AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1998.
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW SOUTH BANCSHARES, INC. NEW SOUTH CAPITAL TRUST I
(EXACT NAME OF REGISTRANT AND CO-REGISTRANT AS SPECIFIED IN THEIR CHARTERS)
---------------
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
63-1132716 Applied For
(I.R.S. Employer Identification (I.R.S. Employer Identification No.)
No.) 1900 Crestwood Boulevard
1900 Crestwood Boulevard Birmingham, Alabama 35210
Birmingham, Alabama 35210 (205)951-4000
(205)951-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT M. COUCH, EXECUTIVE VICE PRESIDENT
NEW SOUTH BANCSHARES, INC.
1900 CRESTWOOD BOULEVARD
BIRMINGHAM, ALABAMA 35210
(205) 951-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
WITH COPIES TO:

WALTER M. BEALE, JR. FRANK M. CONNER III
JOHN W. MCCULLOUGH JONATHAN H. TALCOTT
BALCH & BINGHAM LLP ALSTON & BIRD LLP
1901 SIXTH AVENUE NORTH 601 PENNSYLVANIA AVENUE, N.W.
BIRMINGHAM, ALABAMA 35203 NORTH BUILDING, 11TH FLOOR
(205)251-8100 WASHINGTON, D.C. 20004-2601
(202)508-3300
---------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the
same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the
same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.

CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------

PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(2) FEE(3)
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Preferred Securities of
New South Capital Trust
I...................... 3,450,000 $10.00 $34,500,000 $10,177.50
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Subordinated Deferrable
Interest Debentures of
New South Bancshares,
Inc.(4)................ (6) - - - - - -
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New South Bancshares,
Inc.'s Guarantee with
respect to Preferred
Securities(5).......... (6) - - - - - -

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(1) Includes 450,000 % Cumulative Trust Preferred Securities ("Preferred
Securities") offered hereby which may be sold to cover over-allotments, if
any.
(2) Such amount represents the aggregate liquidation amount of the Preferred
Securities to be issued hereunder and the principal amount of Subordinated
Deferrable Interest Debentures (the "Subordinated Debentures") that may be
distributed to holders of Preferred Securities upon any liquidation of New
South Capital Trust I.
(3) The registration fee is calculated in accordance with Section 6 of the
Securities Act of 1933, as amended.
(4) The Subordinated Debentures will be purchased by New South Capital Trust I
with the proceeds of the sale of the Preferred Securities. The
Subordinated Debentures may later be distributed for no additional
consideration to the holders of the Preferred Securities of New South
Capital Trust I upon its dissolution and the distribution of its assets.
(5) No separate consideration will be received for the New South Bancshares,
Inc. Guarantee.
(6) This Registration Statement is deemed to cover the Subordinated Debentures
of New South Bancshares, Inc., the rights of holders of Subordinated
Deferrable Interest Debentures of New South Bancshares, Inc. under the
Indenture, the rights of holders of Preferred Securities of New South
Capital Trust I under the Trust Agreement and the Guarantee which, taken
together, fully, irrevocably and unconditionally guarantee the obligations
of New South Capital Trust I under the Preferred Securities.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED

PROSPECTUS
3,000,000 PREFERRED SECURITIES

NEW SOUTH CAPITAL TRUST I

% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10.00 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
LOGO

NEW SOUTH BANCSHARES, INC.

The % Cumulative Trust Preferred Securities (the "Preferred Securities")
offered hereby represent preferred undivided beneficial interests in the assets
of New South Capital Trust I, a statutory business trust formed under the laws
of the State of Delaware (the "Trust"). New South Bancshares, Inc., a Delaware
corporation (the "Company"), will be the owner of all of the undivided
beneficial interests in the assets of the Trust represented by common
securities of the Trust (the "Common Securities" and, together with the
Preferred

(Continued on next page)

The Company intends to apply to have the Preferred Securities approved for
quotation on the American Stock Exchange, Inc.

SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREOF FOR CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE PREFERRED SECURITIES.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS,
ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE
OF THE COMPANY (EXCEPT TO THE EXTENT THAT PREFERRED SECURITIES ARE
GUARANTEED BY THE COMPANY AS DESCRIBED HEREIN), ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND
INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.

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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) COMMISSION(2) TRUST(3)(4)
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Per Preferred Security.................. $10.00 (4) $10.00
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Total(5)................................ $30,000,000 (4) $30,000,000

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(1) Plus accumulated Distributions (as defined herein) from , 1998.
(2) The Trust and the Company have each agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses of the offering which are payable by the Company,
estimated to be $350,000.
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Deferrable Interest
Debentures issued by the Company, the Company has agreed to pay to the
Underwriters as compensation for their arranging the investment therein of
such proceeds $0.35 per Preferred Security (or $1,050,000 in the
aggregate). See "Underwriting."
(5) The Trust has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 450,000 additional Preferred
Securities on the same terms and conditions set forth above solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Commissions and Proceeds to the
Trust will be $34,500,000, $1,207,500 and $34,500,000, respectively.

-----------

The Preferred Securities are offered by the Underwriters, subject to receipt
and acceptance by them, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that the delivery of the Preferred Securities
will be made on or about , 1998.

-----------

J.C.Bradford&Co. Sterne, Agee & Leach, Inc.

, 1998

[MAP TO COME]

(cover page continued)

Securities, the "Trust Securities"). Bankers Trust Company is the Property
Trustee (as defined herein) of the Trust. The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
$30,927,840 initial principal amount of % Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures"), to be issued by the Company. The
Subordinated Debentures will mature on , 2028 (the "Stated Maturity"). The
Preferred Securities will have a preference under certain circumstances with
respect to cash distributions and amounts payable on liquidation, redemption
or otherwise over the Common Securities. See "Description of the Preferred
Securities--Subordination of Common Securities."

Holders of the Preferred Securities will be entitled to receive cumulative
cash distributions accruing from , 1998 (the "Issue Date"), and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of
each year (each a "Distribution Date"), commencing September 30, 1998, at the
annual rate of % of the Liquidation Amount of $10.00 per Preferred Security
("Distributions"). Subject to certain exceptions, as described herein, the
Company has the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each deferral period (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the rate of % per annum, compounded
quarterly, to the extent permitted by applicable law), the Company may elect
to begin a new Extension Period subject to the requirements set forth herein.
If interest payments on the Subordinated Debentures are so deferred,
Distributions on the Preferred Securities will also be deferred and the
Company will not be permitted, subject to certain exceptions described herein,
to declare or pay any cash distributions with respect to the Company's capital
stock or debt securities that rank pari passu with or junior to the
Subordinated Debentures. During an Extension Period, interest on the
Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Preferred Securities are entitled will
accumulate) at the rate of % per annum, compounded quarterly, to the extent
permitted by applicable law, from the relevant payment date for such interest,
and holders of Preferred Securities will be required to continue to accrue
income for United States federal income tax purposes, even though the Trust is
not making cash Distributions on such Preferred Securities. A holder of
Preferred Securities that disposes of its Preferred Securities between record
dates for payments of Distributions (and consequently does not receive a
Distribution from the Trust for the period prior to such disposition) will
nevertheless be required to include accrued but unpaid interest on the
Subordinated Debentures through the date of disposition in income as ordinary
income and to add such amount to adjusted tax basis in its pro rata share of
the underlying Subordinated Debentures deemed disposed of. See "Description of
the Subordinated Debentures--Option to Extend Interest Payment Dates" and
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."

The Company will, through the Guarantee, the Trust Agreement, the
Subordinated Debentures and the Indenture (each as defined herein), taken
together, fully, irrevocably and unconditionally guarantee all of the Trust's
obligations with respect to the Preferred Securities. See "Relationship Among
the Preferred Securities, the Subordinated Debentures and the Guarantee--Full
and Unconditional Guarantee." The Guarantee of the Company guarantees the
payment of Distributions and payments on liquidation or redemption of the
Preferred Securities, but only in each case to the extent of funds held by the
Trust. See "Description of the Guarantee." The Guarantee does not cover
payment of Distributions when the Trust has insufficient funds to pay such
Distributions. If the Company does not make interest payments on the
Subordinated Debentures held by the Trust, the Trust will have insufficient
funds to pay Distributions on the Preferred Securities. In such event, a
holder of Preferred Securities may institute a legal proceeding directly
against the Company pursuant to the terms of the Guarantee to enforce payment
of amounts equal to such Distributions to such holder. See "Description of the
Subordinated Debentures--Enforcement of Certain Rights by Holders of Preferred
Securities."

The Company's Subordinated Debentures and its Guarantee are unsecured and
subordinated to all Senior Debt (as defined herein). Substantially all of the
Company's existing indebtedness constitutes Senior Debt.

Accordingly, the Subordinated Debentures and the Guarantee will rank junior in
right of payment to all present and future Senior Debt of the Company and rank
pari passu with obligations to or rights of the Company's other general
unsecured creditors. In the case of a bankruptcy or insolvency proceeding
involving the Company, the Company's obligations under the Guarantee will rank
subordinate and junior in right of payment to all liabilities of the Company,
but senior to any obligation in respect of any class of capital stock of the
Company.

The Preferred Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debentures at their Stated Maturity
or their earlier redemption. The Subordinated Debentures are redeemable prior
to their Stated Maturity at the option of the Company (i) on or after ,
2003, in whole at any time or in part from time to time, or (ii) at any time,
in whole (but not in part), upon the occurrence of a Special Event (as defined
herein). See "Description of the Subordinated Debentures--Optional Prepayment
after , 2003," and "--Special Event Prepayment." For a description of the
redemption prices for the Preferred Securities in the event of a redemption of
the Subordinated Debentures pursuant to clause (i) or (ii) above, see
"Description of the Preferred Securities --Redemption."

The Company will have the right at any time to terminate the Trust and cause
the Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. See "Description of the Preferred
Securities--Liquidation of Trust and Distribution of Subordinated Debentures."
In the event of the termination of the Trust, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $10.00 per Preferred Security plus accumulated and unpaid
Distributions thereon to the date of payment, which may be in the form of a
distribution of such amount in Subordinated Debentures, subject to certain
exceptions. See "Description of the Preferred Securities--Liquidation of Trust
and Distribution of Subordinated Debentures."

The Preferred Securities will be represented by global certificates
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Preferred Securities will be shown on, and
transfers thereof will be effected only through, records maintained by
participants in DTC. Except as described in the accompanying Prospectus,
Preferred Securities in certificated form will not be issued in exchange for
the global certificates. See "Description of the Preferred Securities--Form,
Denomination, Book-Entry Procedures and Transfer."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

This Prospectus constitutes a part of a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Trust with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Preferred Securities offered hereby and
by the Company with respect to its Subordinated Debentures to be issued to the
Trust pursuant to the Indenture and its guarantee of payment of the
Distributions due on the Preferred Securities pursuant to the Guarantee. This
Prospectus does not contain all of the information set forth in such
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, although it does include a
summary of the material terms of the Indenture and the Trust Agreement.
Reference is made to such Registration Statement and to the exhibits relating
thereto for further information with respect to the Company, the Trust, the
Preferred Securities and the Subordinated Debentures. Any statements contained
herein concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission or incorporated
by reference herein are not necessarily complete, and, in each instance,
reference is made to the copy of such document so filed for a more complete
description of the matter involved. Each such statement is qualified in its
entirety by such reference.

Neither the Company nor the Trust is currently subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), but
each of the Company and the Trust will become subject to such requirements
upon the effectiveness of the Registration Statement. The Company intends to
seek an order from the Commission conditionally exempting the Trust from the
reporting requirements of the Exchange Act pursuant to Section 12(h) thereof,
and, therefore, it is not expected that the Trust will be filing separate
reports under the Exchange Act. When filed, the Company's reports and other
information can be inspected and copied at the following public reference
facilities maintained by the Commission: 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and
the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may also be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, upon payment of prescribed rates. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers who file electronically
with the Commission. The address of that site is http://www.sec.gov.

No separate financial statements of the Trust have been included herein. The
Company does not consider that such financial statements would be material to
holders of Preferred Securities because (i) all of the voting securities of
the Trust will be owned by the Company, (ii) the Trust has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in the assets of the Trust and investing the
proceeds thereof in Subordinated Debentures issued by the Company, and (iii)
the obligations of the Company described herein to provide certain indemnities
in respect of, and be responsible for, certain costs, expenses, debts and
liabilities of the Trust under the Indenture and pursuant to the Trust
Agreement, the Guarantee issued by the Company with respect to the Preferred
Securities, the Subordinated Debentures purchased by the Trust and the related
Indenture, taken together, constitute, in the belief of the Company and the
Trust, a full and unconditional guarantee of payments due on the Preferred
Securities. See "Description of the Subordinated Debentures" and "Description
of the Guarantee."

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the exercise of the Underwriters' over-allotment option. Prospective investors
should carefully consider the information set forth under the heading "Risk
Factors." Throughout this Prospectus, unless the context clearly requires
otherwise, references to "the Company" should be deemed references to the
combined activities of New South Bancshares, Inc., a non-operating holding
company, and its principal operating subsidiary, New South Federal Savings
Bank.

THE COMPANY

New South Bancshares, Inc. (the "Company") is a closely held unitary thrift
holding company headquartered in Birmingham, Alabama. Through its financial
institution subsidiary, New South Federal Savings Bank ("New South"), a
federally chartered savings association organized in 1985, the Company operates
two full-service retail branch offices in Birmingham, Alabama, and 49 loan
production offices located in 14 states throughout the southeastern and western
United States. New South is the largest thrift and the sixth largest depository
institution, based on asset size, headquartered in the State of Alabama. See
"The Company" and "Business."

The Company's operations principally involve residential mortgage lending,
installment (automobile) lending, residential construction and land lending and
deposit gathering activities. The Company's residential mortgage lending
efforts involve the origination and purchase of residential mortgage loans
through its loan origination offices and wholesale sources, the sale of such
loans (usually on a pooled and securitized basis) in the secondary market, and
the servicing of residential mortgage loans for investors as well as the
Company's own loan portfolio. The installment (automobile) lending program
involves indirect lending through 600 automobile dealers in six southern
states. The Company's residential construction and land lending efforts involve
making loans to builders for the construction of single family properties and,
on a more limited basis, loans for the acquisition and development of improved
residential lots. In addition, the Company actively funds and purchases
commercial real estate loans originated by Collateral Mortgage Ltd.
("Collateral"), an affiliate, which may be sold to investors or held in New
South's portfolio. See "Business."

The Company funds its lending activities primarily with customer deposits
gathered through a broad range of banking services including certificates of
deposit, individual retirement and other time and demand deposit accounts and
money market accounts. The Company takes a wholesale approach to generating
deposits, paying high interest rates while keeping deposit gathering overhead
costs low. The Company maintains two retail branch offices, both located in
Birmingham, Alabama, and attracts the majority of its deposits through
telemarketing activities and third parties, primarily brokers. See "Business."

At December 31, 1997, the Company's loan portfolio consisted of the
following: (i) $385.3 million in residential mortgage loans, of which $252.6
million the Company classifies as conforming residential mortgage loans, and
$132.7 million the Company classifies as nonconforming residential mortgage
loans; (ii) $96.9 million in installment (automobile) loans; (iii) $87.9
million in residential construction and land loans; (iv) $158.4 million in
commercial real estate loans (the majority of which are originated by
Collateral but funded and closed by New South); and (v) $1.5 million in
commercial loans. Also as of such date, the Company serviced approximately $1.7
billion of residential mortgage loans, installment (automobile) loans and
commercial real estate loans which had an approximate weighted average yield of
8.67%. Of such amount, $999.6 million represented loans serviced for others and
$729.9 million represented loans the Company held in its own portfolio. During
the 1997 fiscal year, the Company originated $490.7 million of residential
mortgage loans and $75.8 million of installment (automobile) loans. See
"Business."

The following information summarizes certain selected consolidated financial
information of New South as of and for its fiscal years ended September 30,
1993 and 1994 and of the Company (which was established in 1994 with a fiscal
year ended December 31) as of and for its fiscal years ended December 31, 1995,
1996 and 1997. The data for the Company, on a consolidated basis as of and for
its fiscal year ended December 31, 1994, did not differ significantly from the
corresponding data for New South as of and for its fiscal year ended
September 30, 1994. The summary below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included herein.

NEW SOUTH FEDERAL
SAVINGS BANK
AS OF AND FOR NEW SOUTH BANCSHARES, INC.
THE YEAR ENDED AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ -------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)

Total assets............. $616,949 $575,767 $ 746,518 $ 822,980 $ 992,065
Loans serviced for
others.................. 643,429 723,699 716,664 709,773 999,613
Loans originated......... 104,339 161,526 228,295 367,605 807,074
Net income............... 5,804 3,793 3,366 2,562 4,716
Net income per share..... 5.80 3.79 2.42 1.84 3.42
Total stockholders'
equity.................. 37,350 38,263 45,780 47,941 52,314
Return on average
equity.................. 17.01% 9.51% 6.82% 4.42% 7.68%
Return on average
assets.................. 0.99 0.59 0.47 0.31 0.51

STRATEGY

The Company's strategy is to increase its earnings through increased loan
originations while maintaining high levels of asset quality. The principal
components of the Company's strategy include:

. Continued Expansion of the Residential Mortgage Loan Production
Network. The Company will continue to increase its volume of residential
mortgage loan origination by expanding into new geographic markets as
opportunities arise. New South's strategy involves entering areas with
stable and growing economies by developing relationships with highly
productive loan officers who can effectively manage the Company's
origination efforts in those areas, or mortgage brokers who find the
Company's loan products attractive to offer to their customers.

. Increased Automobile Loan Originations. The Company has grown its
automobile dealer network to over 600 dealers, consisting, at this time,
primarily of franchised new car dealers. The Company plans to grow its
existing dealer network both by further penetrating its current market
as well as expanding into new markets. Management will also place
greater emphasis on increasing the proportion of approved applications
that are actually funded and increasing the Company's relationships with
independent car dealers, which have generally proven to be more stable
and profitable long-term relationships. In addition, the Company plans
to evaluate select market opportunities to grow non-prime lending.

. Increased Residential Construction and Land Loans. The Company plans to
increase residential construction and land loans through relationships
with builders in new geographic markets and through increased
penetration in existing markets. Management believes that this increase
may also lead to additional originations of residential mortgage loans.

. Improved Cross-Selling Activities. In 1997, the Company created a cross-
marketing unit to focus on increasing sales of New South's various
products and products offered through third party vendors to existing
customers. The Company utilizes programs designed to analyze customer
purchasing needs and uses this information to cross-sell its products
via direct mail and telemarketing campaigns.

. Increased Loan Portfolio Servicing Efficiency. The Company is in the
process of upgrading its computer systems and re-engineering employee
work flow with a view towards lowering the per loan cost of servicing.
In addition, management believes the Company will achieve some economies
of scale through growth of the servicing portfolios. At December 31,
1997, the Company serviced approximately $1.7 billion in loans,
approximately $1.0 billion of which is serviced for others.

The principal executive offices of the Company are located at 1900 Crestwood
Boulevard, Birmingham, Alabama 35210. Its telephone number at such address is
(205) 951-4000.

NEW SOUTH CAPITAL TRUST I

The Trust is a statutory business trust formed under Delaware law pursuant to
(i) a trust agreement, dated as of April 2, 1998, executed by the Company, as
depositor, and Bankers Trust (Delaware), as a trustee (the "Delaware Trustee"),
and (ii) a certificate of trust filed with the Delaware Secretary of State on
April 2, 1998. The initial trust agreement will be amended and restated in its
entirety (as so amended and restated, the "Trust Agreement") substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. This Trust Agreement will, among other things, appoint
a "Property Trustee" which shall hold legal title to the Subordinated
Debentures in trust for the benefit of the holders of the Trust Securities and
several "Administrative Trustees" who shall have the power, duty and authority
to cause the Trust to issue and sell the Trust Securities and to execute any
documents or certificates necessary to effectuate such issuance and sale. The
Delaware Trustee shall be a Trustee for the sole and limited purpose of
fulfilling the statutory requirements of Section 3807 of the Delaware Business
Trust Act and shall have no authority to take any action except as required
under the Delaware Business Trust Act. The Delaware Trustee, Property Trustee
and Administrative Trustees are collectively referred to herein as the "Issuer
Trustees."

The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Trust exists
for the exclusive purposes of (i) issuing the Preferred Securities offered
hereby representing preferred undivided beneficial interests in the assets of
the Trust, (ii) issuing the Common Securities representing common undivided
beneficial interests in the assets of the Trust to the Company, (iii) investing
the gross proceeds of the sale of the Trust Securities in the Subordinated
Debentures, and (iv) engaging in only those other activities necessary,
advisable, or incidental thereto. The Subordinated Debentures will be the only
assets of the Trust and payments on the Subordinated Debentures will be the
only revenue of the Trust. The Subordinated Debentures will be issued by the
Company pursuant to the Junior Subordinated Indenture between the Company and
Bankers Trust Company, as debenture trustee (as amended and supplemented from
time to time, the "Indenture").

Upon issuance of the Preferred Securities, the purchasers thereof will own
all of the Preferred Securities. The Company will acquire all of the Common
Securities which will represent an aggregate liquidation amount equal to at
least 3% of the total capital of the Trust. The Common Securities will rank
pari passu, and payments

will be made thereon pro rata, with the Preferred Securities, except that upon
the occurrence and during the continuance of an Event of Default (as defined
herein) under the Trust Agreement resulting from a Debenture Event of Default
(as defined herein), the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Preferred Securities. See "Description of the Preferred
Securities--Subordination of Common Securities."

The Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The principal executive offices of the Trust are located
at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number at
such address is (205) 951-4000. It is anticipated that the Trust will be
conditionally exempted from the reporting requirements of the Exchange Act.

THE OFFERING

Securities Offered.......... 3,000,000 Preferred Securities having a
Liquidation Amount of $10.00 per Preferred
Security. The Preferred Securities represent
preferred undivided beneficial interests in the
assets of the Trust, which will consist solely of
the Subordinated Debentures and payments
thereunder. The Company and the Trust have
granted the Underwriters an option, exercisable
within 30 days after the date of this Prospectus,
to purchase up to an additional 450,000 Preferred
Securities at the initial offering price, solely
to cover over-allotments, if any.

Payment of Distributions.... The Distributions payable on each Preferred
Security will be fixed at a rate per annum of
% of the Liquidation Amount of $10.00 per
Preferred Security, will be cumulative, will
accumulate from , 1998, the Issue Date of the
Preferred Securities, and will be payable
quarterly in arrears, on March 31, June 30,
September 30 and December 31 of each year,
commencing September 30, 1998. See "Description
of the Preferred Securities --Distributions."

Extension Periods........... The Company has the right, at any time, so long
as no Debenture Event of Default has occurred and
is continuing, to defer payments of interest on
the Subordinated Debentures by extending the
interest payment period on the Subordinated
Debentures, at any time and from time to time,
for up to 20 consecutive quarters (each, an
"Extension Period"), provided, that no Extension
Period may extend beyond the Stated Maturity of
the Subordinated Debentures. See "Description of
the Subordinated Debentures--Option to Extend
Interest Payment Date." There could be multiple
Extension Periods of varying lengths throughout
the term of the Subordinated Debentures.

As a consequence of the extension by the Company
of the interest payment period, quarterly
Distributions on the Preferred Securities will be
deferred (though such Distributions will continue
to accumulate and compound quarterly, since
interest will continue to

accrue and compound on the Subordinated
Debentures) during any such Extension Period.
During an Extension Period the Company will be
prohibited, subject to certain exceptions
described herein, from declaring or paying any
cash distributions with respect to its capital
stock or debt securities that rank pari passu
with or junior to the Subordinated Debentures.
Upon the termination of any Extension Period and
the payment of all amounts then due, the Company
may commence a new Extension Period, subject to
the foregoing requirements. See "Description of
the Preferred Securities--Distributions" and
"Description of the Subordinated Debentures--
Option to Extend Interest Payment Date." During
an Extension Period, holders of Preferred
Securities will be required to continue to
include income in the form of Original Issue
Discount ("OID") in their gross income for
federal income tax purposes in advance of the
receipt of the cash payments attributable to such
deferred interest. See "Description of the
Subordinated Debentures--Option to Extend
Interest Payment Date" and "Certain Federal
Income Tax Consequences--Interest Income and
Original Issue Discount."

Ranking..................... The Preferred Securities will rank pari passu,
and payments thereon will be made pro rata, with
the Common Securities except as described under
"Description of the Preferred Securities--
Subordination of Common Securities." The
Subordinated Debentures will be unsecured and
subordinate and junior in right of payment to all
Senior Debt to the extent and in the manner set
forth in the Indenture. See "Description of the
Subordinated Debentures." The Guarantee will
constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of
payment to all Senior Debt to the extent and in
the manner set forth in the Guarantee Agreement
and, in the event of bankruptcy or insolvency
proceedings involving the Company, will rank
subordinate and junior in right of payment to all
liabilities of the Company, but senior to any
obligations in respect of any class of capital
stock of the Company. See "Risk Factors--Risk
Factors Relating to the Preferred Securities--
Ranking of Subordinate Obligations Under the
Guarantee and Subordinated Debentures" and
"Description of the Guarantee." In addition,
because the Company is a holding company, the
Subordinated Debentures and the Guarantee will be
effectively subordinated to all existing and
future liabilities of the Company's subsidiaries,
including New South's deposit liabilities. See
"Description of the Subordinated Debentures--
Subordination."

Optional Redemption......... The Preferred Securities are subject to
redemption, in whole or in part, upon repayment
of the Subordinated Debentures at , 2028, the
Stated Maturity, or their earlier redemption. The
Subordinated Debentures are redeemable prior to
the Stated Maturity at the option of the Company
(i) on or after , 2003, in whole at any time
or in part from time to time, or (ii) at any
time, in whole (but not in part), upon the
occurrence of a Special Event.

See "Description of the Preferred Securities--
Redemption," "Description of the Subordinated
Debentures--Optional Prepayment after ,
2003," and "--Special Event Prepayment."

No Ratings.................. The Preferred Securities are not expected to be
rated by any rating agency, nor is any other
security issued by the Company so rated.

Termination and The Company will have the right at any time to
Distribution................ terminate the Trust and cause the Subordinated
Debentures to be distributed to the holders of
the Preferred Securities in liquidation of the
Trust. This right is optional and wholly within
the discretion of the Company. Circumstances
under which the Company may determine to exercise
such right could include the occurrence of
adverse tax consequences to the Company or the
Trust that are not within the definition of a Tax
Event (as defined herein) because they do not
result from an amendment or change described in
such definition, and changes in the accounting
requirements applicable to the Preferred
Securities as described under "Accounting
Treatment." See "Description of the Preferred
Securities--Liquidation of Trust and Distribution
of Subordinated Debentures."

Guarantee................... The Company has, through the Guarantee, the
Indenture, the Subordinated Debentures and the
Trust Agreement, fully and unconditionally
guaranteed all the Trust's obligations with
respect to the Preferred Securities, subject to
certain subordination provisions discussed below.
The payment of distributions on the Preferred
Securities is guaranteed by the Company under the
Guarantee, but only to the extent the Trust has
funds legally and immediately available to make
such distributions. If the Company does not make
principal or interest payments on the
Subordinated Debentures, the Trust will not have
sufficient funds to make distributions on the
Preferred Securities. In such event, a holder of
Preferred Securities may institute a legal
proceeding directly against the Company pursuant
to the terms of the Guarantee to enforce payment
of amounts equal to such Distributions to such
holder. See "Description of the Subordinated
Debentures--Enforcement of Certain Rights by
Holders of Preferred Securities."

Voting Rights............... The holders of the Preferred Securities will have
no voting rights except in limited circumstances.
See "Description of the Preferred Securities--
Voting Rights; Amendment of the Trust Agreement."

ERISA Considerations........ Prospective purchasers should consider the
restrictions on purchase set forth under "ERISA
Considerations."

Absence of Market for the
Preferred Securities........ The Preferred Securities will be a new issue of
securities for which there currently is no
market. Although the Company intends to apply to
have the Preferred Securities approved for
quotation on the American Stock Exchange, there
can be no assurance that such application will be
approved, that an active trading market in the

Preferred Securities will develop or, if one does
develop, that it will be maintained. Accordingly,
there can be no assurance as to the development
or liquidity of any market for the Preferred
Securities.

American Stock Exchange..... The Company intends to apply to have the
Preferred Securities approved for quotation on
the American Stock Exchange, Inc.

For additional information regarding the Preferred Securities, see "The Trust,"
"Use of Proceeds," "Description of the Preferred Securities," "Description of
the Subordinated Debentures," "Description of the Guarantee," "Relationship
Among the Preferred Securities, the Subordinated Debentures and the Guarantee,"
"Certain Federal Income Tax Consequences," and "ERISA Considerations."

USE OF PROCEEDS

The proceeds from the sale of the Preferred Securities offered hereby will be
used by the Trust to purchase the Subordinated Debentures from the Company. The
net proceeds to the Company from the sale of Subordinated Debentures offered
hereby are estimated to be approximately $28.6 million ($32.9 million if the
Underwriter's over-allotment option is exercised in full), after deducting the
underwriting commission and estimated offering expenses. The Company intends to
use the net proceeds to repay approximately $5.0 million drawn down under a
revolving line of credit and $5.0 million payable under a term note with a
commercial lender, each of which bears interest at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 2%. The balance will be used for general
corporate purposes, including, but not limited to, increasing the size of the
loan and servicing portfolio, funding an anticipated common stock repurchase
program with a view towards making an election to be treated as an "S-
corporation" under the Code and reducing other long-term debt and short-term
borrowings of the Company and/or New South. The precise amount and timing of
the application of such proceeds will depend on the funding requirements of and
availability of other funds to the Company. Pending such application by the
Company, such net proceeds may be temporarily invested in short-term interest-
bearing securities. See "The Company," "Business--Funding Activities" and
"Business--Potential S-election."

The Office of Thrift Supervision (the "OTS") imposes certain capital adequacy
requirements on the Company's thrift subsidiary, New South. To the extent the
Company contributes a portion of the net proceeds received from the sale of the
Preferred Securities to New South, such proceeds would qualify as Tier 1
capital of New South under the current capital adequacy guidelines of the OTS.
Under current policy, the OTS does not impose any capital adequacy requirements
on the Company itself. Moreover, the Company is not regulated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve") and is not
subject to the Federal Reserve's risk based capital adequacy guidelines. If,
however, the Company were to become subject to the capital adequacy guidelines
of either the Federal Reserve or OTS, it is expected that the proceeds of the
sale of the Preferred Securities would qualify as Tier 1 capital of the Company
in the absence of a Capital Event. Federal Reserve guidelines for calculation
of Tier 1 capital limit the amount of cumulative preferred stock (which would
include the Preferred Securities) which can be included in Tier 1 capital to
25% of total Tier 1 capital. See "Use of Proceeds."

RISK FACTORS

Prospective purchasers of the Preferred Securities should carefully consider
the risks in connection with this offering set forth under "Risk Factors."

SELECTED CONSOLIDATED FINANCIAL DATA

NEW SOUTH FEDERAL
SAVINGS BANK AS OF
AND FOR THE YEAR ENDED NEW SOUTH BANCSHARES, INC. AS OF AND
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

SUMMARY OF OPERATIONS
DATA:
Interest income......... $ 46,201 $ 44,934 $ 55,064 $ 65,535 $ 75,491
Interest expense........ 28,582 28,234 37,523 43,158 47,723
----------- ----------- ------------ ------------ ------------
Net interest income..... 17,619 16,700 17,541 22,377 27,768
Provision for possible
loan losses............ 1,025 1,485 572 2,492 2,954
----------- ----------- ------------ ------------ ------------
Net interest income
after provision for
possible loan losses... 16,594 15,215 16,969 19,885 24,814
Noninterest income:
Loan administration
income................ 3,147 5,955 4,547 4,870 4,915
Gain on sale of loans.. (2,753) (505) 629 457 5,079
Other income........... 5,788 1,968 1,490 2,998 5,320
----------- ----------- ------------ ------------ ------------
Total noninterest
income............... 6,182 7,418 6,666 8,325 15,314
Noninterest expense:
Salaries and benefits.. 4,420 5,242 5,371 7,424 16,024
Other expense.......... 9,500 10,813 12,633 15,742 15,398
----------- ----------- ------------ ------------ ------------
Total noninterest
expense.............. 13,920 16,055 18,004 23,166 31,422
Income before income
taxes.................. 8,856 6,578 5,631 5,044 8,706
Income taxes expense.... 3,052 2,785 2,265 2,482 3,990
----------- ----------- ------------ ------------ ------------
Net income.............. $ 5,804 $ 3,793 $ 3,366 $ 2,562 $ 4,716
=========== =========== ============ ============ ============
PER SHARE DATA:
Earnings per share
(basic and diluted).... $ 5.80 $ 3.79 $ 2.42 $ 1.84 $ 3.42
Weighted average shares
outstanding (in
thousands)............. 1,000 1,000 1,393 1,391 1,377
SELECTED BALANCE SHEET
DATA:
Total assets............ $ 616,949 $ 575,767 $ 746,518 $ 822,980 $ 992,065
Investment securities
available for sale..... 53,932 67,323 96,678 94,451 197,135
Loans, net of unearned
income................. 496,569 407,555 561,611 681,730 727,854
Allowance for possible
loan losses............ 4,056 5,089 4,562 5,904 7,333
Deposits................ 514,320 485,342 539,011 660,668 695,365
Federal Home Loan Bank
Advances............... 45,000 46,000 104,000 95,388 179,420
Total liabilities....... 579,599 537,504 700,738 775,039 939,751
Total stockholders'
equity................. 37,350 38,263 45,780 47,941 52,314

NEW SOUTH FEDERAL
SAVINGS BANK AS OF
AND FOR THE YEAR ENDED NEW SOUTH BANCSHARES, INC. AS OF AND
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------

PERFORMANCE RATIOS:
Return on average as-
sets................... 0.99% 0.59% 0.47% 0.31% 0.51%
Return on average equi-
ty..................... 17.01 9.51 6.82 4.42 7.68
Net interest spread..... 2.34 1.99 2.22 2.45 2.67
Net interest margin..... 3.08 2.64 2.65 2.94 3.21
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 114.72 114.10 107.58 108.55 109.82
Ratio of noninterest
expense to average
assets................. 2.37 2.48 2.52 2.84 3.42
Efficiency ratio........ 78.72 75.95 77.70 87.35 77.07
ASSET QUALITY DATA:
Net charge-offs to
average loans, net of
unearned income........ (0.02) 0.09 0.22 0.18 0.21
Nonperforming assets to
total assets........... 1.11 1.36 0.78 1.07 0.94
Nonperforming loans to
total loans, net of
unearned income........ 0.98 1.34 0.69 1.21 1.12
Allowance for possible
loan losses to total
loans, net of unearned
income................. 0.82 1.25 0.81 0.87 1.01
Allowance for possible
loan losses to total
nonperforming assets... 59.03 65.23 78.43 60.00 78.97
CAPITAL RATIOS(1):
Tangible capital (tier 1
to total assets)....... 6.05 6.65 7.24 6.90 6.17
Tier 1 capital (to risk
adjusted assets)....... 9.96 10.32 11.12 10.30 9.51
Total risk-based capital
(to risk adjusted
assets)................ 10.72 11.04 11.78 11.14 10.48

- --------
(1) Capital ratio data for all periods presented are for New South only.

