SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
---------------------------------
For the Quarterly Period Ended March 31, 2001 Commission file number 333-49459
New South Bancshares, Inc.
(Exact name of registrant as specified in its charter)
----------------------------------------------------
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 Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- --------
NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000............................................ 3
Consolidated Income Statements - Three months ended
March 31, 2001 and 2000...................................... 4
Consolidated Statements of Cash Flow - Three months ended
March 31, 2001 and 2000...................................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Part II. Other Information
Item 1. Legal Proceedings....................................... 20
Item 5. Other Information....................................... 20
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures................................................................. 21
Exhibit Index.............................................................. 22
2
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
---------- -----------
(Unaudited) (Audited)
(In thousands)
ASSETS
Cash and due from banks $ 8,973 $ 14,286
Interest-bearing deposits in other banks 75,455 11,033
Federal funds sold and securities purchased under
agreements to resell 7,500 -
Investment securities available for sale 151,362 168,176
Residual interest in loan securitizations 8,347 8,259
Loans available for sale 124,659 74,449
Loans, net of unearned income 697,297 895,186
Allowance for loan losses (13,506) (13,513)
---------- ----------
Net Loans 683,791 881,673
Premises and equipment, net 8,857 9,049
Mortgage servicing rights, net 19,222 16,176
Other assets 44,314 39,676
---------- ----------
Total Assets $1,132,480 $1,222,777
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 67,235 $ 63,037
Interest-bearing 847,118 853,189
---------- ----------
Total Deposits 914,353 916,226
Federal funds purchased and securities sold under
agreements to repurchase - 53,213
Federal Home Loan Bank advances 98,415 133,415
Notes payable 12,434 11,599
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 14,559 13,816
---------- ----------
Total Liabilities 1,074,261 1,162,769
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares; issued
and outstanding: 1,255,537.1 at March 31, 2001 and December 31, 2000) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 32,118 29,062
Accumulated other comprehensive income (loss) (4,630) 215
---------- ----------
Total Shareholders' Equity 58,219 60,008
---------- ----------
Total Liabilities and Shareholders' Equity $1,132,480 $1,222,777
========== ==========
See accompanying notes to consolidated financial statements.
3
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the three months ended
March 31,
--------------------------
2001 2000
----------- ----------
(In thousands)
Interest Income:
Interest on securities available for sale $ 4,425 $ 2,744
Interest on loans 21,025 18,983
Interest on other short-term investments 226 110
------- -------
Total Interest Income 25,676 21,837
Interest Expense:
Interest on deposits 13,532 10,620
Interest on federal funds purchased and securities sold
under agreements to repurchase 463 897
Interest on Federal Home Loan Bank advances 2,712 2,020
Interest on notes payable 248 88
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 733 733
------- -------
Total Interest Expense 17,688 14,358
Net Interest Income 7,988 7,479
Provision for Loan Losses 1,803 468
------- -------
Net Interest Income After Provision for Loan Losses 6,185 7,011
Noninterest Income:
Loan administration income 2,540 3,071
Origination fees 2,456 1,713
Gain/(Loss) on sale of investment securities available for sale (1,031) 195
Gain on sale of loans and mortgage servicing rights 6,912 3,041
Other income 1,023 1,138
------- -------
Total Noninterest Income 11,900 9,158
Noninterest Expense:
Salaries and benefits 8,358 8,101
Net occupancy and equipment expense 1,119 1,635
Other expense 4,207 5,010
------- -------
Total Noninterest Expense 13,684 14,746
------- -------
Income Before Provision for Income Taxes and Cumulative
Effect of a Change in Accounting Principle 4,401 1,423
Provision for Income Taxes 221 85
------- -------
Income Before Cumulative Effect of a Change in Accounting
Principle 4,180 1,338
Cumulative Effect of a Change in Accounting for Derivative
Instruments and Hedging Activities, Net of Tax Beneift of $72 1,124 -
------- -------
Net Income $ 3,056 $ 1,338
======= =======
Weighted average shares outstanding 1,256 1,256
Earnings per share
Cumulative Effect of a Change in Accounting for Derivative
Instruments and Hedging Activities $ 0.89 $ -
======= =======
Net Income $ 2.43 $ 1.07
======= =======
See accompanying notes to consolidated financial statements.
