SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
---------------------------------
For the Quarterly Period Ended June 30, 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 - June 30, 2001 and
December 31, 2000.............................................. 2
Consolidated Income Statements - Three months ended
June 30, 2001 and 2000......................................... 3
Consolidated Income Statements - Six months ended
June 30, 2001 and 2000......................................... 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 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 4. Submission of Matters to a Vote of Security Holders..... 20
Item 5. Other Information....................................... 21
Item 6. Exhibits and Reports on Form 8-K........................ 21
Signatures................................................................. 21
Exhibit Index.............................................................. 21
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-----------------------------
2001 2000
----------- ----------
(Unaudited) (Audited)
(In thousands)
ASSETS
Cash and due from banks $ 16,769 $ 14,286
Interest-bearing deposits in other banks 47,233 11,033
Federal funds sold and securities purchased under
agreements to resell 4,150 -
Investment securities available for sale 200,491 168,176
Residual interest in loan securitizations 8,199 8,259
Loans available for sale 115,345 74,449
Loans, net of unearned income 705,267 895,186
Allowance for loan losses (11,717) (13,513)
---------- ----------
Net Loans 693,550 881,673
Premises and equipment, net 8,585 9,049
Mortgage servicing rights, net 19,868 16,176
Other assets 44,401 39,676
---------- ----------
Total Assets $1,158,591 $1,222,777
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 58,094 $ 63,037
Interest-bearing 808,880 853,189
---------- ----------
Total Deposits 866,974 916,226
Federal funds purchased and securities sold under
agreements to repurchase 83,223 53,213
Federal Home Loan Bank advances 95,026 133,415
Notes payable 10,328 11,599
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 14,749 13,816
---------- ----------
Total Liabilities 1,104,800 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 June 30, 2001 and December 31, 2000) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 26,028 29,062
Accumulated other comprehensive income (loss) (2,968) 215
---------- ----------
Total Shareholders' Equity 53,791 60,008
---------- ----------
Total Liabilities and Shareholders' Equity $1,158,591 $1,222,777
========== ==========
See accompanying notes to consolidated financial statements
2
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the three months ended
June 30,
--------------------------
2001 2000
------- --------
(In thousands, except
per share data)
Interest Income:
Interest on securities available for sale $ 3,708 $ 3,807
Interest on loans 16,765 20,720
Interest on other short-term investments 265 147
------- -------
Total Interest Income 20,738 24,674
Interest Expense:
Interest on deposits 12,222 11,045
Interest on federal funds purchased and securities sold
under agreements to repurchase 473 1,240
Interest on Federal Home Loan Bank advances 1,323 2,815
Interest on notes payable 229 92
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 733 733
------- -------
Total Interest Expense 14,980 15,925
Net Interest Income 5,758 8,749
Provision for loan losses 1,010 1,942
------- -------
Net Interest Income After Provision for Loan Losses 4,748 6,807
Noninterest Income:
Loan administration income 3,362 2,786
Origination fees 3,197 2,216
Gain on sale of loans and mortgage servicing rights 4,049 2,962
Other income 1,750 2,295
------- -------
Total Noninterest Income 12,358 10,259
Noninterest Expense:
Salaries and benefits 8,639 7,781
Net occupancy and equipment expense 1,214 1,533
Other expense 4,605 4,144
------- -------
Total Noninterest Expense 14,458 13,458
------- -------
Income Before Income Taxes 2,648 3,608
Provision for income taxes 138 229
------- -------
Net Income $ 2,510 $ 3,379
======= =======
Weighted average shares outstanding 1,256 1,256
Earnings per share $ 2.00 $ 2.69
See accompanying notes to consolidated financial statements
3
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the six months ended
June 30,
-------------------------
2001 2000
------- -------
(In thousands)
Interest Income:
Interest on securities available for sale $ 8,133 $ 6,551
Interest on loans 37,790 39,703
Interest on other short-term investments 491 257
------- -------
Total Interest Income 46,414 46,511
Interest Expense:
Interest on deposits 25,754 21,665
Interest on federal funds purchased and securities sold
under agreements to repurchase 936 2,137
Interest on Federal Home Loan Bank advances 4,035 4,835
Interest on notes payable 477 180
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 1,466 1,466
------- -------
Total Interest Expense 32,668 30,283
Net Interest Income 13,746 16,228
------- -------
Provision for Loan Losses 2,813 2,410
------- -------
Net Interest Income After Provision for Loan Losses 10,933 13,818
Noninterest Income:
Loan administration income 5,902 5,857
