on securities available for sale, plus minority interest in consolidated
subsidiaries. New South's Tier 2 capital consists of the general reserve for
possible loan losses subject to certain limitations. Certain capital ratios
require deductions from tier 1 capital for certain high loan-to-value ratio
loans and low level recourse assets. 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:
34
Analysis of Capital
As of December 31,
-------------------------------------
2000 1999
-------------------------------------
(In thousands, except for percentages)
Shareholder's equity................................... $ 98,345 $ 84,518
Minority interest in consolidated
subsidiaries........................................... 206 96
Unrealized (gains) losses on investment securities
available for sale.................................... (215) 3,923
-------- --------
Tier 1 capital...................................... 98,336 88,537
Allowance for loan losses............................. 9,282 9,321
-------- --------
Tier 2 capital...................................... 9,282 9,321
Certain high loan-to-value ratio level.................. 150 36
Low level recourse deduction............................ 8,259 7,569
-------- --------
Total deductions.................................... 8,409 7,605
-------- --------
Total risk-based capital............................ $ 99,209 $ 90,253
======== ========
Risk-weighted assets (including off-balance
sheet exposure)................................... $898,939 $745,723
Tier 1 leverage ratio.................................. 8.05% 8.64%
Total risk-based capital ratio......................... 11.04 12.10
Tier 1 risk-based capital ratio(1)..................... 10.02 10.86
- ------------
(1) Tier 1 capital utilized in the tier 1 capital ratio is reduced by the low
level recourse deduction.
New South has consistently exceeded regulatory minimum guidelines and it is
the intention of management to continue to monitor these ratios to ensure
regulatory compliance and maintain adequate capital for New South. New South's
current capital ratios place New South in the regulatory defined well-
capitalized category.
Liquidity Management and Capital Resources
Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of a company to convert assets into
cash or cash equivalents without significant loss and to raise additional funds
by increasing liabilities. Without proper liquidity management, the Company
would not be able to perform the primary function of a financial intermediary
and would, therefore, not be able to meet the needs of the customers it serves.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities in the investment securities available for sale
portfolio is predictable and is, therefore, subject to a high degree of control
at the time investment decisions are made. However, net deposit inflows and
outflows are less predictable and are not subject to the same degree of control.
New South is required by OTS regulations to maintain minimum levels of
liquid assets. This requirement, which may be changed at the discretion of the
OTS depending upon economic conditions and net deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently four percent. New South management monitors liquidity closely and
continues to ensure liquidity ratios are in excess of the minimum requirements.
35
The Company depends on deposits, including brokered certificates of
deposit, FHLB advances, and reverse repurchase agreements as primary sources of
liquidity. Brokered deposits approximated 31.8 percent of total deposits as of
December 31, 2000. These brokered deposits are either deposits solicited by the
Company from national and regional brokerage firms, which accounted for
approximately $290.9 million of deposits at December 31, 2000, or are
unsolicited and are brought to New South by the Company's competitive rates.
The solicited brokered deposits are utilized as alternative funding sources that
are often cheaper than retail deposits or other funding sources. However, this
funding source is highly interest rate sensitive and, as such, the Bank never
considers brokered deposits, either singly or as a whole, to be a permanent
funding source. In the unlikely event that the Company is unable to replace or
maintain a current level of brokered certificate of deposit funding, the Company
can either increase efforts in the retail deposit market or can utilize any of
the various alternative funding sources available. As of December 31, 2000,
alternative funding sources included $45.0 million of available lines to
purchase federal funds, $1.1 million of unused revolving credit facilities, $8.6
million unused warehousing lines of credit from other financial institutions
related to the New South Joint Ventures, and $149 million in unused FHLB
borrowing capacity. The Company also had $22.5 million of unpledged investment
securities available for sale to serve as security for additional borrowings.
Reliance on all funding sources is monitored on an ongoing basis to insure no
reliance upon a single source and to insure that adequate reserve sources are
available, if needed.
New South anticipates completing the securitization of approximately $225
million in primarily residential nonconforming loans in March 2001. Upon
settlement, currently acticipated to be March 29, 2001, New South will utilize
the sale proceeds to reduce its borrowings with the FHLB and other short-term
borrowings.
Accounting Rule Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). In June 2000, the
FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Hedging Activities - an Amendment of SFAS 133. SFAS 133, as amended, 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. SFAS 133 is
effective for fiscal quarters of fiscal years beginning after June 15, 2000.
The Company adopted SFAS 133 effective January 1, 2001 and recognized a
cumulative-effect transition adjustment of approximately $1.1 million to
decrease net income for the effect of the change in the accounting principle.
Additionally, the Company recognized a cumulative-effect transition adjustment
to reduce accumulated other comprehensive income ("OCI") by $3.1 million on a
pre-tax basis. The transition adjustment to OCI represents net unrealized
losses on derivative instruments that qualify as cash flow hedges of certain
mortgage-backed securities, adjustable rate mortgage loans, loans available for
sale, automobile installment loans, and certain certificates of deposit.
Cumulative gains in future cash flows associated with the related mortgage-
backed securities, adjustable rate mortgage loans, loans available for sale,
automobile installment loans, and certificates of deposit are expected to offset
the aforementioned net unrealized losses included in OCI. Pursuant to SFAS 133,
the amount recorded in OCI will be reclassified into earnings when the hedged
forecasted transaction affects earnings.
As required under SFAS 133, hedge ineffectiveness of cash flow hedges will
be reclassified into earnings based on the extent to which changes in the value
of designated hedge instruments do not effectively offset changes in the value
of hedged items. As a result, earnings volatility can be expected which could
be material to future results of operations. The extent of hedge
ineffectiveness is influenced by a number of factors including future interest
rate volatility, hedge performance and correlation.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125 ("SFAS 140"). This statement revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral along with requiring certain disclosures. This statement is
effective for the transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. It is effective
for recognition and reclassification of collateral for fiscal years ending after
December 15, 2000, which were immaterial to the Company's financial
36
statement presentation. Management does not expect the other requirements of
this standard to have a significant impact on the financial statements.
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.
37
New South Bancshares, Inc.
Consolidated Financial Statements
December 31, 2000 and 1999
New South Bancshares, Inc.
Consolidated Financial Statements
December 31, 2000 and 1999
Contents
Report of Independent Public Accountants............ 40
Audited Financial Statements
Consolidated Balance Sheets...................... 41
Consolidated Income Statements................... 42
Consolidated Statements of Shareholders' Equity.. 43
Consolidated Statements of Cash Flows............ 44
Notes to Consolidated Financial Statements....... 45
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New South Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of NEW SOUTH
BANCSHARES, INC. AND SUBSIDIARIES (a Delaware corporation) as of December 31,
2000 and 1999 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New South Bancshares, Inc. and
Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARHTUR ANDERSEN LLP
Birmingham, Alabama
February 28, 2001
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------------
2000 1999
-----------------------------------------
(In thousands)
ASSETS
Cash and due from banks $ 14,286 $ 6,943
Interest-bearing deposits in other banks 11,033 11,732
Investment securities available for sale 168,176 135,703
Residual interest in loan securitizations 8,259 7,569
Loans available for sale 74,449 66,258
Loans, net of unearned income 895,186 748,277
Allowance for loan losses (13,513) (11,114)
---------- ----------
Net Loans 881,673 737,163
Premises and equipment, net 9,049 10,249
Mortgage servicing rights, net 16,176 16,101
Other assets 39,676 29,389
---------- ----------
Total Assets $1,222,777 $1,021,107
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 63,037 $ 47,678
Interest-bearing 853,189 697,407
---------- ----------
Total Deposits 916,226 745,085
Federal funds purchased and securities sold under
agreements to repurchase 53,213 50,923
Federal Home Loan Bank advances 133,415 128,417
Notes payable 11,599 6,115
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 13,816 8,759
---------- ----------
Total Liabilities 1,162,769 973,799
Commitments and contingencies (see Note 21)
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares; issued
and outstanding: 1,255,537.1 at December 31, 2000 and 1999) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 29,062 20,500
Accumulated other comprehensive income (loss) 215 (3,923)
---------- ----------
Total Shareholders' Equity 60,008 47,308
---------- ----------
Total Liabilities and Shareholders' Equity $1,222,777 $1,021,107
========== ==========
See accompanying notes to consolidated financial statements.
41
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
Years ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands, except per share data)
Interest Income:
Interest on securities available for sale $13,372 $ 7,704 $11,927
Interest on loans 84,113 76,829 70,844
Interest on other short-term investments 519 823 480
------- ------- -------
Total Interest Income 98,004 85,356 83,251
Interest Expense:
Interest on deposits 47,856 39,833 38,724
Interest on federal funds purchased and securities sold
under agreements to repurchase 4,090 2,232 2,785
Interest on Federal Home Loan Bank advances 10,914 8,461 8,851
Interest on notes payable 796 126 366
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 2,932 2,932 1,573
------- ------- -------
Total Interest Expense 66,588 53,584 52,299
Net Interest Income 31,416 31,772 30,952
Provision for Loan Losses 5,565 3,638 3,944
------- ------- -------
Net Interest Income After Provision for Loan Losses 25,851 28,134 27,008
Noninterest Income:
Loan administration income 11,409 10,348 5,143
Origination fees 8,190 9,758 11,376
Gain/(Loss) on sale of investment securities available for sale (639) 381 (942)
Gain on sale of loans and mortgage servicing rights 14,599 12,058 12,435
Other income 5,981 5,424 5,558
------- ------- -------
Total Noninterest Income 39,540 37,969 33,570
Noninterest Expense:
Salaries and benefits 31,005 34,347 26,286
Net occupancy and equipment expense 5,962 6,193 4,024
Other expense 17,665 21,566 18,443
------- ------- -------
Total Noninterest Expense 54,632 62,106 48,753
------- ------- -------
Income Before Income Taxes 10,759 3,997 11,825
Provision for Income Taxes 644 1,406 5,088
------- ------- -------
Net Income $10,115 $ 2,591 $ 6,737
======= ======= =======
Weighted average shares outstanding 1,256 1,255 1,333
Earnings per share $ 8.05 $ 2.06 $ 5.05
See accompanying notes to consolidated financial statements.