4
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
(In thousands)
Operating Activities:
Net income $ 3,056 $ 1,338
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of discounts and fees (509) (115)
Provision for loan losses 1,803 468
Depreciation and amortization 491 665
Amortization of mortgage servicing rights 898 919
(Gain) loss on sale of investment securities available for sale 1,031 (195)
Origination of mortgage loans held for sale (516,540) (103,522)
Proceeds from the sale of mortgage loans held for sale and servicing rights 379,022 79,565
Gain on sale of loans and mortgage servicing rights (6,912) (3,041)
Increase in other assets (8,269) (3,887)
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities (5,557) 1,280
--------- ---------
Net Cash Used in Operating Activities (151,486) (26,525)
Investing Activities:
Net increase in interest bearing deposits in other banks (64,422) (6,396)
Proceeds from sales of investment securities available for sale 126,841 13,947
Net increase in federal funds sold and securities purchased
under agreements to repurchase (7,500) -
Proceeds from maturities and calls of investment securities
available for sale 2,945 -
Purchases of investment securities available for sale (18,212) (5,465)
Net (increase) decrease in loan portfolio 196,162 (33,968)
Purchases of premises and equipment (299) (1,114)
Proceeds from sale of premises and equipment 9 8
Net (investment in) proceeds from sale of real estate owned (100) 338
--------- ---------
Net Cash Provided by (Used in) Investing Activities 235,424 (32,650)
Financing Activities:
Net increase in noninterest bearing deposits 4,198 4,541
Net increase (decrease) in interest bearing deposits (6,071) 27,974
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (53,213) 9,135
Net increase in note payable 835 -
Net increase (decrease) of Federal Home Loan Bank Advances (35,000) 19,999
--------- ---------
Net Cash Provided by (Used in) Financing Activities (89,251) 61,649
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,313) 2,474
Cash and cash equivalents at beginning of year 14,286 6,943
--------- ---------
Cash and cash equivalents at end of year $ 8,973 $ 9,417
========= =========
See accompanying notes to consolidated financial statements
5
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 2001
1. General
The consolidated financial statements have been prepared using generally
accepted accounting principles. The accompanying interim financial statements
are unaudited; however, in the opinion of management, all adjustments necessary
for the fair presentation of the consolidated financial statements have been
included. All such adjustments are of a normal recurring nature. Certain
amounts in the prior year financial statements have been reclassified to conform
with the 2001 presentation. These reclassifications had no effect on net income
and were not material to the financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Annual Report on Form 10-K for the year ended
December 31, 2000.
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"). 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 May 31, 2000, New South sold its
operations in Avondale and is currently in the process of disposing of the
remaining assets (the "Divestiture").
2. Accounting For Derivative Instruments and Hedging Activities
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.
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
relating to derivatives that did not receive hedge accounting treatment.
Additionally, the Company recognized a cumulative-effect transition adjustment
to reduce accumulated other comprehensive income ("OCI") by $3.2 million on a
pre-tax basis. The transition adjustment to OCI represents net unrealized
losses on derivative instruments that qualify as cash flow hedges.
6
The Company utilizes certain derivatives in its operations that do not
qualify as hedges for accounting purposes under SFAS 133. The following
summarizes the impact on earnings from valuation adjustments relating to these
derivatives.
Valuation Adjustments of Nondesignated Derivatives
Three Months Ended March 31, 2001
(In thousands)
Gain
(Loss)
--------
Interest rate caps $ (293)
Interest rate lock contracts (11)
Mandatory forward delivery contracts 137
------
$ (167)
======
During First Quarter 2001, certain mandatory forward delivery contracts
relating to loans available for sale initially designated as cash flow hedges
were redesignated as fair value hedges resulting in the reclassification of $.4
million into gain on the sale of loans and mortgage servicing rights. During
the First Quarter 2001, OCI was reduced by $2.7 million, net of tax, reflecting
the decline in value of those derivatives receiving cash flow hedge treatment.
OCI was increased by $.1 million resulting from reclassification into earnings
resulting from First Quarter 2001 hedge ineffectiveness. Any future
ineffectiveness will result in earnings volatility 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.
