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 September 30, 2001 Commission file number 333-
49459
New South Bancshares, Inc.
(Exact name of registrant as specified in its charter)
----------------------------------------------------
________________________________________________________________________________
Delaware
(State or other jurisdiction of 63-1132716
incorporation or organization) (I.R.S. Employer Identification No.)
1900 Crestwood Boulevard
Birmingham, Alabama 35210
(Address of Principal Executive Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000......................................................................... 2
Consolidated Income Statements - Three months ended
September 30, 2001 and 2000............................................................... 3
Consolidated Income Statements - Nine months ended
September 30, 2001 and 2000............................................................... 4
Consolidated Statements of Cash Flows - Nine months ended
September 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............................................................ 12
Part II. Other Information
Item 1. Legal Proceedings........................................................................ 22
Item 5. Other Information........................................................................ 22
Item 6. Exhibits and Reports on Form 8-K......................................................... 22
Signatures..................................................................................................... 23
Exhibit Index.................................................................................................. 23
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
----------------------------------
September 30, December 31,
----------------------------------
2001 2000
---------------- ----------------
(Unaudited) (Audited)
(In thousands)
ASSETS
Cash and due from banks $ 29,574 $ 14,286
Interest-bearing deposits in other banks 2,087 11,033
Federal funds sold and securities purchased under
agreements to resell 12,000 -
Investment securities available for sale 276,179 168,176
Residual interest in loan securitizations 8,351 8,259
Loans available for sale 88,563 74,449
Loans, net of unearned income 749,470 895,186
Allowance for loan losses (12,032) (13,513)
------------- -------------
Net Loans 737,438 881,673
Premises and equipment, net 8,297 9,049
Mortgage servicing rights, net 20,191 16,176
Other assets 47,212 39,676
------------- -------------
Total Assets $ 1,229,892 $ 1,222,777
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 73,431 $ 63,037
Interest-bearing 796,730 853,189
------------- -------------
Total Deposits 870,161 916,226
Federal funds purchased and securities sold under
agreements to repurchase 153,622 53,213
Federal Home Loan Bank advances 95,026 133,415
Notes payable 10,781 11,599
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 16,780 13,816
------------- -------------
Total Liabilities 1,180,870 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 September 30, 2001 and December 31, 2000) 1,256 1,256
Surplus 29,475 29,475
Retained earnings 27,547 29,062
Accumulated other comprehensive income (loss) (9,256) 215
------------- -------------
Total Shareholders' Equity 49,022 60,008
------------- -------------
Total Liabilities and Shareholders' Equity $ 1,229,892 $ 1,222,777
============= ============
See accompanying notes to consolidated financial statements
2
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the three months ended
September 30,
--------------------------------
2001 2000
-------------- --------------
(In thousands, except
per share data)
Interest Income:
Interest on securities available for sale $ 4,965 $ 3,428
Interest on loans 17,217 22,127
Interest on other short-term investments 117 149
-------------- --------------
Total Interest Income 22,299 25,704
Interest Expense:
Interest on deposits 11,172 12,511
Interest on federal funds purchased and securities sold
under agreements to repurchase 1,564 1,102
Interest on Federal Home Loan Bank advances 1,372 3,232
Interest on notes payable 227 197
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 733 733
-------------- --------------
Total Interest Expense 15,068 17,775
Net Interest Income 7,231 7,929
Provision for loan losses 1,000 1,353
-------------- --------------
Net Interest Income After Provision for Loan Losses 6,231 6,576
Noninterest Income:
Loan administration income 2,669 2,713
Origination fees 3,208 2,209
Gain on sale of investment securities available for sale 553 -
Gain on sale of loans and mortgage servicing rights 4,306 3,531
Other income 1,120 1,020
-------------- --------------
Total Noninterest Income 11,856 9,473
Noninterest Expense:
Salaries and benefits 8,431 7,437
Net occupancy and equipment expense 1,319 1,365
Other expense 4,939 4,040
-------------- --------------
Total Noninterest Expense 14,689 12,842
-------------- --------------
Income Before Income Taxes 3,398 3,207
Provision for income taxes 171 190
-------------- --------------
Net Income $ 3,227 $ 3,017
============== ==============
Weighted average shares outstanding 1,256 1,256
Earnings per share $ 2.57 $ 2.40
See accompanying notes to consolidated financial statements
3
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the nine months ended
September 30,
--------------------------------
2001 2000
-------------- --------------
(In thousands)
Interest Income:
Interest on securities available for sale $ 13,098 $ 9,979
Interest on loans 55,007 61,830
Interest on other short-term investments 608 406
-------------- --------------
Total Interest Income 68,713 72,215
Interest Expense:
Interest on deposits 36,926 34,176
Interest on federal funds purchased and securities sold
under agreements to repurchase 2,500 3,239
Interest on Federal Home Loan Bank advances 5,407 8,067
Interest on notes payable 704 377
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 2,199 2,199
-------------- --------------
Total Interest Expense 47,736 48,058
Net Interest Income 20,977 24,157
Provision for Loan Losses 3,813 3,763
-------------- --------------
Net Interest Income After Provision for Loan Losses 17,164 20,394
Noninterest Income:
Loan administration income 8,571 8,570
Origination fees 8,861 6,138
Gain on sale of investment securities available for sale 553 -
Gain on sale of loans and mortgage servicing rights 14,236 9,729
Other income 3,893 4,453
-------------- --------------
Total Noninterest Income 36,114 28,890
Noninterest Expense:
Salaries and benefits 25,428 23,319
Net occupancy and equipment expense 3,652 4,533
Other expense 13,751 13,194
-------------- --------------
Total Noninterest Expense 42,831 41,046
-------------- --------------
Income Before Provision for Income Taxes and Cumulative
Effect of a Change in Accounting Principle 10,447 8,238
Provision for Income Taxes 530 504
-------------- --------------
Income Before Cumulative Effect of a Change in Accounting
Principle 9,917 7,734
Cumulative Effect of a Change in Accounting for Derivative
Instruments and Hedging Activities, Net of Tax Benefit of $72 1,124 -
-------------- --------------
Net Income $ 8,793 $ 7,734
============== ==============
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 $ 7.00 $ 6.16
============== ==============
See accompanying notes to consolidated financial statements
4
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months
ended September 30,
--------------------------------
2001 2000
---------------- ---------------
Operating Activities:
Net income $ 8,793 $ 7,734
Adjustments to reconcile net income to net cash used in operating activities:
Accretion of discounts and fees (1,295) (2,220)
Provision for loan losses 3,813 3,763
Depreciation and amortization 1,473 2,015
Amortization of mortgage servicing rights 3,021 2,252
Origination of loans available for sale (923,524) (396,698)
Proceeds from the sale of loans available for sale and servicing rights 969,943 297,284
Gain on sale of investment securities available for sale (553) -
Gain on sale of loans available for sale and mortgage servicing rights (14,236) (9,729)
Increase in other assets (13,606) (9,436)
Increase (decrease) in accrued expenses, deferred
revenue and other liabilities (14,243) 2,918
Other, net (24) -
----------- ----------
Net Cash Provided by (Used in) Operating Activities 19,586 (102,117)
Investing Activities:
Net decrease in interest-bearing deposits in other banks 8,946 11,555
Net increase in federal funds sold and securities purchased
under agreements to resell (12,000) (22,000)
Proceeds from sales of investment securities available for sale 27,835 -
Proceeds from maturities and calls of investment securities
available for sale 30,391 75,324
Purchases of investment securities available for sale (204,091) (21,334)
Net (increase) decrease in loan portfolio 140,655 (116,555)
Purchases of premises and equipment (806) (2,238)
Proceeds from sale of premises and equipment 109 1,034
Net (investment in) proceeds from sale of real estate owned (142) 370
----------- ----------
Net Cash Used in Investing Activities (9,103) (73,844)
Financing Activities:
Net increase in noninterest-bearing deposits 10,394 19,238
Net increase (decrease) in interest-bearing deposits (56,459) 87,815
Net increase in federal funds purchased and securities
sold under agreements to repurchase 100,409 19,064
Net increasse (decrease) in notes payable (818) 6,093
Net increase (decrease) of Federal Home Loan Bank Advances (38,389) 49,998
Dividends paid (10,308) (1,553)
----------- ----------
Net Cash Provided by Financing Activities 4,829 180,655
----------- ----------
Net increase in cash and cash equivalents 15,288 4,694
Cash and cash equivalents at beginning of period 14,286 6,943
----------- ----------
Cash and cash equivalents at end of period $ 29,574 $ 11,637
=========== ==========
See accompanying notes to consolidated financial statements
5
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Nine months Ended September 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 five 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 Nine Months
Ended September 30, 2001
------------------------
Gain (Loss) Gain (Loss)
--------------- ---------------
Interest rate caps........................... $ (255) $ (356)
Interest rate lock contracts................. (499) (632)
Mandatory forward delivery contracts......... (104) (101)
--------------- ---------------
$ (858) $ (1,089)
=============== ===============
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 and $.3 million in the third quarter 2001 and YTD
2001, respectively, from 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 $10.3
million and $1.6 million were declared in the nine month periods ending
September 30, 2001 and September 30, 2000, respectively. 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
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 nine month periods ended September 30, 2001 and 2000.