42
NEW SOUTH BANCSHARES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Surplus Earnings Income (Loss) Equity
--------- -------- --------- --------------- ------------
(In thousands)
Balance at January 1, 1998 $1,377 $38,896 $11,172 $ 869 $52,314
Comprehensive Income:
Net income - - 6,737 - 6,737
Change in unrealized loss on securities
available for sale, net of tax - - - (818) (818)
-------
Total comprehensive income 5,919
Stock repurchase and retirement (127) (9,666) - - (9,793)
------ ------- ------- ------- -------
Balance at December 31, 1998 1,250 29,230 17,909 51 48,440
Comprehensive Loss:
Net income - - 2,591 - 2,591
Change in unrealized loss on securities
available for sale, net of tax - - - (3,974) (3,974)
-------
Total comprehensive loss (1,383)
Issuance of common stock 6 245 - - 251
------ ------- ------- ------- -------
Balance at December 31, 1999 1,256 29,475 20,500 (3,923) 47,308
Comprehensive Income:
Net income - - 10,115 - 10,115
Change in unrealized gain on securities
available for sale, net of tax - - - 4,138 4,138
-------
Total comprehensive income 14,253
Common dividends declared
($1.24 per share) - - (1,553) - (1,553)
------ ------- ------- ------- -------
Balance at December 31, 2000 $1,256 $29,475 $29,062 $ 215 $60,008
====== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
43
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------------------
2000 1999 1998
--------------------------------------------------------
(In thousands)
Operating Activities:
Net income $ 10,115 $ 2,591 $ 6,737
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for (benefit of) deferred taxes (766) 1,552 890
Accretion of discounts and fees (2,275) (676) (423)
Provision for loan losses 5,565 3,638 3,944
Depreciation and amortization 2,702 2,456 1,182
Amortization of mortgage servicing rights 3,027 2,387 635
(Gain) loss on sale of investment securities available for sale 639 (381) 942
Purchase of loans available for sale - (3,997) (2,756)
Origination of loans available for sale (508,676) (633,384) (1,013,667)
Proceeds from the sale of loans available for sale and
servicing rights 450,151 454,401 425,383
Loss on sale of premises and equipment - 26 -
Gain on sale of loans available for sale and mortgage
servicing rights (14,599) (12,058) (12,435)
Increase in other assets (12,904) (20,931) (12,281)
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities 4,583 (8,257) 862
--------- --------- -----------
Net Cash Used in Operating Activities (62,438) (212,633) (600,987)
Investing Activities:
Net (increase) decrease in interest-bearing
deposits in other banks 699 45,305 (46,733)
Proceeds from sales of investment securities available
for sale 85,407 214,951 674,201
Proceeds from maturities and calls of investment securities
available for sale 13,472 43,879 88,120
Purchases of investment securities available for sale (23,286) (39,381) (49,026)
Net (increase) decrease in loan portfolio (188,546) 63,754 (197,886)
Purchases of premises and equipment (2,547) (4,962) (6,099)
Proceeds from sale of premises and equipment 1,045 91 25
Net (investment in) proceeds from sale of real estate owned 164 (2,159) (269)
--------- --------- -----------
Net Cash Provided by (Used in) Investing Activities (113,592) 321,478 462,333
Financing Activities:
Net increase (decrease) in noninterest-bearing deposits 15,359 (26,195) 2,976
Net increase (decrease) in interest-bearing deposits 155,782 (4,168) 77,107
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 2,290 (17,877) 28,000
Net increase (decease) in note payable 6,497 6,115 (10,000)
Proceeds from the assurance of guaranteed preferred
beneficial interests in the Company's subordinated
debentures in the Company's subordinated debentures - - 34,500
Net increase (decrease) of Federal Home Loan Bank Advances 4,998 (70,001) 18,998
Dividends paid (1,553) - -
Proceeds from the issuance of common sock - 251 -
Repurchase and retirement of common stock - - (9,793)
--------- --------- -----------
Net Cash Provided by (Used in) Financing Activities 183,373 (111,875) 141,788
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents 7,343 (3,030) 3,134
Cash and cash equivalents at beginning of year 6,943 9,973 6,839
--------- --------- -----------
Cash and cash equivalents at end of year $ 14,286 $ 6,943 $ 9,973
========= ========= ===========
Supplemental information:
Interest paid $ 63,998 $ 54,152 $ 54,458
Income taxes paid (received) $ (250) $ (140) $ 5,649
See accompanying notes to consolidated financial statements.
44
New South Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 2000
1. Summary of Significant Accounting Policies
------------------------------------------
New South Bancshares, Inc. ("Bancshares" or 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"). NSMS was formed during the second quarter of 2000. NSMS performs
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. and significant interest in four joint ventures (the
"New South Joint Ventures"). The consolidated financial statements presented
primarily represent the accounts of Bancshares and New South. The New South
Joint Ventures are consolidated with their non New South interests included in
other accrued expenses, deferred revenues, and other liabilities. All
significant intercompany accounts or transactions have been eliminated upon
consolidation. Certain accounting principles which significantly affect the
determination of financial position, results of operations and cash flows are
summarized below. Certain amounts in the prior year's financial statements have
been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on previously reported net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes
in the near term relate to the estimate of prepayment speeds in connection with
the valuation of mortgage servicing rights and the estimation of the allowance
for loan losses. For the valuation of mortgage servicing rights, management
obtains external information, evaluates overall portfolio characteristics and
monitors economic conditions to arrive at appropriate prepayment speeds and
other assumptions.
Cash and Due From Banks
For the purpose of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks. New South maintains cash balances with the
Federal Reserve when required. As of December 31, 2000 and 1999, reserve
requirements amounted to $2.8 million and $1.3 million, respectively.
Investment Securities Available for Sale
Investment securities available for sale consist of bonds, notes, debentures,
interest only strips and certain equity securities which are classified as
available for sale and are carried at fair value. Any unrealized gains or losses
are reported as a net amount in other comprehensive income or loss, net of any
tax effect. Realized gains and losses on the sales of investment securities
available for sale are determined using the specific identification method and
are included in noninterest income. Any premiums and discounts are recognized in
interest income using the effective interest method over the period to maturity.
Interest only strips ("IOs") are financial investments which represent the
right to receive earnings from assets that contain excess interest income which
is stripped from the underlying interest earning asset. IOs are
45
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
recorded as assets by determining the net present value of the excess interest
income stream generated by the assets. To determine the fair value of IOs, the
Company uses market prices for comparable assets and a valuation model that
calculates the present value of the estimated cash flows. Interest income is
recorded on these securities based on their expected internal rate of return,
which is reevaluated periodically. A quarterly impairment analysis is performed
using discounted cash flow methodology comparable to yields on similar assets.
Declines in value judged to be other than temporary as well as realized gains
and losses are reported in noninterest income. Key assumptions used in the
initial recording and on-going valuation and impairment analyses relate to
prepayment speeds, discount rates, and loss experience.
Residual Interest in Loan Securitizations
Residual interest in loan securitizations ("Residuals") are financial
investments which represent the right to receive excess cash flow from loan
securitizations. Residuals are recorded as assets by determining the net
present value of the excess interest income stream generated by the assets. To
determine the fair value of Residuals, the Company uses a valuation model that
calculates the present value of the estimated cash flows and market prices of
comparable assets where appropriate. Interest income is recorded on these
securities based on their expected internal rate of return, which is reevaluated
periodically. A quarterly impairment analysis is performed using discounted
cash flow methodology comparable to yields on similar assets. Declines in value
judged to be other than temporary as well as realized gains and losses are
reported in noninterest income. Key assumptions used in the initial recording
and on-going valuation and impairment analyses relate to prepayment speeds,
discount rates, and loss experience.
Loans Available for Sale
Loans available for sale are reported at the lower of cost or market, as
determined in the aggregate. Gains or losses on the sale of these assets are
included in noninterest income while interest collected on these assets is
included in interest income.
Loans
All loans are stated at principal balances outstanding, adjusted for any
amounts charged off, discounts or premiums on loans purchased from others, and
discount points collected at origination. Interest income on loans is credited
to income based upon the principal amount of the loans outstanding using
contractual rates of interest. Amortization of discounts and premiums on loans
is calculated using the effective interest method and included in interest
income over the period to maturity.
Certain impaired loans are reported at the present value of expected future
cash flows using the loan's effective interest rate. Others are reported at the
loan's observable market price or the fair value of the collateral, if the loan
is collateral dependent. Residential mortgage loans and installment loans,
primarily automobile, are evaluated collectively for impairment. At December
31, 2000 and 1999, the recorded investment in loans that were considered to be
impaired under Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS No. 5
and 15, were $6.1 million and $5.1 million, respectively. The related
allowances for loan losses on impaired loans were $1.3 million and $1.0 million
at December 31, 2000 and 1999, respectively.
It is the policy of New South to stop accruing interest income and place the
recognition of interest on a cash basis when any loan is past due more than 90
days as to principal or interest or if the ultimate collection of either is in
doubt. Any interest previously accrued but not collected is reversed against
current income when a loan is placed on a nonaccrual basis. Generally, New
South has a mortgage lien on all property on which mortgage loans are made in
order to protect New South's interest in both the principal amounts outstanding
and interest collections. Additionally, portions of certain mortgage loan
balances are insured by private or government guaranty or insurance policies.
Loans collateralized by savings accounts are secured by savings account balances
46
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
in excess of the outstanding loan amount. The amount of interest income earned
during 2000 and 1999 on nonaccrual loans outstanding at year-end was
approximately $.5 million and $.2 million, respectively. If these loans had
been current in accordance with their original terms, approximately $1.3 million
and $.6 million would have been earned on these loans during 2000 and 1999,
respectively.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for losses inherent in the portfolio. The provision for loan losses
charged to income is determined by various factors including actual loss
experience, the current volume and condition of loans in the portfolio, changes
in the composition of the portfolio, known and inherent risks in the portfolio,
and current and expected economic conditions. Such provisions, less net loan
charge-offs, comprise the allowance for loan losses and is available for future
loan charge-offs. New South follows a policy of charging off loans which
management determines to be uncollectible. Subsequent recoveries are credited
to the allowance.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the double-declining balance method
over the estimated useful lives of the properties or equipment. Estimated
useful lives are generally as follows:
Building 29 - 40 years
Leasehold improvements 7 - 40 years
Furniture and equipment 3 - 7 years
Mortgage Servicing Rights
The Company sells a substantial portion of its originated loans into the
secondary market by securitizing pools of loans and sales to private investors.
During 2000, the Company sold approximately $118.0 million of mortgage loans
primarily in agency securitizations. Mortgage servicing rights ("MSRs") are
capitalized based on relative fair values of the mortgages and MSR when the
mortgages are sold.
The fair values of MSRs are based on an analysis of various loan
characteristics, including interest rates, maturities, and product types. These
characteristics are used to stratify the servicing portfolio on which MSRs have
been recognized to determine valuation and impairment. Impairment is recognized
for the amount by which MSRs for a stratum exceed their fair value. The Company
amortizes MSRs over the estimated lives of the underlying loans in proportion to
the resultant servicing income stream.
Foreclosed Real Estate Owned and Repossessed Assets
Real estate owned arises from loan foreclosure or deed in lieu of foreclosure
and is reported at the lower of cost or net realizable value. Any resultant
writedown at the time of foreclosure/repossession is charged to the allowance
for loan losses. Subsequent gains or losses on the sale or losses from
valuation of these properties are credited or charged to income. Costs of
improvements made to facilitate sale are capitalized while costs of holding the
property are charged to expense. Allowances, if any, are recorded for any
anticipated costs to dispose.
Real estate owned, which is included in Other Assets at December 31, 2000 and
1999, totaled $3.1 million and $3.3 million, respectively. Repossessed
assets, also included on Other Assets, totaled $1.1 million and $.2 million
at December 31, 2000 and 1999, respectively.
47
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
Recognition of Income
Loan administration income primarily represents fees earned in connection
with the servicing of real estate mortgage loans for investors. Such income is
recognized concurrent with the receipt of the related mortgage payments and is
usually based on the outstanding principal balances of the loans serviced.
Gains or losses on sales of mortgages are recognized based upon the
difference between the selling price and the carrying value of the related loans
sold.
Income Taxes
Effective January 1, 1999, the Company elected S Corporation status.
Corporations electing such treatment under the Internal Revenue Code generally
are not subject to Federal corporate taxation. Certain states, however, do not
recognize S Corporation status; therefore, the Company incurs state income taxes
for those jurisdictions. Profits and losses flow through to the S Corporation
shareholders directly in proportion to their per share ownership in the entity.