3. S Corporation Election
The Company is an S Corporation. Such corporations generally are not
subject to Federal corporate taxation. Certain states, however, do not recognize
S Corporation status; therefore, the Company incurs state income taxes for those
jurisdictions. Profits and losses flow through to the S corporation shareholders
directly in proportion to their per share ownership in the entity. Accordingly,
shareholders will be required to include profits and losses from the Company on
their individual income tax returns for federal, and state and local, if
applicable, income tax purposes.
Typically, S Corporations declare dividends to shareholders in an amount
sufficient to enable shareholders to pay the tax on any S Corporation income
included in the shareholder's individual income. Although the Company did not
declare dividends in the three month periods ending March 31, 2001 or March 31,
2000, such dividends are generally not subject to tax since they result from S
Corporation income on which shareholders have previously been taxed. The
Company declared a dividend to its shareholders in April 2001 in the amount of
$6.6 million.
4. Comprehensive Income
Comprehensive income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources. For New
South, nonowner transactions consist of changes in unrealized gains and losses
on securities available for sale and changes relating to cash flow hedges under
SFAS 133. The following table represents, in thousands, comprehensive income
for the three months ended March 31, 2001 and 2000.
7
Three Months Ended
March 31,
------------------
2001 2000
------- -------
Net income............................................................ $ 3,056 $1,338
Other comprehensive loss, net of tax:
Cumulative effect of a change in accounting for
derivative instruments and hedging activities................... (3,222) -
Net losses on current period cash flow hedges.................... (2,699) -
Reclassification adjustment for amount included
in net income................................................... (274) -
Unrealized gain (loss) on investment securities
available for sale.............................................. 1,350 (746)
------- ------
Other comprehensive loss........................................ (4,845) (746)
Comprehensive income (loss) .......................................... $(1,789) $ 592
======= ======
8
5. Segment Reporting
Reportable segments consist of Residential Mortgage Banking, Automobile
Lending, and Portfolio Management.
Residential Mortgage Banking originates and services single-family mortgage
loans. These loans are originated through the Company's network of retail loan
origination offices and through brokers and correspondents. Automobile Lending
consists of the origination 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 its funding needs. Residential Mortgage Banking and Automobile Lending
retain the assets generated by each unit, which are credited with the interest
income generated by those assets. The originating unit pays a market based
funds used charge to Portfolio Management. The segment results include certain
other overhead allocations. The results for the reportable segments of the
Company for the three months ended March 31, 2001 and 2000, in thousands, are
included in the following table.
For the three months ended March 31, 2001
---------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
----------- ----------- ---------- -------- ------------
Interest income $ 13,300 $ 3,472 $ 5,009 $ 3,895 $ 25,676
Interest expense 2 - 16,705 981 17,688
Intra-company funds (used) / provided (7,832) (1,379) 11,303 (2,092) -
Provision for loan losses 153 1,075 - 575 1,803
Noninterest income 11,103 550 (694) 941 11,900
Noninterest expense 8,358 1,174 1,192 2,960 13,684
-------- -------- -------- ------- ----------
Net income (loss) before
income taxes and
cumulative effect of a change in
accounting principle 8,058 394 (2,279) (1,772) 4,401
Provision for (benefit of)
income taxes 405 20 (115) (89) 221
-------- -------- -------- ------- ----------
Net income before
cumulative effect
of a change in accounting principle 7,653 374 (2,164) (1,683) 4,180
Cumulative effect of change in
accounting principle - - 1,124 - 1,124
-------- -------- -------- ------- ----------
Net income (loss) $ 7,653 $ 374 $ (3,288) $ (1,683) $ 3,056
======== ======== ======== ======== ==========
Depreciation and
amortization, net $ 214 $ 30 $ 10 $ 237 $ 491
Total assets 552,326 119,537 185,639 274,978 1,132,480
Capital expenditures 184 3 1 111 299
For the three months ended March 31, 2000
---------------------------------------------------------------------------
Residential
Mortgage Automobile Portfolio
Lending Lending Management Other Consolidated
----------- ----------- ---------- -------- ------------
Interest income $ 10,719 $ 2,743 $ 4,905 $ 3,470 $ 21,837
Interest expense 355 79 13,726 198 14,358
Intra-company funds (used)/
provided (9,351) (2,214) 13,587 (2,022) -
Provision for loan losses 3 - 98 367 468
Noninterest income 7,565 690 (1,613) 2,516 9,158
Noninterest expense 8,036 1,348 779 4,583 14,746
-------- -------- -------- ------- ----------
Net income (loss) before
income taxes 539 (208) 2,276 (1,184) 1,423
Provision for (benefit of)
income taxes 33 (12) 155 (91) 85
-------- -------- -------- ------- ----------
Net income (loss) $ 506 $ (196) $ 2,121 $ (1,093) $ 1,338
======== ======== ======== ======== ==========
Depreciation and
amortization, net $ 212 $ 45 $ 9 $ 399 $ 665
Total assets 559,341 110,250 250,613 164,424 1,084,628
Capital expenditures 171 2 - 941 1,114
9
6. Recent Accounting Pronouncements
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 statement
presentation. Management does not expect the other requirements of this
standard to have a significant impact on the financial statements.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Basis of Presentation
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the other financial data
included elsewhere in this document. The financial information provided below
has been rounded in order to simplify its presentation. However, the ratios and
percentages provided below are calculated using the detailed financial
information contained in the Consolidated Financial Statements, the Notes
thereto, and the other financial data included elsewhere in this document. All
tables, graphs, and financial statements included in this report should be
considered an integral part of this analysis.