RISK FACTORS

Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following risk factors before
purchasing the Preferred Securities offered hereby. Certain statements in this
Prospectus are forward-looking and are identified by the use of forward-
looking words or phrases such as "intended," "will be positioned," "expects,"
is or are "expected," "anticipates," and "anticipated." These forward-looking
statements are based on the Company's current expectations. To the extent any
of the information contained or incorporated by reference in this Prospectus
constitutes a "forward-looking statement" as defined in Section 27A(i)(1) of
the Securities Act or Section 21E(i)(1) of the Exchange Act, the risk factors
set forth below are cautionary statements identifying important factors that
could cause actual results to differ materially from those in the forward-
looking statement. These considerations are not intended to represent a
complete list of the general or specific risks that may affect the Preferred
Securities, the Subordinated Debentures, the Company or the Trust. It should
be recognized that other risks may be significant, presently or in the future.
Throughout this Prospectus, unless the context clearly requires otherwise,
references to "the Company" should be deemed references to the combined
activities of New South Bancshares, Inc., a non-operating holding company, and
its principal operating subsidiary, New South Federal Savings Bank.

RISK FACTORS RELATING TO THE COMPANY

Status of the Company as a Holding Company

Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability
of holders of the Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary
(including depositors in the case of New South), except to the extent that the
Company may itself be recognized as a creditor of that subsidiary. At December
31, 1997, the subsidiaries of the Company had total liabilities (excluding
liabilities owed to the Company) of approximately $929.9 million, including
deposits. Accordingly, the Preferred Securities will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, and holders of the Preferred Securities should look only to the
assets of the Company for payments on the Preferred Securities. None of the
Guarantee, the Indenture, or the Trust Agreement places any limitation on the
amount of secured or unsecured debt that may be incurred by the Company's
subsidiaries in the future. See "Description of the Subordinated Debentures"
and "Description of the Guarantee."

In addition, as the Company is a non-operating holding company, almost all
of the operating assets of the Company are owned by the Company's
subsidiaries. The Company relies primarily on dividends from such subsidiaries
to meet its obligations for payment of principal and interest on its
outstanding debt obligations, if any, and corporate expenses. New South is
subject to certain restrictions imposed by federal law on any extensions of
credit to, and certain other transactions with, the Company and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
New South unless the loans are secured by various types of collateral.
Further, such secured loans, other transactions and investments by New South
are generally limited in amount as to the Company and as to each of such other
affiliates to 10% of New South capital and surplus and as to the Company and
all of such other affiliates to an aggregate of 20% of New South capital and
surplus. In addition, payment of dividends to the Company by New South is
subject to ongoing review by banking regulators and is subject to various
statutory limitations and in certain circumstances requires prior approval by
banking regulatory authorities. Under current regulations of the OTS, during
1997, New South could have declared dividends to the Company of approximately
$13.5 million, of which approximately $1.1 million have been declared and paid
during 1997 to the Company. Federal regulatory agencies also have the
authority to limit further New South's payment of dividends based on other
factors, such as the maintenance of adequate capital for New South, which
could reduce the amount of dividends otherwise payable. See "Supervision and
Regulation."

Fluctuations in Performance

The Company's operating results can fluctuate substantially from period to
period as a result of a number of factors, including the volume of loan
production, interest rates, risk of credit losses, the level of amortization
of mortgage servicing rights required by prepayment rates. In particular, the
Company's results are strongly influenced by the level of loan production,
which is influenced by the interest rate environment and other economic
factors. Accordingly, the net income of the Company may fluctuate
substantially from period to period.

Reliance on Residential Mortgage Originations

The market for residential mortgages is highly volatile, and an increase in
interest rates could have a material adverse effect on non-interest income,
interest income and in the growth of New South's residential mortgage
portfolio. Due to the cyclical nature of residential mortgage originations,
there can be no assurance that New South will be able to sustain recent levels
of gains on the sale of residential mortgage loans which constitute a
substantial portion of New South's other income or the level of fees in
noninterest income.

Interest Rate Fluctuations

Changes in interest rates can have differing effects on various aspects of
the Company's business, particularly on the net interest income of the
Company, the rate of loan prepayments, the volume of residential mortgage
loans originated or produced, the sales of residential mortgage loans on the
secondary market and the value of the Company's mortgage servicing rights.

Net Interest Income. New South's profitability is dependent to a large
extent on its net interest income, which is the difference between its income
on interest-earning assets and its expense on interest-bearing liabilities.
New South, like most financial institutions, is affected by changes in general
interest rate levels and by other economic factors beyond its control.
Interest rate risk arises in part from the mismatch (i.e., the interest
sensitivity gap) between the dollar amount of repricing or maturing interest
earning assets and liabilities, and is measured in terms of the ratio of the
interest rate sensitivity gap to total assets. More interest earning assets
than interest bearing liabilities repricing or maturing over a given time
period is considered asset-sensitive and is reflected as a positive gap, and
more liabilities than assets repricing or maturing over a given time period is
considered liability-sensitive and is reflected as a negative gap. A
liabilities-sensitive position (i.e., a negative gap) may generally enhance
net interest income in a falling interest rate environment and reduce net
interest income in a rising interest rate environment, while an asset-
sensitive position (i.e., a positive gap) may generally enhance net interest
income in a rising interest rate environment and will reduce net interest
income in a falling interest rate environment. Fluctuations in interest rates
are not predictable or controllable. Periodically, New South estimates the
prepayment rates of all loans in New South's loan and mortgage-backed
securities portfolios in order to determine New South's gap position over the
approaching twelve month period. At December 31, 1997, based on management's
assumptions derived from its experience, New South had a negative gap of 19%.
If all interest rate caps and swaps are considered as immediately repriceable
instruments, New South had a positive gap at December 31, 1997 of 11%.

Rate of Loan Prepayment. Changes in interest rates also affect the average
life of loans and mortgage-backed securities. The relatively lower interest
rates in recent periods have resulted in increased prepayments of loans and
mortgage-backed securities as borrowers have refinanced their mortgages to
reduce their borrowing costs. Under these circumstances, New South is subject
to reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates which are comparable to the rates on the prepaid loans or
securities.

Volume of Residential Mortgage Loans Produced. During periods of declining
interest rates, the Company typically experiences an increase in loan
originations because of increased home purchases and, particularly, increased
refinancing activity. In contrast, the demand for residential mortgage loans
typically decreases during periods of increasing interest rates. Increases in
interest rates in the future may adversely affect demand for residential
mortgage loans and refinancing activity, which could have an adverse effect on
the Company's origination revenues.

Sales of Residential Mortgage Loans. Gains or losses on sales of residential
mortgage loans may result from changes in interest rates from the time the
interest rate on a customer's mortgage loan application is established to the
time the Company sells the loan. Such a change in interest rates could result
in a gain or loss upon the sale of such loan. In order to reduce the effect of
interest rate changes on the gain or loss on loan sales, the Company may
commit to sell residential mortgage loans to investors for delivery at a
future time at a stated price. At any given time, the Company may have
committed to sell substantially all of its residential mortgage loans that are
closed ("warehouse loans") and a percentage of the residential mortgage loans
that are not yet closed but for which the interest rate has been established
("pipeline loans"). To manage the interest rate risk of the Company's pipeline
loans, the Company continuously projects the percentage of the pipeline loans
it expects to close and, on the basis of such projections, enters into forward
sales commitments to sell such loans.

If interest rates make an unanticipated change, the actual percentage of
pipeline loans that close may differ from the projected percentage. A sudden
increase in interest rates can cause a higher percentage of pipeline loans to
close than projected. To the degree that this may not have been anticipated,
the Company may not have made forward sales commitments to sell these
additional loans at pre-established prices and, consequently, may incur
significant losses upon their sale at current market prices, adversely
affecting results of operations. Likewise, if a lower percentage of pipeline
loans closes than was projected, due to a sudden decrease in interest rates or
otherwise, the Company may have committed to sell more loans than actually
close and as a result may incur significant losses in fulfilling these
commitments, adversely affecting results of operations. This risk is greater
during times of higher volatility of interest rates.

Value of Mortgage Servicing Rights. The value of the Company's servicing
portfolio may be adversely affected if mortgage interest rates decline and
loan prepayments increase. The value of the Company's mortgage servicing
rights is based upon the net present value of future servicing income from
related residential mortgage loans. As interest rates on residential mortgage
loans decline, the economic advantages to borrowers of refinancing their
residential mortgage loans increase. As residential mortgage loans are
prepaid, the period during which the Company receives servicing income from
such loans decreases, thereby reducing the value of the Company's mortgage
servicing rights. If the rate of prepayment of the related loans exceeds the
rate assumed by the Company, due to a significant reduction in interest rates
or otherwise, the value of the Company's servicing portfolio will decrease and
accelerated amortization of servicing rights or recognition of an impairment
provision may become necessary, thereby decreasing earnings. There can be no
assurance that the Company's efforts to mitigate these risks will prevent
value loss or impairment provisions.

Delinquency and Default Risks

The Company's profitability may be negatively impacted by economic downturns
as the frequency of loan defaults tends to increase. From the time that the
Company funds the loans it originates to the time it sells the loans,
generally 10 to 40 days thereafter, the Company is generally at risk for any
loan defaults. Once the Company sells the loans it originates, the risk of
loss from loan defaults and foreclosure generally passes to the purchaser or
insurer of the loans. In connection therewith, the Company typically makes
certain representations and warranties to the purchasers and insurers of loans
and to the purchasers of servicing rights, if any. Such representations and
warranties generally relate to the origination and servicing of loans in
substantial conformance with state and federal laws and applicable investor
guidelines. If a loan defaults and there has been a breach of these
representations and warranties, the Company becomes liable for the unpaid
principal and interest on the defaulted mortgage loan. In such a case, the
Company may be required to repurchase the loan and bear the subsequent loss,
if any. Historically, the impact of loans repurchased by the Company as the
result of such breaches of representations and warranties has not been
material. However, the number and amount of loans repurchased in the future
could increase due to the high volume of loans which the Company originates,
acquires and sells. Accordingly, the Company believes that future charges to
net income relating to loan repurchases may be necessary as loan origination
volume increases. In addition, the Company's installment (automobile) loans
are subject to similar risks of delinquency and default. In 1997, the Company
charged off a portion of its installment (automobile) loans. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Business."

The Company is also affected by loan delinquencies and defaults on loans
that it services. Under certain types of servicing contracts, particularly
contracts to service loans that have been pooled or securitized, the

servicer must advance all or part of the scheduled payments to the owner of
the loan, even when loan payments are delinquent. Also, to protect their liens
on mortgaged properties, owners of loans usually require the servicer to
advance mortgage and hazard insurance and tax payments on schedule even if
sufficient escrow funds are not available. The servicer will be reimbursed,
subject to certain limitations with respect to Federal Housing Administration
("FHA") and Veterans Administration ("VA") loans, by the mortgage owner or
from liquidation proceeds for payments advanced that the servicer is unable to
recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the servicer must absorb the cost of
funds advanced during the time the advance is outstanding. Further, the
servicer must bear the increased costs of attempting to collect on delinquent
and defaulted loans. The Company also foregoes servicing income from the time
such loan becomes delinquent until foreclosure when, if any proceeds are
available, such amounts may be recovered.

The Company periodically incurs losses attributable to servicing FHA and VA
loans for investors, including actual losses for final disposition of loans
that have been foreclosed or assigned to the FHA or VA and accrued interest on
such FHA or VA loans for which payment has not been received. The Company's
servicing losses on investor-owned loans have historically primarily
represented losses on VA loans. Because the total principal amount of FHA
loans is guaranteed, losses on such loans are generally limited to expenses of
collection and certain contractually defined costs. The Company has
experienced minimal losses from FHA loans. With respect to VA loans, the VA
guarantees the initial losses on a loan. The guaranteed amount generally
ranges from 20% to 35% of the original principal balance. Before each
foreclosure sale, the VA determines whether to bid by comparing the estimated
net sale proceeds to the outstanding principal balance and the servicer's
accumulated reimbursable costs and fees. If this amount is a loss and exceeds
the guaranteed amount, the VA typically issues a no-bid and pays the servicer
the guaranteed amount. Whenever a no-bid is issued, the servicer absorbs the
loss, if any, in excess of the sum of the guaranteed principal and amounts
recovered at the foreclosure sale. The Company's historical delinquency and
foreclosure rate experience on VA loans has generally been consistent with
that of the industry. There can be no assurance that the Company's servicing
losses on investor-owned loans will not be greater in the future.

Economic downturns in states in which the Company has a significant
concentration of business could have an adverse impact on the Company's
results of operations. The Company originates and purchases servicing rights
for residential mortgage loans primarily in the southern United States and
actively monitors the geographic distribution of its servicing portfolio to
maintain a mix that it deems appropriate and makes adjustments as it deems
necessary. There can be no assurance that the Company's monitoring of and
adjustments to such geographic distribution will prevent any material adverse
impact on the Company's business, results of operations and financial
condition in the future.

Allowance for Possible Loan Losses

Industry experience indicates that a portion of the Company's loans held in
its own portfolio will become delinquent and a portion of the loans will
become charge-offs. Regardless of the underwriting criteria used by New South,
losses may be experienced as a result of various factors beyond New South's
control, including, among other things, changes in market conditions affecting
the value of properties and problems affecting the credit of the borrower. New
South's determination of the adequacy of its allowance for possible loan
losses is based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which would have loan loss potential, delinquency
trends, estimated fair value of the underlying collateral, current economic
conditions, the views of New South's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentration.
If delinquency levels were to increase as a result of adverse general economic
conditions, the loan loss reserve so determined by New South, however, may not
be adequate. New South believes the allowance to be adequate, but there can be
no assurance that the allowance will be adequate to cover possible loan losses
or that New South will not experience significant losses in its loan
portfolios which may require significant increases to the allowance for
possible loan losses in the future. At December 31, 1997, the Company's
allowance for possible loan losses totaled $7.3 million which was 1.01% of
total loans, net of unearned income, or 78.97% of nonperforming assets.

Growth

There can be no assurance that New South will be able to adequately and
profitably manage its future growth. Failure by the Company to manage its
growth effectively or sustain historical increases in loan origination volume
could have a material adverse effect on the Company's business, financial
condition, and results of operations. New South has experienced significant
growth over the past five years, as total assets have increased from $616.9
million at September 30, 1993 to approximately $1.0 billion at December 31,
1997. New South, as part of this growth, has expanded its loan production
network through the transfer of 39 loan production offices from its affiliate,
Collateral, in the Transfer (as defined and discussed herein under the heading
"The Company"). The additional costs associated with operating the additional
loan production offices have increased New South's noninterest expense and
decreased earnings in the short-term and should continue to do so for some
time.

Availability of Funding Sources

The degree to which the Company is leveraged could have important
consequences to holders of the Preferred Securities, including the following:
(i) the Company's ability to grow will depend on its ability to obtain
additional financing in the future for originating loans, investment in
servicing rights, working capital, capital expenditures and general corporate
purposes; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of the principal of and interest
on its indebtedness, thereby reducing the funds available to finance
operations or pay cash dividends; and (iii) the Company may be more highly
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage and make it more vulnerable to economic downturns.

The Company requires substantial funding for its business operations. Such
funding is currently provided primarily by customer deposits, but the Company
also relies on advances from the Federal Home Loan Bank ("FHLB") and
commercial lenders. At December 31, 1997, FHLB advances to the Company
totalled approximately $179.4 million, and the Company's indebtedness to
commercial lenders pursuant to existing lines of credit totalled approximately
$16.0 million. The Company may incur additional indebtedness in the future,
subject to certain limitations contained in the instruments governing its
current indebtedness. See "Business--Borrowings."

To the extent that the Company is not successful in negotiating renewals of
its borrowings or in arranging new financing, it may have to curtail its
origination activities and/or sell significant portions of its servicing
portfolio, which would have a material adverse effect on the Company's
business results of operations and financial condition. Among the factors that
will affect the Company's ability to refinance its bank credit and term
facilities are financial market conditions and the value and performance of
the Company prior to the time of such refinancing. There can be no assurance
that any such refinancing can be successfully completed at advantageous rates
or at all.

Forward Sale Arrangements

In connection with its mortgage loan sales programs, which involve the sale
of residential mortgage loans and mortgage-backed securities on a forward or
other deferred delivery and payment basis, the Company has credit risk
exposure to the extent purchasers are unable to meet the terms of their
forward purchase contracts. As is customary in the marketplace, none of the
forward payment obligations of any of the Company's counterparties is
currently secured or subject to margin requirements. Although the Company has
never suffered a loss as a result of a default by a forward contract
counterparty, the Company attempts to limit its credit exposure on forward
sales arrangements on residential mortgage loans and mortgage-backed
securities by entering into forward contracts only with institutions that the
Company believes are acceptable credit risks and by limiting exposure to any
single counterparty by selling to a number of investors. All counterparties
are obligated to settle their sales in accordance with the terms of the
related forward sale agreement. The Company also attempts to limit its
exposure on flow servicing sales by only selling to institutions that the
Company believes are acceptable credit risks.

Loan Sales and Securitizations

In connection with certain whole loan sales and securitizations, the Company
recognizes a gain on sale of the loans upon the closing of the transaction and
the delivery of the loans, but does not receive the cash representing such
gain until it receives the excess servicing spread, which is payable over the
actual life of the loans sold. The Company is subject to over-
collateralization requirements and incurs significant expenses in connection
with securitizations and incurs tax liabilities as a result of the gain on
sale.

The pooling and servicing agreements and sale and servicing agreements
relating to the Company's securitizations require the Company to build over-
collateralization levels through retention within each securitization trust of
servicing distributions and application thereof to reduce the principal
balances of the senior interests issued by the related trust or cover interest
shortfalls. This retention causes the aggregate unpaid principal amount of the
loans in the related pool to exceed the aggregate principal balance of the
outstanding investor securities. Such over-collateralization amounts serve as
credit enhancement for the related trust and therefore are available to absorb
losses realized on loans held by such trust. The Company continues to be
subject to the risks of default and foreclosure following the sale of loans
through securitizations to the extent servicing distributions are required to
be retained or applied to reduce principal or cover interest shortfalls from
time to time. Such retained amounts are predetermined by the entity issuing
any guarantee of the related senior interests as a condition to obtaining
insurance or by the rating agencies as a condition to obtaining the desired
rating on the various classes of notes thereon. In addition, such retention
delays cash distributions that otherwise would flow to the Company through its
retained interest, thereby adversely affecting the flow of cash to the
Company.

Regulation, Possible Changes and Related Matters

New South's mortgage banking business is subject to the rules and
regulations of the FHA, the VA, the United States Department of Housing and
Urban Development ("HUD"), the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Governmental
National Mortgage Association ("GNMA"), and other regulatory agencies with
respect to originating, processing, underwriting, selling, securitizing and
servicing residential mortgage loans. In addition, there are other federal and
state statutes and regulations affecting the activities of New South. These
rules and regulations, among other things, impose licensing obligations on New
South, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers, establish eligibility criteria for residential mortgage
loans and fix maximum loan amounts.

Moreover, lenders such as New South are required annually to submit audited
financial statements to FNMA, FHLMC, GNMA, HUD and various state regulatory
authorities, and to comply with each regulatory entity's financial
requirements. New South's business is also subject to examination by FNMA,
FHLMC, GNMA and state regulatory authorities at all times to assure compliance
with applicable regulations, policies and procedures.

New South's mortgage origination activities are subject to the provisions of
various federal and state statutes including, among others, the Equal Credit
Opportunity Act, the Federal Truth-in-Lending Act, the Federal Equal Credit
Opportunity Act, the Fair Credit Reporting Act of 1970, the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act of 1974 ("RESPA"),
the Fair Housing Act and the regulations promulgated thereunder, which, among
other provisions, prohibit discrimination, prohibit unfair and deceptive trade
practices, require the disclosure of certain basic information to mortgagors
concerning credit terms and settlement costs, limit fees and charges paid by
borrowers and lenders and otherwise regulate terms and conditions of credit
and the procedures by which credit is offered and administered. New South is
further subject to federal and state laws and regulations governing the
activities involved in servicing residential mortgage loans, including RESPA,
the Federal Debt Collection Practices Act (with respect to the servicing of
loans that are in default when the right to service is acquired by the
Company), as well as other federal and state statutes and regulations
affecting New South's servicing activities. These statutes and regulations,
among other things, regulate assessment, collection, foreclosure and claims
handling, and investment and interest payments on escrow balances.

Members of Congress and government officials from time to time have
suggested the elimination of or further limitation on the mortgage interest
deduction for federal income tax purposes based on borrower income, type of
loan or principal amount. Because many of the Company's loans are made to
borrowers for the purpose of consolidating consumer debt or financing other
consumer needs, the competitive advantages to tax deductible interest when
compared with alternative source of financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits would have a material adverse effect on the
demand for loans of the kind offered by the Company.

Failure to comply with any of the foregoing requirements regulating mortgage
origination or mortgage servicing activities can lead to loss of approved
status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for borrowers, class action lawsuits and administrative
enforcement actions. Such regulatory requirements are subject to change from
time to time and may in the future become more restrictive, thereby making
compliance more difficult or expensive or otherwise restricting the ability of
New South to conduct its business as such business is now conducted. See
"Supervision and Regulation."

Federal Programs; Availability of Active Secondary Market

New South's ability to generate funds by sales of mortgage-backed securities
is largely dependent upon the continuation of programs administered by FNMA,
FHLMC and GNMA, which facilitate the issuance of such securities, as well as
New South's continued eligibility to participate in such programs. In
addition, approximately 35% (based on 1997 mortgage loan production) of New
South's conforming residential mortgage lending is dependent upon the
continuation of various programs administered by the FHA, which insures
residential mortgage loans, and the VA, which partially guarantees residential
mortgage loans. Although New South is not aware of any proposed
discontinuation of, or significant reduction in, the operation of such
programs, any such changes could have a material adverse effect on New South's
operations. New South anticipates that it will continue to remain eligible to
participate in such programs, but any significant impairment of such
eligibility would materially adversely affect its operations. In addition, the
mortgage loan products eligible for such programs may be changed from time to
time by the sponsor. The profitability of specific types of mortgage loan
products may vary depending on a number of factors, including the
administrative costs to New South of originating or purchasing such types of
residential mortgage loans.

There can be no assurance that New South will be successful in effecting the
sale of residential mortgage loans at the historic price or volume levels in
any particular future periods. Any significant change in the secondary market
level of activity or underwriting criteria of FNMA, FHLMC or private investors
could have a material adverse effect on the gain or loss on sales of
residential mortgage loans recorded by New South and therefore on New South's
results of operations.

Dependence on Key Individuals

The success of the Company is in large part dependent upon the efforts of
William T. Ratliff, III, Chairman of the Board and President of the Company,
Robert M. Couch, Executive Vice President of the Company, David E. Mewbourne,
Executive Vice President of New South, Roger D. Murphree, Senior Vice
President of New South, David A. Roberts, Senior Vice President of New South,
Larry A. Nelson, Senior Vice President of New South, Suzanne H. Moore, Vice
President and Controller of the Company and New South, and Lizabeth R.
Nichols, Vice President and General Counsel of New South. The loss of the
services of any of these officers could have a material adverse effect upon
the Company.

Concentration of Control

Almost all of the equity securities in the Company are owned by members of
the Ratliff family (the "Common Stockholders"). Accordingly, the Common
Stockholders are able to control the election of the Board of Directors of the
Company and thus the direction and future operations of the Company without
any approving

vote of the holders of the Preferred Securities offered hereby. See "Security
Ownership of Certain Beneficial Owners."

Potential Conflicts of Interest

Certain decisions concerning the operations of, or financial dealings
between, the Company and other financial services companies controlled by the
Common Stockholders, including Collateral, may present conflicts of interest
between the Common Stockholders and the holders of the Preferred Securities
offered hereby. As a result of the Transfer (as defined and discussed below
under the heading "The Company"), Collateral has become primarily a commercial
mortgage lender, having transferred all of its residential mortgage lending
operations to New South. Although New South is primarily a residential
mortgage lender, it actively funds and purchases commercial real estate loans
originated by Collateral and expects to continue to do so. Although it is
expected that the terms of any such transactions between New South and
Collateral will be on terms no less favorable than those that could be
obtained from an independent third party, the Company cannot predict with
certainty either the nature of, or the financial terms of, any transactions
which may arise in the future. See "Certain Relationships and Related
Transactions." Moreover, there can be no assurance that Collateral will not
seek to re-enter the residential mortgage lending arena. See "The Company,"
"Business" and "Certain Relationships and Related Transactions."

In addition, the Company and Collateral are dependent on outside sources for
the funding of their respective lending operations, and, from time to time,
the Company or New South may seek funding from or provide funding to
Collateral.

Common Management

Several of the executive officers of the Company and New South are also
executive officers of Collateral or other affiliates of the Company. It is
possible that the services provided by these executive officers to Collateral
or such other affiliates may be adverse to New South's interests. In addition,
there can be no assurance that the nature and extent of the demands placed
upon such executive officers by Collateral or such other affiliates will not
diminish the time which such executive officers are able to devote to New
South. See "Directors and Executive Officers" and "Certain Relationships and
Related Transactions."

Competition

New South faces substantial competition in purchasing and originating loans
and in attracting deposits. Competitors include other thrifts and thrift
holding companies, national and state banks, trust companies, insurance
companies, mortgage banking operations, credit unions, finance companies,
money market funds and other financial and non-financial companies which may
offer products similar to those offered by New South. Many competing providers
have greater financial resources than New South, offer additional services,
have wider geographic presence or more accessible branch and loan production
offices. See "Business--Competition."

Developments in Technology

The Company is heavily dependent upon complex computer systems for all
phases of its operations. The year 2000 issue--common to most corporations--
concerns the inability of certain software and databases to properly recognize
date sensitive information beginning January 1, 2000. This problem could
result in a disruption to the Company's operations, if not corrected.
Financial services institutions are particularly sensitive to such
disruptions. The Company uses third party vendors for many of its systems. As
a result, much of the Company's remediation effort relates to monitoring and
communicating with those vendors. The Company has assessed and developed a
detailed strategy to prevent or at least minimize problems related to the year
2000 issue. In 1997, resources were committed and implementation began to
modify the affected information systems. Implementation is currently on
schedule, but the degree of success of the project cannot be determined at
this time. Management believes that the final outcome will not have a material
adverse effect on New South's business, results of operations, or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000."

The market for financial services, including banking services, is
increasingly affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking, and telebanking. New South's ability to compete successfully in its
markets may depend on its ability to exploit such technological changes.
However, there can be no assurance that the development of these or any other
new technologies, or New South's success or failure in anticipating or
responding to such developments, will materially affect New South's business,
results of operations and financial condition.

Liabilities Under Representations and Warranties

Under certain circumstances, New South may become liable for certain damages
or may be required to repurchase a loan if there has been a breach of
representations or warranties made by New South in the ordinary course of
business to the purchasers and insurers of its residential mortgage loans and
automobile loans regarding compliance with laws, regulations and program
standards and as to accuracy of information. New South generally receives
similar representations and warranties from mortgage brokers and the
correspondents from whom it purchases loans. However, in the event of breaches
of such representations and warranties, New South is subject to the risk that
a mortgage broker or correspondent may not have the financial capacity to
repurchase loans when called upon to do so by New South or otherwise respond
to demands made by New South.

Litigation

In recent years, many providers of financial services have been subject to
class action lawsuits that allege violations of federal and state laws and
regulations, including the propriety of collecting and paying various fees and
charges and the calculation of escrow amounts on residential mortgage loans
and the lending, collection, servicing and other dealer activities (e.g.,
sales of insurance and warranties) associated with installment (automobile)
lending. Most recently, at least 50 purported class action lawsuits have been
commenced against various mortgage companies alleging, inter alia, that the
payment of certain fees to mortgage brokers violates the anti-kickback
provisions of RESPA. If these cases are resolved against the lenders, it may
cause an industry-wide change in the way independent mortgage brokers are
compensated. Such a change may have a material adverse effect on the Company
and the entire mortgage lending industry. The Company's broker compensation
and table-funded correspondent purchase programs permit such payments.
Although the Company believes these programs comply with all applicable laws
and are consistent with long-standing industry practice and regulatory
interpretations, in the future new regulatory interpretations or judicial
decisions may require the Company to change its broker compensation and table-
funded correspondent purchase practices. Class action lawsuits may continue to
be filed in the future against the mortgage banking industry generally. No
prediction can be made as to whether the ultimate decisions in any of these
class actions will be adverse to the defendant mortgage companies. See
"Business--Legal Proceedings."

Risk of Claims

In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation, and failures by the Company to comply with various
laws and regulations applicable to its business. Relying as it does on
hundreds of employees interacting with its customers, New South may encounter
circumstances where employees knowingly or unknowingly violate
representations, warranties, laws or regulations without the knowledge of
management, in which case the Company may be liable for these acts. The
Company believes that liability with respect to any currently asserted claims
or legal actions is not likely to be material to the Company's results of
operations or financial condition; however, any claims asserted may result in
legal expenses or liabilities which could have a material adverse effect on
the Company's results of operations and financial condition. See "Business--
Legal Proceedings."

Environmental Matters

In the course of its business, through the foreclosure process, the Company
has acquired, and may acquire in the future, properties securing loans that
are in default. Although the Company lends primarily to owners of residential
properties, there is a risk that the Company could be required to investigate
and cleanup hazardous or toxic substances or chemical releases at such
properties after its acquisition and may be held liable to a

governmental entity or to third-parties for property damage, personal injury
and investigation cleanup costs incurred by such parties in connection with
the contamination. In addition, the Company purchases loans from Collateral
which are secured by commercial real estate which is subject to similar, and
in some respects more significant, risk. To date, the Company has not been
required to perform any investigation or cleanup activities of any material
nature. No assurance can be given, however, that this will remain the case in
the future.

Dependence Upon Independent Mortgage Brokers and Mortgage Bankers

The Company depends largely upon independent mortgage bankers, including
smaller mortgage companies and commercial banks, and, to a lesser extent, upon
independent mortgage brokers, for its originations and purchases of
residential mortgage loans. Substantially all of the independent mortgage
brokers and mortgage bankers with whom the Company does business deal with
multiple loan originators for each prospective borrower. Wholesale
originators, such as the Company, compete for business based upon pricing,
service, loan fees and costs and other factors. The Company's competitors also
seek to establish relationships with such independent mortgage bankers and
mortgage brokers, none of whom is obligated by contract or otherwise to
continue to do business with the Company. In addition, the Company expects the
volume of broker and mortgage banker-sourced loans purchased by it to
increase. Future operating and financial results of the Company may be more
susceptible to fluctuations in the volume and cost of its broker and mortgage
banker-sourced loans resulting from, among other things, competition from
other purchasers of such loans.

RISK FACTORS RELATING TO THE PREFERRED SECURITIES

Ranking of Subordinate Obligations Under the Guarantee and Subordinated
Debentures

The obligations of the Company under the Guarantee issued by it for the
benefit of the holders of Preferred Securities and the Subordinated Debentures
will be unsecured and subordinate and rank junior in right of payment to all
present and future Senior Debt of the Company and rank pari passu with
obligations to or rights of the Company's other general unsecured creditors.
In addition, in the case of a bankruptcy or insolvency proceeding involving
the Company, the Company's obligations under the Guarantee will rank
subordinate and junior in right of payment to all liabilities of the Company,
but senior to any obligation in respect of any class of capital stock of the
Company.

No payment of the principal of, or premium, if any, or interest on the
Subordinated Debentures, or in respect of any redemption, retirement, purchase
or other acquisition by the Company of any of the Subordinated Debentures
("Debenture Payment") may be made at any time when (i) there is a default in
the payment of the principal of, or premium, if any, or interest on or
otherwise in respect of any Senior Debt (as defined herein), whether at
maturity or at a date fixed for prepayment or by declaration or otherwise, or
(ii) any other event of default with respect to any Senior Debt has occurred
and is continuing, or would occur as a result of such Debenture Payment, which
permits or would permit the holders of such Senior Debt (or a trustee on
behalf of the holders thereof) to accelerate the maturity thereof. Neither the
Indenture, the Guarantee nor the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Debt, that may be
incurred by the Company. At December 31, 1997, the aggregate principal amount
of outstanding indebtedness for borrowed money which constitutes Senior Debt
of the Company was approximately $16 million. See "Business--Funding
Activities" and "Description of the Subordinated Debentures--Subordination."

Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any direct or indirect subsidiary
upon such subsidiary's liquidation or reorganization or otherwise (and thus
the ability of holders of the Preferred Securities to benefit indirectly from
such distribution) is subject to the prior claims of creditors of that
subsidiary, except to the extent that the Company may itself be recognized as
a creditor of that subsidiary. At December 31, 1997, the direct and indirect
subsidiaries of the Company had total liabilities (excluding liabilities owed
to the Company) of approximately $929.9 million. In addition, because the
Company's primary subsidiary, New South, is a federally chartered savings bank
subject to regulatory control by the OTS, the ability of New South to pay
dividends to the Company without prior regulatory approval is limited by
applicable laws and regulations. Federal and state regulatory agencies also
have the authority to limit further New South's payment of dividends based on
other factors, such as the maintenance of adequate capital

for New South, which could reduce the amount of dividends otherwise payable.
Accordingly, the Subordinated Debentures and the Guarantee will be effectively
subordinated to all existing and future liabilities of the Company and it's
subsidiaries, including New South, and Debenture Payments on the Subordinated
Debentures (and corresponding Distributions on the Preferred Securities) will
be paid only out of the assets of the Company legally available therefor. See
"Risk Factors Relating to the Company--Status of the Company as a Holding
Company" and "Supervision and Regulation."

Option to Extend Interest Payment Period; Tax Considerations

So long as no event of default under the Indenture (a "Debenture Event of
Default") has occurred or is continuing, the Company has the right under the
Indenture to defer payment of interest on the Subordinated Debentures at any
time or from time to time for a period not exceeding 20 consecutive quarterly
periods, each an Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures or end on a
date other than a Distribution Date. As a consequence of any such deferral,
quarterly Distributions on the Preferred Securities by the Trust will also be
deferred (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate additional Distributions thereon at
the rate of % per annum, compounded quarterly, to the extent permitted by
applicable law, from the relevant payment date for such Distributions) during
any such Extension Period. During any such Extension Period, the Company may
not (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Company
that rank pari passu in all respects with or junior in interest to the
Subordinated Debentures, or (iii) make any guarantee payment with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in right of payment
to the Subordinated Debentures, subject to certain exceptions described
herein. See "Description of the Subordinated Debentures--Option to Extend
Interest Payment Date." Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity or end on a date other than a Distribution Date. Upon the
termination of any Extension Period and the payment of all interest then
accrued and unpaid on the Subordinated Debentures (together with interest
thereon at the annual rate of %, compounded quarterly from the interest
payment date for such interest, to the extent permitted by applicable law),
the Company may elect to begin a new Extension Period subject to the above
requirements. There is no limitation on the number of times that the Company
may elect to begin an Extension Period. See "Description of the Subordinated
Debentures--Option to Extend Interest Payment Date," and "Description of the
Preferred Securities--Distributions."

Should the Company exercise its right to defer payments of interest on the
Subordinated Debentures, each holder of Preferred Securities will be required
to continue to accrue income (as OID) in respect of the deferred stated
interest allocable to its Preferred Securities for United States federal
income tax purposes, which will be allocated but not distributed to holders of
Preferred Securities. As a result, during an Extension Period, each holder of
Preferred Securities will recognize income for United States federal income
tax purposes in advance of the receipt of cash and will not receive the cash
related to such income from the Trust if the holder disposes of the Preferred
Securities prior to the record date for the payment of Distributions
thereafter. See "Certain Federal Income Tax Consequences--Interest Income and
Original Issue Discount" and "--Sales of Preferred Securities."

Should the Company elect to exercise its right to defer payments of interest
on the Subordinated Debentures, the then current market price of the Preferred
Securities is likely to be affected adversely. A holder that disposes of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, the mere existence of the Company's right
to defer payments of interest on the Subordinated Debentures may cause the
market price of the Preferred Securities to be more volatile than the market
prices of other securities on which OID accrues that are not subject to such
deferral rights.

Special Event Redemption; Optional Early Redemption

Upon the occurrence of a Capital Event, a Tax Event, or an Investment
Company Event (in each case, a "Special Event"), the Company shall have the
right to prepay the Subordinated Debentures in whole (but not in part) and
thereby cause a mandatory redemption of the Preferred Securities within 90
days following the occurrence of such Special Event. See "Description of the
Subordinated Debentures--Special Event Prepayment."

In addition to a Special Event Redemption, the Company shall have the right
to prepay the Subordinated Debentures, in whole at any time, or in part from
time to time, at its option at any time after , 2003, and thereby cause a
redemption of a proportional amount of the Preferred Securities. See
"Description of the Subordinated Debentures--Optional Prepayment after ,
2003."

Possible Tax Law Changes

In both 1996 and 1997, the Clinton Administration proposed to amend the
Internal Revenue Code of 1986, as amended (the "Code") to deny deductions of
interest on instruments with features similar to those of the Subordinated
Debentures when issued under arrangements similar to the Trust. That proposal
was not passed by, and is not currently pending before, Congress. There can be
no assurance, however, that future legislative proposals, future regulations
or official administrative pronouncements or future judicial decisions will
not affect the ability of the Company to deduct interest on the Subordinated
Debentures. Such change could give rise to a Tax Event, which may permit the
Company, to cause a redemption of the Preferred Securities.

Possible Distribution of Subordinated Debentures; Tax Consequences

The Company will have the right at any time to terminate the Trust and,
after satisfaction of claims of creditors of the Trust as provided by
applicable law, to cause the Subordinated Debentures to be distributed to the
holders of the Trust Securities. Because holders of Preferred Securities may
receive Subordinated Debentures in liquidation of the Trust and because
Distributions are otherwise limited to payments on the Subordinated
Debentures, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Subordinated Debentures and should
carefully review all the information regarding the Subordinated Debentures
contained herein. See "Description of the Subordinated Debentures."

Under current United States federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Preferred Securities. If, however, the Trust
is characterized as an association taxable as a corporation at the time of the
dissolution of the Trust, the distribution of the Subordinated Debentures
would constitute a taxable event to the Trust and to holders of Preferred
Securities. Moreover, upon occurrence of a Tax Event, a dissolution of the
Trust in which holders of the Preferred Securities receive cash may be a
taxable event to such holders. See "Certain Federal Income Tax Consequences--
Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust."

Absence of Public Market

The Preferred Securities will be a new issue of securities for which there
currently is no market. Although application has been made to have the
Preferred Securities approved for quotation on the American Stock Exchange,
there can be no assurance that such application will be approved, that an
active trading market in the Preferred Securities will develop or, if one does
develop, that it will be maintained. Accordingly, there can be no assurance as
to the development or liquidity of any market for the Preferred Securities.

The Underwriters have informed the Trust and the Company that they intend to
make a market in the Preferred Securities. However, the Underwriters are not
obligated to do so and any such market making activity may be terminated at
any time without notice to the holders of the Preferred Securities. To the
extent the Underwriters do make a market for the Preferred Securities, the
Preferred Securities (or the Subordinated Debentures which may be distributed
to the holders of the Preferred Securities upon liquidation of the Trust)

may trade at a discounted price that does not fully reflect the price that the
investor paid to purchase the Preferred Securities offered hereby or the value
of accrued but unpaid interest with respect to the underlying the Subordinated
Debentures. Accordingly, there can be no assurance as to the market prices for
Preferred Securities or the Subordinated Debentures. In addition, such market
making activity will be subject to the limits of the Securities Act.

Potential Adverse Tax Consequences Upon Sale

A holder which disposes of its Preferred Securities between record dates for
payments of Distributions thereon will be required to include accrued but
unpaid OID on the Subordinated Debentures through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis in
its share of the underlying Subordinated Debentures deemed disposed of. To the
extent the selling price is less than the holder's adjusted tax basis (which
will include all accrued but unpaid OID), a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied
to offset ordinary income for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales of Preferred Securities."

Rights Under the Guarantee

The Guarantee will guarantee to the holders of the Preferred Securities the
following payments, to the extent not paid by the Trust: (i) any accumulated
and unpaid Distributions required to be paid on the Preferred Securities, to
the extent that the Trust has funds on hand legally available therefor; (ii)
the Redemption Price (as defined herein) with respect to any Preferred
Securities called for redemption, to the extent that the Trust has funds on
hand at that time legally available therefor; and (iii) upon a voluntary or
involuntary termination and liquidation of the Trust (unless the Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Trust has funds
on hand at that time legally available therefor and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Preferred
Securities. The obligations of the Company under the Guarantee are
subordinated in the manner set forth above under "--Ranking of Subordinate
Obligations Under the Guarantee and Subordinated Debentures."

The holders of a majority in Liquidation Amount of the Preferred Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee. Any holder of the Preferred Securities may institute a
legal proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. If the Company defaults on
its obligation to pay amounts payable under the Subordinated Debentures, the
Trust will not have sufficient funds for the payment of Distributions or
amounts payable on redemption of the Preferred Securities or otherwise, and,
in such event, holders of the Preferred Securities will not be able to rely
upon the Guarantee for payment of such amounts. Instead, in the event a
Debenture Event of Default shall have occurred and be continuing and such
event is attributable to the failure of the Company to pay principal of or
premium, if any, or interest on the Subordinated Debentures on the payment
date on which such payment is due and payable, then a holder of Preferred
Securities may institute a legal proceeding directly against the Company for
enforcement of payment to such holder of the principal of or premium, if any,
or interest on such Subordinated Debentures having a principal amount equal to
the Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). Notwithstanding any payments made to a holder of Preferred
Securities by the Company in connection with a Direct Action, the Company
shall remain obligated to pay the principal of and premium, if any, and
interest on the Subordinated Debentures, and the Company shall be subrogated
to the rights of the holder of such Preferred Securities with respect to
payments on the Preferred Securities to the extent of any payments made by the
Company to such holder in any Direct Action. Except as described herein,
holders of Preferred Securities will not be able to exercise directly any
other remedy available to the holders of the Subordinated Debentures or to
assert directly any other rights in respect of the Subordinated Debentures.
See "Description of the Subordinated Debentures--Enforcement of Certain Rights
by

Holders of Preferred Securities" and "--Debenture Events of Default" and
"Description of the Guarantee." The Trust Agreement will provide that each
holder of the Preferred Securities by acceptance thereof agrees to the
provisions of the Indenture.

Limited Voting Rights

Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the terms of the Preferred
Securities, the dissolution, termination or liquidation of the Trust, and the
exercise of the Trust's rights as holder of the Subordinated Debentures.
Holders of the Preferred Securities will not be entitled to vote to appoint,
remove or replace, or to increase or decrease the number of, the Issuer
Trustees, which voting rights are vested exclusively in the holder of the
Common Securities, except as described under "Description of the Preferred
Securities--Removal of Issuer Trustees." The Issuer Trustees and the Company
may amend the Trust Agreement without the consent of holders of Preferred
Securities to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust even if such action adversely
affects the interests of such holders. See "Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement."

Preferred Securities Are Not Insured

The Preferred Securities are not insured by the Bank Insurance Fund or the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") or by any other governmental agency.

THE COMPANY

GENERAL

The Company is a closely held unitary thrift holding company headquartered
in Birmingham, Alabama. Through its financial institution subsidiary, New
South, the Company operates two full-service retail branch offices Birmingham,
Alabama, and 49 loan production offices located in 14 states throughout the
southeastern and western United States. New South is the largest thrift and
the sixth largest depository institution, based on asset size, headquartered
in the State of Alabama.

The Company's operations principally involve residential mortgage lending,
installment (automobile) lending, residential construction and land lending
and deposit gathering activities. The Company's residential mortgage lending
efforts involve the origination and purchase of residential mortgage loans
through its loan origination offices and wholesale sources, the sale of such
loans (usually on a pooled and securitized basis) in the secondary market, and
the servicing of residential mortgage loans for investors as well as the
Company's own loan portfolio. The installment (automobile) lending program
involves indirect lending through 600 automobile dealers in six southern
states. The Company's residential construction and land lending efforts
involve making loans to builders for the construction of single family
properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. In addition, the Company actively
funds and purchases commercial real estate loans originated by Collateral
which may be sold to investors or held in New South's portfolio. See
"Business."

The Company was established in 1994 for the purpose of acquiring and holding
100% of the capital stock of New South. The Company and New South are members
of a family of financial services companies that are owned primarily by
members of the Ratliff family. Since W. T. Ratliff founded Collateral
Investment Company in 1933, these companies have been engaged in virtually all
aspects of real estate lending, investment, brokerage and management, as well
as various financial services businesses. See "Certain Relationships and
Related Transactions."

Prior to the formation of the Company, New South was a wholly owned
subsidiary of Collateral. Although Collateral and the Company are each
financial services companies and are each controlled by W.T. Ratliff, Jr. and
members of his family, Collateral and the Company have different strategic
goals for their respective lending operations and serve different customers.
Generally, Collateral intends to focus its business on commercial lending and
servicing commercial mortgage loans, while New South intends to focus its
business on residential mortgage lending, installment (automobile) lending and
servicing residential mortgage loans and installment (automobile) loans. In
addition, the Company actively funds and purchases certain commercial real
estate loans originated by Collateral.

Although Collateral's present emphasis rests on commercial lending, prior to
1997, Collateral also conducted residential mortgage lending operations
consisting primarily of direct originations of residential mortgage loans
which were generally underwritten and processed in accordance with the
guidelines issued by FNMA, FHLMC, GNMA, FHA or VA (i.e., conforming
residential mortgage loans) through 39 retail mortgage origination offices
located in 13 southern states. Effective July 1, 1997, Collateral transferred
all 39 of its loan origination offices to New South (the "Transfer"). Prior to
the Transfer, New South's residential mortgage lending operations consisted
primarily of indirect originations of residential mortgage loans which were
generally not underwritten and processed in accordance with government or
federal agency guidelines (i.e., nonconforming residential mortgage loans)
through correspondents and mortgage brokers, although it originated some
nonconforming residential mortgage loans on a direct basis through seven
origination offices.

As a result of the Transfer, New South now originates conforming and
nonconforming residential mortgage loans on a direct and indirect basis
through 49 origination offices and a network of loan correspondents and
mortgage brokers. The 39 offices previously owned by Collateral continue to
originate primarily conforming residential mortgage loans, while the seven
offices historically operated by New South continue to originate primarily
nonconforming residential mortgage loans. Management believes the Transfer
will enable New South to increase residential mortgage loan production
efficiencies while increasing its loan servicing portfolio. New South also
originates conforming and nonconforming residential mortgage loans on an
indirect basis through correspondents and mortgage brokers.

New South currently performs all servicing associated with nonconforming
residential mortgage loans and installment (automobile) loans that it
originates. However, pursuant to a subservicing agreement between Collateral
and New South (the "Subservicing Agreement"), Collateral performs all
servicing, on behalf of New South, in connection with conforming residential
mortgage loans originated by New South. The Company anticipates terminating
this Subservicing Agreement at the point when the balance of these loans which
New South owns or services exceeds the balance of these loans which Collateral
services for others. At this time, which remains to be determined, all current
Collateral employees performing these functions will become employees of New
South, causing all servicing functions to be performed centrally by New South.
See "Certain Relationships and Related Transactions."

If, in the future, the number of holders of the Company's common stock is
reduced to 75 or less, and it is determined that the Company and New South
would otherwise qualify for S corporation status, the remaining holders of the
Company's common stock may elect to have the Company treated as an S
corporation under the Code. If this election were made, the Company could then
elect to treat New South as a qualified subchapter S subsidiary (a "QSSS").
Under the Code, a QSSS is not treated as a separate corporation from its
parent, but rather all of the assets, liabilities, and items of income,
deduction and credit of the QSSS are treated as such items of the parent. In
other words, the Company and New South would be treated as one S corporation
for federal income tax purposes.

THE TRUST

The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of April 2, 1998, executed by the Company,
as depositor, and Bankers Trust (Delaware), as Delaware Trustee, and (ii) a
certificate of trust filed with the Delaware Secretary of State on April 2,
1998. The initial trust agreement will be amended and restated in its entirety
by the Trust Agreement substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. This Trust
Agreement will, among other things, appoint the Property Trustee which shall
hold legal title to the Subordinated Debentures in trust for the benefit of
the holders of the Trust Securities and the several Administrative Trustees
who shall have the power, duty and authority to cause the Trust to issue and
sell the Trust Securities and to execute any documents or certificates
necessary to effectuate such issuance and sale. The Delaware Trustee shall be
a Trustee for the sole and limited purpose of fulfilling the statutory
requirements of Section 3807 of the Delaware Business Trust Act and shall have
no authority to take any action except as required under the Delaware Business
Trust Act. The Delaware Trustee, Property Trustee and Administrative Trustees
are collectively referred to herein as the "Issuer Trustees."

The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. The Trust exists for the exclusive purposes of (i) issuing the
Preferred Securities offered hereby representing preferred undivided
beneficial interests in the assets of the Trust, (ii) issuing the Common
Securities representing common undivided beneficial interests in the assets of
the Trust to the Company, (iii) investing the gross proceeds of the sale of
the Trust Securities in the Subordinated Debentures, and (iv) engaging in only
those other activities necessary, advisable, or incidental thereto. The
Subordinated Debentures will be the only assets of the Trust and payments on
the Subordinated Debentures will be the only revenue of the Trust. The
Subordinated Debentures will be issued by the Company pursuant to the
Indenture.

continuance of an Event of Default under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Preferred Securities. See "Description of the Preferred
Securities--Subordination of Common Securities."

The Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The principal executive offices of the Trust are located
at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number
at such address is (205) 951-4000. It is anticipated that the Trust will be
conditionally exempted from the reporting requirements of the Exchange Act.

ACCOUNTING TREATMENT

The Trust will be treated, for financial reporting purposes, as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The Preferred Securities
will be presented as a separate line item in the consolidated balance sheet of
the Company under the caption "Guaranteed Preferred Beneficial Interests in
the Company's Subordinated Debentures," and appropriate disclosures about the
Preferred Securities, the Guarantee and the Subordinated Debentures will be
included in the notes to the Company's consolidated financial statements.

All future reports of the Company filed under the Exchange Act will (i)
present the Trust Securities issued by the Trust on the balance sheet as a
separate line item entitled "Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures," (ii) include in a note to the financial
statements disclosure that the sole assets of the Trust are the Subordinated
Debentures (including the outstanding principal amount, interest rate and
maturity date of such Subordinated Debentures), and (iii) include in a note to
the financial statements disclosure that the Company owns all of the Common
Securities of the Trust, the sole assets of the Trust are the Subordinated
Debentures, and the back-up obligations, in the aggregate constitute a full
and unconditional guarantee by the Company of the obligations of the Trust
under the Preferred Securities.

USE OF PROCEEDS

The proceeds from the sale of the Preferred Securities offered hereby will
be used by the Trust to purchase the Subordinated Debentures from the Company.
The net proceeds to the Company from the sale of Subordinated Debentures
offered hereby are estimated to be approximately $28.6 million ($32.9 million
if the Underwriter's over-allotment option is exercised in full), after
deducting the underwriting commission and estimated offering expenses. The
Company intends to use the net proceeds to repay approximately $5.0 million
drawn down under a revolving line of credit and $5.0 million payable on a term
note with a commercial lender each of which bears interest at a rate equal to
LIBOR plus 2%. The balance will be used for general corporate purposes,
including, but not limited to, increasing the size of the loan and servicing
portfolios, funding an anticipated common stock repurchase program with a view
towards making an election to be treated as an "S-corporation" under the Code
and reducing other long-term debt and short-term borrowings of the Company
and/or New South. The precise amount and timing of the application of such
proceeds will depend on the funding requirements of and availability of other
funds to the Company. Pending such application by the Company, such net
proceeds may be temporarily invested in short-term interest-bearing
securities. See "The Company," "Business--Funding Activities" and "Business--
Potential S-election."

The OTS imposes certain capital adequacy requirements on the Company's
thrift subsidiary, New South. To the extent the Company contributes a portion
of the net proceeds received from the sale of the Preferred Securities to New
South, such proceeds would qualify as Tier 1 capital of New South under the
current capital adequacy guidelines of the OTS. Under current policy, the OTS
does not impose any capital adequacy requirements on the Company itself.
Moreover, the Company is not regulated by the Federal Reserve and is not
subject to the Federal Reserve's risk based capital adequacy guidelines. If,
however, the Company were to become subject to the capital adequacy guidelines
of either the Federal Reserve or OTS, it is expected that most of the proceeds
of the sale of the Preferred Securities would qualify as Tier 1 capital of the
Company in the absence of a Capital Event. Federal Reserve guidelines for
calculation of Tier 1 capital limit the amount of cumulative preferred stock
(which would include the Preferred Securities) which can be included in Tier 1
capital to 25% of total Tier 1 capital.

RATIOS OF EARNINGS TO FIXED CHARGES

The following table sets forth for the respective periods the ratios of the
Company's consolidated earnings to fixed charges.

NEW SOUTH FEDERAL
SAVINGS BANK NEW SOUTH BANCSHARES, INC.
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, (1) DECEMBER 31, (1)
-------------------- ----------------------------
1993 1994 1995 1996 1997
--------- --------- -------- -------- --------

Ratio of Earnings to Fixed
Charges:
Excluding interest on
deposits............... 4.69x 2.23x 1.65x 1.50x 1.87x
Including interest on
deposits............... 1.31 1.23 1.15 1.12 1.18

The consolidated ratio of earnings to fixed charges has been computed by
dividing income before income taxes and fixed charges by fixed charges. Fixed
charges represent all interest expense (ratios are presented both excluding
and including interest on deposits). Interest expense (other than on deposits)
includes interest on federal funds purchased and securities sold under
agreements to repurchase, Federal Home Loan Bank advances, and other borrowed
funds.

CAPITALIZATION

The following table sets forth the audited consolidated capitalization of
the Company as of December 31, 1997 and as adjusted to give effect to the
consummation of the offering of the Preferred Securities offered hereby and
the application of the net proceeds thereof as if the sale of the Preferred
Securities had been consummated on December 31, 1997. The following should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto included elsewhere herein.

AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- --------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)

Total long-term debt payable......................... $23,420 $13,420
Guaranteed preferred beneficial interests in the
Company's Subordinated Debentures(1)................ 0 30,000
Stockholders' equity:
Common stock $1.00 par value; 1,500,000 authorized
shares; 1,376,956 issued and outstanding.......... 1,377 1,377
Surplus............................................ 38,896 38,896
Unrealized gains on securities available for sale.. 869 869
Retained earnings.................................. 11,172 11,172
----------- -----------
Total stockholders' equity....................... 52,314 52,314
----------- -----------
Total capitalization........................... $ 75,734 $ 95,734
=========== ===========

- --------
(1) See "Accounting Treatment."

SELECTED CONSOLIDATED FINANCIAL DATA

The following information summarizes certain selected consolidated financial
information of New South as of and for its fiscal years ended September 30,
1993 and 1994 and of the Company (which was established in 1994 with a fiscal
year ended December 31) as of and for its fiscal years ended December 31,
1995, 1996 and 1997. The data for the Company, on a consolidated basis, as of
and for its fiscal year ended December 31, 1994, did not differ significantly
from the corresponding data for New South as of and for its fiscal year ended
September 30, 1994. The summary below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included herein.

NEW SOUTH FEDERAL
SAVINGS BANK AS OF
AND FOR THE YEAR ENDED NEW SOUTH BANCSHARES, INC. AS OF AND
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------

PERFORMANCE RATIOS:
Return on average as-
sets.................... 0.99% 0.59% 0.47% 0.31% 0.51%
Return on average equi-
ty...................... 17.01 9.51 6.82 4.42 7.68
Net interest spread..... 2.34 1.99 2.22 2.45 2.67
Net interest margin..... 3.08 2.64 2.65 2.94 3.21
Ratio of average
interest-earning assets
to average interest-
bearing liabilities..... 115.00 114.00 107.58 108.55 109.82
Ratio of noninterest
expense to average
assets.................. 2.37 2.48 2.52 2.84 3.42
Efficiency ratio......... 78.72 75.95 77.70 87.35 77.07
ASSET QUALITY DATA:
Net charge-offs to
average loans, net of
unearned income......... (0.02) 0.09 0.22 0.18 0.21
Nonperforming assets to
total assets............ 1.11 1.36 0.78 1.07 0.94
Nonperforming loans to
total loans, net of
unearned income......... 0.98 1.34 0.69 1.21 1.12
Allowance for possible
loan losses to total
loans, net of unearned
income.................. 0.82 1.25 0.81 0.87 1.01
Allowance for possible
loan losses to total
nonperforming assets.... 59.03 65.23 78.43 60.00 78.97
CAPITAL RATIOS(1):
Tangible capital (Tier 1
to total assets)........ 6.05 6.65 7.24 6.90 6.17
Tier 1 capital (to risk
adjusted assets)........ 9.96 10.32 11.12 10.30 9.51
Total risk-based capital
(to risk adjusted
assets)................. 10.72 11.04 11.78 11.14 10.48

- --------
(1) Capital ratio data for all periods presented are for New South only.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

BASIS OF PRESENTATION

The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto and the other financial data included
elsewhere in this Prospectus. 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 Prospectus.
All tables, graphs, and financial statements included in this report should be
considered an integral part of this analysis.

New South Federal Savings Bank ("New South") is the primary subsidiary of
New South Bancshares, Inc. (the "Company"). The Company is a unitary thrift
holding company formed in November of 1994. Prior to the formation of the
Company and its subsequent purchase of New South, New South's fiscal year end
was September 30. For the purposes of the five year comparisons presented
herein, New South's financial information has been included for the twelve
month periods ended September 30, 1993 and 1994. The Company's fiscal year end
is December 31. Information for the Company is presented for the calendar
years ended December 31, 1995, 1996 and 1997. In all cases, significant
summary information for the Company for the three month period ended December
31, 1994 is presented as a footnote, or a statement is made that there is no
significant difference between such amounts or ratios and the corresponding
amounts or ratios in the table.

GENERAL

The Company's operations principally involve residential mortgage lending,
installment (automobile) lending residential construction and land lending,
and deposit gathering activities. The Company's residential mortgage lending
efforts involve the origination and purchase of residential mortgage loans
through its loan origination offices and wholesale sources, the sale of such
loans (usually on a pooled and securitized basis) in the secondary market, and
the servicing of residential mortgage loans for investors as well as the
Company's own loan portfolio. The installment (automobile) lending program
involves indirect lending through 600 automobile dealers in six southern
states. The Company's residential construction and land lending efforts
involve making loans to builders for the construction of single family
properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. The Company conducts deposit
gathering activities in a traditional fashion through its two full service
branches located in Birmingham, Alabama, and through a broad range of banking
services. See "Business."

The Company's net income is comprised principally of New South's net
interest income. Net interest income is the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities
used to support such assets. Variations in the volume and mix of assets and
liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. Net income is also affected by the
level of the provision for possible loan losses, noninterest income and
noninterest expense. Noninterest income consists primarily of loan
administration income and origination fees related to mortgage banking
operations, net gain on the sales of securities available for sale, net gain
on the sale of loans, and other income. Noninterest expense consists primarily
of salaries and benefits, net occupancy and equipment expense, loan servicing
fees paid to affiliates, losses on loans serviced, and other expenses.

Loans are the single largest component of the Company's earning assets and
generally have a more favorable return than other categories of earning
assets. The Company's loans, net of unearned income, increased 6.8% from
$681.7 million at December 31, 1996 to $727.9 million at December 31, 1997.
This increase resulted principally from increased originations of conforming
residential mortgage loans as a result of the transfer of 39 residential
mortgage loan production offices from Collateral in the Transfer, effective
July 1, 1997.

Deposits are New South's largest source of funds used to support earning
assets. New South's deposits increased 5.3% from $660.7 million at December
31, 1996 to $695.4 million at December 31, 1997. The growth is primarily due
to increased purchases of brokered deposits during 1997. This increase funded
increased loan originations as well as increased overhead resulting from the
Transfer. The Company has been able to attract deposits by offering nationally
competitive rates.

The Company has also increased its use of FHLB advances as an alternative
low cost funding source. These advances increased from $95.4 million at
December 31, 1996 to $179.4 million at December 31, 1997, and were secured by
a pledge of the Company's residential mortgage portfolio.

In July of 1997, Collateral transferred to New South 39 residential mortgage
loan production offices, associated employees, and related assets and
liabilities. Management believes the Transfer will enable New South to
increase residential mortgage loan production efficiencies while increasing
its loan servicing portfolio. In connection with the Transfer, New South will
make semiannual payments to Collateral through June 30, 2000 based on a
percentage of the aggregate principal balance of all residential mortgage
loans originated through the 39 loan production offices. The percentages for
the twelve month periods ending June 30, 1998, 1999 and 2000 are 0.35%, 0.20%
and 0.10%, respectively.

New South is required by the OTS to meet certain capital requirements. Among
these are minimum leverage, tangible, and risk-based capital ratios.
Historically, New South has consistently exceeded these minimum guidelines. At
December 31, 1997, New South's capital ratios place it in the "well
capitalized" category.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net interest income increased $5.4 million, or 24.1%, from $22.4 million in
1996 to $27.8 million in 1997. The increase resulted from an improvement in
the net interest margin and a higher level of average earning assets. The
improvement in the net interest margin, which increased from 2.94% in 1996 to
3.21% in 1997, primarily resulted from higher rates earned on loans (resulting
in part from changes in the mix of the loan portfolio, specifically increases
in the nonconforming residential mortgage and non-prime installment
(automobile) loans) coupled with stable funding costs. The growth in average
earning assets, which increased from $762.0 million in 1996 to $866.1 million
in 1997, primarily resulted from the transfer of the 39 residential mortgage
loan production offices from Collateral effective July 1, 1997.

The provision for possible loan losses increased $462,000, or 18.5%, from
$2.5 million in 1996 to $3.0 million in 1997. The allowance for possible loan
losses as a percentage of total loans, net of unearned income increased from
0.87% at December 31, 1996 to 1.01% at December 31, 1997. Changes in the mix
of the loan portfolio, specifically increases in the nonconforming residential
mortgages and non-prime installment (automobile) loans, contributed to the
increased provision. Nonperforming assets as a percentage of loans, net of
unearned income and foreclosed properties were 1.44% and 1.27% at December 31,
1996 and 1997, respectively. The allowance for possible loan losses as a
percentage of total nonperforming assets was 60.0% and 79.0% at December 31,
1996 and 1997, respectively.

Noninterest income increased $7.0 million, or 84.0%, from $8.3 million in
1996 to $15.3 million in 1997. This increase was primarily due to increased
gain on sales of loans and origination fees. Gain on sale of loans increased
$4.6 million from 1996 to 1997, primarily due to a $1.8 million gain on
securitization of $215 million in nonconforming residential mortgage loans in
August of 1997 and $1.9 million in servicing release fees on the sale of
residential mortgage loans during 1997. Origination fees increased $3.2
million and other income increased $1.5 million due primarily to the transfer
of the 39 residential mortgage loan origination offices from Collateral
effective July 1, 1997.

Noninterest expense increased $8.3 million, or 35.6%, from $23.2 million in
1996 to $31.4 million in 1997. During the third quarter of 1996, the Company
incurred a one-time assessment due to federal government legislation to
recapitalize the SAIF. Excluding the Company's one-time SAIF assessment of
$3.2 million in 1996, total noninterest expense in 1997 increased $11.5
million, or 57.4%. Significant contributors to this increase were increases in
salaries and benefits of $8.6 million and increases in net occupancy and
equipment expense of $1.2 million. These increases are attributable primarily
to the transfer of the loan production offices and personnel from Collateral
in the Transfer. As a part of the Transfer, several key employees moved from
Collateral's payroll to New South's. Also contributing to the increase in
noninterest expense was an increase in other noninterest expense of $3.8
million, including $891,000 paid to Collateral pursuant to the Transfer and
other general and administrative expense increases associated with the
Transfer.

Net income increased $2.2 million, or 84.1%, from $2.6 million (or $1.84 per
share) in 1996, to $4.7 million (or $3.42 per share) in 1997. Increased net
interest income and growth in noninterest income were the primary reasons for
the growth in earnings. Excluding the after tax effect of the one-time SAIF
assessment in 1996 of $1.9 million, net income for 1997 increased $254,000.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Net interest income increased $4.8 million, or 27.6%, from $17.5 million in
1995 to $22.4 million in 1996. The increase resulted from an improvement in
the net interest margin and a higher level of average earning assets. The
improvement in the net interest margin, which increased from 2.65% in 1995 to
2.94% in 1996, primarily resulted from higher rates earned on loans (resulting
in part from changes in the mix of the loan portfolio, specifically increases
in the nonconforming residential mortgage and non-prime installment
(automobile) loans) and mortgage backed securities available for sale coupled
with stable funding costs. The growth in average earning assets, which
increased from $660.7 million in 1995 to $762.0 million in 1996, primarily
resulted from internal loan growth.

The provision for possible loan losses increased $1.9 million from $572,000
in 1995 to $2.5 million in 1996. The allowance for possible loan losses as a
percentage of total loans, net of unearned income increased from 0.81% at
December 31, 1995 to 0.87% at December 31, 1996. Growth in the loan portfolio,
changes in the mix of the loan portfolio, specifically increases in the
nonconforming residential mortgages and non-prime installment (automobile)
loans, and increases in nonperforming loans each contributed to the increased
provision. Nonperforming assets as a percentage of loans, net of unearned
income and foreclosed properties were 1.03% and 1.44% at December 31, 1995 and
1996, respectively, reflecting an industry trend.

Noninterest income increased $1.7 million, or 24.9%, from $6.7 million in
1995 to $8.3 million in 1996. The primary contributor to this increase was
gain on sale of investment securities available for sale, which increased $1.2
million from 1995 to 1996.

Noninterest expense increased $5.2 million, or 28.7%, from $18.0 million in
1995 to $23.2 million in 1996. Excluding the Company's one-time SAIF
assessment of $3.2 million in 1996, total noninterest expense increased $2.0
million, or 10.9%. The primary contributor to the increase was salaries and
benefits expense, which increased $2.1 million from 1995 to 1996, due to the
addition of approximately 40 full-time employees, normal compensation
increases, and enhancements to the bonus program necessary to support the
Company's continuing growth.