Accordingly, shareholders will be required to include profits and losses from
the Company on their individual income tax returns for federal, and state and
local, if applicable, income tax purposes.
Typically S Corporations declare dividends to shareholders in an amount
sufficient to enable shareholders to pay the tax on any S Corporation income
included in the shareholder's individual income. The Company declared dividends
of $1.6 million during 2000, which are generally not subject to tax since they
result from S Corporation income on which shareholders have previously been
taxed. There were no dividends declared in 1999.
The consolidated financial statements have been prepared on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes and for purposes of computing income taxes
currently payable, deferred taxes are provided on such temporary differences.
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. As changes in the
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes in the period of enactment.
Bancshares and the Bank have entered into a tax sharing agreement by which a
consolidated return is filed each calendar year.
Earnings Per Share
SFAS No. 128, Earnings Per Share requires dual presentation of basic and
diluted earnings per share for companies with potentially dilutive securities.
There are no dilutive securities issued or outstanding for the years ended
December 31, 2000, 1999 and 1998 and, therefore, basic and diluted presentations
are the same. Weighted average shares outstanding at December 31, 2000, 1999
and 1998 were 1,256,000, 1,255,000, and 1,333,000, respectively.
Off-Balance Sheet Financial Instruments
Interest Rate Swaps and Caps
New South has from time to time utilized various off-balance sheet
instruments, such as interest rate swaps and caps, which are designated to hedge
imbalances in the Bank's sensitivity to fluctuating interest rates for
designated assets and liabilities. To qualify as a hedge used to manage
interest rate risk, the following criteria must be met: (1) the asset or
liability to be hedged exposes the institution, as a whole, to the interest rate
risk,
48
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
(2) the instrument alters or reduces sensitivity to interest rate changes, and
(3) the instrument is designated and effective as a hedge. If the designated
asset or liability being hedged is terminated, matures or is sold, any realized
or unrealized gain or loss from the related off-balance sheet product would be
recognized in noninterest income coincident with the extinguishment or
termination.
New South has entered into interest rate swap agreements to modify the
interest rate characteristics of some of its mortgage loans and certificates of
deposit. These agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
agreement without an exchange of the notional amount upon which the payments are
based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest income or expense related to
the assets or liabilities being hedged. The related amounts payable to or
receivable from counterparties are included in other liabilities or assets.
Typically, there are no up-front costs involved in these agreements.
New South has purchased interest rate cap agreements to modify the interest
rate characteristics of designated liabilities. The strike price of these
agreements exceeded the current market levels at the date of inception. The
interest rate indices specified by the agreements have been, and are expected to
be, highly correlated with the interest rates New South incurs on its
liabilities. Payments to be received as a result of the specified interest rate
index exceeding the strike price are accrued in other assets and are recognized
as an adjustment of interest expense. The costs of these agreements are
amortized to expense over the life of the agreement.
Other Off-Balance Sheet Instruments
In the ordinary course of business New South has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit, letters
of credit, and forward delivery contracts. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Hedging Activities - an Amendment of SFAS 133. SFAS
133, as amended, 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.
The Company adopted SFAS 133 effective January 1, 2001, and recognized a
cumulative-effect transition adjustment of approximately $1.1 million to
decrease net income for the effect of the change in the accounting principle.
Additionally, the Company recognized a cumulative-effect transition adjustment
to reduce accumulated other comprehensive income ("OCI") by $3.1 million on a
pre-tax basis. The transition adjustment to OCI represents net unrealized
losses on derivative instruments that qualify as cash flow hedges of certain
mortgage-backed securities, adjustable rate mortgage loans, loans available for
sale, automobile installment loans, and certain certificates of deposit.
Cumulative gains in future cash flows associated with the related mortgage-
backed securities, adjustable rate mortgage loans, loans available for sale,
automobile installment loans, and certificates of deposit are expected to offset
the aforementioned unrealized losses included in OCI. Pursuant to SFAS 133, the
amount recorded in OCI will be reclassified into earnings when the hedged
forecasted transaction affects earnings.
As required under SFAS 133, hedge ineffectiveness of cash flow hedges will be
reclassified into earnings based on the extent to which changes in the value of
designated hedge instruments do not effectively offset changes in the value of
hedged items. As a result, earnings volatility can be expected which could be
material to future results of operations. The extent of hedge ineffectiveness
is influenced by a number of factors including future interest rate volatility,
hedge performance and correlation.
49
1. Summary of Significant Accounting Policies - continued
------------------------------------------------------
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125 ("SFAS 140"). This statement revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral along with requiring certain disclosures. This statement is effective
for the transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. It is effective for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000,
which were not material to the Company's financial statements. Management does
not expect the other requirements of this standard to have a significant impact
on the financial statements.
2. Business Acquisition and Divestiture
------------------------------------
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 Corporation ("AFC") to
hold the acquired assets and the assumed acquisition liabilities and related
operations. In July 1999, AFC's name was changed to Avondale Funding.com, inc.
("Avondale"). On May 31, 2000, New South sold its operations in Avondale and is
currently in the process of disposing of the remaining assets.
3. Investment Securities Available For Sale
----------------------------------------
The fair value and amortized cost of securities available for sale and the
related unrealized gains and losses for each category are presented as follows:
50
3. Investment Securities Available For Sale - continued
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- ----------------- --------- ---------- ----------- ---------
(In thousands)
Mortgage-backed securities $109,663 $ 759 $ 717 $109,705
U.S. Treasury and Federal
agency securities 47,622 467 281 47,808
Other 10,663 - - 10,663
-------- ------ ------ --------
$167,948 $1,226 $ 998 $168,176
======== ====== ====== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- ----------------- --------- ---------- ----------- ---------
(In thousands)
Mortgage-backed securities $ 90,465 $ 130 $2,731 $ 87,864
U.S. Treasury and Federal
agency securities 39,065 - 1,536 37,529
Other 10,310 - - 10,310
-------- ------ ------ --------
$139,840 $ 130 $4,267 $135,703
======== ====== ====== ========
The contractual maturities of the securities available for sale are presented
in the following table for 2000 and 1999:
2000 1999
------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ---------
(In thousands)
Due in one year or less $ 7,000 $ 6,968 $ 5,001 $ 4,970
Due after one year through five years 34,762 34,843 34,064 32,559
Due after five years through ten years 5,860 5,997 - -
Mortgage-backed securities 109,663 109,705 90,465 87,864
Equity securities and interest only strips 10,663 10,663 10,310 10,310
-------- -------- -------- --------
$167,948 $168,176 $139,840 $135,703
======== ======== ======== ========
Proceeds from sales of available for sale securities were $85.4 million in
2000, $215.0 million in 1999 and $674.2 million in 1998. Gross realized gains
on securities available for sale for 2000, 1999, and 1998 were $1.4 million,
$4.8 million, and $4.7 million, respectively. Gross realized losses on
securities available for sale for 2000, 1999 and 1998 were $2.0 million, $4.4
million, and $5.6 million, respectively.
At December 31, 2000 and 1999, New South had securities of $142.2 million and
$126.0 million, respectively, pledged to secure certain Federal Home Loan Bank
("FHLB") advances, arrangements for the sale of securities under agreements to
repurchase, interest rate swap contracts, and state and municipal deposits.
There were no securities classified as trading securities during 2000, 1999,
or 1998; therefore, no gains or losses on this security classification have been
included in income.
51
4. Comprehensive Income
--------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income is the change in equity during a period from transactions
and other events and circumstances from nonowner sources. For New South,
changes in other nonowner transactions consist entirely of changes in unrealized
gains and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as part
of net income and other comprehensive income during that or earlier periods.
The following table reflects the reclassification amounts and the related tax
effect for the three years ended December 31:
2000
-------------------------------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-------- -------- ----------
Net unrealized gains (losses) arising during the period $ 3,726 $ 189 $ 3,537
Reclassification adjustments for net (gains) losses
included in net income 639 38 601
------- ----- -------
$ 4,365 $ 227 $ 4,138
======= ===== =======
1999
-------------------------------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-------- -------- ----------
Net unrealized gains (losses) arising during the period $(3,836) $(105) $(3,731)
Reclassification adjustments for net (gains) losses
included in net income (381) (138) (243)
------- ----- -------
$(4,217) $(243) $(3,974)
======= ===== =======
1998
-------------------------------------------------------
(In thousands)
Before After
Tax Tax Tax
Amount Effect Amount
-------- -------- ----------
Net unrealized gains (losses) arising during the period $(2,309) $(898) $(1,411)
Reclassification adjustments for net (gains) losses
included in net income
942 349 593
------- ----- -------
$(1,367) $(549) $ (818)
======= ===== =======
52
5. Loans
-----
New South's primary line of business is the origination of residential
mortgage loans which New South classifies as either conforming or nonconforming.
Conforming loans are typically single family loans which generally have been
underwritten and processed in accordance with standard government or federal
agency guidelines including Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal
Housing Administration ("FHA") and Veterans Administration ("VA"). Conforming
residential mortgage loans are fixed-rate and adjustable-rate residential first
mortgage loans with 15 year or 30 year terms generally secured by owner-occupied
residences. Nonconforming loans typically do not exceed the standard agency
maximum loan size guidelines but may fail to meet one or more other guidelines
relating to creditworthiness, such as acceptable debt ratios and acceptable
consumer loan payment histories. New South originates only fixed rate products
in the nonconforming residential mortgage area.
The majority of New South's automobile installment loans are considered to be
prime loans by industry standards. Generally, the industry classifies prime and
nonprime customers based on the creditworthiness of the consumer. The Company
also classifies as prime an immaterial amount of other nonautomobile installment
loans secured by deposits, boats and recreational vehicles, and some unsecured
signature loans. The terms of nonprime automobile installment loans are
established by New South underwriters based on a variety of factors in
accordance with New South's underwriting guidelines which have been specifically
designed to evaluate nonprime customers.
Commercial loans are generally multi-family real estate. An immaterial
number of commercial loans relate to operating loans to commercial entities and
may be secured by inventories or other assets. Most commercial loans carry
variable interest rates with maturities consistent with industry standards for
the type of instrument, typically 30 years for the real estate related loans.
New South's residential construction and land lending efforts involve making
loans to builders for the construction of single family properties and, on a
more limited basis, loans for the acquisition and development of improved
residential lots.
The composition of the loan portfolio as of December 31, 2000 and 1999 was as
follows:
2000 1999
-------- --------
(In thousands)
Residential Mortgage:
Conforming $200,651 $268,377
Nonconforming 181,410 45,513
-------- --------
382,061 313,890
Installment (automobile and other)
Prime 163,588 140,268
Non prime 18,036 10,010
-------- --------
181,624 150,278
Residential construction and land 168,390 136,831
Commercial real estate 157,977 146,072
Commercial 10,689 6,417
-------- --------
900,741 753,488
Less unearned income 5,555 5,211
-------- --------
$895,186 $748,277
======== ========
53
5. Loans - continued
-----------------
The undisbursed portion of mortgage and construction loans was $29.8 million
and $72.2 million at December 31, 2000 and 1999, respectively.