Three Months Ended
September 30,
-------------------------------
2001 2000
--------------- --------------
Net income................................................... $ 3,227 $ 3,017
Other comprehensive income (loss), net of tax:
Net losses on current period cash flow hedges........... (11,498) -
Reclassification adjustment for amount included
in net income........................................ 113 -
Unrealized gain on investment securities
available for sale................................... 5,097 1,461
--------------- --------------
Other comprehensive income (loss)................... (6,288) 1,461
--------------- --------------
Comprehensive income (loss).................................. $ (3,061) $ 4,478
=============== ==============
Nine Months Ended
September 30,
-------------------------------
2001 2000
--------------- --------------
Net income................................................... $ 8,793 $ 7,734
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........... (13,038) -
Reclassification adjustment for amount included
in net income........................................ (86) -
Unrealized gain on investment securities
available for sale................................... 6,875 584
--------------- --------------
Other comprehensive income (loss)................... (9,471) 584
--------------- --------------
Comprehensive income (loss).................................. $ (678) $ 8,318
=============== ==============
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 nine month periods ended September 30, 2001 and 2000, in
thousands, are included in the following table.
For the three months ended September 30, 2001
--------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ----------- ---------- ---------- ---------- ------------
Interest income $ 10,113 $ 3,113 $ 3,729 $ 4,914 $ 430 $ 22,299
Interest expense - 117 - 14,109 842 15,068
Intra-company funds (used) / provided (4,830) (1,381) (1,202) 7,437 (24) -
Provision for loan losses 101 - 725 50 124 1,000
Noninterest income 10,462 105 634 142 513 11,856
Noninterest expense 9,462 104 1,389 1,105 2,629 14,689
----------- ----------- ---------- ---------- ---------- ------------
Net income (loss) before income taxes 6,182 1,616 1,047 (2,771) (2,676) 3,398
Provision for (benefit of) income taxes 315 83 53 (142) (138) 171
----------- ----------- ---------- ---------- ---------- ------------
Net income (loss) $ 5,867 $ 1,533 $ 994 $ (2,629) $ (2,538) $ 3,227
=========== =========== ========== ========== ========== ============
Depreciation and amortization, net $ 232 $ - $ 25 $ 9 $ 223 $ 489
Capital expenditures 129 - 12 18 85 244
9
For the three months ended September 30, 2000
------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ------------- ------------ ------------ ------------ --------------
Interest income $ 14,612 $ 2,983 $ 3,735 $ 3,837 $ 537 $ 25,704
Interest expense - 59 - 16,846 870 17,775
Intra-company funds (used) / provided (6,489) - (1,101) 7,531 59 -
Provision for loan losses 1,660 - (255) (552) 500 1,353
Noninterest income 8,455 83 930 (591) 596 9,473
Noninterest expense 8,414 24 1,170 778 2,456 12,842
----------- ------------- ------------ ------------ ------------ --------------
Net income (loss) before income taxes 6,504 2,983 2,649 (6,295) (2,634) 3,207
Provision for (benefit of) income taxes 233 4 127 280 (454) 190
----------- ------------- ------------ ------------ ------------ --------------
Net income (loss) $ 6,271 $ 2,979 $ 2,522 $ (6,575) $ (2,180) $ 3,017
=========== ============= ============ ============ ============ ==============
Depreciation and amortization, net $ 231 $ - $ 39 $ 11 $ 378 $ 659
Capital expenditures 79 - - - 763 842
For the nine months ended September 30, 2001
------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
----------- ------------- ------------ ------------ ------------ --------------
Interest income $ 32,990 $ 9,928 $ 10,811 $ 13,798 $ 1,186 $ 68,713
Interest expense 2 343 - 44,832 2,560 47,736
Intra-company funds (used) / provided (17,408) (5,003) (3,785) 26,300 (104) -
Provision for loan losses 244 50 2,000 50 1,469 3,813
Noninterest income 35,435 312 1,465 (4,011) 2,914 36,114
Noninterest expense 26,735 251 3,983 3,258 8,605 42,831
----------- ------------- ------------ ------------ ------------ --------------