The Company's net income decreased $804,000, or 23.9%, from $3.4 million (or
$2.42 per common share) in 1995 to $2.6 million (or $1.84 per common share) in
1996. Excluding the after tax effect of the one-time SAIF assessment of $1.9
million in 1996, net income increased 32.6%, from $3.4 million in 1995 to $4.5
million in 1996. Increased net interest income and average earning assets were
the primary reasons for the growth in earnings.

NET INTEREST INCOME

General

Net interest income is determined by the yields earned on the Company's
interest-earning assets and the rates paid on its interest-bearing
liabilities, the relative amounts of interest-earning assets and interest-
bearing liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing
liabilities. Net interest income divided by average earning assets represents
the Company's net interest margin.

Average Balances, Income, Expenses and Rates

The following table sets forth, for the periods and entities indicated,
certain information related to the Company's average balance sheet and its
average yields on assets and average costs of liabilities. Such yields 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, EXPENSES AND RATES

AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ ------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)

ASSETS
Loans, net of unearned
income................ $552,698 $47,072 8.52% $654,607 $57,395 8.77% $713,935 $64,831 9.08%
Federal funds sold..... 3,067 192 6.26 3,572 216 6.05 6,512 381 5.85
Mortgage-backed
securities............ 80,013 5,545 6.93 77,506 5,603 7.23 105,536 7,436 7.05
Other investments...... 24,915 2,255 9.05 26,267 2,321 8.84 40,129 2,843 7.08
-------- ------- -------- ------- -------- -------
Total earning assets... 660,693 55,064 8.33 761,952 65,535 8.60 866,112 75,491 8.72
Securities under
repurchase
agreements............ 6,045 5,024 2,129
Allowance for possible
loan losses........... (4,754) (4,835) (6,489)
Noninterest bearing
assets................ 52,515 53,394 55,887
-------- -------- --------
Total assets........... $714,499 $815,535 $917,639
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other interest bearing
deposits.............. $ 3,140 $ 107 3.41% $ 3,162 $ 161 5.09% $ 3,517 $ 126 3.58%
Savings deposits....... 51,716 2,295 4.44 50,561 2,275 4.50 58,806 2,595 4.41
Time deposits.......... 423,592 26,441 6.24 488,629 30,604 6.26 571,221 35,011 6.13
Other borrowings....... 36,707 2,678 7.30 35,502 2,707 7.62 41,624 3,149 7.57
Federal Home Loan Bank
advances.............. 99,005 6,002 6.06 124,093 7,411 5.97 113,512 6,842 6.03
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities........... 614,160 37,523 6.11 701,947 43,158 6.15 788,680 47,723 6.05
---- ---- ----
Noninterest bearing
deposits.............. 45,006 48,932 57,037
Accrued expenses and
other liabilities..... 6,003 6,636 10,539
Total stockholders'
equity................ 49,330 58,020 61,383
-------- -------- --------
Total liabilities and
stockholders' equity.. $714,499 $815,535 $917,639
======== ======== ========
Net interest spread.... 2.22% 2.45% 2.67%
==== ==== ====
Net interest income.... $17,541 $22,377 $27,768
======= ======= =======
Net interest margin.... 2.65% 2.94% 3.21%
==== ==== ====

Analysis of Changes in Net Interest Income

The following table sets forth the effect which the varying level of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income from 1995 to 1996 and 1996 to
1997.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 COMPARED TO 1996 1996 COMPARED TO 1997
CHANGE DUE TO CHANGE DUE TO
--------------------------- --------------------------
AVERAGE AVERAGE
YIELD/RATE BALANCE NET YIELD/RATE BALANCE NET
---------- ------- ------- ---------- ------- ------
( IN THOUSANDS)

EARNINGS ASSETS
Total loans, net of
unearned income(1)..... $1,604 $8,719 $10,323 $2,101 $5,335 $7,436
Federal funds sold...... (8) 32 24 (7) 172 165
Mortgage-backed
securities............. 266 (208) 58 (138) 1,971 1,833
Other investments....... (59) 125 66 (314) 836 522
------ ------ ------- ------ ------ ------
Total interest in-
come................. 1,803 8,668 10,471 1,642 8,314 9,956
INTEREST BEARING
LIABILITIES
Other interest bearing
deposits............... 53 1 54 (56) 21 (35)
Savings deposits........ 31 (50) (19) (43) 363 320
Time deposits........... 103 4,060 4,163 (639) 5,046 4,407
Other borrowings........ 135 (106) 29 (21) 463 442
Federal Home Loan Bank
advances............... (114) 1,522 1,408 69 (638) (569)
------ ------ ------- ------ ------ ------
Total interest
expense.............. 208 5,427 5,635 (690) 5,255 4,565
------ ------ ------- ------ ------ ------
Net interest income..... $1,595 $3,241 $ 4,836 $2,332 $3,059 $5,391
====== ====== ======= ====== ====== ======

- --------
(1) Loans, net of unearned income includes nonaccrual loans for all years
presented.

Interest Sensitivity

Through policies established by an asset/liability management committee
formed by New South's Board of Directors, the Company monitors and manages the
repricing and maturity of its assets and liabilities in order to diminish the
potential adverse impact that changes in interest rates could have on its net
interest income. The asset/liability management committee 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 OTS by
virtue of the Company's asset size. The Company also utilized the Black-
Scholes model to determine the effect of 300 possible interest rate scenarios
on the Company's net interest income. Throughout 1996 and 1997, New South's
asset/liability management committee met 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 interest rate margin and net
income.

In general, the Company is a liability sensitive institution, meaning that
the Company is more negatively impacted by increases in interest rates and
benefits from decreases in interest rates. The Company's interest rate risk
management model indicates that projected net interest income would decrease
by 9.7% assuming an instantaneous increase in interest rates of 200 basis
points, or decrease by 1.9%, assuming an instantaneous decrease of 200 basis
points. All measurements of interest rate risk sensitivity fall within
guidelines established by New South's Board of Directors.

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 (i) a review of creditworthiness of the counterparties to such
contracts, (ii) Board established credit limits for each counterparty, and
(iii) monitoring by the asset/liability management committee.

At December 31, 1997, New South had interest rate swap contracts with
notional amounts totaling $125 million. Of these, $80 million were variable-
for-fixed swap contracts designated as hedges against New South's loan
portfolio. These contracts effectively convert $80 million in variable rate
funding to a fixed rate, thus reducing the impact of an upward movement in
interest rates on the net interest margin.

The Company entered into an additional $45 million in fixed-for-variable
swaps concurrent with the issuance of $45 million in brokered certificates of
deposit. These swaps reduce the current cost of these liabilities, and convert
them to an adjustable rate. These swaps are callable at the option of the
counterparty. If called, the Company holds the right to call the certificates
of deposits.

In addition, New South had $305 million in interest rate cap contracts
outstanding at December 31, 1997. As discussed above, the Company is exposed
to rising liability costs due to the nature of its liability portfolio. The
interest rate cap contracts serve as hedges against increases in costs of
liabilities. As of December 31, 1997, only one of these contracts had reached
its strike rate, and an immaterial amount of income was received per the
contract.

The following table sets forth the Company's interest rate contract activity
for the years 1995, 1996 and 1997.

INTEREST RATE SWAPS AND CAPS

INTEREST RATE SWAPS
---------------------
INTEREST
RECEIVED PAY RATE
FIXED FIXED CAPS TOTAL
--------------------- -------- --------
(IN THOUSANDS)

Balance at January 1, 1995........ $ -- $ 55,000 $ -- $ 55,000
Additions......................... -- 80,000 40,000 120,000
Maturities........................ -- (5,000) (5,000)
--------- ---------- -------- --------
Balance at December 31, 1995...... -- 130,000 40,000 170,000
Additions......................... -- -- 175,000 175,000
Maturities........................ -- (10,000) -- (10,000)
--------- ---------- -------- --------
Balance at December 31, 1996...... -- 120,000 215,000 335,000
Additions......................... 45,000 -- 90,000 135,000
Maturities........................ -- (40,000) -- (40,000)
--------- ---------- -------- --------
Balance at December 31, 1997...... $ 45,000 $ 80,000 $305,000 $430,000
========= ========== ======== ========

The following table sets forth the relative maturities and interest rates
related to interest rate contracts outstanding at December 31, 1997.

MATURITIES ON CAPS AND INTEREST RATES EXCHANGED ON SWAPS

YEAR OF MATURITY
--------------------------------------------
2002 &
1998 1999 2000 2001 AFTER TOTAL
------- -------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)

Notional amount of pay
fixed swaps............ $40,000 $ 15,000 $25,000 $ -- $ -- $ 80,000
Receive rate
variable............. 5.78% 5.84% 5.88% -- % -- % 5.82%
Pay rate fixed........ 6.11 5.70 5.99 -- -- 6.00
Notional amount of
receive fixed swap..... $ -- $ -- $ -- $ -- $45,000 $ 45,000
Receive rate fixed.... -- % -- % -- % -- % 6.97% 6.97%
Pay rate variable..... -- -- -- -- 5.77 5.77
Caps
Notional amount....... $40,000 $105,000 $50,000 $70,000 $40,000 $305,000

The Company also enters into forward commitments to sell loans based on the
interest rates of loans currently in the Company's pipeline. This reduces the
impact of future changes in market rates on the value of those loans upon
delivery. All forward commitments are considered in the lower of cost or
market valuation for residential mortgage loans held for sale.

PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

General

Management establishes allowances for the purpose of absorbing possible
losses that may exist within the loan portfolio and that may be expected to
occur based on management's review of the economy, historical losses,
underwriting standards, changes in the composition of the loan portfolio, and
other factors. The allowance for possible loan losses is maintained at a level
considered adequate to provide for potential 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 possible loan losses, which are expensed as
the provision for possible 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 potential 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 level of nonperforming loans, and current
and anticipated economic conditions.

The Company's allowance for possible 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 possible loan losses includes management's identification
and analysis of loss potential in various portfolio segments using a credit
grading process and specific reviews and evaluations of significant problem
credits. In addition, management monitors the overall portfolio quality
through observable trends in delinquency, charge-offs, and general and
economic conditions in the service area. The adequacy of the allowance for
possible loan losses and the effectiveness of the Company's monitoring and
analysis system are also reviewed periodically by the banking regulators and
the Company's independent auditors.

Based on present information and an ongoing evaluation, management considers
the allowance for possible 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 possible loan losses or that additional increases in the
allowance for possible loan losses will not be required.

The following table sets forth certain information with respect to the
Company's allowance for possible loan losses and the composition of charge-
offs and recoveries for each of the last five reporting periods.

ALLOWANCE FOR POSSIBLE LOAN LOSSES(1)

NEW SOUTH FEDERAL
SAVINGS BANK AS OF NEW SOUTH BANCSHARES, INC.
AND FOR THE YEAR AS OF AND FOR THE YEAR
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
-------------------- ----------------------------
1993 1994 1995 1996 1997
--------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Loans net of unearned
income, outstanding at end
of period................. $ 496,569 $ 407,555 $561,611 $681,730 $727,854
========= ========= ======== ======== ========
Average loans net of
unearned income........... $ 465,911 $ 505,106 $552,698 $654,607 $713,935
========= ========= ======== ======== ========
Balance of allowance for
possible loan losses at
beginning of period....... $ 2,952 $ 4,056 $ 5,189 $ 4,562 $ 5,904
LOANS CHARGED OFF:
Residential mortgage...... (143) (74) (177) (131) (40)
Installment............... (463) (444) (448) (1,479) (2,159)
Commercial real estate.... 0 (186) (813) 0 0
--------- --------- -------- -------- --------
Total charge-offs....... (606) (704) (1,438) (1,610) (2,199)
--------- --------- -------- -------- --------
RECOVERIES OF LOANS
PREVIOUSLY CHARGED OFF:
Residential mortgage...... 38 21 64 8 14
Installment............... 186 194 173 400 660
Commercial real estate.... 461 37 2 52 0
--------- --------- -------- -------- --------
Total recoveries........ 685 252 239 460 674
--------- --------- -------- -------- --------
Net recoveries/(charge-
offs)..................... 79 (452) (1,199) (1,150) (1,525)
Addition to allowance
charged to expense........ 1,025 1,485 572 2,492 2,954
--------- --------- -------- -------- --------
Balance of allowance for
possible loan losses at
end of period............. $ 4,056 $ 5,089 $ 4,562 $ 5,904 $ 7,333
========= ========= ======== ======== ========
Allowance for possible loan
losses to period end loans
net of unearned income.... 0.82% 1.25% 0.81% 0.87% 1.01%
Net charge-offs to average
loans net of unearned
income.................... (0.02) 0.09 0.22 0.18 0.21

- --------
(1) New South changed its fiscal year end from September 30 to December 31 in
November of 1994 (upon the formation of the Company). Amounts shown for
1993 and 1994 relate to New South only. Amounts for 1995 and thereafter
relate to the Company on a consolidated basis. Amounts for the Company as
of December 31, 1994 did not differ significantly from the corresponding
amounts for New South as of September 30, 1994 presented above. For the
three month period ended December 31, 1994, total charge offs were
$45,000. Total recoveries were $55,000, and additions to the allowance
charged to expense were $90,000. There were no charge offs or recoveries
in the residential construction and land or commercial portfolios for any
of the periods above.

The following table sets forth the components of the allowance for possible
loan losses related to the primary segment of the Company's loan portfolio.
All loan amounts are net of unearned income.

ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES(1)

NEW SOUTH FEDERAL SAVINGS BANK AS OF
SEPTEMBER 30, NEW SOUTH BANCSHARES, INC. AS OF DECEMBER 31,
1993 1994 1995 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)

Residential
mortgage......... $ 616 65.96% $ 500 56.05% $ 875 62.95% $1,385 61.08% $2,373 52.67%
Installment
(automobile)..... 154 4.73 348 2.81 535 6.32 1,310 10.38 1,651 13.29
Residential
construction and
land............. 0 1.50 0 3.34 0 5.51 499 6.96 499 12.08
Commercial
real estate...... 3,286 27.71 4,241 37.09 3,152 25.14 2,710 21.52 2,810 21.76
Commercial........ 0 0.10 0 0.11 0 0.07 0 0.06 0 0.20
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. $4,056 100.00% $5,089 100.00% $4,562 100.00% $5,904 100.00% $7,333 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======

Nonperforming Assets

The following table sets forth the Company's nonperforming assets for the
dates indicated.

NONPERFORMING ASSETS(2)

NEW SOUTH FEDERAL NEW SOUTH BANCSHARES,
SAVINGS BANK INC.
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
------------------ -------------------------
1993 1994 1995 1996 1997
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)

Nonaccrual loans(1)............. $ 4,883 $ 5,468 $ 1,639 $ 6,168 $ 6,065
Restructured loans.............. -- -- 2,241 2,088 2,062
-------- -------- ------- ------- -------
Total nonperforming loans...... 4,883 5,468 3,880 8,256 8,127
-------- -------- ------- ------- -------
Foreclosed properties........... 1,988 2,334 1,937 1,585 1,159
Total nonperforming assets..... $ 6,871 $ 7,802 $ 5,817 $ 9,841 $ 9,286
======== ======== ======= ======= =======
Nonperforming assets
to period end loans, net of
unearned
income, and foreclosed
properties..................... 1.38% 1.91% 1.03% 1.44% 1.27%

- --------
(1) Includes all loans contractually past due 90 days or more as to principal
and interest.
(2) New South changed its fiscal year end from September 30 to December 31 in
November of 1994 (upon the formation of the Company). Amounts shown for
1993 and 1994 relate to New South only. Amounts for 1995 and thereafter
relate to the Company on a consolidated basis. Amounts for the Company as
of December 31, 1994 did not differ significantly from the corresponding
amounts for New South as of September 30, 1994 presented above.

Management closely monitors loans and other assets which are classified as
nonperforming assets. Nonperforming assets include non-accrual loans,
restructured loans, foreclosed properties and repossessions. Management
utilizes tracking and monitoring systems to identify potential problem assets
within all lending portfolios. It is the Company's policy to place on non-
accrual status any loan that is contractually 90 days or more past due with
respect to principal or interest. When a loan is placed in nonaccrual status,
all accrued but unpaid interest is reversed and deducted from interest income.
No additional interest is accrued on the loan balance until collection of both
principal and interest is reasonably certain.

The amount of interest income earned in 1997 on the $6.1 million of
nonaccruing loans outstanding at year end was approximately $340,000. If these
loans had been current in accordance with their original terms, approximately
$571,000 would have been earned on these loans in 1997. Additional interest
income of approximately $249,000 would have been earned in 1997 under the
original terms of the $2.1 million in restructured loans outstanding at
December 31, 1997. Approximately $183,000 in interest income was actually
earned in 1997 on these loans, due in part to recognition of interest foregone
in prior years.

Total nonperforming assets as a percentage of loans net of unearned income
and foreclosed properties has decreased from 1.44% at December 31, 1996 to
1.27% at December 31, 1997. The decrease is primarily due to lower levels of
foreclosed properties and stable nonperforming loans in a growing loan
portfolio.

The improvement in foreclosed properties is due to the Company's focus on
the timely disposition of foreclosed assets. During 1996, the Company
intensified efforts to identify earlier, and increase contact with, potential
delinquent customers, while enhancing collection efforts with existing
delinquent accounts. The net result is a trend of decreasing foreclosed
properties in 1996 and 1997. Foreclosed properties have decreased from $1.6
million at December 31, 1996 to $1.2 million at December 31, 1997, a decrease
of 26.9%.

The following table sets forth nonperforming loans and net charge-off
information by portfolio segment for the years presented.

NONPERFORMING LOANS AND NET CHARGE-OFFS(1)

NONPERFORMING LOANS AS OF DECEMBER NET CHARGE-OFFS AS OF DECEMBER
31, 31,
----------------------------------- ----------------------------------
1996 1997 1996 1997
----------------- ----------------- ----------------- ----------------
% OF % OF % OF % OF
AVERAGE AVERAGE AVERAGE AVERAGE
LOANS PER LOANS PER LOANS PER LOANS PER
BALANCE CATEGORY BALANCE CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------- --------- ------- --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)

Residential mortgage.... $6,001 1.39% $5,514 1.29% $ 123 0.03% $ 26 0.01%
Installment
(automobile)........... 167 0.32 524 0.69 1,079 2.07 1,499 1.98
Commercial real estate.. 2,088 1.56 2,062 1.52 (52) (0.04) -- 0.00
Commercial.............. -- 0.00 27 1.29 -- 0.00 -- 0.00
------ ------ ------ ------
Total.................. $8,256 1.26 $8,127 1.14 $1,150 0.18 $1,525 0.21
====== ====== ====== ======

(1) New South changed its fiscal year end from September 30 to December 31 in
November of 1994 (upon the formation of the Company). Amounts shown for
1993 and 1994 relate to New South only. Amounts for 1995 and thereafter
relate to the Company on a consolidated basis. Amounts for the Company as
of December 31, 1994 did not differ significantly from the corresponding
amounts for New South as of September 30, 1994 presented above. There were
no nonperforming loans or net charge-offs in the residential construction
and land portfolio for the periods presented above.

Total nonperforming loans remained stable from December 31, 1996 to December
31, 1997.

Total nonperforming loans increased from $3.9 million at December 31, 1995
to $8.3 million at December 31, 1996. This increase is attributable to
increases in nonperforming residential mortgage loans. Nonconforming
residential mortgage loans, which generally have a higher risk of loss than
conforming residential mortgage loans, increased from 13.7% of loans, net of
unearned income at December 31, 1995 to 29.8% of loans, net of unearned income
at December 31, 1996.

NONINTEREST INCOME AND EXPENSE

Noninterest Income

Noninterest income consists primarily of mortgage banking activities,
including sales of loans, origination fees, and servicing fees; and gains
(losses) on securities sales.

The following table sets forth, for the periods indicated, the principal
components of noninterest income.

NONINTEREST INCOME

YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)

Loan administration income....................... $ 4,547 $ 4,870 $ 4,915
Origination fees................................. 300 540 3,722
Gain/(loss) on sale of investment securities
available for sale.............................. 464 1,689 (645)
Gain on sale of loans............................ 629 457 5,079
Other income..................................... 726 769 2,243
------- ------- --------
Total noninterest income....................... $ 6,666 $ 8,325 $ 15,314
======= ======= ========

During 1997, loan origination fees totaled $3.7 million, an increase of $3.2
million from 1996. This increase is attributable to the transfer of the 39
residential mortgage loan production offices from Collateral in the Transfer.

The Company sells a substantial portion of its originated loans into the
secondary market, principally by securitizing pools of loans and through sales
to private investors. Generally, New South retains all or a portion of the
servicing rights of the loans that it sells. These periodic sales have been
used to build a servicing portfolio while generating cash to fund new loans.

Gain on sales of loans totaled $5.1 million in 1997, a $4.6 million increase
from $457,000 in 1996. In August of 1997, the Company issued a securitization
of $215 million nonconforming residential mortgage loans in a FHLMC Real
Estate Mortgage Investment Conduit ("REMIC"). This transaction helped build
the servicing portfolio while generating cash to fund new loans. The sale
transaction, and related servicing assets created thereby, resulted in a gain
of $1.8 million. Additional sales of residential mortgage loans on a servicing
released basis as a result of the Transfer resulted in gain on sale of $1.9
million.

Servicing income is another significant component of noninterest income. The
following table sets forth, for the periods indicated, loans serviced for
others.

LOANS SERVICED FOR OTHERS

AS OF DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)

Government National Mortgage Association......... $317,326 $265,475 $261,581
Federal Home Loan Mortgage Corporation........... 71,932 114,612 188,463
Federal National Mortgage Association............ 78,419 94,196 88,038
Other investors.................................. 248,987 316,490 461,531
-------- -------- --------
Total loans serviced for others................ $716,664 $790,773 $999,613
======== ======== ========

Other noninterest income increased $1.5 million from 1996 to 1997. A portion
of this increase is due to underwriting fees of $392,000 earned after the
transfer of the 39 residential mortgage loan production offices transferred by
Collateral. Gain on sales of foreclosed properties increased $203,000 largely
due to increased foreclosure activity, timely dispositions, and more extensive
use of competitive bidding to maximize profits. In addition, office rental
property was sold to an affiliate for a gain of $158,000 during 1997.

Noninterest Expense

Noninterest expense consists primarily of salaries and benefits, occupancy
and equipment costs, servicing fees paid to Collateral pursuant to the
Subservicing Agreement covering all conforming residential mortgage loans for
which New South holds the mortgage servicing rights, and other noninterest
expenses.

The following table sets forth, for the periods indicated, the principal
components of noninterest expense.

NONINTEREST EXPENSE

YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)

Salaries and benefits............................... $ 5,371 $ 7,424 $16,024
Net occupancy and equipment expense................. 1,009 799 1,955
Loan servicing fees paid to affiliates.............. 3,584 3,468 3,642
Loss on loans serviced.............................. 1,694 1,271 1,423
Federal Deposit Insurance Corporation premium....... 1,114 4,368 418
Management fees paid to affiliates.................. 1,704 1,704 --
Other expense....................................... 3,528 4,132 7,960
------- ------- -------
Total noninterest expense......................... $18,004 $23,166 $31,422
======= ======= =======

The most significant contributor to the overall increase in total
noninterest expenses during 1997 was the transfer of 39 residential mortgage
loan production offices from Collateral. As a result of the Transfer, New
South added approximately 300 employees to its payroll and assumed occupancy
costs related to the 39 loan production offices. The additional employees
included senior management and other support employees. Primarily as a result
of the Transfer, salaries and benefits expense and net occupancy and equipment
expense increased $8.6 million and $1.2 million, respectively, from 1996 to
1997.

Due to offsetting expenses owed to Collateral for services prior to the
Transfer, no management fees were due from Collateral in 1997. Had offsetting
expenses not been incurred, amounts payable from Collateral would have been
$282,272. See "Certain Relationships and Related Transactions."

Other noninterest expenses increased $3.8 million, or 92.6%, from 1996 to
1997. Fees on originated loans paid in 1997 to Collateral under the terms of
an agreement related to the Transfer totaled $891,000. Other expense increases
that are attributable to the Transfer, in whole or in part, include telephone
expenses of $320,000, professional fees of $163,000, travel expenses of
$125,000, outside loan brokerage fees of $160,000, computer fees of $160,000,
and postage of $379,000. In addition, the Company began its first mass media
advertising campaign in 1997. Total expenses for the advertising campaign were
$395,000.

In 1996, total noninterest expense increased $5.2 million, or 28.7%, from
1995. Excluding the one-time pre-tax SAIF assessment of $3.2 million in 1996,
total noninterest expense increased $2.0 million, or 10.9%. Salaries and
benefits expense increased $2.1 million, or 38.2% from 1995 to 1996 due to the
addition of approximately 40 full time employees during 1996, normal
compensation increases, and enhancements to the bonus program.

EARNING ASSETS

Loans

Loans are the single largest category of earning assets and typically
provide higher yields than other categories. Total loans net of unearned
income increased 6.8%, from $681.7 million at December 31, 1996 to $727.9
million at December 31, 1997.

The following table sets forth the composition of the loan portfolio by
category at the dates indicated.

LOANS BY CATEGORY(1)

NEW SOUTH FEDERAL
SAVINGS BANK NEW SOUTH BANCSHARES
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------- --------------------------
1993 1994 1995 1996 1997
--------- --------- -------- -------- --------
(IN THOUSANDS)

Residential mortgage
Conforming.................... $ 295,633 $ 222,773 $278,749 $214,865 $252,568
Nonconforming................. 37,927 9,726 77,106 203,405 132,700
--------- --------- -------- -------- --------
Total residential mortgage
loans...................... 333,560 232,499 355,855 418,270 385,268
Installment (automobile)
Prime(2)...................... 23,493 10,626 29,769 61,323 84,769
Non-prime..................... 0 815 5,749 9,668 12,147
--------- --------- -------- -------- --------
Total installment
(automobile) loans......... 23,493 11,441 35,518 70,991 96,916
Residential construction and
land........................... 7,467 13,602 30,941 47,423 87,889
Commercial real estate.......... 137,601 153,612 141,196 146,700 158,377
Commercial...................... 475 472 408 403 1,467
--------- --------- -------- -------- --------
Total loans................. 502,596 411,626 563,918 683,787 729,917
Less unearned income............ 6,027 4,071 2,307 2,057 2,063
--------- --------- -------- -------- --------
Loans net of unearned
income..................... $ 496,569 $ 407,555 $561,611 $681,730 $727,854
========= ========= ======== ======== ========

- --------
(1) New South changed its fiscal year end from September 30 to December 31 in
November of 1994 (the formation of the Company). Amounts shown for 1993
and 1994 relate to New South only. Amounts for 1995 and thereafter relate
to the Company on a consolidated basis. Amounts for the Company as of
December 31, 1994 did not differ significantly from the corresponding
amounts for New South as of September 30, 1994 presented above.
(2) Includes certain other non-automobile installment loans. See "Business."

The principal component of the Company's loan portfolio is residential
mortgage loans. At December 31, 1997, residential mortgage loans comprised
52.9% of the total loan portfolio, compared to 61.4% of the total loan
portfolio at December 31, 1996. This decrease is primarily due to the August
1997 REMIC securitization and growth in other loan categories, specifically
installment (automobile), commercial real estate, and residential construction
and land.

Residential mortgage loans consist of conforming loans, which are originated
primarily through the Company's loan production offices, and nonconforming
loans, which are originated primarily through correspondent relationships or
through the Company's retail branch network. Generally, conforming residential
mortgage loans adhere to FNMA, FHLMC, or GNMA underwriting requirements.
Nonconforming residential mortgage loans typically do not exceed the standard
agency maximum loan size guidelines, but the borrower may fail to meet one or
more other guidelines relating to creditworthiness, such as acceptable debt
ratios and acceptable consumer loan payment delinquencies. See "Business--
Residential Mortgage Lending."

Installment (automobile) loans consist almost exclusively of automobile
lending. Most of these loans are originated on an indirect basis through a
network of over 600 automobile dealers located in Alabama, Georgia,

Florida, Tennessee, Mississippi, and Texas. Dealers are selected based on
their financial history and other references. The majority of New South's
installment (automobile) loans are considered to be "prime" loans by industry
standards. New South does offer a nonprime product to certain qualifying
consumers who report credit bureau scores slightly below the "prime" threshold
due to minor delinquencies on certain accounts. See "Business--Installment
(Automobile) Lending."

As a percentage of loans, net of unearned income, total installment
(automobile) loans increased from 10.4% at December 31, 1996 to 13.3% at
December 31, 1997. This growth is the result of the Company's strategy to
increase this portfolio through additional relationships with new dealers in
new markets and the marketing of the nonprime lending program in the dealer
network.

The Company originates and purchases residential mortgage and installment
(automobile) loans with the idea that they may be sold based on liquidity
needs, loan portfolio mix, or other asset liability strategies. Loans may be
securitized or sold directly into the secondary market. The composition of the
Company's loan portfolio is significantly influenced by the timing and amount
of these sales.

The Company also makes residential construction and land development loans.
As a percentage of loans, net of unearned income loans, these loans increased
from 7.0% at December 31, 1996 to 12.1% at December 31, 1997. The growth is
generally attributable to expansion into new geographic markets. All loans in
this category mature in one year or less and have a variable interest rate.
See "Business--Other Lending."

New South maintains a minimal amount of commercial loans to certain
independent automobile dealers to finance such dealers' used automobile
inventory (i.e., "floor plan" loans), all of which are revolving in maturity
and have a variable interest rate. See "Business--Other Lending."

Investment Securities

Investment securities are a significant component of the Company's total
earning assets. Total investment securities averaged $145.7 million in 1997,
compared to $103.8 million in 1996 and $104.9 million in 1995. At December 31,
1997, all investment securities were classified as available for sale and
recorded at market value. The Company elected to classify its entire
securities portfolio as available for sale in order to maximize flexibility in
meeting funding requirements.

The following table sets forth the book value of the securities held by the
Company for the dates indicated.

SECURITIES AVAILABLE FOR SALE

AS OF DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)

Mortgage-backed securities ("MBS").................... $71,650 $70,516 $140,059
U.S. Treasury and federal agency securities........... 12,222 12,495 39,593
Other securities...................................... 12,806 11,440 17,483
------- ------- --------
Total securities available for sale................. $96,678 $94,451 $197,135
======= ======= ========

The following table sets forth the scheduled maturities and average yields
of securities held at December 31, 1997.

AVAILABLE-FOR-SALE SECURITIES
RELATIVE CONTRACTUAL MATURITIES AND WEIGHTED AVERAGE YIELDS

DUE AFTER ONE DUE AFTER FIVE
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
------------- -------------- ---------------- -------------- TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------- ----- -------- ------ ------- ----- --------
(DOLLARS IN THOUSANDS)

Mortgage-backed
securities(1).......... $ -- $ -- $ 51,923 6.51% $88,133 6.90% $140,056
U.S. Treasury and
federal agency
securities............. 2,648 5.42% 36,945 6.72% -- -- 39,593
Other securities(2)..... 2,608 7.31 5,092 4.30 3 9.00 349 0.10 8,052
------ ------- ---- -------- ------- --------
Total.................. $5,256 6.83 $42,037 6.42 $ 51,926 6.51 $88,482 6.88 $187,701
====== ======= ======== ======= ========
Percentage of total
portfolio.............. 2.80% 22.40% 27.66% 47.14%

- --------
(1) Maturity of MBS and interest only strips were determined based on
contractual maturity.
(2) Federal Home Loan Bank Stock and other equity securities of $9,434,000 is
not included.

At December 31, 1997, 71.0% of the securities portfolio consisted of
mortgage-backed securities. Generally, these securities consist of pooled,
homogenous residential mortgage loans originated or purchased by New South and
securitized with GNMA, FNMA, or FHLMC guarantees. These securities are subject
to the risk of prepayment on the underlying mortgages. At December 31, 1997,
20.1% of the securities portfolio consisted of United States Treasury and
federal agency securities, which are backed by the full faith and credit of
the United States government or its agencies.

DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES

Average interest-bearing liabilities increased $86.8 million, or 12.4%, to
$788.7 million in 1997 from $701.9 million in 1996. This increase was due to
an increase in average interest bearing deposits which increased $91.1
million, or 16.8%, to $633.5 million in 1997 from $524.4 million in 1996.

Deposits

Deposits are a significant source of funding for the Company. The Company's
loan-to-deposit ratio was 104.7% at December 31, 1997 and 103.2% at December
31, 1996. The Company has been able to attract deposits from throughout the
United States by consistently paying nationally competitive rates.

The following table sets forth the deposits of the Company by category for
the dates indicated.

AVERAGE DEPOSITS

1995 1996 1997
-------- -------- --------
(IN THOUSANDS)

Time............................................. $423,592 $488,629 $571,221
Savings.......................................... 51,716 50,561 58,806
Non-interest bearing demand...................... 45,006 48,932 57,037
Interest-bearing demand.......................... 3,140 3,162 3,517
-------- -------- --------
Total average deposits......................... $523,454 $591,284 $690,581
======== ======== ========

The increase in average deposits is primarily due to the increase in average
time deposits, which increased $82.6 million, or 16.9%, from $488.6 million at
December 31, 1996 to $571.2 million at December 31, 1997. Contributing to the
1997 increase in average time deposits was the Company's advertising campaign
designed to increase its reputation as a provider of nationally competitive
interest rates on certificates of deposit.

The use of brokered certificates of deposit also contributed to the increase
in average time deposits. The Company pays fees to regional and national
brokers to attract deposits on the Company's behalf and it also purchases
existing deposits from brokers. The deposits which are solicited for a fee are
typically available for a total cost which is traditionally below the cost of
obtaining funding through the Company's retail network. Brokered deposits
totaled $229.9 million, or 33.1% of total deposits at December 31, 1997,
compared to $162.2 million, or 24.5% of total deposits at December 31, 1996.