Origination fees 5,653 3,929
Gain on sale of loans and mortgage servicing rights 9,930 6,198
Other income 2,773 3,433
------- -------
Total Noninterest Income 24,258 19,417
Noninterest Expense:
Salaries and benefits 16,997 15,882
Net occupancy and equipment expense 2,333 3,168
Other expense 8,812 9,154
------- -------
Total Noninterest Expense 28,142 28,204
------- -------
Income Before Provision for Income Taxes and Cumulative
Effect of a Change in Accounting Principle 7,049 5,031
Provision for Income Taxes 359 314
------- -------
Income Before Cumulative Effect of a Change in Accounting
Principle 6,690 4,717
Cumulative Effect of a Change in Accounting for Derivative
Instruments and Hedging Activities, Net of Tax Benefit of $72 1,124 -
------- -------
Net Income $ 5,566 $ 4,717
======= =======
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 $ 4.43 $ 3.76
======= =======
See accompanying notes to consolidated financial statements
4
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
------------------------
2001 2000
--------- ---------
(In thousands)
Operating Activities:
Net income $ 5,566 $ 4,717
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of discounts and fees (968) (1,287)
Provision for loan losses 2,813 2,410
Depreciation and amortization 984 1,356
Amortization of mortgage servicing rights 1,814 1,487
Origination of loans available for sale (702,446) (255,801)
Proceeds from the sale of loans available for sale and servicing rights 370,537 187,499
Gain on sale of premises and equipment (18) --
Gain on sale of loans available for sale and mortgage servicing rights (9,930) (6,198)
Increase in other assets (9,507) (5,209)
Increase (decrease) in accrued expenses, deferred revenue and other liabilities (4,142) 1,583
--------- ---------
Net Cash Used in Operating Activities (345,297) (69,443)
Investing Activities:
Net (increase) decrease in interest-bearing deposits in other banks (36,200) 6,276
Net increase in federal funds sold and securities purchased
under agreements to resell (4,150) --
Proceeds from sales of investment securities available for sale 343,672 51,971
Proceeds from maturities and calls of investment securities
available for sale 15,515 --
Purchases of investment securities available for sale (88,473) (13,449)
Net (increase) decrease in loan portfolio 185,471 (88,415)
Purchases of premises and equipment (562) (1,396)
Proceeds from sale of premises and equipment 60 1,037
Net (investment in) proceeds from sale of real estate owned (51) 106
--------- ---------
Net Cash Provided by (Used in) Investing Activities 415,282 (43,870)
Financing Activities:
Net increase (decrease) in noninterest-bearing deposits (4,943) 8,002
Net increase (decrease) in interest-bearing deposits (44,309) 38,756
Net increase in federal funds purchased and securities
sold under agreements to repurchase 30,010 13,110
Net decrease in notes payable (1,271) --
Net increase (decrease) of Federal Home Loan Bank Advances (38,389) 54,999
Dividends paid (8,600) --
--------- ---------
Net Cash Provided by (Used in) Financing Activities (67,502) 114,867
--------- ---------
Net increase in cash and cash equivalents 2,483 1,554
Cash and cash equivalents at beginning of year 14,286 6,943
--------- ---------
Cash and cash equivalents at end of year $ 16,769 $ 8,497
========= =========
See accompanying notes to consolidated financial statements
5
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Six months Ended June 30, 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 and
notes should be read in conjunction with the consolidated financial statements
and notes thereto contained in the Company's 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's principal
operating subsidiary is New South Federal Savings Bank ("New South" or the
"Bank"). New South has three subsidiaries, Avondale Funding.com, inc.
("Avondale"), New South Real Estate, LLC, 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 continues to
dispose 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.
Three Months Six Months
Ended June 20, 2001
-----------------------------
Gain (Loss) Gain (Loss)
------------ --------------
Interest rate caps....................... $ 192 $(101)
Interest rate lock contracts............. (122) (133)
Mandatory forward delivery contracts..... (134) 3
----- -----
$ (64) $(231)
===== =====
During the first quarter of 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.
OCI was increased by $.1 million in each the first and second quarter 2001 from
the reclassification into earnings resulting from 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. Dividends totaling $8.6
million were declared in the six month period ending June 30, 2001. There were
no dividends declared in the six month period ending June 30, 2000. Dividends
declared are generally not subject to tax since they result from S Corporation
income on which shareholders have previously been taxed.
7
4. Comprehensive Income
Other comprehensive income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources. For
Bancshares, 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 and six month periods ended June 30, 2001 and 2000.