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle 24,035 4,593 2,508 (12,053) (8,638) 10,447
Provision for (benefit of) income taxes 1,219 236 127 (610) (442) 530
----------- ------------- ------------ ------------ ------------ --------------
Net income before cumulative effect
of a change in accounting principle 22,816 4,357 2,381 (11,443) (8,196) 9,917
Cumulative effect of change in
accounting principle - - - 1,124 - 1,124
----------- ------------- ------------ ------------ ------------ --------------
Net income (loss) $ 22,816 $ 4,357 $ 2,381 $ (12,567) $ (8,196) $ 8,793
=========== ============= ============ ============ ============ ==============
Depreciation and amortization, net $ 654 $ - $ 86 $ 28 $ 705 $ 1,473
Total assets 590,886 138,019 128,600 318,610 53,777 1,229,892
Capital expenditures 416 - 90 20 280 806
10
For the nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Residential Commercial
Mortgage Real Estate Automobile Portfolio
Lending Lending Lending Management Other Consolidated
-------------- -------------- ------------- -------------- ------------ --------------
Interest income $ 37,985 $ 7,854 $ 9,621 $ 14,166 $ 2,589 $ 72,215
Interest expense - 59 - 45,435 2,564 48,058
Intra-company funds (used)/provided (25,020) - (4,994) 30,058 (44) -
Provision for loan losses 1,666 - (255) 2 2,350 3,763
Noninterest income 23,766 358 2,459 (2,172) 4,479 28,890
Noninterest expense 24,748 98 3,738 2,458 10,004 41,046
-------------- -------------- ------------- -------------- ------------ ------------
Net income (loss) before income taxes 10,317 8,055 3,603 (5,843) (7,894) 8,238
Provision for (benefit of) income taxes 469 318 186 308 (777) 504
-------------- -------------- ------------- -------------- ------------ ------------
Net income (loss) $ 9,848 $ 7,737 $ 3,417 $ (6,151) $ (7,117) $ 7,734
============== ============== ============= ============== ============ ============
Depreciation and amortization, net $ 665 $ - $ 128 $ 27 $ 1,195 $ 2,015
Total assets $ 670,976 10 102,331 397,636 42,092 1,213,045
Capital expenditures 369 - 5 13 1,851 2,238
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.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). This statement revises
the standards of accounting for the accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. Management does not expect the requirements
of this statement to have a significant impact on the financial statements.
11
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 September 30, 2001
as compared to December 31, 2000, in addition to including an analysis of income
for the three months ended September 30, 2001 ("Third Quarter 2001") and the
nine months ended September 30, 2001 ("YTD 2001") as compared to the three
months ended September 30, 2000 ("Third Quarter 2000") and the nine months ended
September 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, 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 September 30, 2001 period end assets and liabilities,
especially Third Quarter 2001 and YTD 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 $3.2 million for Third Quarter 2001, a
7.0% increase from net income of $3.0 million for Third Quarter 2000. On a per
share basis, earnings were $2.57 and $2.40, respectively, for the same periods.
During Third Quarter 2001 the return on average assets was 1.08% and the return
on average equity, excluding components of other comprehensive income, was
23.03% compared to 1.01% and 21.20%, respectively, for Third Quarter 2000.
Net income totaled $8.8 million for YTD 2001, a 13.7% increase from net
income of $7.7 million for YTD 2000. On a per share basis, earnings were $7.00
and $6.16, 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
0.99% and the return on average equity, excluding components of other
comprehensive income, was 20.57% compared to 0.93% and 19.95%, respectively, for
YTD 2000.
Net Interest Income
Net interest income for Third Quarter 2001 was $7.2 million, a $.7
million, or 8.8%, decrease from net interest income of $7.9 million for Third
Quarter 2000. This decrease is attributable to lower average loan balances
during the Third Quarter 2001 following the Securitization, compared with the
same period in 2000, and the impact of interest rate swap contracts ("Swaps").