6. Allowance for Loan Losses
-------------------------
A summary of the activity in the allowance for loan losses for the
years ended December 31, 2000, 1999, and 1998 is presented as follows:
2000 1999 1998
-------- ----------- ---------
(In thousands)
Balance at beginning of year $11,114 $ 9,107 $ 7,333
Provision for loan losses 5,565 3,638 3,944
Loans charged off 4,776 3,186 3,205
Loan recoveries (1,610) (1,555) (1,035)
-------- -------- --------
Net charge-offs 3,166 1,631 2,170
-------- -------- --------
Balance at end of year $13,513 $11,114 $ 9,107
======== ======== ========
7. Premises and Equipment
- -- ----------------------
Major classifications of premises and equipment as of December 31, 2000 and
1999 are summarized as follows:
2000 1999
(In thousands)
Land $ 600 $ 600
Building and leasehold improvements 6,511 6,238
Furniture and equipment 9,756 8,619
------- -------
16,867 15,457
Less accumulated depreciation and amortization 7,818 5,208
------- -------
$ 9,049 $10,249
======= =======
54
8. Mortgage Servicing Rights and Retained Interests
------------------------------------------------
A summary of activity in the MSR accounts for the years ended December 31,
2000 and 1999 is presented in the following table:
2000 1999
--------- --------
(In thousands)
Balance at beginning of year $16,101 $ 7,041
Originated MSR 2,245 13,633
Purchased MSR 857 -
Sale of MSR - (2,186)
Amortization expense (3,027) (2,387)
------- -------
Balance at end of year $16,176 $16,101
======= =======
Estimated fair value at end of year $20,011 $21,110
======= =======
At December 31, 2000, the fair value and key economic assumptions for the
following retained interests (similar to those resulting from securitizations
during 2000) are as follows:
MSR's IOs Residuals
------------------------------------------------------
(In thousands, except percentages)
Estimated fair value $20,011 $2,992 $8,259
Annual prepayment rate 13.00% 15.00% 25.00%
Annual discount rate 10.50 12-20 20-25
The impact of 10 percent and 20 percent adverse changes in the prepayment
rate and discount rate, respectively, are not material to the financial
condition of the Company. Furthermore, the estimated fair values as disclosed
should not be considered indicative of future earnings on the assets.
For the securitizations indicated, as of December 31, 2000, the principal
amount of delinquent loans, in addition to credit losses, net of recoveries, are
as follows (in thousands):
Principal
Amount of
Loans 90 Days Net Credit
Or More Past Due Losses
------------------ -------------
1998-A $ 286 $1,220
1999-1 19,736 622
1999-2 9,768 165
55
9. Deposits
--------
The composition of the deposit base as of December 31, 2000 and 1999 is
summarized in the following table:
2000 1999
----------------------------------------------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(In thousands)
Noninterest bearing demand $ 63,037 6.9% $ 47,678 6.4%
Interest bearing transaction accounts 4,587 0.5 4,322 0.6
Money market accounts 62,199 6.8 74,332 10.0
Statement savings 5,712 0.6 5,512 0.7
Certificates of deposit:
Less than 4% 1,364 0.1 35 0.0
4% to 4.99% 2,190 0.2 27,761 3.7
5% to 5.99% 45,687 5.0 429,687 57.7
6% to 6.99% 570,438 62.3 106,653 14.3
7% to 8.99% 160,555 17.5 48,211 6.5
More than 9% 457 0.0 894 0.1
-------- ----- -------- -----
$916,226 100.0% $745,085 100.0%
======== ===== ======== =====
The aggregate amounts of certificates of deposit in denominations greater
than $100,000 were approximately $340.6 million and $219.8 million as of
December 31, 2000 and 1999, respectively.
56
9. Deposits - continued
--------------------
The scheduled maturities of certificates of deposit as of December 31, 2000
were as follows (in thousands):
2001 $ $583,545
2002 74,403
2003 38,219
2004 6,312
2005 and thereafter 78,212
--------- --------
$ $780,691
========= ========
The following table notes the breakdown of interest expense on deposits for
the years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
-----------------------------------------------
(In thousands)
Interest bearing transaction accounts $ 156 $ 150 $ 82
Money market accounts 3,213 3,600 2,543
Statement savings 268 211 184
Certificates of deposit 44,219 35,872 35,915
------- ------- -------
$47,856 $39,833 $38,724
======= ======= =======
10. Notes Payable
-------------
The table below provides information relating to the Company's notes payable
as of December 31, 2000 and 1999:
2000 1999
-------- --------
(In thousands)
Bancshares $ 5,500 $4,500
Other notes payable 6,099 1,615
------- ------
$11,599 $6,115
======= ======
During 2000, Bancshares borrowed under terms of a $6.6 million credit
facility from a commercial bank. As of December 31, 2000 and 1999, $5.5 million
and $4.5 million, respectively, was outstanding on the line of credit.
Bancshares pays interest under terms of the credit facility quarterly at a
variable interest rate, which was 8.40 percent at December 31, 2000.
11. Federal Home Loan Bank Advances
-------------------------------
As of December 31, 2000 and 1999, FHLB advances amounted to $133.4 million
and $128.4 million, respectively. The advances outstanding at December 31, 2000
bear interest at rates ranging from 4.64 percent to 7.89 percent.
57
11. Federal Home Loan Bank Advances - continued
-------------------------------------------
The advances are collateralized by stock in the FHLB, a blanket assignment of
mortgage loans, and the pledge of certain investment securities available for
sale. Scheduled maturities for the advances outstanding as of December 31, 2000
are as follows (in thousands):
2001 $ 73,388
2003 25,000
2005 and thereafter 35,027
--------
$133,415
========
12. Employee Benefit Plan
---------------------
Substantially all full-time employees with six months of service are eligible
to participate in New South's 401(k) Defined Contribution Plan. Under the plan,
an employee may elect to defer a portion of their wages with New South matching
deferrals up to three percent of the first eight percent of the employee's
salary deferred. The Company recognized expenses related to its matching of
eligible employee contributions of $.5 million for 2000 and 1999 and $.3 million
for 1998.
13. Income Taxes
------------
The provisions for (benefit of) income taxes included in the consolidated
statements of income are summarized below:
Current Deferred Total
------- -------- -----
(In thousands)
2000
State $1,410 $ (766) $ 644
------ ------ ------
$1,410 $ (766) $ 644
====== ====== ======
1999
Federal $ - $1,316 $1,316
State (146) 236 90
------ ------ ------
$ (146) $1,552 $1,406
====== ====== ======
1998
Federal $3,740 $ 792 $4,532
State 458 98 556
------ ------ ------
$4,198 $ 890 $5,088
====== ====== ======
At December 31, 2000 and 1999, deferred income taxes reflects the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The valuation allowances for net deferred tax was eliminated during
1999.
58
13. Income Taxes - continued
------------------------
Significant components of New South's deferred tax assets and liabilities as
of December 31, 2000 and 1999 are listed in the following table:
2000 1999
-------- --------
(In thousands)
Deferred tax asset:
Allowance for loan losses $ 814 $ 610
REMIC income 613 327
Unrealized loss on securities
available for sale - 214
Other 69 283
------ ------
1,496 1,434
Deferred tax liability:
Originated mortgage servicing rights 660 642
Unrealized gain on securities
available for sale 14 -
Servicing asset 263 307
Other 106 570
------ ------
1,043 1,519
------ ------
Net deferred tax asset (liability) $ 453 $ (85)
====== ======
Applicable income taxes for financial reporting purposes differs from the
amount computed by applying the applicable income tax rate of 6 percent, the
blended tax rate for states in which the Company operates, for 2000 and 1999 and
34 percent for 1998 for the following reasons:
2000 1999 1998
------- ------ ------
(In thousands)
Tax computed at statutory
applicable income tax rate $ 646 $ 240 $4,020
Reversal of federal net deferred tax asset - 3,145 -
Elimination of valuation allowance - (1,988) -
Increase in taxes resulting from:
State income tax, not of federal benefit - - 320
Other, net (2) 9 748
----- ------- ------
$ 644 $ 1,406 $5,088
===== ======= ======
59
14. Other Noninterest Expense
-------------------------
The following table sets forth the principal components of other noninterest
expense for the years ended December 31:
2000 1999 1998
------- ------ ------
(In thousands)
Loan servicing fees paid to affiliates $ 366 $ 354 $ 4,480
Loss on loans serviced 668 209 398
Supplies and printing 1,099 1,247 916
Legal and professional 1,772 2,274 1,484
Telephone 1,291 1,431 1,129
Advertising 599 1,429 792
Computer service 1,542 1,722 849
Branch purchase fee 184 906 2,305
Other expense 10,144 11,994 6,090
------- ------- -------
$17,665 $21,566 $18,443
======= ======= =======
15. Capital
-------
Various regulatory capital measures used within the banking industry are
indicators of capital adequacy. Among these are leverage, tangible, and risk-
based capital ratios. These ratios adjust reported asset and capital amounts by
various nonqualifying regulatory assets such as certain mortgage servicing
rights and certain nonqualifying intangibles. Regulatory authorities set these
minimum ratio standards for banking institutions in order to monitor the capital
strength of the institutions. Should the Bank's capital ratios decline below
these minimum standards, it would become subject to a series of increasingly
restrictive regulatory actions. The Bank has consistently exceeded these
minimum guidelines and it is the intention of management to continue to monitor
these ratios to insure regulatory compliance and maintain adequate capital for
the Bank. The Bank's current regulatory ratios place the Bank in the regulatory
defined well capitalized category. The capital levels for the Bank under these
various measures are noted in the table for December 31, 2000 and 1999.
Management believes, as of December 31, 2000, that the Bank meets all capital
adequacy guidelines to which it is subject.
60
15. Capital - continued
-------------------
Minimum To Be Well
Requirement Actual Capitalized
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(In thousands, except percentages)
Tier I capital ("Tier 1")
Tier 1 to total adjusted assets $36,627 3.00% $98,336 8.05% $61,045 5.00%
Tangible capital
Tangible capital to total adjusted assets 18,313 1.50 98,336 8.05 N/A N/A
Total risk-based capital to risk weighted assets 71,915 8.00 99,209 11.04 89,894 10.00
Tier 1 capital
Tier 1 to risk weighted assets N/A N/A 90,077 10.02 53,936 6.00
Tier I capital
Tier 1 to total adjusted asesets $30,747 3.00% $88,537 8.64% $51,245 5.00%
Tangible capital
Tangible capital to total adjusted assets 15,374 1.50 88,537 8.64 N/A N/A
Total risk-based capital
to risk weighted assets 59,658 8.00 90,253 12.10 74,572 10.00
Tier 1 capital
Tier 1 to risk weighted assets N/A N/A 88,537 11.86 44,743 6.00
While the Company presently intends to declare dividends in an amount
sufficient to enable shareholders to pay income tax at the highest marginal
federal, state and local income tax rate of any shareholder of the Company for
the applicable period, and since the Company is dependent upon dividends from
the Bank, there is no assurance that dividends to shareholders can be timely
made. The Bank also presently intends to declare dividends in an amount
sufficient to pay such dividends to shareholders; however, the Bank is subject
to strict regulatory and legal guidelines regarding capital adequacy, dividend
policies and other restrictions and rules designed to assure the safety and
soundness of the Bank and the Company. As of December 31, 2000, the Bank could
declare dividends in the amount of $7.5 million without additional consent of
the Office of Thrift Supervision.
61
16. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, Disclosures about Fair Value of Financial Instruments requires
the disclosure of estimated fair values for all financial instruments, both
assets and liabilities, on and off-balance sheet, for which it is practicable to
estimate their value along with pertinent information on those financial
instruments for which such values are not available.