Three Months Ended
June 30,
------------------
2001 2000
------ ------
Net income.................................................. $2,510 $3,379
Other comprehensive income (loss), net of tax:
Net gains on current period cash flow hedges............. 1,159 --
Reclassification adjustment for amount included
in net income.......................................... 75 --
Unrealized gain (loss) on investment securities
available for sale..................................... 428 (131)
------ ------
Other comprehensive income (loss)...................... 1,662 (131)
------ ------
Comprehensive income........................................ $4,172 $3,248
====== ======
Six Months Ended
June 30,
----------------
2001 2000
------ ------
Net income.................................................. $5,566 $4,717
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.......... (1,540) --
Reclassification adjustment for amount included
in net income....................................... (199) --
Unrealized gain (loss) on investment securities
available for sale.................................. 1,778 (746)
------ ------
Other comprehensive loss........................... (3,183) (746)
------ ------
Comprehensive income........................................ $2,383 $3,971
====== ======
8
5. Segment Reporting
Reportable segments consist of Residential Mortgage Lending, Commercial
Real Estate Lending, Automobile Lending, and Portfolio Management.
Residential Mortgage Lending originates and services single-family mortgage
loans. These loans are originated through the Company's network of retail loan
origination offices and through brokers and correspondents. Commercial Real
Estate Lending consists of the origination of primarily multi family housing.
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 Lending, Commercial Real Estate Lending, 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 and six month periods ended June 30, 2001 and 2000, in thousands, are
included in the following table.
For the three months ended June 30, 2001
-----------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ----------- ---------- ---------- ------- -----------
Interest income $ 9,577 $ 3,465 $ 3,610 $ 3,875 $ 211 $ 20,738
Interest expense -- 114 -- 14,018 848 14,980
Intra-company funds (used) / provided (4,746) (1,591) (1,204) 7,560 (19) --
Provision for loan losses (10) 50 200 -- 770 1,010
Noninterest income 13,870 105 281 (3,459) 1,561 12,358
Noninterest expense 8,915 66 1,420 961 3,096 14,458
-------- -------- -------- --------- ------- ----------
Net income (loss) before income taxes 9,796 1,749 1,067 (7,003) (2,961) 2,648
Provision for (benefit of) income taxes 499 92 54 (353) (154) 138
-------- -------- -------- --------- ------- ----------
Net income (loss) $ 9,297 $ 1,657 $ 1,013 $ (6,650) $(2,807) $ 2,510
======== ======== ======== ========= ======= ==========
Depreciation and amortization, net $ 208 $ -- $ 31 $ 9 $ 245 $ 493
Total assets 558,787 151,871 125,220 229,111 93,602 1,158,591
Capital expenditures 103 -- 75 1 84 263
For the three months ended June 30, 2000
-----------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ----------- ---------- ---------- ------- -----------
Interest income $ 12,654 $ 2,530 $ 3,143 $ 5,424 $ 923 $ 24,674
Interest expense (355) -- (79) 14,863 1,496 15,925
Intra-company funds (used) / provided (9,180) -- (1,679) 8,940 1,919 --
Provision for loan losses 3 -- -- 456 1,483 1,942
Noninterest income 7,746 184 839 32 1,458 10,259
Noninterest expense 8,298 25 1,220 901 3,014 13,458
-------- -------- -------- --------- ------- ----------
Net income (loss) before income taxes 3,274 2,689 1,162 (1,824) (1,693) 3,608
Provision for (benefit of) income taxes 203 171 71 (127) (89) 229
-------- -------- -------- --------- ------- ----------
Net income (loss) $ 3,071 $ 2,518 $ 1,091 $ (1,697) $(1,604) $ 3,379
======== ======== ======== ========= ======= ==========
Depreciation and amortization, net $ 222 $ -- $ 44 $ 7 $ 418 $ 691
Total assets 574,874 123,579 114,350 274,080 54,514 1,141,397
Capital expenditures 119 -- 3 13 147 282
9
For the six months ended June 30, 2001
-----------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ----------- ---------- ---------- ------- -----------
Interest income $ 22,877 $ 6,815 $ 7,082 $ 8,884 $ 756 $ 46,414
Interest expense 2 226 -- 30,723 1,717 32,668
Intra-company funds (used) / provided (12,578) (3,622) (2,583) 18,863 (80) --
Provision for loan losses 143 50 1,275 -- 1,345 2,813
Noninterest income 24,973 207 831 (4,153) 2,400 24,258
Noninterest expense 17,273 147 2,594 2,153 5,975 28,142
-------- -------- -------- --------- ------- ----------
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle 17,854 2,977 1,461 (9,282) (5,961) 7,049
Provision for (benefit of) income taxes 904 153 74 (468) (304) 359
-------- -------- -------- --------- ------- ----------
Net income before cumulative effect
of a change in accounting principle 16,950 2,824 1,387 (8,814) (5,657) 6,690
Cumulative effect of change in
accounting principle -- -- -- 1,124 -- 1,124