Although total average earning assets were the same during both the Third
Quarter 2001 and Third Quarter 2000 at $1.1 billion, average loans, the highest
yielding earning asset category, decreased $141.0 million, or 15.6%, from $906.4
million in 2000 to $765.4 million in 2001. The decline in loan assets were
primarily offset by increases in the Company's investment portfolio which have a
lower yield. In addition, the Company's Swaps, intended primarily to convert
variable rates liabilities to fixed rates, decreased net interest
12
income by $1.4 million during Third Quarter 2001, compared to an increase of $.1
million during Third Quarter 2000.
Net interest income for YTD 2001 was $21.0 million, a $3.2 million, or
13.2%, decrease from net interest income of $24.2 million for YTD 2000. The
decrease reflects the Company's reliance on relatively higher cost time deposits
in its overall funding and the impact of Swaps. Time deposits, the highest
costing funding source, averaged $713.5 million during YTD 2001 and $654.8
million during YTD 2000, an increase of $58.7 million, or 9.0%. The Company's
Swaps decreased net interest income by $2.3 million during YTD 2001, compared to
an increase of $.4 million during YTD 2000, a combined decrease in the net
interest income of $2.7 million. These swaps are primarily hedges of the
Company's time deposits which have resulted in the effective yields remaining
approximately the same between years.
While interest rates remain unpredictable, the Bank remains liability
sensitive which could reduce net interest income in rising interest
environments. See the section "Interest Sensitivity and Market Risk" for a more
complete discussion of the Company's utilization of interest rate derivative
instruments and their potential impact on net interest income.
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.
13
Average Balances, Income, Expense, and Rates
For the three months ended September 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)............... $ 765,435 $ 17,217 8.92% $ 906,401 $ 22,127 9.71%
Federal funds sold............................. 11,340 117 4.09 8,039 149 7.37
Investment securities available for sale....... 227,602 3,685 6.42 115,277 1,993 6.88
Other investments.............................. 71,868 1,280 7.07 70,246 1,435 8.13
----------------------- ----------------------
Total earning assets......................... 1,076,245 22,299 8.22 1,099,963 25,704 9.30
Allowance for loan losses...................... (11,523) (12,275)
Other assets................................... 120,768 97,582
----------- -----------
Total Assets................................. $ 1,185,490 $ 1,185,270
=========== ===========
Liabilities and Shareholders' Equity
Other interest bearing deposits................ $ 5,282 72 5.41 $ 3,918 69 7.01
Savings deposits............................... 106,744 838 3.11 74,793 852 4.53
Time deposits.................................. 645,616 10,262 6.31 685,082 11,590 6.73
Other borrowings............................... 146,313 1,791 4.86 67,818 1,299 7.62
Federal Home Loan Bank advances................ 106,871 1,372 5.09 189,011 3,232 6.80
Guaranteed preferred beneficial interests
in the Company's subordinated debt........ 34,500 733 8.43 34,500 733 8.43
----------- -------- ----------------------
Total interest bearing liabilities........... 1,045,326 15,068 5.72 1,055,122 17,775 6.70
Noninterest bearing deposits................... 68,803 65,322
Accrued expenses and other liabilities......... 16,266 12,148
Shareholders' equity........................... 55,095 52,678
----------- -----------
Total Liabilities and Shareholders' Equity..... $ 1,185,489 $ 1,185,270
=========== ===========
---- ----
Net interest rate spread....................... 2.50% 2.60%
==== ====
-------- -------
Net interest income............................ $ 7,231 $ 7,929
======== =======
Net interest rate margin....................... 2.67% 2.87%
==== ====
(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.