Fair value estimates are made at a specific point in time and are based on
relevant market information which is continuously changing. Because no quoted
market prices exist for a significant portion of New South's financial
instruments, fair values for such instruments are based on management's
assumptions with respect to future economic conditions, estimated discount
rates, estimates of the amount and timing of future cash flows, expected loss
experience, and other economic factors. These estimates are subjective in
nature involving uncertainties and matters of significant judgement; therefore,
they cannot be determined with precision. Changes in the assumptions could
significantly affect the estimates.
For purposes of this disclosure, the carrying value approximates, or is equal
to, the fair value of financial instruments for the balance sheet lines
captioned: cash and due from banks, interest-bearing deposits in other banks,
accrued interest receivable and payable, and federal funds purchased and
securities sold under agreements to repurchase.
The carrying amount and estimated fair values of other financial instruments
is summarized as follows:
December 31,
-------------------------------------------------------------
2000 1999
-------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ------------ ----------- -------------
(In thousands)
Financial Assets:
Investment securities available for sale $167,948 $168,176 $132,482 $132,482
Loans available for sale 74,449 74,449 66,258 66,258
Loans, net of unearned income 895,186 885,690 748,277 744,985
Residuals 8,259 8,259 7,569 7,569
Financial Liabilities:
Deposits 916,226 920,049 745,085 746,161
FHLB advances 133,415 132,308 128,417 128,751
Notes payable 11,599 11,599 6,115 6,115
Off-balance Sheet Financial Instruments:
Unrealized gains/(losses):
Interest rate swap agreements - (3,827) - 607
Interest rate cap agreements - (1,205) - 17
Commitments to extend credit - 146 - 966
Mandatory forward delivery contracts - (753) - (671)
The following methods and assumptions were used by New South in estimating
its fair value disclosures for financial instruments:
62
16. Fair Value of Financial Instruments - continued
-----------------------------------------------
Investment Securities Available for Sale, Loans Available for Sale, and
-----------------------------------------------------------------------
Residuals - Fair values for securities and loans available for sale are based on
- ---------
quoted market prices where available. Where quoted market prices are not
available, fair values are based on quoted market prices of similar instruments,
adjusted for any significant differences between the quoted instruments and the
instruments being valued.
Loans - The fair values of variable rate loans that reprice frequently and
-----
have no significant change in credit risk are assumed to approximate carrying
amounts. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality and estimates of maturity
based on New South's historical experience.
Deposits - The fair value of deposits with no stated maturity, such as
--------
noninterest-bearing demand deposits, savings accounts, and money market and
interest-bearing checking accounts is, by definition, equal to the amount
payable on demand or the carrying amount. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates of deposit
to a schedule of aggregated expected monthly maturities on time deposits.
FHLB Advances and Notes Payable - The fair values of these advances are
-------------------------------
determined using discounted cash flow analyses which apply interest rates
currently offered.
Off-Balance Sheet Instruments - Fair values for New South's off-balance sheet
-----------------------------
instruments are determined using various methods. Fair values of interest rate
swaps and caps are determined with the use of pricing models or formulas using
current assumptions if there are no relevant market comparables.
Commitments to Extend Credit -- The value of these unrecognized financial
----------------------------
instruments, with notional values totaling $40.1 million and $96.0 million at
December 31, 2000 and 1999, respectively, is estimated based on the fee income
associated with the commitments which, in the absence of credit exposure, is
considered to approximate their settlement value.
Letters of Credit - These instruments, with notional values totaling $8.5
-----------------
million and $6.9 million at December 31, 2000 and 1999, respectively, are short-
term in nature and have no unrealized gain or losses associated with them.
Mandatory Forward Delivery Contracts - Mandatory forward delivery contracts
------------------------------------
with notional amounts totaling $68.9 million and $68.8 million at December 31,
2000 and 1999, respectively, are valued based upon discounted cash flow
analyses, using interest rates currently being offered for underlying loans with
similar terms to borrowers of similar credit quality and estimates of maturity
based on New South's historical experience.
17. Off-Balance Sheet Risk and Commitments
--------------------------------------
New South is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The financial
instruments may include commitments to extend credit, letters of credit,
interest rate caps and floors, interest rate swaps, forward and futures
contracts, and commitments to purchase loans. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the financial statements. The contract, or notional,
amounts of these instruments reflect the extent of involvement New South has in
the particular class of financial instrument.
New South's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
New South uses the same credit policies in making commitments and conditional
63
17. Off-Balance Sheet Risk and Commitments - continued
--------------------------------------------------
obligations as it does for on-balance sheet instruments. For interest rate
caps, floors, and swap agreements and for forward and futures contracts, the
contract, or notional, amounts do not represent exposure to credit loss. New
South controls the credit risk of its interest rate swap agreements and forward
and futures contracts through credit approvals, limits, and monitoring
procedures. Generally, New South will require collateral, margin deposits or
other security to support financial instruments with credit or interest risk.
Commitments to extend credit ("Mortgage Pipeline") are agreements to lend to
customers as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Mortgage Pipeline consists of both fixed rate commitments and floating rate
obligations. The fixed rate commitments result in market risk, while floating
rate commitments contain no market risk. New South controls this market risk
through mandatory forward commitments to sell loans and other financial
instruments designed to hedge this type of interest rate exposure. The market
risk associated with these mandatory forward commitments exists to the extent
loans are not available at appropriate rates.
New South's mandatory forward commitments on loans available for sale are
considered in the lower of cost or market calculation. The total Mortgage
Pipeline for loans available for sale was $26.6 million and $11.2 million as of
December 31, 2000 and 1999, respectively. Of the 2000 Mortgage Pipeline, $25.5
million were fixed rate commitments with market risk and $1.1 million were
adjustable rate commitments with no market risk. For 1999, $7.7 million were
fixed rate commitments and $3.5 million were adjustable commitments. Adequate
sources of funds were available at December 31, 2000 to fund anticipated
closings from the Mortgage Pipeline.
Commitments to purchase loans are agreements to buy mortgage loans on a
specified date at an amount stated as a percentage of the note amount of the
loans to be purchased. On these commitments, New South uses the same policies
to control credit and interest rate risk as it does for other commitments to
extend credit.
Letters of credit are conditional commitments issued by New South to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, such as a
bond financing. While some of the guarantees are short-term in nature, most
extend for the same as that for extending loan facilities to customers. New
South holds various assets as collateral, including real estate and mortgage-
backed securities, supporting those commitments for which collateral is deemed
necessary.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. One party to the transaction will pay a fixed
rate of interest to the other party and receive from that party a floating rate
of interest, both based on the same notional value, at specified intervals.
Whether New South enters the agreement as the party to pay either the fixed rate
or the floating rate is determined by management's assessment of New South's
obligations and overall interest rate risk exposure and, consequently, can vary
greatly over time.
Entering into interest rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the contracts
but also the interest rate risk associated with unmatched positions. Notional
principal amounts are often used to express the volume of these transactions;
however, the amounts potentially subject to credit risk are much smaller.
Generally, New South will enter into interest rate swap agreements with firms
that are rated investment grade or better by a nationally recognized investment
rating service.
The effective notional amounts outstanding at December 31, 2000 and 1999 were
$195.0 million and $100.0 million, respectively. During 2000, the average
notional amount of rate swaps was $167.1 million; the
64
17. Off-Balance Sheet Risk and Commitments - continued
--------------------------------------------------
average rate received under the contracts was 6.69 percent and the average rate
paid was 6.56 percent, resulting in an increase in net interest income of $.2
million. During 1999, the average notional outstanding amount was $107.5
million and the average rates received and paid were 5.70 percent and 5.81
percent, respectively, and increased net interest income by $.3 million. At
December 31, 2000, the effective notional amounts and contractual maturities of
rate swaps were as follows:
Effective
Notional
Amount Expiration Year
- --------------- --------------------
(In thousands)
$ 10,000 2002
50,000 2003
90,000 2005
10,000 2006
10,000 2007
10,000 2008
15,000 2009
- --------
$195,000
========
Interest rate cap agreements are used to modify and/or reduce New South's
interest rate risk. As of December 31, 2000 and 1999, New South had interest
rate cap agreements with commercial banks and major investment banking firms
covering New South's interest rate exposure on short-term liabilities. The
effective notional amounts outstanding were $306.4 million at December 31, 2000
and $230.0 million at December 31, 1999. The results of the rate caps were an
increase in expense of $.8 million, $.7 million and $.8 million for 2000, 1999,
and 1998, respectively.
Credit risk represents the maximum potential loss due to possible non-
performance by counterparties under terms of the contracts. The Company manages
credit risk by entering into financial instrument transactions with approved
counterparties to limit potential exposure. Credit risk may occur when there is
a gain in the fair value of a financial instrument and the counterparty fails to
perform according to terms of the contract and/or when the collateral proves to
be of insufficient value.
18. Loan Servicing
--------------
Mortgage and installment loans serviced for others are not recorded on New
South's books and, accordingly, are not reflected in the accompanying financial
statements. New South is obligated to service the unpaid principal balances of
these loans. See Note 19 for a discussion of the servicing arrangement New
South has with Collateral.
New South, as a servicer for all FHA/VA loans, is required to advance from
its own funds escrow and foreclosure costs on the loans it services. Portions
of these advances are not recoverable for loans serviced for the Governmental
National Mortgage Association ("GNMA").
The average GNMA, FHA, and VA loss resulting from these advances and relating
to loans that subsequently went into foreclosure amounted to approximately $403
per loan in 2000, $990 per loan in 1999, and $2,300 per loan in 1998. Total
losses of this nature for 2000, 1999, and 1998 amounted to $.1 million, $.2
million, and $.1 million, respectively.
65
18. Loan Servicing - continued
--------------------------
The outstanding mortgage and installment loan amounts serviced for others as
of December 31, 2000 and 1999 are summarized below:
2000 1999
-------------------------------------
(In thousands)
GNMA $302,618 $328,564
FHLMC 692,141 709,402
FNMA 130,711 138,637
Other investors 882,294 937,747
Custodial escrow balances maintained in connection with loan servicing were
approximately $6.2 million and $6.1 million at December 31, 2000 and 1999,
respectively. These are included with noninterest-bearing deposits.
19. Related Party Transactions
--------------------------
Due to the nature of their businesses, the operations of New South and
Collateral, an affiliate, are closely involved. Management, systems, and
facilities are shared, and, accordingly, there are numerous intercompany
transactions. Management monitors all activity to ensure that all transactions
are made in a fair and equitable manner to both New South and Collateral. New
South collected $.6 million, $.3 million, and $1.0 million in management fees
from Collateral in 2000, 1999, and 1998, respectively, which are paid monthly.
New South collected $.1 million, $.08 million, and $.06 million from Collateral
Investment Corp. in 2000, 1999, and 1998, respectively, which are paid monthly.
Additionally, management fees were received during 2000, 1999, and 1998 in the
amounts of $.06 million, $.1 million, and $0.6 million, respectively from Triad
Guaranty Insurance Corporation, an affiliate, for services provided. These fees
are due quarterly and bear no interest. New South paid Collateral monthly fees
for services provided, including facilities management of $.1 million and $.07
million during 1999 and 1998, respectively.
In connection with its commercial loan servicing activities, Collateral is
required to maintain escrow accounts as trustee for investors and mortgagors.
At December 31, 1999, Collateral had on deposit with New South approximately
$11.4 million and $6.9 million, respectively, in interest-bearing and
noninterest-bearing accounts. For 2000, these deposits represented escrows on
the commercial servicing and amounted to $15.0 million and $27.5 million.