-------- -------- -------- --------- ------- ----------
Net income (loss) $ 16,950 $ 2,824 $ 1,387 $ (9,938) $(5,657) $ 5,566
======== ======== ======== ========= ======= ==========
Depreciation and amortization, net $ 422 $ -- $ 61 $ 19 $ 482 $ 984
Total assets 558,787 151,871 125,220 229,111 93,602 1,158,591
Capital expenditures 287 -- 78 2 195 562
For the six months ended June 30, 2000
-----------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ----------- ---------- ---------- ------- ------------
Interest income $ 23,373 $ 4,871 $ 5,886 $ 10,329 $ 2,052 $ 46,511
Interest expense -- -- -- 28,589 1,694 30,283
Intra-company funds (used) / provided (18,531) -- (3,893) 22,527 (103) --
Provision for loan losses 6 -- -- 554 1,850 2,410
Noninterest income 15,311 275 1,529 (1,581) 3,883 19,417
Noninterest expense 16,334 74 2,568 1,680 7,548 28,204
-------- -------- -------- -------- ------- ----------
Net income (loss) before income taxes 3,813 5,072 954 452 (5,260) 5,031
Provision for (benefit of) income taxes 236 314 59 28 (323) 314
-------- -------- -------- -------- ------- ----------
Net income (loss) $ 3,577 $ 4,758 $ 895 $ 424 $(4,937) $ 4,717
======== ======== ======== ======== ======= ==========
Depreciation and amortization, net $ 434 $ -- $ 89 $ 16 $ 817 $ 1,356
Total assets 574,874 123,579 114,350 274,080 54,514 1,141,397
Capital expenditures 290 -- 5 13 1,088 1,396
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.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
These statements revise the standards of accounting for business combinations
and related goodwill and other intangible assets. SFAS 141 is generally
effective for business combinations after July 1, 2001 and SFAS 142 is effective
for fiscal years beginning after December 15, 2001 with certain provisions
effective earlier. Management does not expect the requirements of these
statements 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 June 30, 2001 as
compared to December 31, 2000, in addition to including an analysis of income
for the three months ended June 30, 2001 ("Second Quarter 2001") and the six
months ended June 30, 2001 ("YTD 2001") as compared to the three months ended
June 30, 2000 ("Second Quarter 2000") and the six months ended June 30, 2000
("YTD 2000"), respectively.
During YTD 2001, the Company completed the securitization of approximately
$254 million, $229 million in the first quarter and $25 million in the Second
Quarter 2001, of primarily residential nonconforming mortgage loans (the
"Securitization"), recording a gain of $3.7 million. The nature and timing of
the Securitization had a significant impact on the YTD 2001 results of
operations as well as June 30, 2001 period end assets and liabilities,
especially Second Quarter 2001 averages. The residual interest in the amount of
$7.9 million associated with the Securitization was sold to an affiliated
company at fair value.
Net Income and Key Performance Ratios
Summary
New South reported net income of $2.5 million for Second Quarter 2001, a
25.7% decrease from net income of $3.4 million for Second Quarter 2000. On a
per share basis, earnings were $2.00 and $2.69, respectively, for the same
periods. During Second Quarter 2001 the return on average assets was 0.91% and
the return on average equity was 19.30% compared to 1.23% and 25.80%,
respectively, for Second Quarter 2000.
Net income totaled $5.6 million for YTD 2001, a 17.8% increase from net
income of $4.7 million for YTD 2000. On a per share basis, earnings were $4.43
and $3.76, respectively, for the same periods. YTD 2001 results of operations
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. For YTD 2001, the return on average assets was
0.95% and the return on average equity was 20.17% compared to 0.89% and 19.26%,
respectively, for YTD 2000.
Net Interest Income
Net interest income for Second Quarter 2001 was $5.8 million, a 34.2%
decrease from net interest income of $8.7 million for Second Quarter 2000. This
decrease is attributable to a decrease in the net interest rate margin of 106
basis points from 3.39 % for the Second Quarter 2000 to 2.33 % for the Second
Quarter 2001, primarily resulting from a 118 basis point decline in the yield on
earning assets as a result of the Securitization. Net interest income for YTD
2001 was $13.7 million, a 15.3% decrease from net interest income of $16.2
million for YTD 2000. The decrease reflects a decrease in the net interest rate
margin of 68 basis points from 3.26 % for YTD 2000 to 2.58% for YTD 2001 as the
yield on earning assets decreased by 64 basis points resulting from the
Securitization. While interest rates remain unpredictable, the Bank's position
for a rising interest rate environment in the short-term could result in a
further widening of the changes in rate paid on interest bearing liabilities and
yield on
11
earning assets thus causing a decline in the net interest rate margin in future
quarters. However, the impact of certain interest rate derivative instruments
could mitigate these declines depending upon the severity of the market rise in
general interest rates.