The purpose of this discussion is to provide an analysis of significant
changes in the Company's assets, liabilities, and capital at March 31, 2001 as
compared to December 31, 2000, in addition to including an analysis of income
for the three months ended March 31, 2001 ("First Quarter 2001") as compared to
the three months ended March 31, 2000 ("First Quarter 2000").
In March 2001, the Company completed the securitization of approximately
$229 million of primarily residential nonconforming mortgage loans (the
"Securitization"), recording a gain of $3.4 million. The nature and timing of
the Securitization had a significant impact on the First Quarter 2001 results of
operations as well as March 31, 2001 period end assets and liabilities,
especially First Quarter 2001 averages. The residual interest in the amount of
$6.9 million associated with the Securitization was sold to an affiliated
company at fair value.
Net Income and Key Performance Ratios
New South reported net income of $3.1 million for First Quarter 2001, a
128.4 percent increase from net income of $1.3 million for First Quarter 2000.
On a per share basis, net earnings were $2.43 and $1.07, respectively, for the
same periods. First Quarter 2001 results of operations also included a
transition adjustment relating to the cumulative effect of a change in
accounting principle for derivative instruments and hedging activities of $1.1
million, or $.89 per share. During First Quarter 2001 the annualized return on
average assets was 0.98 percent and the annualized return on average equity was
20.97 percent compared to 0.52 percent and 11.74 percent, respectively, for
First Quarter 2000.
Net Interest Income, Earning Assets and Interest-bearing Liabilities
Net interest income for First Quarter 2001 was $8.0 million, a 6.8 percent
increase from $7.5 million for First Quarter 2000. This increase is primarily
attributable to an increase in average earning assets of $194.0 million, to
$1,157.7 million during First Quarter 2001, compared with $963.7 million during
First Quarter 2000. The impact of the increase in average earning assets was
offset with comparable increases in the level of average interest-bearing
liabilities of $199.4 million to $1,129.2 million during First Quarter 2001,
compared with $929.8 million during First Quarter 2000. Net interest income was
also effected by a decline in the yield on earning assets of 12 basis points and
an increase in the cost of interest-bearing liabilities of 14 basis points.
Overall, this movement in volumes and rates resulted in a decrease in the net
interest rate margin of 32 basis points during the First Quarter 2001 compared
with the same period in 2000.
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.