14
Average Balances, Income, Expense, and Rates
For the nine months ended September 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).......... $ 800,150 $ 55,007 9.19% $ 851,890 $ 61,830 9.69%
Federal funds sold........................ 17,368 608 4.68 8,170 406 6.64
Investment securities available for sale.. 184,990 9,098 6.58 109,047 5,754 7.05
Other investments......................... 72,395 4,000 7.39 64,535 4,225 8.75
------------ ----------- -------------- ------------
Total earning assets.................... 1,074,903 68,713 8.55 1,033,642 72,215 9.33
Allowance for loan losses................. (12,680) (11,780)
Other assets.............................. 125,045 86,523
------------ --------------
Total Assets............................ $ 1,187,268 $ 1,108,385
============ ==============
Liabilities and Shareholders' Equity
Other interest bearing deposits........... $ 4,674 207 5.92 $ 3,930 199 6.76
Savings deposits.......................... 84,080 2,391 3.80 75,246 2,546 4.52
Time deposits............................. 713,487 34,328 6.43 654,842 31,431 6.41
Other borrowings.......................... 80,846 3,204 5.30 65,682 3,616 7.35
Federal Home Loan Bank advances........... 133,661 5,407 5.41 158,160 8,067 6.81
Guaranteed preferred beneficial interests
in the Company's subordinated debt... 34,500 2,199 8.52 34,500 2,199 8.52
------------ ----------- -------------- -----------
Total interest bearing liabilities...... 1,051,248 47,736 6.07 992,360 48,058 6.47
Noninterest bearing deposits.............. 64,925 54,681
Accrued expenses and other liabilities.... 15,648 10,947
Shareholders' equity...................... 55,447 50,397
------------ --------------
Total Liabilities and Shareholders' Equity $ 1,187,268 $ 1,108,385
============ ==============
--------- --------
Net interest rate spread.................. 2.48% 2.86%
========= ========
----------- -----------
Net interest income....................... $ 20,977 $ 24,157
=========== ===========
Net interest rate margin.................. 2.61% 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, including loans available for sale and loans, net of unearned
income, represent the largest component of earning assets. Loans averaged
$765.4 million during Third Quarter 2001 and $800.2 million during YTD 2001,
compared with $906.4 million during Third Quarter 2000 and $851.9 million during
YTD 2000, a decrease of 15.6% and 6.1%, respectively, as a result of the
Securitization. Loans totaled $838.0 million at September 30, 2001 and $969.6
million at December 31, 2000, a decline of $131.6 million, or 13.6%, also
reflecting the Securitization.
Investment securities available for sale ("Investments AFS") increased
$112.3 million, or 97.4%, comparing Third Quarter 2001 average of $227.6 million
to Third Quarter 2000 average of $115.3 million. Comparing YTD 2001 average of
$185.0 million to YTD 2000 average of $109.0 million, Investments AFS increased
$76.0 million, or 69.6%. Investments AFS totaled $276.2 million at September 30,
2001 and $168.2 million at December 31, 2000, an increase of $108.0 million, or
64.2%. This increase in
15
investment securities is primarily the result of the Company's implementation
of a strategy to more fully leverage its core capital. The Company purchased a
portfolio of GNMA securities beginning in the second quarter of 2001, which
averaged $121.1 million during Third Quarter 2001 and $91.3 million during YTD
2001, and may continue to add to the portfolio throughout the remainder of
2001. The GNMA securities are being funded with repurchase agreements, which
accounted for the increase in other borrowings for both YTD 2001 and Third
Quarter 2001. The Company has entered into certain interest rate swaps to
mitigate the repricing interest rate risk on a portion of the repurchase
agreements.
The composition of the Company's interest earning assets impacted
composition of the interest bearing liabilities. Deposits and FHLB Advances are
the primary funding source for loan assets. As a result, average time deposits
decreased by $39.5 million, or 5.8%, to $645.6 million during the Third Quarter
2001 from $685.1 million during the Third Quarter 2000. Average time deposits
increased by $58.7 million, or 9.0%, to $713.5 million during YTD 2001 from
$654.8 million during the YTD 2000. Although a significant funding component
during most of 2001, the decline in average time deposits during Third Quarter
2001 reflects a shift in funding from such time deposits to alternative sources.