The following tables show certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities for the periods noted. Such yields or costs are derived by dividing
income or expense by the average balance of the corresponding assets or
liabilities. Average balances have been derived from the daily balances
throughout the periods indicated.
Average Balances, Income, Expense, and Rates
For the three months ended June 30,
---------------------------------------------------------------------
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)..................... $ 748,286 $16,765 8.99% $ 852,219 $ 20,720 9.78%
Federal funds sold................................... 23,243 265 4.57 8,745 147 6.76
Investment securities available for sale............. 147,749 2,340 6.35 110,067 2,011 7.35
Other investments.................................... 72,420 1,368 7.58 65,548 1,796 11.02
---------- ------- ---------- --------
Total earning assets............................... 991,698 20,738 8.39 1,036,579 24,674 9.57
Allowance for loan losses............................ (13,402) (11,744)
Other assets......................................... 137,112 81,522
---------- ----------
Total Assets...................................... $1,115,408 $1,106,357
========== ==========
Liabilities and Shareholders' Equity
Other interest bearing deposits..................... $ 4,860 71 5.86 $ 4,085 66 6.50
Savings deposits.................................... 75,765 753 3.99 73,809 840 4.58
Time deposits....................................... 710,682 11,398 6.43 635,040 10,139 6.42
Other borrowings.................................... 53,828 702 5.23 69,254 1,332 7.74
Federal Home Loan Bank advances..................... 100,549 1,323 5.28 174,735 2,815 6.48
Guaranteed preferred beneficial interests
in the Company's subordinated debt............. 34,500 733 8.55 34,500 733 8.55
---------- ------- ---------- --------
Total interest bearing liabilities................ 980,184 14,980 6.13 991,423 15,925 6.46
Noninterest bearing deposits........................ 66,831 51,816
Accrued expenses and other liabilities.............. 16,216 10,450
Shareholders' equity................................ 52,176 52,668
---------- ----------
Total Liabilities and Shareholders' Equity.......... $1,115,407 $1,106,357
========== ========== ----
Net interest rate spread............................ 2.26% 3.11%
==== ====
Net interest income................................. $ 5,758 $ 8,749
======= =======
Net interest rate margin............................ 2.33% 3.39%
==== ====
(1) Loans classified as nonaccrual are included in the average volume
classification. Loan fees for all periods presented are included in the
interest amounts for loans.
12
Average Balances, Income, Expenses, and Rates
For the six months ended June 30,
-------------------------------------------------------------------------------
2001 2002
------------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ------- ------ ---------- ------- ------
(In thousands, except percentages)
Assets
Loans, net of unearned income(1)............. $ 817,795 37,790 9.32% $ 824,335 39,703 9.69%
Federal funds sold........................... 20,432 491 4.85 8,236 257 6.28
Investment securities available for sale..... 163,331 5,413 6.68 105,898 3,761 7.14
Other investments............................ 72,663 2,720 7.55 61,648 2,790 9.10
---------- ------- ---------- -------
Total earning assets....................... 1,074,221 46,414 8.71 1,000,117 46,511 9.35
Allowance for loan losses.................... (13,268) (11,530)
Other assets................................. 127,219 80,933
---------- ----------
Total assets............................... $1,188,172 $1,069,520
========== ==========
Liabilities and Shareholders' Equity
Other interest bearing deposits.............. $ 4,365 135 6.24 $ 3,936 130 6.64
Savings deposits............................. 72,560 1,553 4.32 75,475 1,694 4.51
Time deposits................................ 747,985 24,066 6.49 639,556 19,841 6.24
Other borrowings............................. 47,570 1,413 5.99 64,602 2,317 7.21
Federal Home Loan Bank advances.............. 147,278 4,035 5.52 142,565 4,835 6.82
Guaranteed preferred beneficial interests
in the Company's subordinated debt......... 34,500 1,466 8.55 34,500 1,466 8.55
---------- ------- ----------- -------
Total interest bearing liabilities......... 1,054,258 32,668 6.25 960,634 30,283 6.34
Noninterest bearing deposits................... 62,954 49,302
Accrued expenses and other liabilities......... 15,334 10,340
Shareholders' equity........................... 55,626 49,244
---------- ----------
Total Liabilities and Shareholders' Equity..... $1,188,172 $1,069,520
========== ==========
---- ----
Net interest rate spread....................... 2.46% 3.01%
==== ====
------- -------
Net interest income............................ $13,746 $16,228
======= =======
Net interest rate margin....................... 2.58% 3.26%
==== ====
(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, including loans available for sale and loans, net of unearned
income, represents the largest component of earning assets. Loans averaged
$748.3 million during Second Quarter 2001 and $817.8 million during YTD 2001,
compared with $852.2 million during Second Quarter 2000 and $824.3 million
during YTD 2000, a decrease of 12.2% and .8%, respectively, as a result of the
Securitization. Loans totaled $820.6 million at June 30, 2001 and $969.6
million at December 31, 2000, a decline of $149.0 million, or 15.4 %, also
reflecting the Securitization.