11
Average Balances, Income, Expense, and Rates
Three Months Ended March 31,
-----------------------------------------------------------------------
2001 2000
--------------------------------- --------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- ------
(In thousands, except percentages)
Assets
Loans, net of unearned income(1)........... $ 888,076 $21,025 9.60% $ 796,451 $ 18,983 9.59%
Federal funds sold......................... 17,590 226 5.21 7,727 110 5.73
Investment securities available for sale .. 179,086 3,073 6.96 101,729 1,750 6.92
Other investments.......................... 72,909 1,352 7.52 57,748 994 6.92
---------- ------- ---------- ---------
Total earning assets...................... 1,157,661 25,676 8.99 963,655 21,837 9.11
Allowance for loan losses.................. (13,133) (11,316)
Other assets............................... 117,215 80,344
---------- ----------
Total Assets.............................. $1,261,744 $1,032,683
========== ==========
Liabilities and Shareholders' Equity
Other interest-bearing deposits............ $ 3,865 64 6.72 $ 3,787 64 6.80
Savings deposits........................... 69,319 800 4.68 77,141 854 4.45
Time deposits.............................. 785,702 12,668 6.54 644,072 9,702 6.06
Other borrowings........................... 41,242 711 6.99 59,950 985 6.61
Federal Home Loan Bank advances............ 194,526 2,712 5.65 110,395 2,020 7.36
Guaranteed preferred beneficial interests
in the Company's subordinated debt....... 34,500 733 8.55 34,500 733 8.55
---------- ------- ---------- ---------
Total interest-bearing liabilities........ 1,129,154 17,688 6.35 929,845 14,358 6.21
Noninterest-bearing deposits............... 59,034 46,788
Accrued expenses and other liabilities..... 14,442 10,230
Shareholders' equity....................... 59,114 45,820
---------- ----------
Total Liabilities and Shareholders' Equity. $1,261,744 $1,032,683
========== ==========
---- ----
Net interest rate spread................... 2.64% 2.90%
==== ====
------- ----------
Net interest income........................ $ 7,988 $ 7,479
======= ==========
Net interest rate margin................... 2.80% 3.12%
==== ====
(1) Loans classified as nonaccrual are included in the average volume
classification. Loan fees for all periods presented are included in the
interest amounts for loans.
Loans averaged $888.1 million during First Quarter 2001, compared with
$796.5 million during First Quarter 2000, an increase of 11.5 percent,
attributable to increased loan origination volume reflecting a lower mortgage
interest rate environment. Investment securities available for sale increased
76.0 percent when comparing the First Quarter 2001 average of $179.1 million to
the First Quarter 2000 average of $101.7 million, also effected by First Quarter
2001 loan origination volume as the Company converted loans originated into
mortgage backed securities.
12
The increase in average earning assets required increases in the Company's
major sources of funding. As a result, average time deposits increased by
$141.6 million, or 22.0 percent, from $644.1 million during the First Quarter
2000 to $785.7 million during the First Quarter 2001. Federal Home Loan Bank
advances averaged $194.5 million during First Quarter 2001, and averaged $110.4
million during First Quarter 2000, an increase of $84.1 million, or 76.2
percent.
Loans, including loans available for sale and loans, net of unearned
income, represents the largest component of earning assets and totaled $822.0
million at March 31, 2001 and $969.6 million at December 31, 2000, a decline of
$147.6 million, or 15.2 percent, reflecting the Securitization. The
Securitization also reduced the quarter-end balance of loans to amounts below
their average balances outstanding during First Quarter 2001. Because of the
size of the Securitization and the nature of the assets included, the Company
expects some decline in its net interest rate spread and net interest rate
margin during the remainder of 2001. The amount of this decline will be
effected by the loan origination volume and interest rate levels of loan
production during that period.
During First Quarter 2001, investment securities available for sale
averaged $179.1 million compared with $101.7 million during First Quarter 2000,
an increase of $77.4 million, or 76.0 percent, reflecting a change in the sale
delivery method of conforming mortgage loans from a flow to a mini-bulk basis.
This change in delivery method has also increased the Company's level of loans
available for sale.
The March 31, 2001 levels of certain short-term interest bearing assets and
interest-bearing liabilities were significantly impacted by the Securitization
causing variation from their First Quarter 2001 averages. Proceeds from the
Securitization facilitated an increase in interest-bearing deposits in other
banks of $64.4 million, from $11.0 million at December 31, 2000. Securitization
proceeds also resulted in the repayment of $35.0 million, or 35.6 percent, in
Federal Home Loan Bank advances to $98.4 million at March 31, 2001 and the full
repayment of federal funds purchased and securities sold under agreements to
repurchase.
Noninterest Income and Noninterest Expenses
Noninterest income totaled $11.9 million during First Quarter 2001 compared
to $9.2 million for the same period in the prior year, an increase of $2.7
million, or 29.9 percent. Significant components of noninterest income include
loan administration income, origination fees, and gains or losses resulting from
the sales of investment securities, loans, and mortgage servicing rights. Loan
administration income totaled $2.5 million in First Quarter 2001 compared with
$3.1 million during First Quarter 2000, a decrease of $.6 million, or 17.3
percent. This decrease resulted from an increase in amortization of existing
servicing rights and a decline in fees relating to automobile loan servicing.