Prior to 1999, Collateral performed the servicing activities on behalf of New
South for New South's investor servicing obligations and New South's owned
portfolio. Effective January 1, 1999, New South began servicing these assets.
In addition, New South began servicing on behalf of Collateral all of
Collateral's residential servicing obligations to third parties and Collateral's
owned portfolio. Collateral paid $.5 million and $1.7 million in 2000 and 1999,
respectively, to New South for these servicing activities under a subservicing
agreement based upon industry servicing fee standards.
Collateral and its affiliates maintain normal business checking and money
market accounts at New South. At December 31, 2000 and 1999, these accounts
totaled approximately $6.0 million and $5.3 million, respectively.
During the third quarter of 1999, New South sold an interest only strip to
Collateral for $4.8 million, the net book value as of the date of sale. No
gains or losses were recognized since net book value approximated the fair value
of the asset sold.
During the third quarter of 1999, New South sold $2.2 million in servicing
rights for $2.6 million. This servicing was combined with the concurrent sale
of servicing rights by Collateral in order for Collateral and New South to
achieve a more efficient execution of the servicing sale.
66
19. Related Party Transactions continued
------------------------------------
During the first quarter of 2000, New South as a continuation of the Bank's
building of it's servicing portfolio, purchased $.8 million in servicing rights
from Collateral for fair value.
New South, prior to June 1997, purchased a portion of its mortgage loans from
Collateral at cost. In addition, Collateral serviced these mortgage loans, and
subserviced loans which New South was obligated to service for third party
investors, until the servicing change noted above in January 1999. Servicing
fees paid to Collateral during both 2000 and 1999 amounted to $.4 million and
$4.5 million in 1998. These amounts relate solely to Collateral's subservicing
of New South's owned commercial loan portfolio.
In July 1997, the loan production operations of the residential mortgage
banking unit of Collateral were transferred into New South. As a result of this
change, New South assumed responsibility for 39 residential loan production
offices, associated employees, and related operating lease obligations. Under
the terms of an agreement with Collateral, a fee was payable semi-annually in
installments over a three year period based on a decreasing percentage ranging
from .35 percent to .10 percent of the aggregate original principal balances of
certain residential mortgage loans originated by New South through June 30,
2000. The fees for 2000, 1999, and 1998 were $.2 million, $.9 million, and $2.3
million, respectively.
20. Parent Only Financial Information
---------------------------------
Financial information and operating results for New South Bancshares, Inc.,
parent only, is presented as follows:
67
20. Parent Only Financial Information - continued
---------------------------------------------
December 31,
-----------------------------
2000 1999
-----------------------------
(In thousands)
Balance Sheets:
Assets:
Cash $ 219 $ 67
Investment in subsidiaries:
New South Federal Savings Bank 98,345 84,518
Collateral Agency of Texas 180 185
New South Management Services, LLC 22 -
Other assets 1,457 1,510
Accounts receivable-intercompany - 312
-------- -------
Total Assets $100,223 $86,592
======== =======
Liabilities:
Notes payable $ 5,500 $ 4,500
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses and other liabilities 215 284
-------- -------
Total Liabilities 40,215 39,284
-------- -------
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million
shares; issued and outstanding: 1,255,537.1 at December 31,
2000 and 1999) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 29,062 20,500
Accumulated other comprehensive income (loss) 215 (3,923)
-------- -------
Total Shareholders' Equit 60,008 47,308
-------- -------
Total Liabilities and Shareholders' Equity $100,223 $86,592
======== =======
68
20. Parent Only Financial Information - continued
---------------------------------------------
Year ended December 31,
-------------------------------------------------
2000 1999 1998
-------------------------------------------------
(In thousands)
Income Statements:
Income:
Dividends from subsidiaries $ 3,650 $ 1,805 $ 900
Interest on other short-term investments - 5 175
Other income - - -
------- ------- ------
Total Income 3,650 1,810 1,075
------- ------- ------
Expenses:
Interest on notes payable 399 92 366
Interest expense on guaranteed preferred beneficial
interests in the Company's subordinated debentures 2,932 2,932 1,573
Other expense 129 110 114
------- ------- ------
Total Expenses 3,460 3,134 2,053
------- ------- ------
Income (loss) before equity in undistributed earnings
of subsidiaries 190 (1,324) (978)
Equity in undistributed earnings of subsidiaries 9,705 3,722 7,715
------- ------- ------
Income before income tax benefit 9,895 2,398 6,737
Income tax benefit 220 193 -
------- ------- ------
Net Income $10,115 $ 2,591 $6,737
======= ======= ======
69
20. Parent Only Financial Information - continued
---------------------------------------------
Year ended December 31,
Year ended December 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(In thousands)
Statements of Cash Flows:
Operating activities:
Net income $10,115 $ 2,591 $ 6,737
Equity in undistributed earnings of subsidiaries (9,705) (3,722) (7,715)
(Increase) decrease in other assets 53 51 (1,560)
(Increase) decrease in accounts receivable-intercompany 312 (312) -
Increase (decrease) in accrued expenses and other liabilities (69) 284 (6)
Decrease in accounts payable-intercompany - (28) (18)
------- ------- -------
Net cash provided by (used in) operations 706 (1,136) (2,562)
------- ------- -------
Investing activities:
Capital contributions to subsidiaries (1) (3,600) (12,174)
------- ------- -------
Net cash used in investing activities (1) (3,600) (12,174)
------- ------- -------
Financing activities:
Net increase (decrease) in notes payable 1,000 4,500 (10,000)
Dividends on common stock (1,553) - -
Proceeds from the issuance of common stock - 251 -
Purchase and retirement of common stock - - (9,793)
Issue of guaranteed preferred beneficial interests in
the Company's subordinated debentures - - 34,500
------- ------- -------
Net cash provided by (used in) financing activities (553) 4,751 14,707
------- ------- -------
Net increase (decrease) in cash and cash equivalents 152 15 (29)
Cash and cash equivalents at beginning of year 67 52 81
------- ------- -------
Cash and cash equivalents at end of year $ 219 $ 67 $ 52
======= ======= ========
21. Commitments and Contingencies
-----------------------------
Various legal proceedings are pending against New South. These actions
arise in the ordinary course of New South's business and include actions
relating to its lending and servicing activities. Although the outcome of any
litigation cannot be predicted with certainty, management considers that any
potential liability resulting from the proceedings would not have a material
adverse impact on the financial condition of New South. Consequently, no
amounts have been accrued relating to these matters.
The Company leases its executive offices, other corporate office space, and
its mortgage production branches. Rent expense is included in net occupancy and
equipment expense and totaled $1.7 million, $2.3
70
21. Commitments and Contingencies - continued
-----------------------------------------
million, and $1.3 million for the years ended December 31, 2000, 1999, and 1998,
respectively. Amounts paid to Collateral for New South's executive office and
other office space totaled $.3 million, $1.0 million, and $.6 million for the
years ended December 31, 2000, 1999, and 1998, respectively. Amounts received
from subleases totaled $.3 million for the years ended December 31, 2000 and
1999, and $.4 million for the year ended December 31, 1998, respectively.
Minimum rental payments due as of December 31, 2000 are summarized below (in
thousands).
2001 $ 715
2002 434
2003 215
2004 107
2005 81
------
$1,552
======
22. Segment Reporting
-----------------
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in 1998. Reportable segments consist of Residential
Mortgage Lending, Automobile Lending, and Portfolio Management. The accounting
policies for each segment are the same as those used by the Company as described
in Note 1 - Significant Accounting Policies.
Residential Mortgage 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 2000, Residential Mortgage Banking and
Automobile Lending retain the assets generated by each unit, and are 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. For 1999 and 1998, 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. All other
allocations are consistent for each period. The segment results include certain
other overhead allocations. The results for the reportable segments of the
Company for 2000, 1999, and 1998 are included in the following table:
71
22. Segment Reporting - continued
-----------------------------
For the year ended December 31, 2000
--------------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
----------- ---------- ------------ --------- -------------
Interest income $ 52,351 $ 12,080 $ 18,137 $ 15,436 $ 98,004
Interest expense - - 62,995 3,593 66,588
Intra-company funds (used)/provided (35,158) (6,086) 49,711 (8,467) -
Provision for loan losses 2,011 592 - 2,962 5,565
Noninterest income 32,506 2,902 (2,169) 6,301 39,540
Noninterest expense 33,108 4,526 3,299 13,699 54,632
-------- -------- -------- -------- ----------
Net income before income taxes 14,580 3,778 (615) (6,984) 10,759
Provision for income taxes 686 189 275 (506) 644
-------- -------- -------- -------- ----------
Net income after income taxes $ 13,894 $ 3,589 $ (890) $ (6,478) $ 10,115
======== ======== ======== ======== ==========
Depreciation and amortization, net $ 1,027 $ 169 $ 42 $ 1,464 $ 2,702
Total assets 682,249 104,575 219,371 216,582 1,222,777
Capital expenditures 466 16 19 2,046 2,547
For the year ended December 31, 1999
--------------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
----------- ---------- ------------ --------- -------------
Interest income $ 18,109 $ 221 $ 63,660 $ 3,366 $ 85,356
Interest expense 39 37 52,463 1,045 53,584
Intra-company funds (used)/provided (11,831) (167) 12,300 (302) -
Provision for loan losses 61 - 2,626 951 3,638
Noninterest income 38,133 798 (4,380) 3,418 37,969
Noninterest expense 35,530 5,783 5,102 15,691 62,106
Intra-company loan service fees 1,695 812 (2,507) - -
Effects of intra-company loan sales 1,157 1,655 (2,812) - -
-------- ------- -------- -------- ----------
Net income before income taxes 11,633 (2,501) 6,070 (11,205) 3,997
Provision for income taxes 4,093 (880) 2,135 (3,942) 1,406
-------- ------- -------- -------- ----------
Net income after income taxes $ 7,540 $(1,621) $ 3,935 $ (7,263) $ 2,591
======== ======= ======== ======== ==========
Depreciation and amortization, net $ 1,504 $ 288 $ 6 $ 658 $ 2,456
Total assets 166,610 12,057 800,363 42,077 1,021,107
Capital expenditures 3,186 147 - 1,629 4,962
72
22. Segment Reporting - continued
-----------------------------
For the year ended December 31,
------------------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
------------------------------------------------------------------------------------
Interest income $ 14,461 $ 486 $ 67,677 $ 627 $ 83,251
Interest expense 475 27 51,974 (177) 52,299
Intra-company funds (used) / provided (8,657) (192) 9,027 (178) -
Provision for loan losses - - 3,944 - 3,944
Noninterest income 29,690 913 780 2,187 33,570
Noninterest expense 33,237 5,522 3,130 6,864 48,753
Intra-company loan service fees 1,130 1,045 (2,175) - -
Effects of intra-company loan sales 3,714 2,685 (6,399) - -
-------- ------ -------- ------- ----------
Net income before income taxes 6,626 (612) 9,862 (4,051) 11,825
Provision for income taxes 2,877 (266) 4,281 (1,804) 5,088
-------- ------ -------- ------- ----------
Net income after income taxes $ 3,749 $ (346) $ 5,581 $(2,247) $ 6,737
======== ====== ======== ======= ==========
Depreciation and amortization, net $ 607 $ 249 $ 4 $ 322 $ 1,182
Total assets 301,131 8,178 747,620 85,693 1,142,622
Capital expenditures 1,610 427 - 4,062 6,099
23. Trust Preferred Securities
--------------------------
In June 1998, the Company sold $34.5 million of 8.5 percent cumulative
preferred securities issued by New South Capital Trust I (the "Trust"). These
preferred securities are collateralized by subordinated debentures issued by the
Company and are presented on the balance sheet as a separate line entitled
"Guaranteed preferred beneficial interests in the Company's subordinated
debentures". The debentures have a stated maturity of June 30, 2028 and are
subject to early redemption after June 30, 2003.