Investment securities available for sale increased 34.2% comparing Second
Quarter 2001 average of $147.8 million to Second Quarter 2000 average of $110.1
million, and 54.2% comparing YTD 2001 average of $163.3 million to YTD 2001
average of $105.9 million. Investment securities available for sale totaled
$200.5 million at June 30, 2001 and $168.2 million at December 31, 2000, an
increase of $32.3 million, or 19.2%. This increase in investment securities is
primarily the result of
13
the Company's implementing a strategy to more fully leverage its core capital.
The Company purchased a portfolio of GNMA securities during the Second Quarter
2001and will continue to add to the portfolio throughout the remainder of 2001.
The GNMA securities are being funded with repurchase agreements. The Company has
entered into interest rate swaps to mitigate the repricing interest rate risk on
the repurchase agreements.
The increase in average earning assets required increases in the Company's
major sources of funding. As a result, average time deposits increased by $65.4
million, or 10.3%, to $700.4 million during the Second Quarter 2001 from $635.0
million during the Second Quarter 2000. Average time deposits increased by
$103.2 million, or 16.1%, to $742.8 million during YTD 2001 from $639.6 million
during the YTD 2000. Cash received in connection with the Securitization was
utilized to reduce the Company's borrowings from the Federal Home Loan Bank
("FHLB"), with the timing of the Securitization having a significant impact on
average FHLB advances. FHLB advances averaged $174.7 million during Second
Quarter 2000, compared with $100.5 million during Second Quarter 2001, a
reduction of $74.2 million, or 42.5%. FHLB advances averaged $147.3 million
during YTD 2001, and averaged $142.6 million during YTD 2000, an increase of
$4.7 million, or 3.3%, reflecting the buildup of loans, and related funding,
prior to the Securitization.
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 compared to 2000. The
amount of this decline will be effected by loan origination volume and interest
rate levels of loan production during this period, as well as the continued
reduction in the Company's funding costs.
Noninterest Income and Noninterest Expenses
Noninterest income totaled $24.3 million during YTD 2001 compared to $19.4
million for the YTD 2000, an increase of $4.8 million, or 24.9%. Loan
administration income totaled $5.9 million for both YTD 2001 and YTD 2000.
Origination fees reflect increased production volume characteristic of
relatively lower interest rates in the general economy and amounted to $5.7
million for YTD 2001, an increase $1.7 million, or 43.9%, over the same period
in 2000. Overall, production in the Bank's residential mortgage lending
business increased 48.1% in YTD 2001 compared to YTD 2000. Gain on the sales of
loans and mortgage servicing rights during YTD 2001 totaled $9.9 million
compared with $6.2 million during YTD 2000, an increase of $3.8 million, or
60.7%, because of the $3.7 million gain relating to the Securitization.
Noninterest income totaled $12.4 million during Second Quarter 2001
compared to $10.3 million for the same period in 2000, an increase of $2.1
million, or 20.5%. Loan administration income totaled $3.4 million in the
Second Quarter 2001, compared with $2.8 million during Second Quarter 2000, an
increase of $.6 million, or 20.7%. The increase resulted from recoveries of
amounts relating to loans in the Securitization. Origination fees reflect
increased production volume characteristic of relatively lower interest rates in
the general economy and amounted to $3.2 million for Second Quarter 2001, an
increase of $1.0 million, or 44.3% over the same period in 2000. Overall,
production in the Bank's residential mortgage lending business increased 44.6%
from Second Quarter 2001 compared to Second Quarter 2000. Gain on the sales of
loans and mortgage servicing rights during Second Quarter 2001 totaled $4.0
million compared with $3.0 million during Second Quarter 2000, an increase of
$1.0 million, or 36.7%. Second Quarter 2001 reflects an increase in sales volume
relative to total production than the same period in 2000.
Noninterest expenses totaled $14.5 million during Second Quarter 2001, a
$1.0 million, or 7.4%, increase compared to $13.5 million for the same period in
2000. Salaries and benefits were $8.6 million for Second Quarter 2001, a $.9
million increase compared to $7.8 million for the same period in the prior year.