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 $106.9 million during Third Quarter 2001, compared with $189.0
million during Third Quarter 2000, a reduction of $82.1 million, or 43.5%. FHLB
advances averaged $133.7 million during YTD 2001, and averaged $158.2 million
during YTD 2000, a decrease of $24.5 million, or 15.5%, 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 its net interest rate spread and net interest rate
margin to be lower in the fourth quarter of 2001 than in the same period of
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 $11.9 million during Third Quarter 2001
compared to $9.5 million for the same period in 2000, an increase of $2.4
million, or 25.2%. Loan administration income totaled $2.7 million for both the
Third Quarter 2001 and the Third Quarter 2000. Origination fees reflect
increased production volume characteristic of relatively lower interest rates in
the general economy and amounted to $3.2 million for Third Quarter 2001, an
increase of $1.0 million, or 45.2% over the same period in 2000. Overall,
production in the Bank's residential mortgage lending business increased 42.6%
from Third Quarter 2001 compared to Third Quarter 2000. Gain on the sales of
loans and mortgage servicing rights during Third Quarter 2001 totaled $4.3
million compared with $3.5 million during Third Quarter 2000, an increase of $.8
million, or 21.9%. In addition, the Company sold approximately $27.8 million of
investment securities available for sale in the Third Quarter 2001 and realized
a gain of $.6 million. There were no sales during comparable periods in 2000.
Noninterest income totaled $36.1 million during YTD 2001 compared to
$28.9 million for YTD 2000, an increase of $7.2 million, or 25.0%. Loan
administration income totaled $8.6 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 $8.9
million for YTD 2001, an increase of $2.7 million, or 44.4%, over the same
period in 2000. Overall, production in the Bank's residential mortgage lending
business increased 46.2% in YTD 2001 compared to same period of 2000. Gain on
the sales of loans and mortgage servicing rights during YTD 2001 totaled $14.2
million compared with $9.7 million during YTD 2000, an increase of $4.5 million,
or 46.3%, largely due to the $3.7 million gain relating to the Securitization
and the increase in sales volume relative to total production.
Noninterest expenses totaled $14.7 million during Third Quarter 2001, a
$1.9 million, or 14.4%, increase compared to $12.8 million for the same period
in 2000. Salaries and benefits were $8.4 million for Third Quarter 2001, a $1.0
million increase compared to $7.4 million for the same period in the prior year.
The increase is attributable to higher compensation resulting from an increase
in the
16
residential loan production volume during 2001. Occupancy and equipment expense
was $1.3 million in Third Quarter 2001, a decline of $.1 million, or 3.4% from
Third Quarter 2000, attributable primarily to the Divestiture. Other
noninterest expenses totaled $4.9 million in Third Quarter 2001 and $4.0 million
in Third Quarter 2000, an increase of $.9 million, or 22.3%. This increase
resulted from higher residential loan production volumes during Third Quarter
2001 compared with the same period in 2000 and expenses associated with
conversions of various systems utilized in the Company's operations.
Noninterest expenses totaled $42.8 million during YTD 2001 compared to
$41.0 million for the same period in 2000. Salaries and benefits were $25.4
million YTD 2001, a $2.1 million increase compared to $23.3 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 $3.7 million compared to $4.5 million YTD 2000, a decrease of $.8
million or 19.4%, resulting from the Divestiture in the second quarter of
2000. Other noninterest expenses totaled $13.8 million in YTD 2001 and $13.2
million YTD 2000, an increase of $.6 million, or 4.2% for the same reasons as
the increase in Third Quarter 2001 other expenses.
Interest Sensitivity and Market Risk
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 September 30, 2001, New South had Swaps with notional amounts
totaling $340 million. $310 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 September 30, 2001 these Swaps were designated as cash flow
hedges for $70 million of repurchase agreements and $240 million of certain time
deposits. Additionally, the Company has entered into $30 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 September 30, 2001. As discussed above, the
Company is exposed to rising liability
17
costs due to the relatively short-term nature of its liability portfolio. The
Caps could mitigate increases in the costs of liabilities if rates rose above
the index rate. 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. Short-term interest rates would need to increase
significantly before the Caps would provide the Company with a material benefit.
Asset Quality
Nonperforming Assets
The following table summarizes nonperforming assets as of September 30,
2001 and December 31, 2000.