The sole assets of the Trust are $35.6 million in subordinated debentures
which have the same interest rate and maturity characteristics as the trust
preferred securities. The Company owns all of the common securities of the
Trust which amount to $1.1 million.
The Company will, through the guarantee, the trust agreement, the
subordinated debentures and the indenture, taken together, fully, irrevocably
and unconditionally guarantee all of the Trust's obligations with respect to the
preferred securities. The guarantee of the Company guarantees the payment of
distributions and payments on liquidation or redemption of the preferred
securities, but only in each case to the extent of funds held by the Trust. The
guarantee does not cover payment of distributions when the Trust has
insufficient funds to pay such distributions. If the Company does not make
interest payments on the subordinated debentures held by the Trust, the Trust
will have insufficient funds to pay distributions on the preferred securities.
In such event, a holder of preferred securities may institute a legal proceeding
directly against the Company pursuant to the terms of the guarantee to enforce
payment of amounts equal to such distributions to such holder.
The Company's subordinated debentures and its guarantee are unsecured and
subordinated to all senior debt. Accordingly, the subordinated debentures and
the guarantee will rank junior in right of payment to all present and future
senior debt of the Company and rank pari passu with obligations to or rights of
the Company's other general unsecured creditors. In the case of a bankruptcy or
insolvency proceeding involving the Company, the Company's obligations under the
guarantee will rank subordinate and junior in right of payment to all
liabilities of the Company, but senior to any obligation in respect of any class
of capital stock of the Company.
73
23. Trust Preferred Securities - continued
--------------------------------------
The preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the subordinated debentures at their stated maturity or
their earlier redemption. The subordinated debentures redeemable prior to their
stated maturity at the option of the Company on or after June 30, 2003, in whole
at any time or in part from time to time, or at any time, in whole, but not in
part, upon the occurrence of a special event as defined in the preferred
securities agreements.
The Company will have the right at any time to terminate the Trust and cause
the subordinated debentures to be distributed to the holders of the trust
securities in liquidation of the Trust. In the event of the termination of the
Trust, after satisfaction of liabilities to creditors of the Trust as required
by applicable law, the holders of the preferred securities will be entitled to
receive a liquidation amount of $10.00 per preferred security plus accumulated
and unpaid distributions thereon to the date of payment, which may be in the
form of a distribution of such amount in subordinated debentures, subject to
certain exceptions.
74
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors ("Board of Directors") is divided into
three classes, and each of the Company's five directors is elected into one of
these three classes to hold office for a term of three years or until their
successors have been elected and qualified. Executive officers serve at the
pleasure of the Board of Directors and directors are elected in the annual
meeting of stockholders. The directors, executive officers and other key
employees of the Company and their ages as of March 31, 2001, are as follows:
Name Age Position
Director elected to serve until annual meeting in 2001 (Class II)
J.K.V. Ratliff 71 Director and Vice President of the Company
Directors elected to serve until annual meeting in 2002 (Class I)
William T. Ratliff, Jr. 76 Director and Vice President of the Company;
Director of New South
Robert M. Couch 43 Director and Executive Vice President of the Company;
Director, President and Chief
Executive Officer of New South
Directors elected to serve until annual meeting in 2003 (Class III)
William T. Ratliff, III 47 Chairman of the Board and President of the Company;
Chairman of the Board of New South
David W. Whitehurst 51 Director of the Company and New South
Executive Officers Who Are Not Also Directors
David E. Mewbourne 51 Executive Vice President of New South
Roger D. Murphree 54 Executive Vice President and Treasurer of New South
David A. Roberts 47 Director and Senior Vice President of New South
Richard W. Edwards 41 Senior Vice President and Chief Financial Officer (1)
Larry A. Nelson 51 Senior Vice President of New South
Lizabeth R. Nichols 45 Vice President of the Company and Senior
Vice President and General Counsel of New South
Cheryl R. Stone 47 Vice President of New South
- ------------
(1) Elected January 2001.
The business experience of each of the persons named above during the past five
years is discussed below.
Mr. William T. Ratliff, Jr. has been a Director and Vice President of the
Company since its organization in 1994. He has been a Director of New South
since its organization in 1985. He served as Chief Executive Officer of
Collateral (or its predecessor Collateral investment Company) for 31 years until
1986. Mr. Ratliff, Jr. is the father of Mr. Ratliff, III, the Chairman and
President of the Company, and the brother of Mr. J.K.V. Ratliff, a Director and
Vice President of the Company.
75
Mr. J.K.V. Ratliff has been a Director and Vice President of the Company
since its organization in 1994. He has been a director and Vice President of
Collat, Inc., an affiliate, since 1986. Mr. J.K.V. Ratliff has been Assistant
to the President and a Director of Collateral Agency, Inc., an affiliate, since
its inception in 1956. Mr. Ratliff has also served as a director and Vice
President of Collateral Investment Corp., an affiliate, since September 1990.
Mr. J.K.V. Ratliff is the brother of Mr. Ratliff, Jr., a Director and Vice
President of the Company, and the uncle of Mr. Ratliff, III, the Chairman and
President of the Company.
Mr. William T. Ratliff, III has been President and a Director of the
Company since its organization in October 1994 and Chairman of the Board and
Chief Executive Officer of New South since 1985. Mr. Ratliff, III, has been the
Chairman of the Board of Triad Guaranty, Inc., an affiliate, since its inception
in 1993 and Chairman of the Board of Triad Guaranty Insurance Corporation, an
affiliate, since 1989. He has been President of Collateral Investment Corp., an
affiliate, since 1990 and was President and an individual General Partner of
Collateral from 1987 to 1995. From March 1994 until December 1996, Mr. Ratliff
served as President of Southwide Life Insurance Corp., an affiliate. He served
as Executive Vice President of Southwide Life Insurance Corp., an affiliate,
from 1986 to 1993. Mr. Ratliff, III joined Collateral in 1981. Mr. Ratliff,
III is the son of Mr. Ratliff, Jr., a Director and Vice President of the
Company, and the nephew of Mr. J.K.V. Ratliff, a Director and Vice President of
the Company.
Mr. Robert M. Couch has been Executive Vice President of the Company since
1994, and a Director since July 1998. Mr. Couch is responsible for the day-to-
day operations of the Company. He has been President and Chief Executive
Officer of New South since March 2001, and a Director since January 1995. He
was President and Chief Operating Officer of New South from June 1997 to March
2001. From March 1995 to June 1997, he served as Vice Chairman of New South.
Mr. Couch has been Managing Director of Collateral since November 1999. From
August 1995 to November 1999, Mr. Couch was President of Collateral. From
October 1993 to August 1995, Mr. Couch served as Executive Vice President of
Collateral.
Mr. David W. Whitehurst has been a Director of the Company since July of
1998 and a Director of New South since 1989. Mr. Whitehurst has been Managing
Director of North American Vision Alliance, L.L.C., an affiliate, since
September 2000. He was Executive Vice President, Chief Financial Officer, and a
Director of Triad Guaranty, Inc. from 1993 to 1999, and served as Secretary of
Triad Guaranty, Inc. from 1993 until 1996. He has been Executive Vice President
of CIC since 1995 (Vice President from 1990 to 1995), was Chief Financial
Officer of CIC from 1990 through 1995, was Executive Vice President of Southwide
Life Insurance Corp. from 1992 until 1996. From January 1997 until July 2000
Mr. Whitehurst was the President, Treasurer and a Director of Southland National
Insurance Corp. and its subsidiaries, all of which are affiliates. Mr.
Whitehurst joined Collateral in 1989 and served as Vice President of Collateral
and its affiliates until 1992, when he began devoting all of his time to CIC and
its affiliates.
Mr. David E. Mewbourne has been Executive Vice President of New South since
July 1997. Mr. Mewbourne is responsible for the day to day operations of
residential mortgage loan production, underwriting and servicing. From 1995 to
June 1997, he was Senior Vice President of New South. Mr. Mewbourne has been
Senior Vice President of Collateral since March 1, 1995. From June 1987 to
March 1995, he served as Executive Vice President of AmSouth Mortgage Company.
Mr. Roger D. Murphree has been Executive Vice President of New South since
October 2000. Mr. Murphree was Senior Vice President of New South from December
1997 to October 2000. Mr. Murphree is responsible for secondary marketing
sales, securitizations, and portfolio trading for the Company. Since December
1996, Mr. Murphree has been a Director of Southland National Insurance
Corporation, an affiliate. From 1995 to December 1997, he served as Vice
President of New South. Mr. Murphree has been employed by New South since 1985.
Mr. Murphree has served as Senior Vice President of Collateral since June 1995.
Mr. David A. Roberts has been a Director of New South since September 1997
and Senior Vice President since July 1997. Mr. Roberts is responsible for New
South's commercial real estate lending activities. Mr. Roberts has served as
President and Chief Operating Officer of Collateral since November 1999. Mr.
Roberts served as Executive Vice President and Chief Operating Officer of
Collateral from August 1997 to November 1999. From February 1995 to July 1997,
he served as Senior Vice President of Collateral. From June 1990 to February
1995, he served as Vice President of Collateral.
76
Mr. Richard W. Edwards has been Senior Vice President and Chief Financial
Officer of New South since January 2001. From July 1989 to December 2000, Mr.
Edwards served as a senior financial officer of Bank of America Corporation and
its predecessors in various businesses and capacities. Mr. Edwards was a Senior
Vice President of Bank of America from September 1995 until December 2000. From
April 2000 to December 2000 Mr. Edwards served as the Chief Financial Officer of
Bank of America Marketplace, LLC. and Bank of America Financial Services Engine,
LLC.
Mr. Larry A. Nelson has been Senior Vice President of New South since
December 1997. Mr. Nelson is responsible for the day-to-day operations of
automobile installment lending. From 1989 to 1997, he served as Vice President
of New South.
Ms. Lizabeth R. Nichols has been Vice President of the Company since August
1998 and has been Senior Vice President and General Counsel of New South since
November 1998. From February 1998 to November 1998 Ms. Nichols served as Vice
President and General Counsel of New South. From January 1997 to January 1998,
Ms. Nichols served as Vice President and Legal Counsel of New South. Ms.
Nichols has served as Vice President of Collateral since January 1997. Ms.
Nichols has been a Director and General Counsel of Southland National Insurance
Corporation, an affiliate since September 2000. From October 1993 to September
1996, Ms. Nichols was Vice President and Associate General Counsel of Protective
Life Corporation, an insurance holding company and was an employee until January
1997.
Ms. Cheryl R. Stone has been Vice President, Strategic Planning and
Analysis, for the Company, New South and Collateral since January 2001. Ms.
Stone was Acting Controller of the Company from January 2000 to January 2001 and
a Vice President since November 1994. Ms. Stone served as Vice President of
Loan Operations from July 1997 to January 2000 for Collateral and New South.
From 1992 until July 1997, she served as Vice President and Controller of
Collateral and New South. Ms. Stone has been Vice President of New South
Banchsares from November 1994 to present.