The increase is attributable to higher compensation resulting from an increase
in the residential loan production volume during 2001. Occupancy and equipment
expense was $1.2 million in Second Quarter 2001, a decline of $.3 million, or
20.8% from Second Quarter 2000, attributable primarily to the Avondale asset
sale. Other noninterest expenses totaled $4.6 million in Second Quarter 2001
and $4.1 million in Second Quarter 2000, an increase of $.5 million, or 11.1%.
14
This increase resulted from higher residential loan production volumes during
Second Quarter 2001 compared with the same period in 2000.
Noninterest expenses totaled $28.1 million during YTD 2001 compared to
$28.2 million for the same period in 2000. Salaries and benefits were $17.0
million YTD 2001, a $1.1 million increase compared to $15.9 million for the same
period in the 2000, resulting from higher compensation resulting from an
increase in residential loan production volume. YTD 2001 occupancy and
equipment expense was $2.3 million compared to $3.2 million YTD 2000, a decrease
of $.9 million or 26.4%, resulting from the Avondale sale in the second quarter
of 2000. Other noninterest expenses totaled $8.8 million in YTD 2001 and $9.2
million YTD 2000, a decrease of $.4 million, or 3.7%.
Interest Sensitivity and Market Risk
Interest Sensitivity
Through policies established by the Asset/Liability Management Committee
("ALCO") of the Bank'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 June 30, 2001, New South had interest rate swap contracts ("Swaps") with
notional amounts totaling $320 million. $280 million of the Swaps 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. At June 30, 2001 these Swaps were designated
as cash flow hedges for $40 million of repurchase agreements and $240 million of
certain time deposits. Additionally, the Company has entered into $40 million
of receive fixed/pay variable Swaps utilized as cash flow hedges for certain
brokered certificates of deposit included 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 to Swaps, New South had $285 million in interest rate cap
contracts ("Caps") outstanding at June 30, 2001. As discussed above, the
Company is exposed to rising liability costs due to the relatively short-term
nature of its liability portfolio. The Caps serve to mitigate increases in the
costs of liabilities; however under SFAS 133, the Caps do not qualify for hedge
accounting. As a result, changes in the market value of the Caps are recorded
through the income statement versus OCI.
15
Asset Quality
Nonperforming Assets
The following table summarizes nonperforming assets as of June 30, 2001
and December 31, 2000.
Nonperforming Assets
June 30, December 31,
2001 2000
-------- ------------
(In thousands, except percentages)
Nonaccrual loans............................................ $15,061 $13,621
Restructured loans.......................................... 1,845 1,879
------- -------
Total nonperforming loans.............................. 16,906 15,500
Foreclosed properties....................................... 3,275 3,124
------- -------
Total nonperforming assets............................. $20,181 $18,624
======= =======
Allowance for loan losses to period-end loans............... 1.66% 1.51%
Allowance for loan losses to period-end
nonperforming loans.................................... 69.31% 87.18%
Allowance for loan losses to period-end
nonperforming assets................................... 58.06% 72.56%
Nonperforming assets to period-end loans
and foreclosed properties.............................. 2.85% 2.07%
Nonperforming loans to period-end loans..................... 2.40% 1.73%
The increase in nonaccrual loans is related to the slowing of general
economic conditions, certain construction-perm loans in specific developments,
and certain repurchased governmental loans relating to the Company's loan
servicing activities. 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 June 30, 2001 loan levels attributable to
the Securitization. See the following section "Provision and Allowance for
Loan Losses" for a discussion of the adequacy of the allowance.
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.
16
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.
17
The following table analyzes activity in the allowance for loan losses for
YTD 2001 and YTD 2000.
Analysis of the Allowance for Loan Losses
For the six months ended June 30,
(In thousands, except percentages)
2001 2000
-------- --------
Average loans, net of unearned income............. $817,795 $824,335
======== ========
Balance of allowance for loan losses
at beginning of period....................... $ 13,513 $ 11,114
Loans charged off:
Residential mortgage......................... 3,009 777
Installment.................................. 2,657 1,393
Commercial real estate....................... - -
-------- --------
Total charge-offs....................... 5,666 2,170
-------- --------
Recoveries of loans previously charged off:
Residential mortgage......................... 162 192
Installment.................................. 895 704
Commercial real estate....................... - -
-------- --------
Total recoveries........................ 1,057 896
-------- --------
Net charge-offs................................... 4,609 1,274
Addition to allowance charged to expense.......... 2,813 2,410
-------- --------
Balance of allowance for loan losses
at end of period............................. $ 11,717 $ 12,250
======== ========
Net charge-offs to average loans, net of
unearned income, annualized.................. 1.14% 0.31%
Residential mortgage net charge-offs increased significantly during YTD
2001. The increase was primarily attributable to the charge-off of certain
Avondale assets which had been reserved for in prior periods. The increase in
installment net charge-offs is the result of a seasoning of the portfolio, the
general economic slowdown, and increased bankruptcy related losses.