Nonperforming Assets
September 30, December 31,
2001 2000
---------------- -----------------
(In thousands, except percentages)
Nonaccrual loans................................ $ 14,020 $ 13,621
Restructured loans.............................. 1,827 1,879
---------------- -----------------
Total nonperforming loans.................. 15,847 15,500
Foreclosed properties and repossessed assets.... 5,889 4,222
---------------- -----------------
Total nonperforming assets................. $ 21,736 $ 19,722
================ =================
Allowance for loan losses to period-end loans... 1.61% 1.51%
Allowance for loan losses to period-end
nonperforming loans........................... 75.93% 87.18%
Allowance for loan losses to period-end
nonperforming assets.......................... 55.36% 68.52%
Nonperforming assets to period-end loans and
foreclosed properties and repossessed assets.. 2.88% 2.19%
Nonperforming loans to period-end loans......... 2.11% 1.73%
The increase in nonaccrual loans is related to the slowing of general
economic conditions, and certain repurchased governmental loans relating to the
Company's loan servicing activities. The increased level of foreclosed and
repossessed assets is due to the foreclosure of construction loans during the
third quarter. 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 is primarily the result of the reduced September 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
18
management.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the inherent risk in the loan portfolio. The amount of
the provision is a function of the level of loans outstanding, the mix of the
outstanding loan portfolio, the levels of classified assets and nonperforming
loans, and current and anticipated economic conditions.
The Company's allowance for loan losses is based upon management's
judgment and assumptions regarding risk elements in the portfolio, future
economic conditions, and other factors affecting borrowers. The evaluation of
the allowance for loan losses includes management's identification and analysis
of loss inherent in various portfolio segments using a credit grading process
and specific reviews and evaluations of certain significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general economic conditions in the
Company's markets 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.
19
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 nine months ended September 30,
(In thousands, except percentages)
2001 2000
-------------- --------------
Average loans, net of unearned income.................... $ 800,150 $ 851,890
============== ==============
Balance of allowance for loan losses
at beginning of period.............................. $ 13,513 $ 11,114
Loans charged off:
Residential mortgage................................ 3,423 1,449
Installment......................................... 3,932 2,362
Commercial real estate.............................. - -
-------------- --------------
Total charge-offs.............................. 7,355 3,811
-------------- --------------
Recoveries of loans previously charged off:
Residential mortgage................................ 1,166 310
Installment......................................... 895 1,126
Commercial real estate.............................. - -
-------------- --------------
Total recoveries............................... 2,061 1,436
-------------- --------------
Net charge-offs.......................................... 5,294 2,375
Addition to allowance charged to expense................. 3,813 3,763
-------------- --------------
Balance of allowance for loan losses
at end of period.................................... $ 12,032 $ 12,502
============== ==============
Net charge-offs to average loans, net of
unearned income, annualized......................... 0.88% 0.37%
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 Third Quarter 2001
compared with $1.4 million for the Third Quarter 2000, a decrease of $.4
million. The provision for loan losses was $3.8 million for both YTD 2001 and
YTD 2000. At September 30, 2001 and December 31, 2000, the allowance for loan
losses was $12.0 million and $13.5 million, respectively. As a percentage of
loans, net of unearned income, the allowance for loan losses increased to 1.61%
at September 30, 2001 from 1.51% at December 31, 2000, as a result of the
reduction in loans attributable to the Securitization.
20
Capital
At September 30, 2001 shareholders' equity of the Company totaled $49.0
million, or 4.0% 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
$8.8 million earned during YTD 2001, reduced by a $9.5 million increase in
accumulated other comprehensive loss and dividends paid totaling $10.3 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
September 30, December 31,
2001 2000
-------------------- ---------------------
(In thousands, except for percentages)
Shareholder's equity......................................... $ 86,332 $ 98,345
Minority interest in consolidated subsidiaries............... 280 206
Unrealized (gains) losses on investment securities
available for sale and cash flow hedges.................... 9,256 (215)
------------------ ---------------------
Tier 1 capital........................................... 95,868 98,336
Allowance for loan losses.................................. 9,581 9,282
------------------- ---------------------
Tier 2 capital........................................... 9,581 9,282
Low level recourse deduction................................. 8,351 8,259
Other........................................................ 189 150
------------------- ---------------------
Total deductions......................................... 8,540 8,409
------------------- ---------------------
Total risk-based capital................................. $ 96,909 $ 99,209
=================== =====================
Risk-weighted assets (including off-balance
sheet exposure)......................................... $ 826,883 $ 898,939
Tier 1 leverage ratio........................................ 7.75% 8.05%
Total risk-based capital ratio............................... 11.72 11.04
Tier 1 risk-based capital ratio (1).......................... 10.58 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.
21
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 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 23 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 July
1, 2001 to September 30, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
New South Bancshares, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
November 13, 2001 By: /s/ ROBERT M. COUCH
-------------------
Robert M. Couch
Executive Vice President
November 13, 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
23