Origination fees reflect increased production volume characteristic of
relatively lower mortgage interest rates and increases in refinancing volumes
and amounted to $2.5 million and $1.7 million for First Quarter 2001 and First
Quarter 2000, respectively, an increase of $.8 million, or 43.4 percent.
Overall, production in the Bank's Residential Mortgage Lending segment increased
83.0 percent from First Quarter 2000 compared to First Quarter 2001. Gain on
the sales of loans and mortgage servicing rights during First Quarter 2001
totaled $6.9 million compared with $3.0 million during First Quarter 2000, an
increase of $3.9 million, or 127.3 percent, of which $3.4 million related to the
Securitization. During First Quarter 2001, the Company realized losses on sales
of investment securities available for sale totaling $1.0 million compared with
gains during the same period in 2000 of $.2 million, a decline of $1.2 million,
related to the satisfaction of mandatory forward delivery contracts requiring
the delivery of conforming mortgage loans.
Noninterest expenses totaled $13.7 million during First Quarter 2001, a
$1.0 million, or 7.2 percent, decrease compared to $14.7 million for the same
period in 2000. Salaries and benefits were $8.4 million for First Quarter 2001,
a $.3 million increase compared to $8.1 million for the same period in the prior
year. The change in salaries and benefits was the combined effect of a $.9
decrease attributable to Avondale because it conducted no operations during
First Quarter 2001, but did operate
13
during the same period in 2000 and higher compensation resulting from an
increase in the loan production volume during 2001. Occupancy and equipment
expense was $1.1 million in First Quarter 2001 and $1.6 million in First Quarter
2000, a decrease of $.5 million, or 31.6 percent, primarily attributable to the
curtailment of Avondale's operations. Other noninterest expenses totaled $4.2
million in First Quarter 2001 and $5.0 million in First Quarter 2000, a decrease
of $.8 million, or 16.0 percent, resulting from the combined effect of a
decrease of $1.3 million attributable to Avondale and increased production
volumes during First Quarter 2001 compared with the same period in 2000.
Interest Sensitivity and Market Risk
Interest Sensitivity
Through policies established by the Asset/Liability Management Committee
("ALCO") formed by New South's Board of Directors, the Company monitors and
manages the repricing and maturity of its assets and liabilities in order to
diminish the potential adverse impact that changes in interest rates could have
on its net interest income. ALCO uses a combination of traditional gap analysis,
which compares the repricings, maturities, and prepayments, as applicable, of
New South's interest-earning assets, interest-bearing liabilities and off
balance sheet instruments, and interest rate sensitivity analysis to manage
interest rate risk.
The Company's interest rate sensitivity analysis evaluates interest rate
risk based on the impact on the net interest income and market value of
portfolio equity ("MVPE") of various interest rate scenarios. The MVPE analysis
is required quarterly by the Office of Thrift Supervision ("OTS") by virtue of
the Company's asset size. The Company also uses an earnings simulation model to
determine the effect of several interest rate scenarios on the Company's net
interest income. ALCO meets semi-monthly to monitor and evaluate the interest
rate risk position of New South and to formulate and implement strategies for
increasing and protecting the net interest rate margin and net income.
Brokered deposits are considered to be highly interest-sensitive and are
reflected in interest rate risk analyses reviewed by ALCO. Additionally, both
ALCO and the New South's Board of Directors are apprised of the level of
brokered deposits on an ongoing basis.
The Company uses interest rate contracts, primarily interest rate swaps and
caps, to reduce or modify interest rate risk. The impact of these instruments is
incorporated into the interest rate risk management model. The Company manages
the credit risk of its interest rate swaps, caps, and forward contracts through
a review of creditworthiness of the counterparties to such contracts, Board
established credit limits for each counterparty, and monitoring by ALCO.
At March 31, 2001, New South had interest rate swap contracts with notional
amounts totaling $180 million. Of these, $140 million were receive variable/pay
fixed swap contracts designated to convert variable rate funding to a fixed
rate, thus reducing the impact of an upward movement in interest rates on the
net interest rate margin. Additionally, the Company has entered into $40
million of receive fixed/pay variable swaps related to certain brokered
certificates of deposit utilized in the Company's overall funding. These swaps
reduce the current cost of these liabilities and convert them to an adjustable
rate. These swaps are callable at the option of the counterparty. If called, the
Company has the right to call the certificates of deposit.