The maturity distribution of the Company's time deposits over $100,000 at
December 31, 1997 is set forth in the following table.

CERTIFICATES OF DEPOSIT GREATER THAN $100,000
MATURITY SCHEDULE
(IN THOUSANDS)

Three months or less.................................................. $ 97,277
Over three months through six months.................................. 29,171
Over six months through twelve months................................. 18,270
Over twelve months.................................................... 57,967
--------
$202,685
========

Approximately 48.0% of the Company's time deposits over $100,000 had
scheduled maturities within three months and approximately 62.4% had
maturities within six months. These deposits are primarily obtained through
the broker network described above.

Borrowed Funds

Borrowed funds consist primarily of federal funds purchased, securities sold
under agreements to repurchase, and advances from the FHLB. The following
table sets forth information regarding the Company's borrowings over the
periods indicated.

SHORT-TERM BORROWINGS

WEIGHTED AVERAGE AVERAGE
AVERAGE MAXIMUM ENDING INTEREST RATE AT RATE
BALANCE OUTSTANDING BALANCE YEAR-END PAID
-------- ----------- -------- ---------------- -------
(DOLLARS IN THOUSANDS)

AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1995
Federal funds purchased
and securities sold
under agreement to
repurchase............ $ 36,707 $ 41,811 $ 41,811 5.77% 7.30%
Federal Home Loan Bank
advances.............. 99,005 124,000 104,000 6.09 6.06
AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1996
Federal funds purchased
and securities sold
under agreement to
repurchase............ 35,502 52,000 -- 0.00 7.62%
Federal Home Loan Bank
advances.............. 124,093 170,388 95,388 6.35 5.97
AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1997
Federal funds purchased
and securities sold
under agreement to
repurchase............ 41,624 73,100 40,800 7.10 7.57%
Federal Home Loan Bank
advances.............. 113,572 179,420 179,420 6.07 6.03

Average FHLB advances during 1997 were $113.5 million compared to $124.1
million during 1996, a decrease of $10.6 million. The Company intends to
continue to use these advances as a significant funding source. Total advances
were $179.4 million at December 31, 1997.

CAPITAL

The OTS requires thrift financial institutions to maintain capital at
adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-
based standard, capital is classified into two tiers. Tier 1 capital of New
South consists of common stockholders' equity, excluding the unrealized gain
(loss) on securities available-for-sale, minus certain intangible assets. New
South's Tier 2 capital consists of the general reserve for possible loan
losses subject to certain limitations. Consolidated regulatory capital
requirements do not apply to thrift holding companies.

ANALYSIS OF CAPITAL

AS OF DECEMBER 31,
------------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)

Tier 1 capital................................... $ 56,825 $ 61,221
Tier 2 capital................................... 4,604 6,237
Total qualifying capital......................... 61,429 67,458
Risk-adjusted assets (including off-balance sheet
exposures)...................................... 551,459 643,884
Tier 1 risk-based capital ratio.................. 6.90% 6.17%
Total risk-based capital ratio................... 11.14 10.48
Tier 1 leverage ratio............................ 10.30 9.51

New South has consistently exceeded regulatory minimum guidelines and it is
the intention of management to continue to monitor these ratios to ensure
regulatory compliance and maintain adequate capital for New South. New South's
current capital ratios place New South in the "well capitalized" category.

LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES

Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of a company to convert assets into
cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities. Without proper liquidity management, the
Company would not be able to perform the primary function of financial
intermediary and would, therefore, not be able to meet the needs of the
communities it serves.

Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment securities available for sale
portfolio is very predictable and is subject to a high degree of control at
the time investment decisions are made. However, net deposit inflows and
outflows are less predictable and are not subject to nearly the same degree of
control.

New South is required by OTS regulations to maintain minimum levels of
liquid assets. This requirement, which may be changed at the discretion of the
OTS depending upon economic conditions and net deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio
is currently 5%. New South has generally maintained liquid assets
substantially in excess of the minimum requirements.

The Company depends on deposits, including brokered certificates of deposit,
and FHLB advances as its primary sources of liquidity. The Company monitors
the level of each source of funding in order to minimize the risk of
dependence on any one source. Additionally, at December 31, 1997, the Company
had approximately $24.0 million of unused credit for federal funds purchases,
$5.0 million of unused revolving credit facilities, and a $20.0 million unused
warehousing line of credit from another financial institution. The Company had
$197.1 million of securities available for sale as a secondary source of
liquidity at December 31, 1997.

YEAR 2000

properly recognize date sensitive information beginning January 1, 2000. This
problem could result in a disruption to the Company's operations, if not
corrected. Financial services institutions are particularly sensitive to such
disruptions. The Company uses third party vendors for many of its systems. As
a result, much of the Company's remediation effort relates to monitoring and
communicating with those vendors. The Company has assessed and developed a
detailed strategy to prevent or at least minimize problems related to the year
2000 issue. In 1997, resources were committed and implementation began to
modify the affected information systems. Total costs related to the project
are estimated to be between $750,000 and $2.0 million of which $150,000 was
incurred in 1997. Implementation is currently on schedule, but the degree of
success of the project cannot be determined at this time. Management believes
that the final outcome will not have a material adverse effect on New South's
business, results of operations, or financial condition. See "Risk Factors--
Risk Factors Relating to the Company--Developments in Technology."

BUSINESS

GENERAL

The Company is a closely held unitary thrift holding company headquartered
in Birmingham, Alabama. Through its financial institution subsidiary, New
South, the Company operates two full-service retail branch offices in
Birmingham, Alabama, and 49 loan production offices located in 14 states
throughout the southeastern and western United States. New South is the
largest thrift and the sixth largest depository institution, based on asset
size, headquartered in the State of Alabama.

The Company's operations principally involve residential mortgage lending,
installment (automobile) lending, residential construction and land lending
and deposit gathering activities. The Company's residential mortgage lending
efforts involve the origination and purchase of residential mortgage loans
through its loan origination offices and wholesale sources, the sale of such
loans (usually on a pooled and securitized basis) in the secondary market, and
the servicing of residential mortgage loans for investors as well as the
Company's own loan portfolio. The installment (automobile) lending program
involves indirect lending through 600 automobile dealers in six southern
states. The Company's residential construction and land lending efforts
involve making loans to builders for the construction of single family
properties and, on a more limited basis, loans for the acquisition and
development of improved residential lots. In addition, the Company actively
funds and purchases commercial real estate loans originated by Collateral
which may be sold to investors or held in New South's portfolio.

STRATEGY

The Company's strategy is to increase its earnings through increased loan
originations and increased asset size while maintaining high levels of asset
quality. The principal components of the Company's strategy include:

. Increased Residential Construction and Land Loans. The Company plans to
increase residential construction and land loans through relationships
with builders in new geographic markets and through increased
penetration in existing markets. Management believes that this increase
may lead to additional originations of residential mortgage loans.

. Continued Expansion of Retail Deposit Activities. While the Company
plans to continue its emphasis on wholesale funding sources,
management's strategy is to expand its retail deposit activities.
Through the increased use of mass media advertising and direct mail
solicitation to existing retail customers and prospective customers, the
Company hopes to increase the average deposits of existing retail
customers and to add new customers. At this time, the Company intends to
concentrate its mass media advertising efforts in the Birmingham market,
in order to increase the Company's market share in the Birmingham,
Alabama area.

CERTAIN LENDING DATA

The following table sets forth selected data relating to the composition of
loans originated by New South during each of the last three fiscal years,
categorized by loan types discussed below.

LOAN ORIGINATIONS

FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)

Residential
Conforming(1)............................ $ -- $ -- $ 304,508
Nonconforming............................ 70,963 159,077 186,150
Installment (automobile)
Prime(2)................................. 105,967 88,175 67,926
Non-prime................................ 2,648 7,244 7,856
Residential construction and land.......... 34,226 86,927 129,277
Commercial real estate(3).................. 13,180 20,353 109,511
Commercial................................. 1,311 5,829 1,846
---------- ---------- ----------
Total.................................. $ 228,295 $ 367,605 $ 807,074
========== ========== ==========

- --------
(1) Includes only those loans originated from July 1, 1998, the effective date
of the Transfer.

(2) Includes certain other non-automobile loans. See "--Installment
(Automobile) Lending."

(3) Consists entirely of commercial real estate loans generated by Collateral,
for which Collateral earns an origination fee, which loans are funded by
New South and closed in New South's name. See "--Other Lending."

The following table sets forth selected data relating to the composition of
loans held by New South in its own portfolio as of December 31 of each of the
last three fiscal years, categorized by loan types discussed below.

LOAN PORTFOLIO

AS OF DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)

Residential
Conforming..................................... $278,749 $214,865 $252,568
Nonconforming.................................. 77,106 203,405 132,700
Installment (automobile)
Prime (1)...................................... 29,769 61,323 84,769
Non-prime...................................... 5,749 9,668 12,147
Residential construction and land................ 30,941 47,423 87,889
Commercial real estate........................... 141,196 146,700 158,377
Commercial....................................... 408 403 1,467
-------- -------- --------
Total........................................ $563,918 $683,787 $729,917
======== ======== ========

- --------
(1) Includes certain other non-automobile loans.

RESIDENTIAL MORTGAGE LENDING

Conforming Loans

New South's primary line of business is the origination (and subsequent
sale) of residential mortgage loans which New South classifies as conforming
residential mortgage loans. These loans are typically single family loans
which generally have been underwritten and processed in accordance with
standard government or federal agency guidelines including FNMA, FHLMC, GNMA,
FHA and VA. The conforming residential mortgage loans are fixed-rate and
adjustable-rate first residential mortgage loans with 15 year or 30 year terms
generally secured by owner-occupied residences. New South's adjustable-rate
mortgages (ARMs) generally have interest rates that adjust semi-annually or
annually. The maximum loan amount for a conforming residential mortgage loan
which will be purchased by FHLMC or FNMA currently is $227,150, with a typical
term of 360 months, and an average interest rate of approximately 7.0%. In
1997, conforming residential mortgage loan originations were $304.5 million,
which accounted for 62.1% of New South's residential mortgage loan
originations and 37.7% of New South's total loan originations. At December 31,
1997, New South had $252.6 million of conforming residential mortgage loans in
its portfolio, representing 65.6% of New South's residential mortgage loan
portfolio and 34.6% of New South's total loan portfolio.

New South originates conforming residential mortgage loans primarily on a
direct basis through 42 origination offices, 39 of which were transferred from
Collateral in the Transfer, although it augments this line of business with
indirect originations through mortgage brokers and correspondents. All
conforming residential mortgage loans originated, either on a direct or
indirect basis, must conform to New South's underwriting guidelines for
conforming residential mortgage loan products which generally conform to
standard government and federal agency guidelines. See "Residential Mortgage
Lending--Underwriting" and "--Production."

Nonconforming Loans

New South originates residential mortgage loans which it classifies as
nonconforming residential mortgage loans. These loans typically do not exceed
the standard agency maximum loan size guidelines, but may fail to meet one or
more other guidelines relating to creditworthiness, such as acceptable debt
ratios and acceptable consumer loan payment delinquencies. New South
originates only fixed rate nonconforming residential mortgage loans. The
average nonconforming residential mortgage loan amount is $60,000 with average
interest rates of 9.10% and average maturities of up to 15 years. In 1997,
nonconforming residential mortgage loan originations

were $186.2 million, which accounted for 37.9% of New South's residential
mortgage loan originations and 23.1% of New South's total loan originations.
At December 31, 1997, New South had $132.7 million of nonconforming
residential mortgage loans representing 34.4% of New South's residential
mortgage loan portfolio and 18.2% of New South's total loan portfolio.

New South originates nonconforming residential mortgage loans primarily on
an indirect basis through mortgage brokers and correspondents, although it
also originates nonconforming loans on a direct basis through seven loan
origination offices. All nonconforming residential mortgage loans originated,
either on a direct or indirect basis, must conform to New South's underwriting
guidelines for nonconforming residential mortgage loan products which have
been internally developed by New South's management to analyze a variety of
factors, including the proposed equity in the collateral, the credit history
and debt-to-income ratio of the borrower, the property type, and the
characteristics of the underlying first mortgage, if any. Applying these
guidelines, New South will internally classify a proposed nonconforming
residential mortgage loan product as either Grade AA, A, B or C according to
credit risk and establish the terms of the loan in accordance with such
internal classification. Of the $186.2 million of nonconforming residential
mortgage loans originated by New South during 1997, 35.5% was classified as
Grade AA, 42.7% Grade A, 16.6% Grade B, and 5.2% Grade C. See "Residential
Mortgage Lending--Underwriting" and "--Production."

Underwriting

All residential mortgage loans originated by New South, including those
originated on an indirect basis through mortgage brokers and correspondents,
must satisfy New South's underwriting standards. These guidelines are revised
continuously based on opportunities and prevailing conditions in the market,
as well as generally accepted criteria in the market for securities backed by
such residential mortgage loans. New South believes that the guidelines are
consistent with standards generally used by lenders in the business of making
residential mortgage loans. The following is a brief description of New
South's underwriting guidelines currently in effect for conforming residential
mortgages and nonconforming residential mortgage loans.

On both conforming and nonconforming residential mortgage loans, the homes
pledged to secure such residential mortgage loans may be either owner occupied
(which includes second homes) or non-owner occupied investor properties which,
in either case, are single-family residences (which may be detached, part of a
two-to-four-family dwelling, manufactured homes, condominium units or units in
a planned unit development). Commercial properties or agricultural land are
not generally accepted as collateral; however, they may be added as additional
security.

In most cases, the value of each property proposed as security for a
conforming and nonconforming residential mortgage loan is determined by a full
appraisal. A limited appraisal, conducted on a drive-by basis, is sometimes
utilized for loans with current loan to value ("CLTV") under 50%. Appraisals
are performed by professional appraisers who have been approved by New South
or who are employed by an appraisal service company approved by New South. New
South evaluates appraisers based on established criteria and appraisal
requirements, and maintains a current approved appraiser list.

In connection with purchase-money loans, New South's guidelines for both
conforming and nonconforming residential mortgage loans require (i) an
acceptable source of down payment funds, (ii) verification of the source of
the down payment funds, and (iii) adequate cash reserves.

New South's guidelines for both conforming and nonconforming residential
mortgage loans generally require title insurance coverage issued by an
approved American Land Title Association or California Land Title Association
title insurance company on each residential mortgage loan it originates or
purchases. The applicant is required to secure property insurance in an amount
equal to the lesser of (i) an amount sufficient to cover the new residential
mortgage loan and any prior mortgage loan and (ii) the cost of rebuilding the
subject property (which generally does not include land value).

Conforming Residential Mortgages Loans. New South's underwriting guidelines
for conforming residential mortgage loans generally follow FNMA, FHLMC, GNMA,
FHA, and VA guidelines, and may also follow other requirements set by
potential private investors in securitizations. New South employees use an
industry standard automated underwriting process on most conforming loan
applications which analyzes the borrower's credit score (as reported by a
nationally recognized credit reporting agency such as Equifax) and the value
of the property which will secure the loan, all with a view towards evaluating
the loan for sale in the secondary market. This automated process is designed
to reduce processing and underwriting time, to improve overall loan approval
productivity, to improve credit quality and to reduce potential investor
repurchase requests.

Nonconforming Residential Mortgages Loans. New South's underwriting
guidelines for nonconforming residential mortgage loans are designed to assess
both the prospective borrower's ability to repay the loan and the adequacy of
the real property used as collateral for the loan. In general, these
guidelines require an analysis of the equity in the collateral, the payment
history and debt-to-income ratio of the borrower, the property type, and the
characteristics of the underlying first mortgage, if any. Based on these
considerations, New South will classify a proposed nonconforming residential
mortgage loan as either Grade AA, A, B or C according to credit risk and
establish the terms of the loan in accordance with such internal
classification.

On Grade AA loans, the borrower must have a good credit history during the
last three years, and any bankruptcies must have been discharged for a minimum
of three years. On Grade A loans, the borrower must have a satisfactory credit
history (i.e. some minor slow payments are allowed), with any bankruptcies
having been discharged a minimum of four years. On Grade B loans, the borrower
must also have a satisfactory credit history (i.e. some minor slow payments
are allowed), but bankruptcies may have been discharged for a minimum of two
years provided credit has been reestablished within the last 24 months. On
Grade C loans, the borrower may have derogatory credit, and any bankruptcies
must have been discharged a minimum of two years, with re-established credit
within the last 12 months.

On Grade AA loans, New South's guidelines require that the CLTV of a
mortgage loan generally be less than 90%. On Grade A and B loans, New South's
guidelines require that the CLTV be less than 85%. On Grade C loans, New
South's guidelines require that the CLTV be less than 80%. A second mortgage
loan in an amount of $25,000 or less may have a CLTV of up to 100%. New
South's guidelines do not permit the origination or purchase of residential
mortgage loans where the senior mortgagee may share in any appreciation in the
value of the related mortgaged property.

Production

New South originates conforming and nonconforming residential mortgage loans
both on a direct basis through 49 loan origination offices and on an indirect
basis through mortgage brokers and correspondents throughout the United
States.

Conforming Residential Mortgage Loans. Presently, New South originates
conforming residential mortgage loans primarily on a direct basis through 42
loan production offices located in the States of Alabama (15), Tennessee (3),
Georgia (5), North Carolina (2), Florida (4), Texas (2), Nevada (2), Kentucky
(1), Louisiana (1), Virginia (3), Arkansas (1), Mississippi (1), Arizona (1),
and California (1). These offices originate primarily single-family
residential mortgage loans. These offices derive originations from a number of
sources such as referrals from realtors, walk-in customers, borrowers, and
advertising.

New South augments its direct originations of conforming residential
mortgage loans with indirect originations through over 250 wholesale
customers, including independent mortgage brokers and correspondents,
community banks, and other financial institutions in 14 states. These mortgage
brokers and correspondents originate such loans using New South's underwriting
criteria and standards and close such loans using funds advanced by New South
simultaneously with, or following, closing. In some cases, loans are purchased
at some point following closing in a secondary market transaction.

Nonconforming Residential Mortgage Loans. New South originates nonconforming
residential mortgage loans primarily on an indirect basis through mortgage
brokers and correspondents. These "wholesale" mortgage brokers and
correspondents originate the loans using New South's underwriting guidelines.
New South either funds these loans at closing or commits to purchase these
loans within a set period of time after closing. All mortgage brokers and
correspondents must certify to New South that the loans were originated in
accordance with New South's underwriting standards, and the loans are subject
to repurchase by the mortgage brokers and correspondents for a variety of
reasons, such as fraud and misrepresentation. Mortgage brokers and
correspondents are solicited by sales representatives of New South and are
approved by New South generally after a review of: (i) financial statement
strength; (ii) the length of time in the business; and (iii) the background
and experience of personnel including the principals of the company.

New South augments its indirect originations of nonconforming residential
mortgage loans with direct originations through seven loan production offices
in the States of Alabama (2), Florida (4), and Virginia (1). These seven
offices have historically been operated by New South and were not acquired
from Collateral in the Transfer. Like conforming residential mortgage loans,
originations through these offices are derived from a number of sources such
as referrals from realtors, brokers, walk-in customers, borrowers, and
advertising.

INSTALLMENT (AUTOMOBILE) LENDING

New South offers installment (automobile) loans secured by automobiles,
light-duty trucks, vans, boats, and other vehicles. New South began offering
an installment (automobile) lending program in 1989 to automobile dealers in
the southern United States. New South has an extensive automobile dealer
network consisting of over 600 dealers in the States of Alabama, Florida,
Georgia, Mississippi, Tennessee and Texas.

Prime Loans

The majority of New South's installment (automobile) loans are considered to
be "prime" loans by industry standards. Generally, the industry classifies
prime and nonprime customers based on the creditworthiness of the consumer.
New South's current guidelines for its prime lending products require an
applicant to have, among other factors, a credit bureau score of at least 580.
On used cars, the terms of the contract are also based, in part, on the actual
mileage of the vehicle. The Company also classifies as prime an immaterial
amount of other non-automobile installment loans secured by deposits, boats
and recreational vehicles and some signature loans. During 1997, New South's
average size prime loan for both new and used cars was $13,000 with an average
term of 41 months at 10.1% interest rate.

New South purchases prime products (typically fully secured, fixed rate
retail installment contracts) from dealers for 100% of the principal amount of
the loan on a non-recourse basis. In 1997, prime installment (automobile) loan
originations were $67.9 million, which accounted for 89.6% of New South's
installment (automobile) originations and 8.4% of New South's total loan
originations. At December 31, 1997, prime installment (automobile) loans
constituted 87.5% of New South's installment (automobile) loan portfolio and
11.6% of its total loan portfolio.

Nonprime Loans

New South offers a nonprime product to certain qualifying consumers who
report credit bureau scores slightly below the "prime" threshold due to minor
delinquencies on certain accounts. Terms of "nonprime" installment
(automobile) loans are established by New South underwriters based on a
variety of factors in accordance with New South's underwriting guidelines
which have been specifically designed to evaluate nonprime customers.
Importantly, the automobile payment cannot exceed 15% of a nonprime borrower's
gross income. During 1997, New South's average nonprime loan for new and used
cars was $13,000, with an average term of 41 months at 17.3% interest. In some
cases, New South purchases nonprime loans from dealers at a non-refundable
discount. In 1997, nonprime installment (automobile) loan originations were
$7.9 million, which accounted for 10.4% of New South's installment
(automobile) originations and 1.0% of New South's total loan originations. At
December 31, 1997, nonprime installment (automobile) loans constituted 12.5%
of New South's installment (automobile) loan portfolio and 1.7% of New South's
total loan portfolio.

Underwriting

All prime and nonprime consumer installment (automobile) loans purchased or
originated by New South are analyzed using a judgmental credit analysis by
loan officers. Applications are faxed to New South by the dealers. Upon
receipt, the application is reviewed for completeness and compliance with New
South's guidelines and applicable consumer regulations. When a loan package is
incorrect or incomplete, the loan officer notifies the dealer and works to
resolve the problem.

Upon receipt of an application, a New South loan officer will obtain and
review a credit report on the proposed borrower from a major credit reporting
agency. The applicant's current installment debts, charge card accounts,
residential mortgage loans, past credit history, previous repossessions, prior
loans charged off by other lenders, real estate liens and wage attachments are
considered. New South also verifies the applicant's employment and salary. New
South evaluates applications considering the information provided in the
application, credit reports, and the relationship between the applicant's
income and expenses, including expenses relating to the proposed motor vehicle
loan. Based upon this information, the loan officer comes to a conclusion as
to the creditworthiness of the applicant.

While no specific loan to value ratio guidelines are adhered to for motor
vehicle loans, loan to value ratios on new vehicles generally reflect the
equivalent of the dealer's cost for the new vehicle. Loan officers are given
authority to approve loans in excess of dealer cost up to certain limits which
are determined based on the loan officer's lending experience. The Black Book
Used Car Official Guide ("Black Book") is used to determine the loan value on
used vehicles in all states except Texas where the NADA Guide is used. Five
loan officers have the authority to advance up to 115% of clean Black Book
value for used automobiles, assuming the borrower meets certain
creditworthiness criteria. Exceptions to these loan to value guidelines must
be reviewed by a senior loan officer prior to approval.

If the loan is approved by New South and the dealer selects New South as the
lender, New South will issue a bank check and forward it to the dealer. Some
dealers maintain checking accounts with the bank to expedite the receipt of
funds. Funds are not disbursed on any contracts until all documentation is
received in the correct form.

New South will also finance the cost of credit life insurance, accident and
health insurance, and warranties up to a maximum of 20% of the unpaid balance
of the cash price of the automobile as shown on the contract. Any exception
must be approved by a senior vice president of New South.

Production

New South's automobile dealer network consists primarily of new car
franchise dealers. Although independent car dealers make up less than 15% of
the dealer network, management believes that these relationships may be more
stable and profitable to the Company. Dealers are carefully selected by New
South on the basis of set criteria. Generally, for each dealer, New South
evaluates: (i) current year end and quarterly financial statements; (ii) Dun &
Bradstreet Reports on the dealer's business; and (iii) the length of time the
dealer has been in business. In addition, independent car dealers are required
to furnish New South with a credit report and historical financial information
to determine creditworthiness. New South monitors each dealer's performance on
a monthly basis, particularly the loss experience on the installment contracts
purchased from each dealer.

OTHER LENDING

Residential Construction and Land Loans

New South originates residential real estate construction loans to
individuals, as well as providing construction and land development loans in
residential subdivisions to professional home builders and developers. New
South is active in making loans to builders for the construction of single
family properties and,

on a more limited basis, loans for the acquisition and development of improved
residential lots. These loans are made on a commitment term that generally is
for a period of one year. New South reviews each individual builder's
experience and reputation, general financial condition, and inventory levels
in order to limit risks. All construction loans are secured by a first lien on
the property and construction in progress. Additionally, the construction
status is reviewed by on-site inspections. The builders' ongoing financial
position is monitored on a periodic basis. This type of lending has been one
of New South's fastest growing lending activities. At December 31, 1997, New
South had $87.9 million of residential construction and land loans
representing 12.0% of New South's total loan portfolio.

Commercial Real Estate Loans

New South funds and closes in its name certain commercial real estate loans
originated by Collateral. These loans are secured by various types of
commercial real estate, including multifamily properties, retail shopping
centers, mobile home parks, hotels, manufactured home communities and a wide
variety of other commercial properties. Many of these loans may be sold in the
secondary market by New South, as have loans in the past. Investors include
commercial banks, life insurance companies, pension funds, conduit programs,
and government sponsored entities. Many of these loans have been committed for
sale to a third party prior to closing in New South's name, and providing this
interim funding has been a relatively profitable and low risk activity for New
South in recent years. In addition, New South may hold these loans in its own
portfolio, capitalizing on opportunities generated by Collateral. The average
commercial real estate loan is approximately $2.0 million, with a term of 7 to
10 years, and an interest rate range of 180 to 220 basis points over U.S.
Treasury securities with comparable maturities. New South has $158.4 million
in commercial real estate loans as of December 31, 1997, which represents
21.7% of New South's total loan portfolio.

Commercial Loans

New South makes available to certain independent automobile dealers used
automobile "floor plan" credit lines, which are revolving credit lines used
for financing the used automobile inventory of independent automobile
dealerships. New South will make advances on a dealer's credit line when the
dealer purchases an automobile and provides New South with proper evidence of
title to the property. In management's view, high quality independent car
dealers represent a market niche New South is attempting to develop by
providing them with a comprehensive package of products.

Underwriting

Residential construction and land loans are evaluated under the same general
underwriting criteria used for nonconforming residential mortgage loans,
focusing on the equity in the collateral, the payment history and debt-to-
income ratio of the borrower, the property type, and the characteristics of
the underlying first mortgage, if any. New South's underwriting guidelines for
commercial real estate loans consist of verification of the borrower's
financial statements, credit history and references, as well as an analysis of
the property, the borrower, and the market. Detailed appraisals are required
on every property securing a commercial loan. New South requires and reviews
updated financial information on borrowers and on each property's performance
on an annual basis. Commercial loans are underwritten by New South applying
generally the same evaluation criteria used in the selection of independent
car dealers for participation in New South's installment (automobile) lending
program. In many instances, mortgages on real estate or other additional
collateral is required.

Production

Residential construction and land loans are primarily originated on a direct
basis through New South's conforming residential mortgage loan origination
offices. Commercial real estate loans are originated primarily by Collateral
on an indirect basis through mortgage bankers and brokers nationwide. New
South develops prospects for commercial loans primarily through its existing
customer base of independent automobile dealers who have sold retail
installment contracts to New South.

FUNDING ACTIVITIES

The Company funds its lending activities primarily through deposits. In
addition, a significant source of cash flow for New South is the sale of
residential mortgage loans and installment (automobile) loans (either on the
secondary market or as securitizations) and advances from the FHLB. To a
lesser extent, New South receives funds from traditional commercial borrowings
as well as from net interest income, mortgage loan servicing fees and loan
principal repayments.

Deposits

New South conducts deposit gathering activities in a traditional fashion
through its two full service branches located in Birmingham, Alabama. In
addition, New South operates an active telephone banking center that handles
incoming inquiries and conducts an outgoing telemarketing program for deposit
products. The telephone banking center is staffed from 8:00 a.m. to 5:00 p.m.
C.S.T. Monday through Friday and handles both inbound and outbound calls.
Outbound calls are made to former and current customers. New South monitors
the performance of its staff weekly to determine number of calls placed and
answered.

New South has not built an extensive branch network and does not rely
heavily on a local retail deposit base and has primarily utilized certificates
of deposit to compete for consumer deposits. New South attracts deposits from
throughout the country and several foreign countries by paying very
competitive rates. New South is consistently cited in various national
publications which track the highest interest rates paid on bank certificates
of deposit. As of December 31, 1997, these rates have attracted over 18,000
investors to New South's certificates of deposit, retirement accounts and
money market accounts. Deposits are primarily generated from the States of
Alabama (30%), New York (28%), Florida (7%), Texas (6%), and California (3%).
New South's management believes that it is able to offer very competitive
rates on deposits based on a number of factors including, among others, the
absence of overhead expenses associated with a widespread retail branching
network and the ability of management to effectively manage interest rate
risk. New South's senior management reviews rates regularly and adjusts them
based on a review of New South's cash flow needs, New South's cost of funds,
surveys of rates offered by competing institutions, and the U.S. Treasury
yield curve.

New South also distributes its deposit products through brokers to
individuals and institutional purchasers. In 1995, New South initiated a
brokered certificate of deposit program to offer certificate of deposits in
increments of $1.0 million to $20.0 million through selected brokers who meet
New South's guidelines. These guidelines include, among other things, a
positive review of financial statements and ability to provide services to a
broad customer base. At December 31, 1997, brokered certificates of deposit,
including those not solicited by New South for a fee, were $229.9 million, or
33.1% of total deposits.

Sales/Securitizations

New South sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans and through sales
to private investors. With respect to conforming residential mortgage loans,
if a loan meets government or federal agency guidelines and has been
originated through its conforming residential mortgage origination offices
(which include the 39 origination offices transferred from Collateral in the
Transfer), it is typically sold immediately, either through the FNMA, FHLMC or
GNMA programs or to private investors. With respect to nonconforming
residential mortgage loans, New South generally holds these loans in its
portfolio unless New South determines that it is economically necessary or
desirable to sell the loan in light of then existing price, capital
constraints, liquidity needs and prepayment risks. Generally, New South
retains a portion of the servicing rights to the loans that it sells. For the
twelve month period ended December 31, 1997, New South sold approximately
$509.2 million in mortgage backed securities, residential mortgage loans and
installment (automobile) loans.

In August 1997, New South issued a securitization of $215 million
residential mortgage loans in a FHLMC REMIC. New South was only the second
institution to issue such a securitization, a REMIC, with a FHLMC

guaranty. All of the mortgages underlying the REMIC certificates are closed-
end, fixed-rate, primarily one-to-four family first or second lien, home
equity loans secured by property located in 19 states. New South continues to
service the residential mortgage loans under the terms of a pooling and
servicing agreement, dated August 1, 1997. New South earns a servicing fee
from collections of interest on the residential mortgage loans, net investment
income, assumption fees, and late payment charges.

Borrowings

The FHLB makes advances to New South on a secured basis, and the terms and
rates charged for FHLB advances vary in response to general economic
conditions. As of December 31, 1997 and 1996, FHLB advances amounted to $179.4
million and $95.3 million, respectively. The advances outstanding as of
December 31, 1997 bore interest at rates ranging from 5.75% to 7.89% and were
collateralized by stock in the FHLB and a blanket assignment of residential
mortgage loans.

During 1997, New South entered into a $20.0 million warehousing line of
credit agreement with a commercial bank. Borrowings are to be secured by
pledging specific residential mortgage loans and will bear a market interest
rate. During 1997, there were no amounts outstanding on the line of credit.

In addition, the Company has a $15.0 million credit facility agreement with
a commercial bank consisting of a $10.0 million revolving credit line and $5.0
million in long term debt secured by the stock of New South. The amounts
outstanding bear interest at the LIBOR plus 2%, payable quarterly. The Company
receives dividends from New South in amounts necessary to cover the required
interest payments and any principal payments due on the debt. As of December
31, 1997 and 1996, $5.0 million was outstanding on the line of credit and $5.0
million was outstanding on the term debt. These funds have been injected into
New South as capital, enabling New South to grow significantly.

In 1997, New South was granted by three commercial banks federal funds lines
of credit in the amounts of $5.0 million, $10.0 million and $15.0 million. At
December 31, 1997, $6.0 million was outstanding on one of these lines of
credit.

Additionally, New South has a $30.0 million credit facility agreement with a
commercial bank consisting of a $20.0 million warehousing line of credit and a
$10.0 million seven-day line of credit. The warehouse line shall be secured by
residential mortgage loans and the seven-day line shall be unsecured. As of
December 31, 1997, there were no outstanding amounts on the lines of credit.

In 1998, New South entered into a credit facility agreement with a
commercial bank consisting of a $20.0 million warehousing line of credit and a
$10.0 million servicing line of credit where the aggregate may not exceed
$20.0 million. During 1998, there have been no amounts outstanding on these
lines of credit.

LOAN SERVICING

Residential Mortgage Loan Servicing

New South services residential mortgage loans secured by single family
residences for its portfolio and for others including GNMA, FNMA, FHLMC, and
private mortgage investors. Mortgage loan servicing includes collecting
payments of principal and interest from borrowers, remitting aggregate loan
payments to investors, accounting for principal and interest payments, holding
escrow funds for payment of mortgage related expenses such as taxes and
insurance, making advances to cover delinquent payments, inspecting the
mortgaged premises as required, contacting delinquent mortgagors, supervising
foreclosures, and property dispositions in the event of unremedied defaults,
and other miscellaneous duties related to loan administration. New South
collects servicing fees generally ranging from 0.25% to 1.55% of each mortgage
loan principal balance at the time of payment. New South currently services
over $1.0 billion of residential mortgage loans for nine investors.