Item 11. Executive Compensation.
The following table sets forth the compensation earned by the named
Executive Officers of New South during the last two fiscal years.
Summary Compensation Table
- --------------------------
Name and Principal Position Year Salary Bonus All Other
Compensation(1)
William T. Ratliff, III 2000 182,278 302,500 0
President of the Company 1999 127,000 96,252 0
1998 127,000 225,000 0
Robert M. Couch 2000 221,000 120,000 0
Executive Vice President 1999 216,000 80,000 0
of the Company 1998 216,000(2) 180,000 0
David E. Mewbourne 2000 198,542 90,000 0
Executive Vice President 1999 190,000 90,000 0
of New South 1998 190,000 150,000 0
Cheryl R. Stone 2000 114,231 36,088 0
Vice President 1999 102,584 42,175 0
Of New South 1998 93,941 27,656 0
Lizabeth R. Nichols 2000 119,452 28,000 0
Vice President of Company 1999 105,833 40,000 0
1998 89,583 35,096 0
(1) Does include amounts contributed by the Company to the Executive Officer's
401(k) plan, the maximum amount which will be contributed to one individual
is $4,900.
(2) Includes $ 39,600 reimbursed by Collateral under the Administrative Services
Agreement (as defined herein) for services rendered by Mr. Couch to
Collateral. See "Certain Relationships and Related Transactions."
77
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of March 1, 2001 (unless
otherwise noted) with respect to (i) persons the Company believes to be the
beneficial owners of 5 percent or more of the Company's common stock, (ii) each
current director and each of the executive officers named in the Summary
Compensation Table contained herein, and (iii) all directors and executive
officers of the Company, as a group:
Name and Address of Beneficial Owner Amount and Nature of Percentage
Beneficial Ownership (1) Beneficially Owned (1)
Mary R. Johnson-Butterworth 104,512(2) 8.32 percent
4731 Old Leeds Road
Birmingham, Alabama 35213
W.T. Ratliff, Jr. 233,720 18.62 percent
2621 Altadena Road
Birmingham, Alabama 35243
J.K.V. Ratliff 180,507 14.38 percent
46 Greenway Road
Birmingham, Alabama 35213
William T. Ratliff, III 137,678(3) 10.97 percent
3944 Forest Glen Drive
Birmingham, Alabama 35213
Amelie L. Ratliff 98,860 7.87 percent
5 Fuller Street, #1
Brookline, Massachusetts 02446-2452
Daniel T. Ratliff 109,444(4) 8.72 percent
31315 Pine Run Drive
Ono Island
Orange Beach, Alabama 36561
Carlton McCoy Ray 98,360 7.83 percent
9949 Southwind Drive
Indianapolis, Indiana 46256
Thomas E. Gester 22,390 1.78 percent
3020 Briarcliff Road
Birmingham, Alabama 35223
Robert M. Couch 5,347.60 *
8 Club View Drive
Birmingham, Alabama 35223
All current directors and 557,252.60 44.38 percent
executive officers as a group (12
individuals)
78
______________________________
* Less than one percent
(1) Unless otherwise indicated, the persons named above have the sole power to
vote or direct the voting and to dispose or direct the disposition of any
security.
(2) Includes 5,542 shares held by Mrs. Johnson-Butterworth as custodian for the
benefit of her minor children.
(3) Includes 24,406 shares held by Mr. Ratliff, III as custodian for the benefit
of his minor children, nieces and nephews.
(4) Includes 11,054 shares held by Mr. Daniel T. Ratliff as custodian for the
benefit of his minor children.
Item 13. Certain Relationships and Related Transactions
Certain affiliated corporations and limited partnerships in which Messrs.
Ratliff, Jr., J.K.V. Ratliff and Ratliff, III are majority owners have been
customers of New South in the ordinary course of business. These affiliated
corporations and limited partnerships include Collateral, Safemate Life
Insurance Company, Collateral Agency, Inc., Triad Guaranty, Inc., and Southland
National Insurance Corporation. Outside of normal customer relationships, no
directors or officers of the Company, no shareholders holding over five percent
of the Company's voting securities, and no corporations or limited partnerships
with which such persons or entities were associated, maintain or have maintained
since December 31, 1999, any significant business or personal relationship with
the Company or New South, except as described below. The terms of each of the
transactions presented herein are similar to those that could have been obtained
through negotiations with unaffiliated third parties.
Transfer. In connection with the Transfer, which is described in two
agreements between Collateral and New South. New South agreed to make semi-
annual payments to Collateral through June 30, 2000 based on a percentage of the
aggregate principal balance of all residential mortgage loans originated through
the 39 loan production offices. The percentage for the 12 month period ending
2000 is 0.10 percent, or $.2 million.
Subservicing Agreement. Collateral has entered into a Subservicing
Agreement with New South to service certain conforming residential mortgage
loans for Collateral. The Subservicing Agreement has an indefinite term but
may be terminated by Collateral with 60 days notice, provided Collateral pays
New South a penalty equal to 1 percent of the aggregate amount of servicing
outstanding on the date of termination. New South has the right to terminate
the Subservicing Agreement with 30 days notice without penalty. Under the terms
of the Subservicing Agreement, Collateral is required to reimburse New South for
any non recoverable losses. During 2000, Collateral paid New South $.5 million
under the terms of the Subservicing Agreement. New South paid Collateral $.4
million in 2000 for subservicing New South's owned commercial loan portfolio.
Lease Agreements. New South leases furnished office space from certain
affiliates. The Commercial Lease Agreements are each for terms of one year and
are automatically renewable. Either party may terminate same with 60 days
notice. During 2000 New South paid Collateral $1.9 million in rent.
Administrative Services Agreement. New South provides data processing,
legal, management, corporate accounting, human resources, mail,
telecommunications and public relations services to certain affiliated companies
under the terms of an Agreement for Administrative Services effective January 1,
1991 (the "Administrative Services Agreement"). The Administrative Services
Agreement is for a term of one year, and is automatically renewable. The
Administrative Services Agreement may be terminated by any party with sixty days
notice. Administrative services are provided at actual costs, with fees being
due quarterly. During 2000 New South collected $.1 million from Collateral
Investment Corporation and $.06 million from Triad Guaranty Insurance
Corporation.
Investment Advisory Agreements. In 2000, Collateral received fees from
Triad Guaranty Insurance Corporation and Southland National Insurance
Corporation under the terms of Investment Advisory Agreements dated January 1,
1996. These Agreements have an indefinite term and may be terminated by either
party with 60 days notice. For investment advisory services rendered, Collateral
receives a fee based on the value of the assets actively managed. Collateral's
advisory services are provided by New South personnel in the Capital Markets
department who also serve as officers of Collateral. Approximately 20 percent
of New South's Capital Markets department time is expended on these investment
advisory services.
During the first quarter of 2000, New South purchased certain servicing
rights from Collateral to add to its servicing portfolio for $.8 million.
79
Indebtedness of Management. Certain directions and executive officers of
New South and its affiliates are currently indebted to New South for mortgage
loans. These loans (i) were made in the ordinary course of business, (ii) were
made on substantially the same terms, including interest and collateral, as
those prevailing at the time for comparable transactions with other persons, and
(iii) did not involve more than the normal risk of collectibility or present
other unfavorable features.
Additional information concerning Relationships and Transactions with
affiliated persons and organizations is incorporated herein by reference to
"Footnote 19 - Related Party Transactions" under Item 8 filed herein.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(1) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page ------- of this Form
10-K are filed herewith or are incorporated herein by reference. No
management contract or compensatory plan or arrangement is required to be
filed as an exhibit to this form. The Registrant will furnish a copy of
any of the exhibits listed upon the payment of $5.00 per exhibit to cover
the cost of the Registrant in furnishing the exhibit.
(2) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter.
80
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEW SOUTH BANCSHARES, INC.
/s/ Robert M. Couch
- ---------------------------------------
By: Robert M. Couch
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
CAPACITY IN WHICH
SIGNATURE SIGNED DATE
Chairman and President March 30, 2001
- ---------------------------
William T. Ratliff, III*
/s/ Richard W. Edwards Vice President March 30, 2001
- -------------------------- Chief Financial Officer
Richard W. Edwards
Director and Vice President March 30, 2001
- --------------------------
William T. Ratliff, Jr.*
Director and Vice President March 30, 2001
- --------------------------
J. K. V. Ratliff*
Director March 30, 2001
- --------------------------
David W. Whitehurst*
* Lizabeth R. Nichols hereby signs this Report on March 30, 2001 on behalf of
each of the indicated persons for whom she is attorney-in-fact pursuant to
powers of attorney duly executed by such persons and filed with the Securities
and Exchange Commission.
/s/ Lizabeth R. Nichols
- ---------------------------
Elizabeth R. Nichols
Attorney-In-Fact
81
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------------------------------
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of New South Bancshares, Inc.
*3.2 By-Laws of New South Banchares, Inc.
*4.1 Certificate of Trust of New South Capital Trust I
*4.2 Initial Trust Agreement of New South Capital Trust I
**4.3 Form of Junior Subordinated Indenture between the Company and Bankers Trust
Company, as Debenture Trustee
**4.4 Form of Amended and Restated Trust Agreement of New South Capital Trust I
**4.5 Form of Preferred Security Certificate for New South Capital Trust I (included
as Exhibit A-1 of Exhibit 4.4)
**4.6 Form of Guarantee Agreement for New South Capital Trust I
**5.1 Opinion of Balch & Bingham LLP as to legality of the Junior Subordinated
Debentures and the Guarantees to be issued by the Company
**5.2 Opinion of Richards, Layton & Finger, P.A. as to legality of the Preferred
Securities to be issued by New South Capital Trust I
***8.1 Opinion and consent of Balch & Bingham LLP regarding certain federal income tax matters
**10.1 Asset Purchase Agreement dated July 1, 1997
**10.2 Lease Agreement dated July 1, 1997
**10.3 Sub Servicing Agreement dated December 31, 1986
**10.4 Loan/Mortgage B Securities Master Participation Agreement dated March 30, 1988
**10.5 Commercial Lease Agreement dated April 20, 1993
**10.6 Commercial Lease Agreement dated January 1, 1998
**10.7 Administrative Services Agreement dated January 1, 1991
**10.8 Real Estate Purchase Agreement dated June 6, 1997
**10.9 Loan Participation Agreement dated November 25, 1997
***10.10 Stock Purchase Agreement dated December 31, 1997
**12.1 Computation of ratio of earnings to fixed charges
****16 Letter from Ernst & Young LLP
21 List of Subsidiaries of New South Bancshares, Inc.
***23.23 Consent of Balch & Bingham (included in the opinion in Exhibit 8.1)
**23.3 Consent of Richards, Layton & Finger, P.A. (included in the opinion in Exhibit 5.2)
24.1 Power of Attorney
**25.1 Form T-1 Statement of Eligibility of Bankers Trust Company to act as trustee
under (i) the Junior Subordinated Indenture (ii) the Amended and Restated Trust
Agreement of New South Capital Trust I and (iii) the Guarantee for the benefit
of the holders of Preferred Securities of New South Capital Trust I.
- -------------
* Filed with Registration Statement on Form S-1, filed April 6, 1998,
registration No. 333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1,
filed May 13, 1998
*** Filed with Amendment No. 2 to the Registration Statement of Form S-1,
filed My 26, 1998
**** Filed with Amendment to Form 8-K, filed November 19, 1998