In addition, New South had $325 million in interest rate cap contracts
outstanding at March 31, 2001. As discussed above, the Company is exposed to
rising liability costs due to the relatively short-term nature of its liability
portfolio. The interest rate cap contracts serve to mitigate increases in the
costs of liabilities.
14
Asset Quality
The following table summarizes nonperforming assets as of March 31, 2001
and December 31, 2000.
Nonperforming Assets
(In thousands, except percentages)
March 31, December 31,
2001 2000
---------------------------------
Nonaccrual loans................................. $14,699 $13,621
Restructured loans............................... 1,862 1,879
------- -------
Total nonperforming loans..................... 16,561 15,500
Foreclosed properties........................... 3,224 3,124
------- -------
Total nonperforming assets.................... $19,785 $18,624
======= =======
Allowance for loan losses to period-end loans ... 1.94% 1.51%
Allowance for loan losses to period-end
nonperforming loans............................ 81.55% 87.18%
Allowance for loan losses to period-end
nonperforming assets........................... 68.26% 72.56%
Nonperforming assets to period-end loans
and foreclosed properties ..................... 2.82% 2.07%
Nonperforming loans to period-end loans.......... 2.38% 1.73%
The increase in nonaccrual loans is related to certain construction-perm
loans and certain repurchased government loans relating to the Company's loan
servicing activities. As a result, the allowance for loan losses remained at
$13.5 million despite the securitization. The deterioration of the ratio of
nonperforming assets to period-end loans and foreclosed property and the ratio
of nonperforming loans to period-end loans reflect the reduced March 31, 2001
loan levels attributable to the Securitization.
Provision and Allowance for Loan Losses
Management establishes allowances for the purpose of absorbing losses that
are inherent within the loan portfolio and that are expected to occur based on
management's review of historical losses, underwriting standards, changes in the
composition of the loan portfolio, changes in the economy, and other factors.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses as determined by management's continuing review and
evaluation of the loans and its judgment as to the impact of economic conditions
on the portfolio. Charges are made to the allowance for loans that are charged
off during the year while recoveries of these amounts are credited to the
account. The Company follows a policy of charging off loans determined to be
uncollectible by management.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the inherent risk in the loan portfolio. The amount of
the provision is a function of the level of loans outstanding, the mix of the
outstanding loan portfolio, the levels of classified assets and nonperforming
loans, and current and anticipated economic conditions.
15
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.
Based on present information and an ongoing evaluation, management
considers the allowance for loan losses to be adequate to meet presently known
and inherent risks in the loan portfolio. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about future
events which it believes to be reasonable but which may or may not be valid.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required.
16
The following table analyzes activity in the allowance for loan losses for
First Quarter 2001.
Analysis of the Allowance for Loan Losses
For the three months ended March 31, 2001
(In thousands, except percentages)
Average loans, net of unearned income................. $888,076
========
Balance of allowance for loan losses
at beginning of period.............................. $ 13,513
Loans charged off:
Residential mortgage................................ 890
Installment......................................... 1,564
Commercial real estate.............................. -
--------
Total charge-offs................................. 2,454
--------
Recoveries of loans previously charged off:
Residential mortgage................................ 99
Installment......................................... 545
Commercial real estate.............................. -
--------
Total recoveries.................................. 644
--------
Net charge-offs....................................... 1,810
Addition to allowance charged to expense ............. 1,803
--------
Balance of allowance for loan losses
at end of period.................................... $ 13,506
========
Net charge-offs to average loans, net of
unearned income, annualized......................... 0.83%
The following table summarizes the Company's ratio of net charge-offs to
average loans, net of unearned income for the periods indicated:
Analysis of Net Loan Losses to Average Loans
(In thousands, except percentages)
Three Months Ended Year Ended
March 31, December 31,
---------------------- ----------------------
2001 2000 2000 1999
-------- -------- -------- --------
Average loans, net of unearned income................. $888,076 $796,451 $894,681 $898,379
======== ======== ======== ========
Net charge-offs....................................... $ 1,810 $ 273 $ 3,166 $ 1,631
======== ======== ======== ========
Net charge-offs to average loans, net of
unearned income, annualized......................... 0.83% 0.14% 0.35% 0.18%
The provision for loan losses was $1.8 million for First Quarter 2001
compared with $.5 million for the First Quarter 2000, an increase of $1.3
million. The increase in the provision for loan losses reflects the higher
level of nonperforming loans and increases in net charge-offs of primarily
residential and installment loans. At March 31, 2001 and December 31, 2000, the
allowance for loan losses was $13.5 million. As a percentage of loans, net of
unearned income, the allowance for loan losses increased to 1.94 percent at
March 31, 2001 from 1.51 percent at December 31, 2000, as a result of the
reduction in loans attributable to the Securitization.