The provision for loan losses was $1.0 million for Second Quarter 2001
compared with $1.9 million for the Second Quarter 2000, a decrease of $.9
million. The provision for loan losses was $2.8 million for YTD 2001 compared
with $2.4 million YTD 2000, an increase of $.4 million. The increase in the
provision for loan losses reflects the higher level of nonperforming loans and
increases in net charge-offs. At June 30, 2001 and December 31, 2000, the
allowance for loan losses was $11.7 million and $13.5 million, respectively. As
a percentage of loans, net of unearned income, the allowance for loan losses
increased to 1.66% at June 30, 2001 from 1.51% at December 31, 2000, as a result
of the reduction in loans attributable to the Securitization.
18
Capital
At June 30, 2001 shareholders' equity of the Company totaled $53.8 million,
or 4.6 % of total assets, compared to $60.0 million, or 4.9% of total assets at
December 31, 2000. The decrease is attributable to the net income of $5.6
million earned during YTD 2001, reduced by a $3.2 million increase in
accumulated other comprehensive loss and dividends paid totaling $8.6 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
June 30, December 31,
2001 2000
-------- ------------
(In thousands, except
for percentages)
Shareholder's equity......................................... $ 91,662 $ 98,345
Minority interest in consolidated subsidiaries............... 243 206
Unrealized (gains) losses on investment securities
available for sale and cash flow hedges.................... 2,968 (215)
-------- --------
Tier 1 capital........................................... 94,873 98,336
Allowance for loan losses.................................. 8,998 9,282
-------- --------
Tier 2 capital........................................... 8,998 9,282
Low level recourse deduction................................. 8,199 8,259
Other........................................................ 142 150
-------- --------
Total deductions......................................... 8,341 8,409
-------- --------
Total risk-based capital................................. $ 95,530 $ 99,209
======== ========
Risk-weighted assets (including off-balance
sheet exposure)......................................... $ 809,072 $ 898,939
Tier 1 leverage ratio........................................ 8.18% 8.05%
Total risk-based capital ratio............................... 11.81 11.04
Tier 1 risk-based capital ratio (1).......................... 11.71 10.92
(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 the Bank in the well capitalized regulatory
category.
19
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.
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 4. Submission of Matters to a Vote of Security Holders.
The Annual meeting of shareholders of the Company was held on May 22, 2001.
The following matters were submitted to a vote of the Company's shareholders:
Election of One Director Nominee was approved:
Total Votes Total Votes Total Votes
Name For Against Withheld
---- ----------- ----------- -----------
Lizabeth R. Nichols (Term Expires 2004) 1,078,824.10 0 0
Remaining Directors not elected at this meeting whose terms continue:
William T. Ratliff, III (Term Expires 2003)
W.T. Ratliff, Jr. (Term Expires 2002)
Robert M. Couch (Term Expires 2002)
David W. Whitehurst (Term Expires 2002)
The appointment of Arthur Andersen, LLP as the Company's independent
auditor for 2001 was ratified.
Total Votes For Total Votes Against Total Votes Withheld
--------------- ------------------- ---------------------
1,078,824.10 0 0
20
Indemnification of the officers and directors of the Company for any losses,
costs (including attorney's fees), expenses, fines or judgments that they
have or will incur arising out of actions that they have taken (or failed to
have taken) in good faith or on behalf of the Company was approved:
Total Votes For Total Votes Against Total Votes Withheld
--------------- ------------------- --------------------
1,078,824.10 0 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
ITEM 6(A)--EXHIBITS
The exhibits listed in the Exhibit Index at page 21 of this Form 10-Q are
filed herewith or are incorporated by reference herein.
ITEM 6(B)--REPORTS on Form 8-K
No report on Form 8-K was filed by the Company during the period April 1,
2001 to June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, New
South Bancshares, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
August 10, 2001 By: /s/ ROBERT M. COUCH
-------------------
Robert M. Couch
Executive Vice President
August 10, 2001 By: /s/ RICHARD W. EDWARDS
----------------------
Richard W. Edwards
Vice President and Chief Financial Officer
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, 1998,
registration No.333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1, filed
May 13, 1998
*** Filed with Amendment No. 2 to the Registration Statement on Form S-1, filed
May 26, 1998
21