The Company has prescribed procedures for servicing its mortgage loans which
generally consist of the customary and usual standards of practice of prudent
institutional mortgage loan servicers and the servicing guidelines of FHLMC,
FNMA, FHA and VA.

All reasonable efforts are made to collect all payments called for under the
terms of the mortgage loans. The purpose of all collection efforts is to bring
a delinquent mortgage current in as short a time as possible. On one-payment
delinquencies, the Company immediately takes action to prevent it from
becoming more serious. Two types of late notices are used. A payment reminder
notice is mailed no later than the 10th day of delinquency. A late payment
notice is sent for any payment that has not been received by the 16th day
after it is due. The notice states the amount of late charges that are due.
Telephone contacts are made between the 17th and 20th days of the delinquency,
but earlier contact between the 7th and 10th days of the delinquency may be
made for habitual delinquents.

A face-to-face interview is arranged with mortgagors between the 50th and
60th days of the delinquency. For accounts that have become 60 days or more
delinquent, the collection follow-up is increased and efforts to establish a
work out plan with the borrower are instituted. A full financial analysis of
the borrower is performed when the borrower requests assistance and every
reasonable effort is made to have at least one face-to-face interview with the
mortgagor before beginning any foreclosure proceedings.

The Company's policy allows for reasonable discretion to extend appropriate
relief to borrowers who encounter hardship and who are cooperative and
demonstrate proper regard for their obligation. The Company may, at its own
discretion, waive any late payment charge, prepayment charge, assumption fee
or any penalty interest on the Company's portfolio loans in connection with or
the extension of any past due payment for a period (with respect to each
payment as to which the due date is extended).

New South has entered into a Subservicing Agreement with Collateral to
service the majority of all conforming residential mortgage loans for New
South. It is anticipated that this Subservicing Agreement will be terminated
at the point when the balance of these loans which New South owns or services
exceeds the balance of these loans which Collateral services for others. At
this time, which remains to be determined, all current Collateral employees
performing these functions will become employees of New South, causing all
servicing functions to be performed centrally by New South. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Relationships and Related Transactions."

Installment (Automobile) Loan Servicing

New South sells a significant portion of its installment (automobile) loan
originations while retaining servicing for a servicing fee and, in some
instances, a 10% participation. As servicer, New South collects and posts all
payments, responds to inquiries of customers, investigates delinquencies,
sends payment coupons to customers, oversees the collateral in cases of
default and accounts for collections. New South's collections department takes
all actions necessary to maintain the security interest granted in the
financed automobiles, including investigating delinquencies, communicating
with the consumer to ensure timely payments are made and when required,
contracts with third parties to recover and sell the financed automobile. New
South currently services over $70.3 million of installment (automobile) loans
for five investors.

The Company has established a process, both in writing and by telephone, to
ensure timely payments of obligations under the retail installment contract. A
payment is considered past due if the customer fails to make any full payment
on or before the due date as specified by the terms of the retail installment
contract. Company employees typically contact delinquent consumers within
three days after the due date and collection efforts continue until payment
has been received. The Company believes that early and frequent contact with
the consumer reinforces the consumer's recognition of his or her contractual
obligation.

The Company has flexibility in working with consumers in the collection of
payments. Specifically, if a consumer is unable to make a scheduled payment,
the Company may permit deferred payment. The consumer

must pay a fee and must sign a deferment agreement as acceptance of the
contract modification. The scheduled payment is then deferred for the period
of 30 days. Generally, no more than one deferment may be granted in any 12
month period.

When the Company determines that collection efforts are likely to be
unsuccessful, it commences repossession procedures against the underlying
collateral and assigns the accounts to an outside recovery agency.
Repossession generally occurs after a customer has missed three consecutive
monthly payments. In such cases, the net amount due under the retail
installment contract is reduced to the estimated fair value of the collateral,
less estimated costs of disposition. Repossessed automobiles are generally
resold through wholesale auctions.

POTENTIAL S-ELECTION

PROPERTIES

The principal executive offices of the Company are located at 1900 Crestwood
Boulevard, Birmingham, Alabama in a 63,000 square foot building owned by
Collateral. New South owns a 42,789 square foot facility located at 215 North
21st Street in Birmingham, Alabama of which 55% is occupied by New South. The
remaining space is leased to multiple tenants. In addition, New South leases
space at 2000 Crestwood Boulevard, Birmingham, Alabama in a 15,000 square foot
building. New South leases offices that are used in the normal course of
business. At December 31, 1997, New South had 49 offices in 46 cities which
were leased. Substantially all leases are for periods of from one to five
years. The aggregate monthly rent is approximately $62,000. See "Certain
Relationships and Related Transactions."

SEASONALITY

The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general pattern of resale of homes, which typically peak
during the spring and summer seasons and decline to lower levels from mid-
November through January. Refinancings tend to be less seasonal and more
closely related to changes in interest rates. The mortgage servicing business
is generally not subject to seasonal trends, except to the extent that growth
of the portfolio is generally higher in periods of greater mortgage loan
originations.

EMPLOYEES

At December 31, 1997, the Company and its subsidiaries employed
approximately 508 persons. These employees are covered by contributory major
medical insurance, group life and long-term disability insurance plans. The
costs of these benefits in 1997 amounted to approximately $485,000. New South
also matches employee contributions to its 401(k) Plan. See Note 11 to
Consolidated Financial Statements included herein.

COMPETITION

The Company faces substantial competition for loans and deposits as well as
other sources of funding in its areas of operation. The Company competes in
all of its lending lines of business with thrifts, commercial banks, credit
unions, mortgage companies and specialty finance companies, many of which
operate nationwide lending networks comparable to or more extensive than that
operated by New South. In each case, the Company must compete on the basis of
service quality, product offerings and rates. In the mortgage banking and
residential

construction business, the Company must cultivate relationships with builders,
mortgage brokers, real estate brokers and investors. In the installment
(automobile) lending business, the Company must cultivate relationships with
automobile dealers. In all of its lending activities, the Company believes
that it has positioned itself with a product mix that attracts business from
its competitors which may not have sufficient loan origination volume to
obtain preferential pricing directly in the secondary market.

The Company must also compete for funding. The Company competes, at its two
retail branch locations, for deposits from local customers. More importantly,
the Company must compete nationwide for deposits to fund its lending
activities. The Company competes for deposits with thrifts, commercial banks,
and credit unions and the Company's deposit products must compete with the
investment products offered by a broad variety of financial institutions
including thrifts, commercial banks, credit unions, brokerage firms,
investment banks, insurance companies and other financial services companies.
The Company attempts to offer deposit products including certificates of
deposit, individual retirement and other time and deposit accounts and money
market accounts with competitive rates.

In its lending and deposit gathering activities, many of the Company's
competitors are, or are affiliated with, organizations with substantially
larger assets and capital bases (including regional and multinational banks
and bank holding companies). The Company's competitors, also, often have
larger origination networks for loans and a larger customer base to sell
deposit products.

LEGAL PROCEEDINGS

The Company, in the ordinary course of business, from time to time, has been
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits.

Certain of these lawsuits are class actions which request unspecified or
substantial damages. New South is currently a named defendant in four class
actions pending in the state and federal courts of Alabama. These matters have
arisen in the normal course of business and are related to lending,
collections, servicing and other activities and allege breach of contract,
breach of fiduciary duty or violation of federal or state laws. In the first
case, the plaintiff has asserted a putative class action claim involving the
finance rate and credit life and disability insurance on automobile loans; in
the second case, the plaintiff has asserted a putative class action claim
involving an extended service contract on an automobile loan; in the third
case, the plaintiff has asserted a putative class action claim on the purchase
of forced place insurance to secure New South's interest on an automobile
loan; and, in the fourth case, the plaintiff has asserted a putative class
action claim regarding late charges assessed on automobile loans.

In each case, a class has not yet been certified. Because these issues are
complex and for other reasons, it may take years to resolve these actions.
Based on legal counsel's opinion, management is of the opinion that the
ultimate resolution of each of these class actions will not have a material
adverse effect on the Company's financial condition or results of operations.

SUPERVISION AND REGULATION

GENERAL

New South is chartered as a federal savings bank under the Home Owners' Loan
Act, as amended (the "HOLA"), which is implemented by regulations adopted and
administered by the OTS. As a federal savings bank, New South is subject to
regulation, supervision and regular examination by the OTS. Federal banking
laws and regulations control, among other things, New South's required
reserves, investments, loans, mergers and consolidations, payment of dividends
and other aspects of its operations. The deposits of New South are insured by
the SAIF administered by the FDIC to the maximum extent provided by law
($100,000 for each depositor). In addition, the FDIC has certain regulatory
and examination authority over OTS-regulated savings institutions, such as New
South, and may recommend enforcement actions against New South to the OTS,
even though the FDIC is not the primary regulator of New South. The
supervision and regulation of New South is intended primarily for the
protection of the deposit insurance fund and New South's depositors rather
than for holders of the Company's stock or for the Company as the holder of
the stock of New South.

In addition as a unitary savings and loan holding company, the Company is
registered with and is subject to OTS regulation and supervision under the
HOLA. The Company also is required to file certain reports with, and otherwise
comply with the rules and regulations of, the Commission under the federal
securities laws.

The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting New South and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and
regulations.

SUPERVISION AND REGULATION OF NEW SOUTH

Proposed Legislation. Legislation introduced in the United States Congress
in 1997 would, if enacted, require each federal savings institution (such as
New South) to convert to a national bank or a state commercial bank, savings
bank or savings association charter and would require each savings and loan
holding company (such as the Company) to become a bank holding company or
"financial services" holding company. The proposed legislation includes
limited grandfather provisions for business activities of federal savings
institutions that do not conform to applicable banking regulations. Holding
companies that were formerly savings and loan holding companies would not be
subject to any additional activity restrictions as long as their subsidiaries
continued to comply with certain lending restrictions currently applicable to
federal thrifts and were not acquired by another company. Based upon an
analysis of the current provisions of the legislation proposed to date, the
management of the Company does not believe that the enactment of such
legislation would have a material adverse effect on its financial condition or
results of operations.

Business Activities. New South derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, New South may invest in residential mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of commercial paper and debt securities, and certain other assets. New
South may also establish service corporations that may engage in activities
not otherwise permissible for New South, including certain real estate equity
investments and securities and insurance brokerage. These investment powers
are subject to various limitations.

OTS Capital Requirements; Reserve Requirements. Under federal law and OTS
regulations, savings associations are required to comply with each of three
separate capital adequacy standards: a "tangible capital" requirement; a
"leverage ratio;" and a "risk-based capital" requirement. The OTS is
authorized to establish individual capital requirements for a savings
association consistent with these capital standards. As noted below under
"Prompt Corrective Action," the OTS was required by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") to promulgate
additional capital requirements that in certain respects have superseded the
capital requirements discussed immediately below.

Tangible Capital. The OTS capital regulations require tangible capital of at
least 1.5% of adjusted total assets (as defined by regulation). Tangible
capital generally includes common stockholders' equity and retained earnings,
noncumulative perpetual preferred stock and related surplus. In addition, all
intangible assets, other than a limited amount of properly valued purchased
mortgage servicing rights ("PMSRs"), must be deducted from tangible capital.

Leverage Ratio. The leverage ratio adopted by the OTS requires savings
associations to maintain core capital in an amount equal to at least 3.0% of
adjusted total assets. "Core capital" includes common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and any
related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries, certain goodwill and certain mortgage servicing
rights less certain intangible assets, mortgage servicing rights and
investments in nonincludable subsidiaries. In general, intangible assets must
be deducted in computing core capital because they are excluded from assets
under the OTS' capital rules. There are exceptions to this rule of deduction,
however. PMSRs, originated mortgage servicing rights ("OMSRs") and purchased
credit card relationships ("PCCRs") may comprise in the aggregate up to 50% of
an association's core capital, with PCCRs not exceeding 25% of core capital,
provided that such rights must be valued at the lower of 90% of fair market
value or 100% of the remaining unamortized book value of the asset.

Risk-based Capital. The risk-based capital standard for savings institutions
requires the maintenance of total capital (which is defined as core capital
and supplementary capital less certain holdings) to risk-weighted assets of at
least 8.0%. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks OTS
believes are inherent in the type of asset. The components of core capital are
equivalent to those discussed earlier under the 3.0% leverage standard. The
components of supplementary capital currently include cumulative preferred
stock, long term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-adjusted assets. Overall, the
amount of supplemental capital counted toward total capital cannot exceed 100%
of core capital.

FDICIA requires the OTS (and the other federal banking agencies) to revise
their risk-based capital standards, with appropriate transition rules, to
ensure that they take account of interest-rate risk, concentration of credit
risk, and the risks of non-traditional activities. In 1993, the OTS adopted a
final rule adding an interest rate risk ("IRR") component that would be
incorporated into its risk-based capital rule. Under the final rule, which
became effective in 1994, only a savings association with "above normal"
interest rate risk exposure (i.e., where an institution's net portfolio value
or "NPV" would decline by more than 2% in the event of a hypothetical 200-
basis point move in interest rates) would be required to deduct an IRR
component from its capital. The NPV is defined as the net present value of
expected cash inflows and outflows from an institution's assets, liabilities,
and off-balance sheet items. The IRR component deduction that such an
institution would be required to make from its capital would be equal to one-
half of its above normal interest rate risk exposure (i.e., 50% of the amount
by which the decline in its NPV exceeds a 2.0% decline). The deduction would
become effective two quarters after the date of the report on which the IRR
component was based. Savings associations with less than $300 million in
assets and risk-based capital ratios in excess of 12% are not subject to an
IRR component deduction.

On August 31, 1995, the OTS issued an interim rule providing that the amount
of risk-based capital that may be required to be maintained by an institution
for recourse assets cannot be greater than the total of the recourse
liability. The interim rule provides that whenever the calculation of risk-
based assets (including assets sold with recourse) would result in a capital
charge greater than the institution's maximum recourse liability on the assets
sold, instead of including the assets sold in the institution's risk-weighted
assets, the institution may increase its risk-based capital by its maximum
recourse liability. In addition, qualified savings associations may include in
their risk-weighted assets, for the purpose of capital standards and other
measures, only the amount of retained recourse of small business obligation
transfers multiplied by the appropriate risk weight percentage. The interim
rule sets reserve requirements and aggregate limits for recourse held under
the modified treatment. Only well-capitalized institutions and adequately
capitalized institutions with OTS permission may use this reduced capital
treatment.

On August 16, 1996, the federal banking agencies jointly proposed to revise
their respective risk-based capital rules relating to treatment of certain
collateralized transactions. These types of transactions generally include
claims held by banks (such as loans and repurchase agreements) that are
collateralized by cash or securities issued by the U.S. Treasury or U.S.
Government agencies. If adopted, the proposal would permit certain partially
collateralized claims to qualify for the 0% risk category. To qualify for the
0% risk category, the portion of the claim that will be continuously
collateralized must be specified either in terms of dollar amount or
percentage of the claim. For off-balance sheet derivative contracts, the
collateralized portion of the transaction could be specified by dollar amount
or percentage of the current or potential future exposure.

Effective September 1, 1995, the interest rate risk rule was amended to
include, in evaluating capital adequacy, an assessment of the exposure to
declines in the economic value of an association's capital due to changes in
interest rates.

Based upon calculations performed by the OTS, New South's interest rate risk
exposure has been determined to be in compliance with guidelines established
by New South's Board of Directors as of September 30, 1997.

On June 26, 1996, the Office of the Comptroller of the Currency, the Federal
Reserve Board and the FDIC issued a joint agency policy statement that
provides the standards that the federal banking agencies will use to evaluate
the adequacy and effectiveness of an institution's interest rate risk
management. The joint policy addresses fundamental elements for sound interest
rate risk management, including appropriate board and senior management
oversight and the need for a comprehensive risk management process that
identifies, measures, monitors and controls risk. An institution with material
weaknesses in its risk management process or high levels of exposure relative
to its capital will be directed to take corrective action, including raising
additional capital, strengthening management expertise, improving management
information and measurement systems, reducing levels of exposure, or some
combinations of these actions, depending on the facts and circumstances of the
individual institutions.

The OTS issued a Thrift Bulletin in August 1995 that describes how and under
what circumstances an institution may (1) appeal its interest rate risk
component by requesting an adjustment to the interest rate risk component
generated by the OTS model or (2) seek approval to use its own internal
interest rate risk model to calculate the interest rate risk component. The
Thrift Bulletin provides that to be eligible to seek an adjustment to the
interest rate risk component, an institution must show that its interest rate
risk component, as calculated by the OTS, would cause the institution to move
to a lower prompt corrective action category and that the accuracy of the OTS'
estimate of interest rate risk exposure can be materially improved through the
use of more refined data or more appropriate assumptions tailored to the
specific institution. The Thrift Bulletin also outlines the circumstances
under which well capitalized institutions may request to use their own
internal interest rate risk model in place of the OTS model in calculating
interest rate risk capital requirements. The internal model must meet certain
OTS standards, including reasonable assumptions about future interest rates,
prepayment rates for assets and attrition rates for liabilities.

The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of nontraditional
activities. Effective January 17, 1995, the OTS (along with the other federal
banking agencies) issued final regulations which explicitly identify
concentration of credit risk and other risks from nontraditional activities,
as well as an institution's ability to manage these risks, as important
factors in assessing an institution's overall capital adequacy. These final
regulations do not contain any specific mathematical formulas or capital
requirements.

For purposes of determining all three capital components, federal law and
the OTS regulations require that investments in and extensions of credit to
certain non-includable subsidiaries be deducted from capital. However, under
the Housing and Community Development Act of 1992, the OTS, by order, may
prescribe a percentage of a thrift's investment in a non-includable subsidiary
held as of April 12, 1989 that may be included in a particular institution's
capital, if it determines that the use of such a percentage would not increase
the risk to the institution's insurance fund, and would not result in the
institution being in an unsafe or unsound condition. The higher percentage
limit allowed by the OTS may not exceed: (i) 40% from July 1, 1995 to June 30,
1996; and (ii) 0%, thereafter. Certain exemptions also generally apply where
the subsidiary: (i) is engaged in the activities solely as an agent for its
customers; (ii) is engaged solely in mortgage-banking activities; (iii) (1) is
an insured depository institution or a company the sole investment of which is
an insured depository institution and (2) was acquired by the association
prior to May 1989; or (iv) is a federal savings association that existed as
such on August 9, 1989, and was, or acquired its principal assets from, an
association that was chartered before October 15, 1982, as a state savings or
cooperative bank.

The table below sets forth New South's compliance with its regulatory
capital requirements at December 31, 1997.

NEW SOUTH'S CAPITAL CAPITAL REQUIREMENTS EXCESS CAPITAL
--------------------- ---------------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ----------- ---------- ------- -------
(DOLLARS IN THOUSANDS)

Tangible capital........ $ 61,221 6.17% $ 29,758 3.00% $31,463 3.17%
Core capital............ 61,221 6.17 14,879 1.50 46,342 4.67
Total risk-based
capital................ 67,458 10.48 51,511 8.00 15,947 2.48

Pursuant to regulations of the Federal Reserve, all FDIC-insured depository
institutions must maintain average daily reserves against their transaction
accounts. No reserves are required to be maintained on the first $4.3 million
of transaction accounts, and reserves equal to 3% must be maintained on the
next $52.0 million of transaction accounts, plus reserves equal to 10% on the
remainder. These percentages are subject to adjustment by the Federal Reserve.
Because required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest
earning assets. As of December 31, 1997, New South met its reserve
requirements.

Federal Deposit Insurance. New South is required to pay assessments based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the SAIF.

The FDICIA was enacted to recapitalize the Bank Insurance Fund ("BIF") and
impose certain supervisory and regulatory reforms on insured depository
institutions. Pursuant to the FDICIA, the FDIC established a risk-based
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The assessment rate depends on the capital
category and supervisory category to which an institution is assigned. For the
first nine months of 1996, the assessment rate for SAIF-insured institutions
ranged from 0.23% of deposits for well-capitalized institutions in the highest
supervisory subgroup to 0.31% of deposits for undercapitalized institutions in
the lowest supervisory subgroup.

In late 1995, the FDIC amended the risk-based assessment schedule for
depository institutions with deposits insured by the BIF, resulting in a
significant reduction in FDIC assessments for BIF-insured but not SAIF-insured
institutions. In response to this assessment disparity, the Deposit Insurance
Funds Act of 1996 (the "1996 Act"), enacted on September 30, 1996, amended the
Federal Deposit Insurance Act (the "FDI Act") in several ways to recapitalize
the SAIF and reduce the disparity between the assessment rates for the BIF and
the SAIF. The 1996 Act authorized the FDIC to impose a special assessment on
all institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF to the required reserve ratio of 1.25%. SAIF-insured
institutions on November 27, 1996 paid a special assessment equal to 65.7
basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995. The 1996 Act provides the amount of the special assessment
that will be deductible for federal income tax purposes for the taxable year
in which the special assessment is paid. Based on the foregoing, New South
recorded an expense for the special assessment in 1996 of $3.2 million, or
$2.1 million net of tax. In view of the recapitalization of the SAIF, in
December 1996 the FDIC reduced the assessment rate for SAIF-assessable
deposits for periods beginning on October 1, 1996. As a result, the insurance
assessment rates for SAIF-insured institutions, like New South, were set at 18
to 27 basis points for the last quarter of 1996 and zero to 27 basis points
for 1997. In addition, SAIF-insured institutions will be required, until
December 31, 1999, to pay assessments to the FDIC at the annual rate of 6.44
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period,
BIF member banks will be assessed for payment of the FICO obligations at the
annual rate of 1.29 basis points. After December 31, 1999, BIF and SAIF
members will be assessed at the same rate for FICO obligations.

The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25%, except for assessments on institutions
that are not classified as "well-capitalized" or that have been found to have
"moderately severe" or "unsatisfactory" financial, operational or compliance
weaknesses. New South is classified as "well-capitalized" and has not been
found by the OTS to have such supervisory weaknesses. Accordingly, assuming
that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, New South, as long as it maintains
its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those it paid in recent years.

Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
QTL test, as modified by FDICIA, a savings association is

required to maintain at least 65% of its "portfolio assets"(total assets less
(i) specified liquid assets up to 20% of total assets, (ii) intangible assets,
including goodwill, and (iii) the value of property used to conduct business)
in certain "qualified thrift investments" (such as home residential mortgage
loans and other residential real estate-related assets) on a monthly average
basis in nine out of every 12 months.

A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An
initial failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction
on obtaining additional advances from its Federal Home Loan Bank. If a savings
institution does not requalify under the QTL test within the three-year period
after it fails the QTL test, it would be required to terminate any activity
not permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution, such as the Company, would similarly be
required to register as a bank holding company with the Federal Reserve Board.
See "Supervision and Regulation--Supervision and Regulation of the Company."
At December 31, 1997, New South qualified as a QTL.

Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10% limit on all other loans to households is eliminated by the new law, and
such loans may now be counted toward the QTL test within the 20% of portfolio
assets limit. Second, the statute amends the QTL test to provide that a
savings institution may be considered a QTL either (i) by satisfying the
HOLA's QTL requirements or (ii) by qualifying as a "domestic building and loan
association" as defined under the Code.

Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality,
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.

In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves. Management believes
that the asset quality and earnings standards, in the form proposed by banking
agencies, would not have a material effect on the operations of New South.

Prompt Corrective Action. Under FDICIA, the federal banking regulators are
required to take prompt corrective action in respect of depository
institutions that do not meet certain minimum capital requirements, including
a leverage limit and a risk-based capital requirement. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the institution to
become undercapitalized. As required by FDICIA, banking regulators, including
the OTS, have issued regulations that classify insured depository institutions
by capital levels and provide that the applicable agency will take various
prompt corrective actions to resolve the problems of any institution that
fails to satisfy the capital standards.

At December 31, 1997, New South met all of its capital requirements on a
fully phased-in basis and had the requisite capital levels to be deemed a
"well capitalized" institution under the OTS' prompt corrective action
regulations.

Limitations on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. A savings institution must give notice
to the OTS at least 30 days before payment of a proposed capital distribution,
and capital distributions in excess of specified earnings or by certain
institution are subject to approval by the OTS. A savings institution that has
capital in excess of all regulatory capital requirements before and after a
proposed capital distribution and that is not otherwise restricted in making
capital distributions may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the
calendar year, or (ii) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior OTS approval. New
South currently satisfies all of its capital requirements on a fully-phased-in
basis and therefore is permitted to pay dividends in accordance with the
distribution rules described above.

In addition to the foregoing, earnings of New South appropriate to bad debt
reserves and deducted for foreign income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by New South on the amount of earnings
removed from the reserves for such distributions.

Real Estate Lending Standards. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards,
prudent underwriting standards, including loan-to-value limits, that are clear
and measurable, loan administration procedures and documentation, approval and
reporting requirements. An institution's real estate lending policy must
reflect consideration of Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value limits specified
in the Interagency Guidelines for the various types of real estate loans. The
Interagency Guidelines state that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.

Federal Consumer Credit and Non-Discrimination Regulation. New South's
mortgage lending activities are subject to the provisions of various federal
and state statutes, including, among others, the Truth in Lending Act, the
Equal Credit Opportunity Act, the RESPA, the Fair Housing Act and the
regulations promulgated thereunder. These statutes and regulations, among
other things, prohibit discrimination on the basis of race, gender or other
designated characteristics, prohibit unfair and deceptive trade practices,
require the disclosure of certain basic information to mortgage borrowers
concerning credit terms and settlement costs, and otherwise regulate terms and
conditions of credit and the procedures by which credit is offered and
administered. Each of the foregoing statutes provides for various
administrative, civil and, in limited circumstances, criminal enforcement
procedures, and violations thereof may also lead to class actions seeking
actual and/or punitive damages.

New South attempts in good faith to comply with the provisions of these
statutes and their implementing regulations; however, the provisions are
complex and even inadvertent non-compliance could result in liability to New
South. During the past several years, numerous individual claims, purported
class actions and federal enforcement proceedings have been commenced against
a number of financial institutions alleging that one or more of these
provisions have been violated. While New South has incurred no material
detriment as a result of

these actions, there can be no assurance that one or more aspects of its
lending program will not be found to have been in violation of these statutes.

Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its
community and to take that record into account in its evaluation of certain
applications by the institution. FIRREA amended the CRA to require all
institutions to make public disclosure of their CRA performance using the
ratings of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." New South received an outstanding rating in its last CRA
examination by the OTS dated February 12, 1996.

On May 4, 1995, the bank regulatory agencies, including the OTS, adopted new
uniform CRA regulations that provide guidance to financial institutions on
their CRA obligations and the methods by which those obligations will be
assessed and enforced. The regulations establish three tests applicable to New
South: (i) a lending test to evaluate direct lending in low-income areas and
indirect lending to groups that specialize in community lending; (ii) a
service test to evaluate its delivery of services to such areas, and (iii) an
investment test to evaluate its investment in programs beneficial to such
areas. The new CRA regulations became effective on July 1, 1995, but reporting
requirements were not effective until January 1, 1997. Evaluation under the
regulations was not mandatory until July 1, 1997. New South believes its
current operations and policies substantially comply with the regulations, and
therefore no material changes to operations or policies are expected.

Agencies. New South's lending activities, including its mortgage banking
operations, are subject to the rules and regulations of the FHA, VA, FNMA,
FHLMC and GNMA and other regulatory agencies with respect to originating,
processing, underwriting, selling and servicing residential mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
such activities. Moreover, lenders such as New South are required annually to
submit audited financial statements to FNMA, FHLMC and GNMA and to comply with
each regulatory entity's own financial requirements. New South's business is
also subject to examination by FNMA, FHLMC and GNMA to assure compliance with
applicable regulations, policies and procedures.

Transactions with Affiliates. New South is subject to restrictions imposed
by federal law on extensions of credit to, and certain other transactions
with, the Company and other affiliates and on investments in the stock or
other securities thereof. Such restrictions prevent the Company and such other
affiliates from borrowing from New South unless the loans are secured by
specified collateral, and require such transactions to have terms comparable
to terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by New South are generally
limited in amount as to the Company and as to any other affiliate to 10% of
New South's capital and surplus and as to the Company and all other affiliates
to an aggregate of 20% of New South's capital and surplus. These regulations
and restrictions may limit the Company's ability to obtain funds from New
South for its cash needs, including funds for acquisitions and for payment of
dividends, interest and operating expenses. New South's ability to extend
credit to its directors, executive officers, and 10% stockholders, as well as
to entities controlled by such persons, is governed by the requirements of
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve thereunder.

Liquidity Requirements. New South is required by OTS regulation to maintain
an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) equal to the monthly average of not less
than a specified percentage (currently 5%) of its net withdrawable savings
deposit plus short-term borrowings. The average daily liquidity ratio of New
South for the month ended December 31, 1997 was 10.5%. New South is also
required to maintain average daily balances of

short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable savings accounts and borrowings payable in one year or
less. New South was in compliance with the 1% requirement at December 31,
1997. Monetary penalties may be imposed for failure to meet liquidity
requirements.

Branching. Subject to certain limitations, the HOLA and the OTS regulations
currently permit federally chartered savings institutions such as New South to
establish branches in any state of the United States. The authority to
establish such branches is available (i) in states that expressly authorize
branches of savings institutions located in another state or (ii) to a federal
savings institution that qualifies as a "domestic building and loan
association under the Code. See "--Qualified Thrift Lender Test." The
authority for a federal savings institution to establish an interstate branch
network would facilitate a geographic diversification of the institution's
activities. This authority under the HOLA and the OTS regulations preempts any
state law purporting to regulate branching by federal savings institutions.

Federal Home Loan Bank System. The Federal Home Loan Bank System consists of
12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institutions. As a
member of the FHLB, New South is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to 1% of the aggregate
unpaid principal of its home residential mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings), from the FHLB, whichever is greater. New South was
in compliance with this requirement, with an investment in FHLB stock at
December 31, 1997 of $9.3 million. Long-term FHLB advances may only be made
for the purpose of providing funds for residential housing finance. At
December 31, 1997, New South had total advances of $179.4 million outstanding
from the FHLB.

SUPERVISION AND REGULATION OF THE COMPANY

The Company is a unitary thrift holding company under the HOLA and, as such,
is subject to OTS regulation, supervision and examination. In addition, the
OTS has enforcement authority over the Company and may restrict or prohibit
activities that are determined to represent a serious risk to the safety,
soundness or stability of New South or any other subsidiary savings
institution.

Under the HOLA, a thrift holding company may not (i) acquire, with certain
exceptions, more than 5% of a non-subsidiary savings institution or a non-
subsidiary savings and loan holding company; or (ii) acquire or retain control
of a depository institution that is not insured by the FDIC.

As a thrift holding company, the Company generally is not subject to any
restriction as to the types of business activities in which it may engage,
provided that New South continues to satisfy the QTL test. See "Supervision
and Regulation--Supervision and Regulation of New South--Qualified Thrift
Lender Test." Upon any non-supervisory acquisition by the Company of another
savings institution that is held as a separate subsidiary, the Company would
become a multiple savings and loan holding company and would be subject to
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under the Bank Holding Company Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS
regulation.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of December 31, 1997 by each person
(or group within the meaning of Section 13(d)(3) of the Exchange Act) known by
the Company to own beneficially more than five percent of the Company's common
stock:

PERCENTAGE
AMOUNT AND NATURE OF BENEFICIALLY
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OWNED(1)
- ---------------- ----------------------- ------------

Mary R. Johnson-Butterworth
4731 Old Leeds Road
Birmingham, Alabama 35213................ 84,959(2) 6.17%
W. T. Ratliff, Jr.
2621 Altadena Road
Birmingham, Alabama 35243................ 370,173 26.88
J.K.V. Ratliff
46 Greenway Road
Birmingham, Alabama 35213................ 194,409 14.12
William T. Ratliff, III
3944 Forest Glen Drive
Birmingham, Alabama 35213................ 112,018(3) 8.14
Amelie L. Ratliff
5 Fuller Street, #1
Brookline, Massachusetts 02146........... 82,158(4) 5.97
Daniel T. Ratliff
31315 Pine Run Drive
Ono Island
Orange Beach, Alabama 36561.............. 86,346(5) 6.27
Carlton McCoy Ray
9949 Southwind Drive
Indianapolis, Indiana 46256.............. 76,970 5.59

- --------
(1) Unless otherwise indicated, the persons named above have the sole power to
vote or direct the voting and to dispose or direct the disposition of any
security.
(2) Includes 7,376 shares held by Mrs. Johnson-Butterworth as custodian for
the benefit of her minor children.
(3) Includes 20,136 shares held by Mr. Ratliff, III as custodian for the
benefit of his minor children, nieces and nephews.
(4) Includes 4,688 shares held by Ms. Ratliff as custodian for the benefit of
her minor son.
(5) Includes 9,376 shares held by Mr. Daniel T. Ratliff as custodian for the
benefit of his minor children.

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors ("Board of Directors") is divided into
three classes, and each of the Company's three directors is elected into one
of these three classes to hold office for a term of three years or until their
successors have been elected and qualified. Executive officers serve at the
pleasure of the Board of Directors and directors are elected at the annual
meeting of stockholders. The directors, executive officers and other key
employees of the Company and their ages as of April 1, 1998, are as follows:

NAME AGE POSITION
---- --- --------

DIRECTOR ELECTED TO SERVE UNTIL ANNUAL MEETING IN 2000 (CLASS III)
William T. Ratliff, Jr.... 73 Director and Vice President of the Company;
Director of New South
DIRECTOR ELECTED TO SERVE UNTIL ANNUAL MEETING IN 2001 (CLASS I)
J.K.V. Ratliff............ 69 Director and Vice President of the Company
DIRECTOR ELECTED TO SERVE UNTIL ANNUAL MEETING IN 1999 (CLASS II)
William T. Ratliff, III... 44 Chairman of the Board and President of the
Company;
Chairman of the Board and Chief Executive
Officer of New South
EXECUTIVE OFFICERS WHO ARE NOT ALSO DIRECTORS
Robert M. Couch........... 41 Executive Vice President of the Company;
Director, President and Chief Operating
Officer of New South
Suzanne H. Moore.......... 42 Vice President and Controller of the Company
and New South
David E. Mewbourne........ 49 Executive Vice President of New South
Roger D. Murphree......... 52 Senior Vice President of New South
David A. Roberts.......... 45 Director and Senior Vice President of New
South
Larry A. Nelson........... 49 Senior Vice President of New South
Lizabeth R. Nichols....... 42 Vice President and General Counsel of New
South

The business experience of each of the persons named above during the past
five years is discussed below.