17
Capital
At March 31, 2001 shareholders' equity of the Company totaled $58.2
million, or 5.1 percent of total assets, compared to $60.0 million, or 4.9
percent of total assets at December 31, 2000. The increase is attributable to
the net income of $3.1 million earned during First Quarter 2001, reduced by a
$4.9 million increase in accumulated other comprehensive loss. The Company
declared a dividend to its' shareholders in April 2001 in the amount of $6.6
million.
The OTS requires thrift financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from zero to 100 percent. Under the risk-based
standard, capital is classified into two tiers. Tier 1 capital of the Bank
consists of common shareholder's equity, excluding the unrealized gain or loss
on securities available for sale, plus minority interest in consolidated
subsidiaries, and minus certain intangible assets. The Bank's Tier 2 capital
consists of the general reserve for loan losses subject to certain limitations.
Consolidated regulatory capital requirements do not apply to thrift holding
companies. The following table sets forth the specific capital amounts and
ratios of the Bank for the indicated periods.
Analysis of Capital
As of As of
March 31, December 31,
2001 2000
-------------- ------------------
(In thousands, except for percentages)
Shareholder's equity..................................... $ 96,557 $ 98,345
Minority interest in consolidated subsidiaries........... 238 206
Unrealized (gains) losses on investment securities
available for sale..................................... 4,630 (215)
-------- --------
Tier 1 capital....................................... 101,425 98,336
Allowance for loan losses.............................. 9,532 9,282
-------- --------
Tier 2 capital....................................... 9,532 9,282
Low level recourse deduction............................. 8,347 8,259
Other.................................................... 146 150
-------- --------
Total deductions..................................... 8,493 8,409
-------- --------
Total risk-based capital............................. $102,464 $ 99,209
======== ========
Risk-weighted assets (including off-balance
sheet exposure)......................................... $831,143 $898,939
Tier 1 leverage ratio.................................... 8.93% 8.05%
Total risk-based capital ratio........................... 12.33 11.04
Tier 1 risk-based capital ratio(1)....................... 12.19 10.92
(1) Tier 1 capital utilized in the tier 1 capital ratio is reduced by the low
level recourse deduction.
18
New South has consistently exceeded regulatory minimum guidelines and it is
the intention of management to continue to monitor these ratios to ensure
regulatory compliance and maintain adequate capital for New South. New South's
current capital ratios place the Bank in the well capitalized regulatory
category.
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.
19
Part II
Other Information
Item 1. 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 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
ITEM 6(A)--EXHIBITS
The exhibits listed in the Exhibit Index at page 22 of this Form 10-Q are
filed herewith or are incorporated by reference herein.
ITEM 6(B)--REPORTS on Form 8-K
No report on Form 8-K was filed by the Company during the period January 1,
2001 to March 31, 2001.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, New
South Bancshares, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
May 14, 2001 By: /s/ Robert M. Couch
-----------------------------------------
Robert M. Couch
Executive Vice President
May 14, 2001 By: /s/ Richard W. Edwards
-----------------------------------------
Richard W. Edwards
Vice President and Chief Financial Officer
21
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference:
*3.1 Certificate of Incorporation of New South Bancshares, Inc.
*3.2 By-Laws of New South Bancshares, Inc.
*4.1 Certificate of Trust of New South Capital Trust I
*4.2 Initial Trust Agreement of New South Capital Trust I
**4.3 Form of Junior Subordinated Indenture between the
Company and Bankers Trust Company, as Debenture Trustee
**10. Material Contracts
- ------------
* Filed with Registration Statement on Form S-1, filed April 6, 1999,
registration No.333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1, filed
May 13, 1999
*** Filed with Amendment No. 2 to the Registration Statement on Form S-1, filed
May 26, 1999
22