Mr. William T. Ratliff, Jr. has been a Director and Vice President of the
Company since its organization in 1994. He has been a Director of New South
since its organization in 1985. He has served as Chief Executive Officer of
Collateral (or its predecessor Collateral Investment Company) for 31 years
until 1986. Mr. Ratliff, Jr. is the father of Mr. Ratliff, III, the Chairman
and President of the Company, and the brother of Mr. J.K.V. Ratliff, a
Director and Vice President of the Company.

Mr. J.K.V. Ratliff has been a Director and Vice President of the Company
since its organization in 1994. He has been a Director and Vice President of
Collat, Inc., an affiliate, since 1986. Mr. J.K.V. Ratliff has been Assistant
to the President and a Director of Collateral Agency, Inc., an affiliate,
since its inception in 1956. Mr. Ratliff has also served as a director and
Vice President of Collateral Investment Corp., an affiliate, since September
1990. Mr. J.K.V. Ratliff is the brother of Mr. Ratliff, Jr., a Director and
Vice President of the Company, and the uncle of Mr. Ratliff, III, the Chairman
and President of the Company.

Mr. William T. Ratliff, III has been President and a Director of the Company
since its organization in October 1994 and Chairman of the Board and Chief
Executive Officer of New South since 1985. Mr. Ratliff, III, has been the
Chairman of the Board of Triad Guaranty, Inc., an affiliate, since 1993 and
Chairman of the Board of Triad Guaranty Insurance Corporation, an affiliate,
since 1989. He has been President of Collateral Investment Corp., an
affiliate, since 1990 and was President and an individual General Partner of
Collateral from 1987 to 1995. From March 1994 until December 1996, Mr. Ratliff
served as President of Southwide Life Insurance Corp., an affiliate. He served
as Executive Vice President of Southwide Life Insurance Corp., an affiliate,
from 1986 to 1993. Mr. Ratliff, III joined Collateral in 1981. Mr. Ratliff,
III is the son of Mr. Ratliff, Jr., a Director and Vice President of the
Company, and the nephew of Mr. J.K.V. Ratliff, a Director and Vice President
of the Company.

Mr. Robert M. Couch has been Executive Vice President of the Company since
1994. Mr. Couch is responsible for the day-to-day operations of the Company.
He has been President and Chief Operating Officer of New South since June 1997
and a Director since January 1995. From March 1995 to June 1997, he served as
Vice Chairman of New South. From August 1995 to present, Mr. Couch has been
President of Collateral. From October 1993 to August 1995, Mr. Couch served as
Executive Vice President of Collateral. Prior to joining New South in 1993, he
served as General Counsel and Chief Financial Officer of Synovus Bancshares of
Alabama, Inc. (formerly First Commercial Bancshares, Inc.).

Mr. David E. Mewbourne has been Executive Vice President of New South since
July 1997. Mr. Mewbourne is responsible for the day to day operations of the
residential mortgage loan production, underwriting and servicing. From 1995 to
June 1997, he was Senior Vice President of New South. Mr. Mewbourne has been
Senior Vice President of Collateral, since March 1993. From June 1987 to March
1995, he served as Executive Vice President of AmSouth Mortgage Company.

Mr. Roger D. Murphree has been Senior Vice President of New South since
December 1997. Mr. Murphree is responsible for secondary marketing sales,
securitizations, and portfolio trading for the Company. From 1995 to December
1997, he served as Vice President of New South. Mr. Murphree has been employed
by New South since 1985. Mr. Murphree has served as Senior Vice President of
Collateral since June 1995.

Mr. David A. Roberts has been a Director of New South since September 1997
and Senior Vice President since July 1997. Mr. Roberts is responsible for the
commercial real estate lending activities. Mr. Roberts has also served as
Executive Vice President of Collateral since August 1997. From February 1995
to July 1997, he served as Senior Vice President of Collateral. From June 1990
to February 1995, he served as Vice President of Collateral.

Mr. Larry A. Nelson has been Senior Vice President of New South since
December 1997. Mr. Nelson is responsible for the day-to-day operations of
installment (automobile) lending. From 1989 to 1997, he served as Vice
President of New South.

Ms. Suzanne H. Moore has been Vice President and Controller of the Company,
New South and Collateral since September 1997. From April 1989 to August 1997,
Ms. Moore served as Vice President and Controller of NationsBank Commercial
Corporation, a factoring company after serving in various financial positions
with NationsBank since 1976.

Ms. Lizabeth R. Nichols has been Vice President and General Counsel of New
South since February 1998. From January 1997 to January 1998, Ms. Nichols
served as Vice President and Legal Counsel of New South. Ms. Nichols has
served as Vice President of Collateral since January 1997. From October 1993
to September 1996, Ms. Nichols was Vice President and Associate General
Counsel of Protective Life Corporation, an insurance holding company and was
an employee until January 1997. Prior to 1993, Ms. Nichols served in various
capacities with Protective Life Corporation.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information concerning the beneficial
ownership of the Company's common stock as of December 31, 1997, by (i) each
director of the Company, (ii) the President of the Company and each other
executive officer of the Company whose total annual salary and bonus earned
during the fiscal year ended December 31, 1997 exceeded $100,000 (the "Named
Executive Officers"), and (iii) all directors and executive officers of the
Company as a group:

AMOUNT AND NATURE PERCENT OF
NAME OF BENEFICIAL OWNERSHIP(1) CLASS(1)
- ---- -------------------------- ----------

William T. Ratliff, Jr.................. 370,173 26.88%
J.K. V. Ratliff......................... 194,409 14.12
William T. Ratliff, III................. 112,018(2) 8.14
All directors and executive officers as
a group:............................... 676,600 49.14

DIRECTOR COMPENSATION

No Directors receive fees for their service on the Board of Directors.
Executive officers of the Company who are also directors of the Company do not
receive remuneration other than salaries and bonuses for serving on the Board
of Directors.

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES

During the fiscal year ended December 31, 1997, the Board of Directors held
one regularly scheduled meeting, which was attended by all directors.

COMMITTEES OF THE BOARD OF DIRECTORS

There are no committees of the Board of Directors.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the Named
Executive Officers from New South during the fiscal year ended December 31,
1997.

SUMMARY COMPENSATION TABLE

NAME AND ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- ------------------ -------- -------- ---------------

William T. Ratliff, III
President of the Company ................. $127,000 $ 40,000 $2,375
Robert M. Couch
Executive Vice President of
the Company............................... 198,000(2) 160,000 2,375
David E. Mewbourne
Executive Vice President of
New South................................. 166,042 125,000 2,375
Roger D. Murphree
Senior Vice President of New South........ 83,646 25,000 1,747

- --------
(1) Consists solely of amounts contributed by the Company to the executive
officer's 401(k) plan.
(2) Includes $39,600 reimbursed by Collateral under the Administrative
Services Agreement (as defined herein) for services rendered by Mr. Couch
to Collateral. See "Certain Relationships and Related Transactions."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL

Certain affiliated corporations and limited partnerships in which Messrs.
Ratliff, Jr., J.K.V. Ratliff and Ratliff, III are majority owners have been
customers of New South in the ordinary course of business. These affiliated
corporations and limited partnerships include Collateral, Safemate Life
Insurance Company, Collateral Agency, Inc., Triad Guaranty, Inc., and
Southland National Insurance Corporation. Outside of normal customer
relationships, no directors or officers of the Company, no stockholders
holding over five percent (5%) of the Company's voting securities, and no
corporations or limited partnerships with which such persons or entities were
associated, maintain or have maintained since December 31, 1996, any
significant business or personal relationship with the Company or New South,
except as described below.

COLLATERAL TRANSACTIONS

Transfer. New South assumed 39 residential loan production offices,
associated employees, and related assets and liabilities from Collateral in
July 1997 under the terms of two separate agreements. As a result of the
Transfer, New South added approximately 300 employees to its payroll, with
associated increases of expenses of $8.6 million. In connection with the
Transfer, New South agreed to make semi-annual payments to Collateral through
June 30, 2000 based on a percentage of the aggregate principal balance of all
residential mortgage loans originated through the 39 loan production offices.
The percentage for the twelve month periods ending June 30, 1998, 1999, and
2000 are 0.35%, 0.20% and 0.10% respectively. For the six month period between
July 1, 1997 (the effective date of the Transfer) and December 31, 1997, these
fees totalled $891,000. In addition, New South paid Collateral $316,000 during
1997 under the terms of a Lease Agreement effective July 1, 1997 for the
furniture and fixtures associated with the 39 loan production offices. The
Lease Agreement is for a term of 11 months.

Subservicing Agreement. New South has entered into a Subservicing Agreement
with Collateral to service certain conforming residential mortgage loans for
New South. The Subservicing Agreement has an indefinite term but may be
terminated by New South with 60 days notice, provided New South pays
Collateral a penalty equal to 1% of the aggregate amount of servicing
outstanding on the date of termination. Collateral has the right to terminate
the Subservicing Agreement with 30 days notice without penalty. Under the
terms of the Subservicing Agreement, New South is required to reimburse
Collateral for any non-recoverable losses. The total amount of non-recoverable
losses paid by New South to Collateral in 1997 was $71,000. In addition, New
South paid Collateral $3,642,000 in fees under the Subservicing Agreement in
1997.

Trust and Banking Services. New South's Trust Department acts as document
custodian under the terms of a Custodial Agreement dated December 30, 1990 and
Safekeeping Agreement dated April 12, 1994 for certain of Collateral's
mortgage banking activities. Under the terms of the Custodial Agreement, New
South serves as custodian of documents evidencing and relating to mortgages to
be pooled under contracted agreements associated with GNMA, FNMA and FHLM
mortgage backed securities programs. The fees payable under the Custodial
Agreement are calculated on a per file basis. The Custodial Agreement may be
terminated by either party with 30 days prior notice. Under the Safekeeping
Agreement, New South serves as custodian for safekeeping certain commercial
real estate loan files. The Safekeeping Agreement is for an indefinite term,
and may be terminated by either party with 30 days notice. The fees to be paid
to New South under the Safekeeping Agreement are calculated on a per file
basis. New South received $191,022 in fees from Collateral in 1997 for
custodial and safekeeping services.

Collateral maintains deposits with New South in the normal course of
business. At December 31, 1997, these deposits totaled $39.9 million in
noninterest bearing accounts under escrow accounts for Collateral as trustee
for certain investors and mortgagors. Collateral and its affiliates also
maintain business checking and money market accounts at New South. At December
31, 1997, amounts totaling approximately $1.6 million were maintained in such
accounts at New South in the normal course of business.

Loan Purchases. During 1997, New South purchased $55.0 million of mortgage
loans from Collateral at cost. New South sold $20.6 in mortgage loans to
Collateral in 1997. These purchases and sales were governed by terms of the
Loan/Mortgage--Securities Master Participation Agreement dated March 30, 1988.
This Agreement is for an indefinite term and can be terminated by either party
upon an event of default by Collateral or insolvency of either party. New
South's participation percentage is 90% on all loans and mortgage-backed
securities.

Lease Agreements. New South leases furnished office space from certain
affiliates. Under the terms of two Commercial Lease Agreements, New South paid
Collateral $136,540 in rent for lease of office space at 2000 Crestwood
Boulevard, 1900 Crestwood Boulevard, and the Southwide Life Building during
1997. The Commercial Lease Agreements are each for terms of one year and are
automatically renewable. Either party may terminate same with sixty days
notice.

OTHER AFFILIATE TRANSACTIONS

Administrative Services Agreement. New South provides data processing,
legal, management, corporate accounting, human resources, mail,
telecommunications and public relations services to certain affiliated
companies under the terms of an Agreement for Administrative Services
effective January 1, 1991 (the "Administrative Services Agreement"). The
Administrative Services Agreement is for a term of one year, and is
automatically renewable. The Administrative Services Agreement may be
terminated by any party with sixty days notice. Administrative services are
provided at actual costs, with fees being due quarterly. Due to offsetting
expenses owed by New South to Collateral for services rendered by Collateral
to New South prior to the Transfer, no sums were due from Collateral under
this Administrative Services Agreement in 1997. Had these offsetting expenses
not been incurred, amounts payable from Collateral under this Administrative
Services Agreement in 1997 would have been $282,272. The percentage allocation
of New South's total operating costs assessed each affiliate for these
services are indicated below.

CORPORATE DATA MAIL COMPLIANCE/ HUMAN PUBLIC TELECOM-
ACCOUNTING PROCESSING ROOM LEGAL RESOURCES RELATIONS MUNICATIONS
---------- ---------- ---- ----------- --------- --------- -----------

Collateral Mortgage,
Ltd.................... 25% 20% 20% 5% 15% 25% 16%
Safemate Life Insurance
Company................ 0 0 0 0 1 0 0
Collateral Agency,
Inc.................... 5 10 5 0 2 0 2
Triad Guaranty Inc...... 0 0 0 0 0 0 0
Southland National
Insurance Corporation.. 0 0 0 20 5 0 0

Executive officers of New South also serve as executive officers and/or
directors of one or more affiliate companies. Certain compensation allocations
are made as to certain individuals' time devoted to duties as an executive
officer of New South and its affiliates, and New South receives reimbursement
for compensation paid to such executive officers which is allocable to these
other affiliates. Of the amounts of compensation shown in the Summary
Compensation Table approximately 44% of Mr. Ratliff, III's and 80% of Mr.
Couch's total compensation is attributable to services performed for or on
behalf of New South.

Investment Advisory Agreements. In 1997, Collateral received investment fees
of $240,807 and $14,755, respectively from Triad Guaranty Insurance
Corporation and Southland National Insurance Corporation under the terms of
Investment Advisory Agreements dated January 1, 1996. These Agreements have an
indefinite term and may be terminated by either party with 60 days notice. For
investment advisory services rendered, Collateral receives a fee based on the
value of the assets actively managed. Collateral's advisory services are
provided by New South personnel in the Capital Markets department who also
serve as officers of Collateral. Approximately 20% of New South's Capital
Markets department time is expended on these investment advisory services.

Real Estate Purchase Agreement. New South sold an office rental property to
Collateral Agency, Inc., an affiliate, for a purchase price of $1.12 million
in 1997 under the terms of a Real Estate Purchase Agreement dated June 7,
1997. New South realized a gain of $158,000 on the sale.

Loan Sale Agreement. New South paid Collateral Investment Corp., an
affiliate, $996,972 for five commercial loans previously purchased from the
Resolution Trust Corporation pursuant to a Loan Sale Agreement dated November
25, 1997.

Stock Purchase Agreement. The Company paid Collateral Investment Corp.
$197,488 for the purchase of 100% of the common stock of Collateral Agency of
Texas, Inc., a grandfathered insurance agency, pursuant to Stock Purchase
Agreement dated December 31, 1997.

INDEBTEDNESS OF MANAGEMENT

Certain directors and executive officers of New South and its affiliates are
currently indebted to New South for mortgage loans. These loans (i) were made
in the ordinary course of business, (ii) were made on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions with other persons, and (iii) did not involve more
than the normal risk of collectibility or present other unfavorable features.

DESCRIPTION OF THE PREFERRED SECURITIES

The Preferred Securities will represent preferred undivided beneficial
interests in the assets of the Trust, and the holders thereof will be entitled
to a preference over the Common Securities in certain circumstances with
respect to Distributions and amounts payable on redemption of the Trust
Securities or liquidation of the Trust. See "Description of the Preferred
Securities--Subordination of Common Securities." The Trust Agreement will be
qualified under the Trust Indenture Act. The following description does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Agreement and the Trust Indenture Act. Certain
capitalized terms used herein are defined in the Trust Agreement.

GENERAL

The Preferred Securities will be limited to $30 million aggregate
liquidation amount at any one time outstanding. The Preferred Securities will
rank pari passu, and payments will be made thereon pro rata, with the Common
Securities of the Trust except as described under "--Subordination of Common
Securities" below. Legal title to the Subordinated Debentures will be held by
the Property Trustee in trust for the benefit of the holders of the Preferred
Securities and the Common Securities. The Guarantee will not guarantee payment
of Distributions or amounts payable on redemption of the Preferred Securities
or liquidation of the Trust when the Trust does not have funds on hand legally
available for such payments. See "Description of the Guarantee."

DISTRIBUTIONS

The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Trust, and Distributions on the Preferred Securities will
be payable at the annual rate of % of the stated Liquidation Amount of
$10.00, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year to the holders of the Preferred Securities at the
close of business on the fifteenth day (whether or not a Business Day (as
defined below)) next preceding the relevant Distribution Date. Distributions
will accumulate from the Issue Date. The first Distribution payment date for
the Preferred Securities will be September 30, 1998. The amount of
Distributions payable for any period will be computed on the basis of a 360-
day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the
next succeeding day that is a Business Day (and without any additional
Distributions or other payment in respect of any such delay), in each case
with the same force and effect as if made on the date such payment was
originally payable. A "Business Day" shall mean any day other than a Saturday
or Sunday, or a day on which banking institutions in New York, New York are
authorized by law or executive order to be closed.

So long as no Debenture Event of Default shall have occurred and be
continuing, the Company has the right under the Indenture to defer payment of
interest on the Subordinated Debentures at any time or from time to time for a
period not exceeding twenty (20) consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity. As a consequence of any such deferral of interest payments by
the Company, quarterly Distributions on the Preferred Securities will also be
deferred by the Trust during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon at the rate per annum of % thereof, compounded
quarterly, to the extent permitted by applicable law, from the relevant
payment date for such Distributions. The term "Distributions" as used herein
shall include any such additional Distributions.

During any such Extension Period, the Company may extend such Extension
Period, provided that such extension does not cause such Extension Period to
exceed twenty (20) consecutive quarterly periods or to extend beyond the
Stated Maturity. Upon the termination of any such Extension Period and the
payment of all amounts then due, and subject to the foregoing limitations, the
Company may elect to begin a new Extension Period. The Company must give the
Property Trustee, the Administrative Trustees and the Debenture Trustee notice
of its election of any Extension Period or any extension thereof at least five
Business Days prior to the earlier of (i) the date the Distributions on the
Preferred Securities would have been payable except for the election to begin
or extend such Extension Period and (ii) the date the Administrative Trustees
are required to give notice to any securities exchange or to holders of the
Preferred Securities of the record date or the date such Distributions are
payable, but in any event not less than five Business Days prior to such
record date. There is no limitation on the number of times that the Company
may elect to begin an Extension Period. See "Description of the Subordinated
Debentures--Option to Extend Interest Payment Date" and "Certain Federal
Income Tax Consequences--Interest Income and Original Issue Discount."

During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or
(ii) make any payment of principal of or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Company that rank pari
passu in all respects with or junior in interest to the Subordinated
Debentures subject to certain exceptions described herein or (iii) make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
with or junior in right of payment to the Subordinated Debentures (other than
(a) dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, common stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class, or series
of the Company's capital stock for another class or series of the Company's
capital stock, (e) the purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, and (f)
purchases or issuances of common stock in connection with any of the Company's
stock option, stock purchase, stock loan or other benefit plans for its
directors, officers or employees or any of the Company's dividend reinvestment
plans, in each case as now existing or hereafter established or amended). See
"Description of the Subordinated Debentures--Option to Extend Interest Payment
Date."

The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.

The revenue of the Trust available for distribution to holders of its
Preferred Securities will be limited to payments under the Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. If the Company does not make interest payments
on such Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
Distributions (if and to the extent the Trust has funds legally available for
the payment of such Distributions

and cash sufficient to make such payments) is guaranteed by the Company on a
limited basis as set forth herein under "Description of the Guarantee."

SPECIAL EVENT REDEMPTION

If a Capital Event, Tax Event or Investment Company Event (each as defined
herein) occurs, then the Company will have the right, within 90 days following
the occurrence of such event to prepay the Subordinated Debentures in whole
(but not in part) in the manner set forth under "Description of the
Subordinated Debentures--Special Event Prepayment," and therefore to cause a
mandatory redemption of the Preferred Securities prior to the Stated Maturity.
Each of a Capital Event, Tax Event or an Investment Company Event are
sometimes referred to herein as a "Special Event."

OPTIONAL REDEMPTION AFTER , 2003

The Company will have the right to prepay the Subordinated Debentures, in
whole at any time, or in part from time to time, at its option at any time
after , 2003, and thereby cause a mandatory redemption of a proportionate
amount of the Preferred Securities.

REDEMPTION

Upon the mandatory repayment of the Subordinated Debentures at the Stated
Maturity or upon the earlier Prepayment of the Subordinated Debentures (upon
the occurrence of a Special Event at any time or at the option of the Company
after , 2003), the proceeds from such repayment shall be applied by the
Property Trustee to redeem the Trust Securities, upon not less than 30 nor
more than 60 days notice prior to the date fixed for repayment or redemption,
at a redemption price equal to 100% of the aggregate Liquidation Amount of the
Trust Securities so redeemed, plus accumulated and unpaid Distributions due
thereon to the date of payment, if any (the "Redemption Price").

LIQUIDATION OF TRUST AND DISTRIBUTION OF SUBORDINATED DEBENTURES

The Trust shall automatically dissolve and its affairs shall be wound up
upon the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) the distribution of the Subordinated
Debentures to the holders of the Trust Securities, if the Company, as Sponsor,
has given written direction to the Property Trustee to dissolve the Trust
(which direction is optional and wholly within the discretion of the Company,
as Sponsor); (iii) redemption of all of the Trust Securities as described
under "--Redemption" above; (iv) expiration of the term of the Trust; and (v)
the entry of an order for the dissolution of the Trust by a court of competent
jurisdiction.

The Company will have the right at any time to liquidate the Trust and cause
Subordinated Debentures to be distributed to the holders of the Preferred
Securities in exchange therefor upon liquidation of the Trust. Under current
United States federal income tax law, a distribution of Subordinated
Debentures in exchange for Preferred Securities should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however,
the distribution of the Subordinated Debentures could be a taxable event to
holders of the Preferred Securities. See "Certain Federal Income Tax
Consequences."

In the event of any termination of the Trust, the Trust shall be liquidated
by the Administrative Trustees as expeditiously as the Administrative Trustees
determine to be possible by distributing, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, to the holders of the
Trust Securities the Subordinated Debentures, unless such distribution is
determined by the Property Trustee not to be practicable, in which event such
holders will be entitled to receive out of the assets of the Trust legally
available for distribution to holders, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, an amount equal to the
aggregate of the Liquidation Amount plus accumulated and unpaid Distributions
thereon to the date of

payment (such amount being the "Liquidation Distribution"). If the Liquidation
Distribution can be paid only in part because the Trust has insufficient
assets on hand legally available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Preferred
Securities and the Common Securities shall be paid on a pro rata basis, except
that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities. See
"Description of the Preferred Securities--Subordination of Common Securities."

After the liquidation date is fixed for any distribution of Subordinated
Debentures to holders of the Trust Securities, (i) the Trust Securities will
no longer be deemed to be outstanding, (ii) each registered global certificate
representing Trust Securities and held by The Depository Trust Company ("DTC")
or its nominee will receive a registered global certificate or certificates
representing the Subordinated Debentures to be delivered upon such
distribution and (iii) any certificates representing Trust Securities not held
by DTC or its nominee will be deemed to represent Subordinated Debentures
having a principal amount equal to the Liquidation Amount of such Trust
Securities, and bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid Distributions on such Trust Securities until such
certificates are presented to the Administrative Trustees or their agent for
cancellation, whereupon the Company will issue to such holder, and the
Debenture Trustee will authenticate, a certificate representing such
Subordinated Debentures.

There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for the Trust Securities if a dissolution and liquidation of the Trust were to
occur. Accordingly, the Preferred Securities that an investor may purchase, or
the Subordinated Debentures that the investor may receive on dissolution and
liquidation of the Trust, may trade at a discount to the price that the
investor paid to purchase the Preferred Securities.

REDEMPTION PROCEDURES

The Trust Securities shall be redeemed at the Redemption Price with the
proceeds from the contemporaneous repayment or prepayment of the Subordinated
Debentures. Any redemption of Trust Securities shall be made and the
Redemption Price shall be payable on the Redemption Date only to the extent
that the Trust has funds legally available for the payment of such Redemption
Price. See "Description of the Preferred Securities--Subordination of Common
Securities."

If the Trust gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, New York City time, on the Redemption Date,
to the extent funds are legally available, with respect to the Preferred
Securities held by DTC or its nominees, the Property Trustee will deposit
irrevocably with DTC funds sufficient to pay the Redemption Price. See
"Description of the Preferred Securities--Form, Denomination, Book-Entry
Procedures and Transfer." With respect to the Preferred Securities held in
certificated form, the Property Trustee, to the extent funds are legally
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the Redemption Price and will give such
paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing
the Preferred Securities. See "--Payment and Paying Agency" below.
Distributions payable on or prior to the Redemption Date shall be payable to
the holders of such Preferred Securities on the relevant record dates for the
related Distribution Dates. If notice of redemption shall have been given and
funds deposited as required, then upon the date of such deposit, all rights of
the holders of the Preferred Securities will cease, except the right of the
holders of the Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and the Preferred Securities will
cease to be outstanding. In the event that any Redemption Date of Preferred
Securities is not a Business Day, then the Redemption Price payable on such
date will be paid on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay). In the
event that payment of the Redemption Price is improperly withheld or refused
and not paid either by the Trust or by the Company pursuant to the Guarantee
as described under "Description of the Guarantee," Distributions on Preferred
Securities called for redemption will continue to accumulate at the then
applicable rate, from the Redemption Date originally established by the Trust
to the date such Redemption Price is actually paid, in which case the actual
payment date will be the Redemption Date for purposes of calculating the
Redemption Price.

Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.

Notice of any redemption will be mailed at least 30 days but not more than
60 days prior to the Redemption Date to each holder of Trust Securities at its
registered address. Unless the Company defaults in payment of the applicable
Prepayment Price on, or in the repayment of, the Subordinated Debentures, on
and after the Redemption Date Distributions will cease to accrue on the Trust
Securities called for redemption.

SUBORDINATION OF COMMON SECURITIES

Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and the Common Securities, as applicable, shall be made pro rata
based on the Liquidation Amount of the Preferred Securities and Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date a Debenture Event of Default shall have occurred and be continuing, no
payment of any Distribution on, or Redemption Price of, any of the Common
Securities, and no other payment on account of the redemption, liquidation or
other acquisition of the Common Securities, shall be made unless payment in
full in cash of all accumulated and unpaid Distributions on all of the
outstanding Preferred Securities for all Distribution periods terminating on
or prior thereto or, in the case of Preferred Securities called for redemption
on a Redemption Date on or prior thereto, the full amount of the Redemption
Price therefor, shall have been made or provided for, and all funds available
to the Property Trustee shall first be applied to the payment in full in cash
of all Distributions on, or Redemption Price of, the Preferred Securities then
due and payable.

In the case of any Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to such
Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Preferred Securities and not on behalf
of the Company as holder of the Common Securities, and only the holders of the
Preferred Securities will have the right to direct the Property Trustee to act
on their behalf.

EVENTS OF DEFAULT; NOTICE

The occurrence of a Debenture Event of Default (see "Description of the
Subordinated Debentures--Debenture Events of Default") constitutes an "Event
of Default" under the Trust Agreement.

Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Preferred Securities,
the Administrative Trustees and the Company, as Sponsor, unless such Event of
Default shall have been cured or waived. The Company, as Sponsor, and the
Administrative Trustees are required to file annually with the Property
Trustee a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.

If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities as
described under "--Liquidation of Trust and Distribution of Subordinated
Debentures" and "--Subordination of Common Securities" above.

REMOVAL OF ISSUER TRUSTEES

Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing,
the Property Trustee and the Delaware Trustee may be removed at such time by
the holders of a majority in Liquidation Amount of the outstanding Preferred
Securities. In no event will the holders of the Preferred Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which

voting rights are vested exclusively in the Company as the holder of the
Common Securities. No resignation or removal of an Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.

MERGER OR CONSOLIDATION OF ISSUER TRUSTEES

Any corporation into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which such Issuer Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of such Issuer Trustee, shall be the successor of such Issuer
Trustee under the Trust Agreement, provided such corporation shall be
otherwise qualified and eligible.

MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE
TRUST

The Trust may not merge or convert with or into, consolidate, amalgamate, or
be replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described below. The Trust may, at the request of the Company, as
Sponsor, with the consent of the Administrative Trustees but without the
consent of the Property Trustee, the Delaware Trustee or holders of the
Preferred Securities, merge or convert with or into, consolidate, amalgamate,
or be replaced by or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to a trust organized as such under
the laws of any State; provided, that (i) such successor entity either (a)
expressly assumes all of the obligations of the Trust with respect to the
Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities
(the "Successor Securities") so long as the Successor Securities rank the same
as the Preferred Securities rank in priority with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) the Company
expressly appoints a trustee of such successor entity possessing the same
powers and duties as the Property Trustee with respect to the Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Preferred Securities
are then listed, if any, (iv) such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Preferred Securities (including any Successor Securities) to be downgraded by
any nationally recognized statistical rating organization, (v) such merger,
conversion, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
Preferred Securities (including any Successor Securities) in any material
respect (other than with respect to a dilution of such holder's interest in
the new entity), (vi) such successor entity has a purpose identical to that of
the Trust, (vii) prior to such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Company has
received an opinion from independent counsel to the Trust experienced in such
matters to the effect that (a) such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect (other
than with respect to a dilution of such holder's interest in the new entity),
and (b) following such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such
successor entity will be required to register as an investment company under
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
and (viii) the Company or any permitted successor or assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not,
except with the consent of holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge or convert with or into, or be
replaced by or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any other entity or permit any
other entity to consolidate, amalgamate, merge or convert with or into, or
replace it if such consolidation, amalgamation, merger, conversion,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity not to be classified as a grantor trust for United States
federal income tax purposes.

VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT

Except as provided below and under "--Mergers, Conversions, Consolidations,
Amalgamations or Replacements of the Trust" above, "Removal of Issuer
Trustees" and "Description of the Guarantee--Amendments and Assignment" and as
otherwise required by law and the Trust Agreement, the holders of the
Preferred Securities will have no voting rights.

The Trust Agreement may be amended from time to time by the Company and the
Issuer Trustees, without the consent of the holders of the Trust Securities
(i) to cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision of the Trust
Agreement, or to add any other provisions with respect to matters or questions
arising under the Trust Agreement, which shall not be inconsistent with the
other provisions of the Trust Agreement, or (ii) to modify, eliminate or add
to any provisions of the Trust Agreement to such extent as shall be necessary
(A) to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any Trust Securities
are outstanding, (B) to ensure that the Trust will not be required to register
as an "investment company" under the Investment Company Act, or (C) to ensure
that the proceeds from the sale of the Trust Securities will constitute "Tier
1 capital" under capital adequacy requirements which may be applicable to the
Company; provided, however, that in the case of clause (i), such action shall
not adversely affect in any material respect the interests of the holders of
the Trust Securities, and any amendments of the Trust Agreement shall become
effective when notice thereof is given to the holders of the Trust Securities.
The Trust Agreement may be amended by the Issuer Trustees and the Company (i)
with the consent of holders representing a majority (based upon Liquidation
Amount) of the outstanding Trust Securities, and (ii) upon receipt by the
Issuer Trustees of an opinion of counsel to the effect that such amendment or
the exercise of any power granted to the Issuer Trustees in accordance with
such amendment will not affect the Trust's status as a grantor trust for
United States federal income tax purposes or the Trust's exemption from status
as an "investment company" under the Investment Company Act, provided that,
without the consent of each holder of Trust Securities, the Trust Agreement
may not be amended to (i) change the amount or timing of any Distribution or
other payment on or in respect of the Trust Securities or otherwise adversely
affect the amount of any other payment required to be made in respect of the
Trust Securities as of a specified date or (ii) restrict the right of a holder
of Trust Securities to institute suit for the enforcement of any such payment
on or after such date.

So long as any Subordinated Debentures are held by the Property Trustee, the
Issuer Trustees shall not (i) direct the time, method and place of conducting
any proceeding for any remedy available to the Debenture Trustee, or execute
any trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive certain past defaults under the Indenture,
(iii) exercise any right to rescind or annul a declaration of acceleration of
the maturity of the principal of the Subordinated Debentures or (iv) consent
to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent shall be required, without, in
each case, obtaining the prior approval of the holders of a majority in
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture would require the consent of each
holder of Subordinated Debentures affected thereby, no such consent shall be
given by the Property Trustee without the prior approval of each holder of the
Preferred Securities. The Issuer Trustees shall not revoke any action
previously authorized or approved by a vote of the holders of the Preferred
Securities except by subsequent vote of such holders. The Property Trustee
shall notify each holder of Preferred Securities of any notice of default with
respect to the Subordinated Debentures. In addition to obtaining the foregoing
approvals of such holders of the Preferred Securities, prior to taking any of
the foregoing actions, the Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.

Any required approval of holders of Preferred Securities may be given at a
meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Preferred Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be given to
each holder of record of Preferred Securities in the

manner set forth in the Trust Agreement. No vote or consent of the holders of
Preferred Securities will be required for the Trust to redeem and cancel the
Preferred Securities in accordance with the Trust Agreement.

Notwithstanding that holders of the Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Issuer Trustees or any
affiliate of the Company or any Issuer Trustees shall, for purposes of such
vote or consent, be treated as if they were not outstanding.

FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER

The Preferred Securities initially will be represented by one or more
Preferred Securities certificates in global form (the "Global Preferred
Securities"). The Global Preferred Securities will be deposited upon issuance
with the Property Trustee as custodian for DTC, in New York, New York, and
registered in the name of DTC or its nominee, Cede & Co., in each case for
credit to an account of a direct or indirect participant in DTC as described
below. Except as set forth below, the Global Preferred Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Preferred
Securities may not be exchanged for Preferred Securities in certificated form
except in the limited circumstances described below. See "--Exchange of Book-
Entry Preferred Securities for Certificated Preferred Securities" below.

Other Preferred Securities will be issued only in registered, certificated
(i.e., non-global) form. Other Preferred Securities may not be exchanged for
beneficial interests in any Global Preferred Securities except in the limited
circumstances described below. See "--Exchange of Certificated Preferred
Securities for Book-Entry Preferred Securities" below.

Depositary Procedures. DTC has advised the Trust and the Company that DTC is
a limited-purpose trust company created to hold securities for its
participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the Underwriters), banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, the "Indirect Participants"). Persons
who are not Participants may beneficially own securities held by or on behalf
of DTC only through the Participants or the Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of DTC are recorded on the records of
the Participants and Indirect Participants.

DTC has also advised the Trust and the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Preferred Securities, DTC
will credit the accounts of Participants designated by the Underwriters with
portions of the Liquidation Amount of the Global Preferred Securities and (ii)
ownership of such interests in the Global Preferred Securities will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Preferred Securities).

Except as described below, owners of interests in the Global Preferred
Securities will not have Preferred Securities registered in their name, will
not receive physical delivery of Preferred Securities in certificated form and
will not be considered the registered owners or holders thereof under the
Trust Agreement for any purpose.

Payments in respect of the Global Preferred Security registered in the name
of DTC or its nominee will be payable by the Property Trustee to DTC in its
capacity as the registered holder under the Trust Agreement. Under the terms
of the Trust Agreement, the Property Trustee will treat the persons in whose
names the Preferred Securities, including the Global Preferred Securities, are
registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Property

Trustee nor any agent thereof has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Preferred Securities, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Preferred Securities or (ii) any other matter relating to the actions
and practices of DTC or any of its Participants or Indirect Participants. DTC
has advised the Trust and the Company that its current practice, upon receipt
of any payment in respect of securities such as the Preferred Securities, is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in
Liquidation Amount of beneficial interests in the relevant security as shown
on the records of DTC unless DTC has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Preferred Securities will be governed
by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Property Trustee, the Trust or the Company.
Neither the Trust or the Company nor the Property Trustee will be liable for
any delay by DTC or any of its Participants in identifying the beneficial
owners of the Preferred Securities, and the Trust or the Company and the
Property Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.

Interests in the Global Preferred Securities will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants.

DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Preferred Securities only at the
direction of one or more Participants to whose account with DTC interests in
the Global Preferred Securities are credited and only in respect of such
portion of the Liquidation Amount of the Preferred Securities as to which such
Participant or Participants has or have given such direction. However, if
there is an Event of Default under the Trust Agreement, DTC reserves the right
to exchange the Global Preferred Securities for Preferred Securities in
certificated form and to distribute such Preferred Securities to its
Participants.

The information in this section concerning DTC and its book-entry system has
been obtained from sources that the Trust and the Company believe to be
reliable, but neither the Trust nor the Company takes responsibility for the
accuracy thereof.

Although DTC has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Preferred Securities among its participants, it is
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Trust nor the
Company nor the Property Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.

Exchange of Book-Entry Preferred Securities for Certificated Preferred
Securities. A Global Preferred Security is exchangeable for Preferred
Securities in registered certificated form if (i) DTC notifies the Trust that
it is unwilling or unable to continue as Depositary for the Global Preferred
Security and the Trust thereupon fails to appoint a successor Depositary
within 90 days or has ceased to be a clearing agency registered under the
Exchange Act, (ii) the Company in its sole discretion elects to cause the
issuance of the Preferred Securities in certificated form or (iii) there shall
have occurred and be continuing an Event of Default or any event which after
notice or lapse of time or both would be an Event of Default under the Trust
Agreement. In addition, beneficial interests in a Global Preferred Security
may be exchanged for certificated Preferred Securities upon request but only
upon at least 20 days prior written notice given to the Property Trustee by or
on behalf of DTC in accordance with customary procedures. In all cases,
certificated Preferred Securities delivered in exchange for any Global
Preferred Security or beneficial interests therein will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the Depositary (in accordance with its customary procedures) unless the
Property Trustee determines otherwise in compliance with applicable law.

Exchange of Certificated Preferred Securities for Book-Entry Preferred
Securities. Other Preferred Securities, which will be issued in certificated
form, may not be exchanged for beneficial interests in any Global Preferred
Security unless such exchange occurs in connection with a transfer of such
Other Preferred Securities and the transferor first delivers to the Property
Trustee a written certificate (in the form provided in the Trust Agreement) to
the effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Preferred Securities.

PAYMENT AND PAYING AGENCY

Payments in respect of the Preferred Securities held in global form shall be
made to DTC in its capacity as the Depositary, which shall credit its
participants accounts on the applicable Distribution Dates. In respect of
Preferred Securities that are not held by the Depositary, such payments shall
be made by check mailed to the address of the holder entitled thereto as such
address shall appear on the register. The paying agent (the "Paying Agent")
shall initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Administrative Trustees and the
Company. The Paying Agent shall be permitted to resign as Paying Agent upon 30
days' written notice to the Property Trustee and the Company. In the event
that the Property Trustee shall no longer be the Paying Agent, the
Administrative Trustees shall appoint a successor (which shall be a bank or
trust company acceptable to the Administrative Trustees and the Company) to
act as Paying Agent.

REGISTRAR AND TRANSFER AGENT

The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.

Registration of transfers of the Preferred Securities will be effected
without charge by or on behalf of the Trust but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Preferred Securities after they have been
called for redemption

INFORMATION CONCERNING THE PROPERTY TRUSTEE

The Property Trustee, other than during the occurrence and continuance of an
Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise
or use in the conduct of his or her own affairs. Subject to this provision,
the Property Trustee is under no obligation to exercise any of the powers
vested in it by the Trust Agreement at the request of any holder of Trust
Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby. The Property Trustee
is not required to expend or risk its own funds or otherwise incur personal
financial liability in the performance of its duties if repayment or adequate
indemnity is not reasonably assured to the Property Trustee. From time to
time, the Property Trustee and/or its affiliates extend credit and may provide
investment banking and other financial services to the Company. See "The
Trust."

MISCELLANEOUS

The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act of 1940, as amended or classified as an association
taxable as a corporation for United States federal income tax purposes and so
that the Subordinated Debentures will be treated as indebtedness of the
Company for United States federal income tax purposes. In this connection, the
Company and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust or the
Trust Agreement, that the Company and the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes, as long as
such action does not materially adversely affect the interests of the holders
of the Trust Securities.

Holders of the Trust Securities have no preemptive or similar rights.

The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.

DESCRIPTION OF THE SUBORDINATED DEBENTURES

The Subordinated Debentures are to be issued under the Indenture. The
Indenture will be qualified under the Trust Indenture Act and will incorporate
certain provisions of the Trust Indenture Act. This summary of certain terms
and provisions of the Subordinated Debentures and the Indenture does not
purport to be complete, and where reference is made to particular provisions
of the Indenture, such provisions, including the definitions of certain terms,
some of which are not otherwise defined herein, are qualified in their
entirety by reference to all of the provisions of the Indenture and those
terms.

GENERAL

Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in Subordinated Debentures issued by the
Company. The Subordinated Debentures will bear interest at the annual rate of
% of the principal amount thereof, payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year (each, an "Interest Payment
Date"), commencing September 30, 1998, to the person in whose name each
Subordinated Debentures is registered, subject to certain exceptions, at the
close of business on the date fifteen days prior to the relevant Interest
Payment Date. It is anticipated that, until the liquidation, if any, of the
Trust, each Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay), in each case with the same force and
effect as if made on the date such payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of % thereof, compounded quarterly. The term "interest",
as used herein, shall include quarterly interest payments, interest on
quarterly interest payments not paid on the applicable Interest Payment Date
and Additional Sums (as defined herein), as applicable. The Subordinated
Debentures will be issued in denominations of $10.00 and integral multiples
thereof. The Subordinated Debentures will mature on , 2028 (the "Stated
Maturity"), except as described below.

The Subordinated Debentures will be unsecured and subordinate and rank
junior in right of payment to the extent and in the manner set forth in the
Indenture to all Senior Debt. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior
Debt, or other obligations. See "--Subordination" below. In addition, the
Company is a holding company and almost all of the operating assets of the
Company and its consolidated subsidiaries are owned by such subsidiaries.
Accordingly, the Company relies primarily on dividends from such subsidiaries
to meet debt service obligations and pay operating expenses. The inability of
the Company's direct and indirect subsidiaries to pay dividends to the Company
in an amount sufficient to meet debt service obligations and pay operating
expenses would have a material adverse effect on the Company and the Trust.

Because the Company is a holding company, the right of the Company to
participate in any distribution of the assets of a subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the
prior claims of creditors of the subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Subordinated Debentures will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries, including New South, and the
holders of the Preferred Securities should look only to the assets of the
Company for distributions on the Preferred Securities.

In addition, as the Company is a non-operating holding company, almost all
of the operating assets of the Company are owned by the Company's
subsidiaries. The Company relies primarily on dividends from such subsidiaries
to meet its obligations for payment of principal and interest on its
outstanding debt obligations, if any, and corporate expenses. New South is
subject to certain restrictions imposed by federal law on any extensions of
credit to, and certain other transactions with, the Company and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
New South unless the loans are secured by various types of collateral.
Further, such secured loans, other transactions and investments by New South
are generally limited in amount as to the Company and as to each of such other
affiliates to 10% of New South's capital and surplus and as to the Company and
all of such other affiliates to an aggregate of 20% of New South's capital and
surplus. In addition, payment of dividends to the Company by New South is
subject to ongoing review by banking regulators and is subject to various
statutory limitations and in certain circumstances requires prior approval by
banking regulatory authorities. Under current OTS regulations, at December 31,
1997, New South could have declared dividends to the Company of approximately
$13.5 million, of which approximately $1.1 million have been subsequently
declared and paid to the Company. Federal and state regulatory agencies also
have the authority to limit further New South's payment of dividends based on
other factors, such as the maintenance of adequate capital for New South,
which could reduce the amount of dividends otherwise payable.

FORM, REGISTRATION AND TRANSFER

If the Subordinated Debentures are distributed to the holders of the Trust
Securities, the Subordinated Debentures may be represented by one or more
global certificates registered in the name of Cede & Co. as the nominee of
DTC. The depositary arrangements for such Subordinated Debentures are expected
to be substantially similar to those in effect for the Preferred Securities.
For a description of DTC and the terms of the depositary arrangements relating
to payments, transfers, voting rights, redemptions and other notices and other
matters, see "Description of the Preferred Securities--Form, Denomination,
Book-Entry Procedures and Transfer."

PAYMENT AND PAYING AGENTS

Payment of principal of and premium, if any, and any interest on
Subordinated Debentures will be made at the office of the Debenture Trustee in
the Borough of Manhattan in The City of New York or at the office of such
Paying Agent or Paying Agents as the Company may designate from time to time,
except that at the option of the Company payment of any interest may be made,
except in the case of Subordinated Debentures in global form, (i) by check
mailed to the address of the Person entitled thereto as such address shall
appear in the register for Subordinated Debentures or (ii) by transfer to an
account maintained by the Person entitled thereto as specified in such
register, provided that proper transfer instructions have been received by the
relevant Record Date. Payment of any interest on any Subordinated Debentures
will be made to the Person in whose name such Subordinated Debentures is
registered at the close of business on the Record Date for such interest,
except in the case of defaulted interest. The Company may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent; however, the Company will at all times be required to maintain a Paying
Agent in each Place of Payment for the Subordinated Debentures.

Any monies deposited with the Debenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of and premium,
if any, or interest on any Subordinated Debentures and remaining unclaimed for
two years after such principal and premium, if any, or interest has become due
and payable shall, at the request of the Company, be repaid to the Company and
the holder of such Subordinated Debentures shall thereafter look, as a general
unsecured creditor, only to the Company for payment thereof.

OPTION TO EXTEND INTEREST PAYMENT DATE

So long as no Debenture Event of Default has occurred and is continuing, the
Company will have the right under the Indenture at any time during the term of
the Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not exceeding twenty (20) consecutive,
quarterly periods with

respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity. At the end of an Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest then
accrued at the annual rate of %, compounded quarterly, to the extent
permitted by applicable law). During an Extension Period, interest will
continue to accrue and the Trust, as the holder of the Subordinated Debentures
(and holders of the Trust Securities while Trust Securities are outstanding)
will be required to accrue interest income for United States federal income
tax purposes prior to the receipt of cash attributable to such income. See
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."

During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock) or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in right of
payment to the Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
right of payment to the Subordinated Debentures (other than (a) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase shares of, common stock of the Company, (b) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, (d) as a result of a reclassification of the Company's capital
stock or the exchange or conversion of one class or series of the Company's
capital stock for another class or series of the Company's capital stock, (e)
the purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged, and (f) purchases or issuances of
common stock under any of the Company's stock option, stock purchase, stock
loan or other benefit plans for its directors, officers or employees or any of
the Company's dividend reinvestment plans, in each case as now existing or
hereafter established or amended).

Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed twenty (20) consecutive quarterly
periods or to extend beyond the Stated Maturity. Upon the termination of any
such Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period, subject
to the above requirements. No interest shall be due and payable during an
Extension Period, except at the end thereof. If the Property Trustee is the
only registered holder of the Subordinated Debentures at the time the Company
elects such Extension Period, the Company must give the Property Trustee, the
Administrative Trustees and the Debenture Trustee notice of its election of
any Extension Period (or an extension thereof) at least five Business Days
prior to the earlier of (i) the date the Distributions on the Trust Securities
would have been payable except for the election to begin or extend such
Extension Period or (ii) the date the Administrative Trustees are required to
give notice to any securities exchange or to holders of Preferred Securities
of the record date or the date such Distributions are payable, but in any
event not less than five Business Days prior to such record date. The
Debenture Trustee shall give notice of the Company's election to begin or
extend a new Extension Period to the holders of the Preferred Securities.
There is no limitation on the number of times that the Company may elect to
begin an Extension Period.

SPECIAL EVENT PREPAYMENT

If a Capital Event, Tax Event or an Investment Company Event (as defined
below) (each, a "Special Event") shall occur, the Company may, at its option,
prepay the Subordinated Debentures in whole (but not in part) at any time
within 90 days of the occurrence of such Special Event, at a prepayment price
(the "Prepayment Price") equal to 100% of the principal amount of such
Subordinated Debentures plus accrued and unpaid interest thereon, if any, to
the date of such prepayment.

A "Capital Event" means the receipt by the Company and the Trust of an
opinion of Balch & Bingham LLP, or any other independent bank regulatory
counsel experienced in such matters, to the effect that, as a result

of (a) any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or
any rules, guidelines or policies of the OTS, the Federal Reserve or any other
federal bank regulatory agency or (b) any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date the Subordinated Debentures is
issued by the Company to the Trust pursuant to the Indenture (the "Issue
Date"), (i) the Company is or within 90 days will be subject to capital
adequacy requirements and such requirements do not or will not permit the
Preferred Securities to constitute, subject to limitations on inclusion of the
Preferred Securities as Tier 1 capital imposed by Federal Reserve capital
guidelines in effect as of the date of this Prospectus, Tier 1 capital (or its
then-equivalent) or (ii) the amount of net proceeds received from the sale of
the Preferred Securities and contributed by the Company to New South does not
or within 90 days will not constitute Tier 1 (core) capital (or its then-
equivalent).

"Tax Event" means the receipt by the Company and the Trust of an opinion,
requested by the Company, of counsel experienced in such matters to the effect
that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws or any regulations thereunder of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative written decision or pronouncement
or judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or such pronouncement or decision is made on
or after the Issue Date, there is more than an insubstantial risk that (i) the
Trust is, or will be within 90 days of the date of such opinion, subject to
United States federal income tax with respect to income received or accrued on
the Subordinated Debentures, (ii) interest payable by the Company on the
Subordinated Debentures is not, or within 90 days of the date of such opinion
will not be, deductible by the Company, in whole or in part, for United States
federal income tax purposes, or (iii) the Trust is, or will be within 90 days
of the date of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.

"Investment Company Event" means that the Company and the Trust shall have
received an opinion, requested by the Company, of counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in Investment Company Act Law"), there is more than an
insubstantial risk that the Trust is or will be considered an "investment
company" which is required to be registered under the Investment Company Act,
which Change in Investment Company Act Law becomes effective on or after the
Issue Date.

Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures
to be prepaid at its registered address. Unless the Company defaults in
payment of the prepayment price, on and after the prepayment date interest
ceases to accrue on such Subordinated Debentures called for prepayment.

If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Subordinated Debentures the Additional Sums.

OPTIONAL PREPAYMENT AFTER , 2003

The Company will have the right to prepay the Subordinated Debentures, in
whole at any time, or in part from time to time, at its option at any time
after , 2003, at the Prepayment Price.

CERTAIN COVENANTS OF THE COMPANY

The Company will also covenant that it will not, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock) or (ii) make any payment of principal,
interest or premium, if any,

on or repay or repurchase or redeem any debt securities of the Company that
rank pari passu with or junior in right of payment to the Subordinated
Debentures or (iii) make any guarantee payments with respect to any guarantee
by the Company of the debt securities of any subsidiary of the Company if such
guarantee ranks pari passu or junior in right of payment to the Subordinated
Debentures (other than (a) dividends or distributions in shares of, or
options, warrants or rights to subscribe for or purchase shares of, common
stock of the Company, (b) any declaration of a dividend in connection with the
implementation of a stockholder's rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, (d) as a result of
a reclassification of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock, (e) the purchase of fractional
interests in shares of the Company's capital stock pursuant to the conversion
or exchange provisions of such capital stock or the security being converted
or exchanged, and (f) purchases or issuances of common stock in connection
with any of the Company's stock option, stock purchase, stock loan or other
benefit plans for its directors, officers or employees or any of the Company's
dividend reinvestment plans, in each case as now existing or hereafter
established or amended) if at such time (1) there shall have occurred any
event of which the Company has actual knowledge that (a) is, or with the
giving of notice or the lapse of time, or both, would be, a Debenture Event of
Default and (b) in respect of which the Company shall not have taken
reasonable steps to cure, (2) if such Subordinated Debentures are held by the
Trust, the Company shall be in default with respect to its payment of any
obligations under the Guarantee or (3) the Company shall have given notice of
its election of an Extension Period, or any extension thereof, as provided in
the Indenture and shall not have rescinded such notice, and such Extension
Period, or any extension thereof, shall have commenced.

For so long as such Trust Securities remain outstanding, the Company will
covenant (i) to directly or indirectly maintain 100 percent ownership of the
Common Securities of the Trust; provided, however, that any permitted
successor of the Company under the Indenture may succeed to the Company's
ownership of such Common Securities, (ii) to use its reasonable efforts to
cause the Trust (a) to remain a statutory business trust, except in connection
with the distribution of Subordinated Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Trust Agreement of such Trust, and (b) to continue
not to be classified as an association taxable as a corporation or a
partnership for United States federal income tax purposes and (iii) to use its
reasonable efforts to cause each holder of Trust Securities to be treated as
owning an undivided beneficial interest in the Subordinated Debentures.

DEBENTURE EVENTS OF DEFAULT

The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures constitutes a "Debenture
Event of Default" (whatever the reason for such Debenture Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body):

(i) failure for 30 days to pay any interest on the Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or

(ii) failure to pay any principal or premium, if any, on the Subordinated
Debentures when due whether at maturity, upon redemption, by declaration of
acceleration of maturity or otherwise; or

(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of Subordinated Debentures; or

(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.

The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the

Debenture Trustee. The Debenture Trustee or the holders of not less than 25%
in aggregate outstanding principal amount of the Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default. The holders of a majority in aggregate outstanding principal amount
of the Subordinated Debentures may annul such declaration and waive the
default if the default (other than the nonpayment of the principal of the
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee.

The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures affected thereby may, on behalf of the holders of all
the Subordinated Debentures, waive any past default except a default in the
payment of principal of or premium, if any, on or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest and premium, if any, and principal due otherwise than by acceleration
has been deposited with the Debenture Trustee) or a default in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each outstanding Subordinated Debentures.

The Indenture requires the annual filing by the Company with the Debenture
Trustee of a certificate as to the absence of certain defaults under the
Indenture.

The Indenture provides that the Debenture Trustee may withhold notice of an
Indenture Event of Default from the holders of a series of Subordinated
Debentures (except an Indenture Event of Default in payment of principal of,
or of interest or premium on, the Subordinated Debentures) if the Debenture
Trustee considers it in the interest of such holders to do so.

ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES

If a Debenture Event of Default shall have occurred and be continuing and
shall be attributable to the failure of the Company to pay principal of or
interest or premium, if any, on the Subordinated Debentures on the due date, a
holder of Preferred Securities may institute a Direct Action. The Company may
not amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Preferred
Securities. Notwithstanding any payments made to a holder of Preferred
Securities by the Company in connection with a Direct Action, the Company
shall remain obligated to pay the principal of (or premium, if any) or
interest on the Subordinated Debentures, and the Company shall be subrogated
to the rights of the holder of such Preferred Securities with respect to
payments on the Preferred Securities to the extent of any payments made by the
Company to such holder in any Direct Action.

The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Subordinated Debentures unless there shall
have been an Event of Default under the Trust Agreement. See "Description of
the Preferred Securities--Events of Default; Notice".

CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS

The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
as an entirety or substantially as an entirety to any Person, and no Person
shall consolidate with or merge into the Company or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety to
the Company, unless: (i) in case the Company consolidates with or merges into
another Person or conveys or transfers its properties and assets substantially
as an entirety to any Person, the successor Person is organized under the laws
of the United States or any State or the District of Columbia, and such
successor Person expressly assumes the Company's obligations under the
Subordinated Debentures; (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time
or both, would become a Debenture Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions as prescribed in the Indenture
are met.

The general provisions of the Indenture do not afford holders of the
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Subordinated Debentures.

MODIFICATION OF THE INDENTURE

From time to time the Company and the Debenture Trustee may, without the
consent of the holders of Subordinated Debentures, amend, waive or supplement
the Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies (provided that any such action does
not materially adversely affect the interest of the holders of Subordinated
Debentures) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting
the Company and the Debenture Trustee, with the consent of the holders of not
less than a majority in principal amount of the Subordinated Debentures of all
series affected by such modification at the time outstanding, to modify the
Indenture or any supplemental indenture or the rights of the holders of the
Subordinated Debentures; provided that no such modification shall (i) extend
the fixed maturity of any Subordinated Debentures, or reduce the principal
amount thereof (including in the case of a discounted Subordinated Debenture
the amount payable thereon in the event of acceleration or the amount provable
in bankruptcy) or any redemption premium thereon, or reduce the rate or extend
the time of payment of interest thereon, or make the principal of, or interest
or premium on, the Subordinated Debentures payable in any coin or currency
other than that provided in the Subordinated Debentures, or impair or affect
the right of any holder of Subordinated Debentures to institute suit for the
payment thereof or the right of prepayment, if any, at the option of the
holder, without the consent of the holder of each Subordinated Debenture so
affected, or (ii) reduce the aforesaid percentage of Subordinated Debentures
the consent of the holders of which is required for any such modification
without the consent of the holders of each Subordinated Debenture affected.

SATISFACTION AND DISCHARGE

The Indenture generally provides that when all Subordinated Debentures not
previously delivered to the Debenture Trustee for cancellation (i) have become
due and payable, (ii) will become due and payable at maturity within one year,
or (iii) are to be called for prepayment within one year under arrangements
satisfactory to the Debenture Trustee for the giving of notice of prepayment,
and the Company deposits or causes to be deposited with the Debenture Trustee
funds, in trust, for the purpose and in an amount sufficient to pay and
discharge the entire indebtedness on the Subordinated Debentures not
previously delivered to the Debenture Trustee for cancellation, for the
principal and interest to the date of the deposit or to the Stated Maturity,
as the case may be, then the Indenture will cease to be of further effect
(except as to the Company's obligations to pay all other sums due pursuant to
the Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the Company will be deemed to have satisfied
and discharged the Indenture.

SUBORDINATION

In the Indenture, the Company has covenanted and agreed that any
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Debt to the extent provided in the Indenture.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Debt will first be
entitled to receive payment in full in respect of such Senior Debt before the
holders of Subordinated Debentures will be entitled to receive or retain any
payment in respect thereof.

In the event of the acceleration of the maturity of Subordinated Debentures,
the holders of all Senior Debt outstanding at the time of such acceleration
will first be entitled to receive payment in full in respect of such Senior
Debt before the holders of Subordinated Debentures will be entitled to receive
or retain any payment in respect of the Subordinated Debentures.

No payments on account of principal or premium, if any, or interest, if any,
in respect of the Subordinated Debentures may be made if there shall have
occurred and be continuing a default in any payment with respect to Senior
Debt, or an event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.

"Senior Debt" means, with respect to the Company and its Subsidiaries: (a)
all liabilities, obligations and indebtedness for borrowed money, whether or
not evidenced by bonds, debentures, notes or other similar instruments, (b)
all obligations to pay the deferred purchase price of property or services
(other than trade payables due and arising in the ordinary course of
business), (c) all Capital Lease Obligations, (d) all debt of any other Person
secured by a Lien on any asset of the Company or any of its Subsidiaries, (e)
all Contingent Obligations (as defined in the Indenture), and (f) all
obligations, contingent or otherwise, relating to the face amount of letters
of credit, whether or not drawn, and banker's acceptances, but excluding any
obligation relating to an undrawn letter of credit if the undrawn letter of
credit is issued in connection with a liability for which a reserve has been
established by the Company or the applicable Subsidiary in accordance with
United States generally accepted accounting principles; provided, that the
term Senior Debt shall not include the Subordinated Debentures, the Guarantees
or other Qualified Debt Obligations.

"Qualified Debt Obligations" means, without duplication, (a) debt securities
of the Company, provided that the terms of any such debt security (i) permit
the deferral of principal and interest payments for a period of up to five
years (but not beyond the maturity date), as elected by the Company, (ii) have
a maturity for payment of principal of not less than ten (10) years after the
date of issuance, and (iii) include provisions making the debt security
expressly subordinate to all other debt of the Company; (b) preferred
securities issued by a Subsidiary, the sole purpose of which is to issue such
preferred securities and invest the proceeds thereof in debt securities of the
type described in clause (a) above, and which preferred securities are payable
solely out of the proceeds of payments on account of such debt securities; and
(c) the obligations recorded on the consolidated balance sheet of the Company
and its Subsidiaries with respect to debt securities of the type described in
clause (a) above and preferred securities of the type described in clause (b)
above.

By reason of such subordination, in the event of an insolvency, creditors of
the Company who are holders of Senior Debt, as well as certain general
creditors of the Company, may recover more, ratably, than the holders of the
Subordinated Debentures. Additionally, the Company currently conducts
substantially all of its operations through subsidiaries, and the holders of
Subordinated Debentures will be structurally subordinated to the creditors of
the Company's subsidiaries. See "Risk Factors--Risk Factors Relating to the
Preferred Securities--Ranking of Subordinate Obligations Under the Guarantee
and Subordinated Debentures."

The Indenture places no limitation on the amount of additional secured or
unsecured debt, including Senior Debt, or other obligations, that may be
incurred by the Company. The Company expects from time to time to incur
additional indebtedness and obligations, including Senior Debt.

GOVERNING LAW

The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of New York.

INFORMATION CONCERNING THE DEBENTURE TRUSTEE

The Debenture Trustee is under no obligation to exercise any of the powers
vested in it by the Indenture at the request of any holder of Subordinated
Debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.

From time to time, the Debenture Trustee and/or its affiliates extend credit
and may provide other financial services to the Company. See "The Trust."

DESCRIPTION OF THE GUARANTEE

The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the Preferred Securities for the benefit of
the holders from time to time of the Preferred Securities. Bankers Trust
Company will act as guarantee trustee ("Guarantee Trustee") under the
Guarantee. The Guarantee will be qualified under the Trust Indenture Act. This
summary of certain provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee, including the definitions therein of certain
terms, and the Trust Indenture Act. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Preferred Securities.

GENERAL

The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Preferred Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated
and unpaid Distributions required to be paid on Preferred Securities, to the
extent the Trust has funds on hand at such time legally available therefor,
(ii) the Redemption Price with respect to any Preferred Securities called for
redemption, to the extent that the Trust has funds on hand at such time
legally available therefor, or (iii) upon a voluntary or involuntary
termination and liquidation of the Trust (unless the Subordinated Debentures
are distributed to holders of the Preferred Securities), the lesser of (a) the
Liquidation Distribution and (b) the amount of assets of the Trust remaining
available for distribution to holders of Preferred Securities. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of
the required amounts by the Company to the holders of the Preferred Securities
or by causing the Trust to pay such amounts to such holders.

The Guarantee will rank subordinate and junior in right of payment to all
Senior Debt to the extent provided therein and, in the event of bankruptcy or
insolvency proceedings involving the Company, will rank subordinate and junior
in right of payment to all liabilities of the Company, but senior to any
obligations in respect of any class of capital stock of the Company. See "--
Status" below. Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of that subsidiary, except to the extent the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's direct and indirect
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. See "Description of the Subordinated Debentures--
General." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Debt, whether under
the Indenture, any other indenture that the Company may enter into in the
future or otherwise.

The Company will, through the Guarantee, the Trust Agreement, the
Subordinated Debentures and the Indenture, taken together, fully, irrevocably
and unconditionally guarantee all of the Trust's obligations under the
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Subordinated Debentures and the Guarantee."

STATUS

The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt in the
same manner as Subordinated Debentures, except in the event of bankruptcy or
insolvency proceedings involving the Company, in which case the Guarantee will
rank subordinate and junior in right of payment to all liabilities of the
Company.

The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust or upon
distribution to the holders of the Preferred Securities of the Subordinated
Debentures. The Guarantee does not place a limitation on the amount of
additional Senior Debt that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Debt.

AMENDMENTS AND ASSIGNMENT

Except with respect to any changes that do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will
be required), the Guarantee may not be amended without the prior approval of
the holders of a majority of the Liquidation Amount of such outstanding
Preferred Securities. The manner of obtaining any such approval will be as set
forth under "Description of the Preferred Securities--Voting Rights; Amendment
of the Trust Agreement." All guarantees and agreements contained in the
Guarantee Agreement shall bind the successors, assigns, receivers, trustees
and representatives of the Company and shall inure to the benefit of the
holders of the Preferred Securities then outstanding.

EVENTS OF DEFAULT

An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of a majority in Liquidation Amount of the Preferred Securities will
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee.

If the Guarantee Trustee fails to enforce the Guarantee, any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity.

The Company, as guarantor, will be required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.

CERTAIN COVENANTS OF THE COMPANY

In the Guarantee the Company will covenant that, so long as any Preferred
Securities remain outstanding, the Company shall not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock) or (ii) make any payment of principal,
interest or premium, if any, on, or repay or repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in right of
payment to the Subordinated Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu or junior in
right of payment to the Subordinated Debentures (other than (a) dividends or
distributions in shares of, or options, warrants, rights to subscribe for or
purchase shares of, common stock of the Company, (b) any declaration of a
dividend in connection with the implementation of a stockholder's rights,
plan, or the issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights pursuant thereto, (c) payments
under the Guarantee, (d) as a result of a reclassification of the Company's
capital stock or the exchange or the conversion of one class or series of the
Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged, and (f) purchases
or issuances of common stock in connection with any of the Company's stock
option, stock purchase, stock loan or

100

other benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans, in each case as now existing or
hereafter established or amended), if at such time (1) there shall have
occurred any event of which the Company has actual knowledge that (a) is, or
with the giving of notice or the lapse of time, or both, would be an event of
default under the Guarantee and (b) in respect of which the Company shall not
have taken reasonable steps to cure, (2) if such Subordinated Debentures are
held by the Property Trustee, the Company shall be in default with respect to
its payment of any obligations under the Guarantee, or (3) the Company shall
have given notice of its election of the exercise of its right to extend the
interest payment period pursuant to the Indenture and any such extension shall
be continuing.

TERMINATION

The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Preferred Securities, upon full payment
of the Liquidation Amount payable upon liquidation of the Trust or upon
distribution of Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under the Preferred Securities or the
Guarantee.

INFORMATION CONCERNING THE GUARANTEE TRUSTEE

The Guarantee Trustee, other than during the continuance of a default with
respect to a Guarantee, will undertake to perform only such duties as are
specifically set forth in such Guarantee and, after default, must exercise the
same degree of care as a prudent individual would exercise in the conduct of
his or her own affairs. Subject to such provisions, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of Preferred Securities, unless offered
reasonable indemnity against the costs, expenses and liabilities which might
be incurred thereby. The Guarantee Trustee is not required to expend or risk
its own funds or otherwise incur personal financial liability in the
performance of its duties if it reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.

From time to time the Guarantee Trustee and/or its affiliates extend credit
and may provide other financial services to the Company. See "The Trust."

GOVERNING LAW

The Guarantee will be governed by, and construed in accordance with, the
internal laws of the State of New York.

RELATIONSHIP AMONG THE PREFERRED SECURITIES, THESUBORDINATED DEBENTURES AND
THE GUARANTEE

FULL AND UNCONDITIONAL GUARANTEE

Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds on hand legally available for the payment
of such Distributions) will be irrevocably guaranteed by the Company as and to
the extent set forth under "Description of the Guarantee." Taken together, the
Company's obligations under the Subordinated Debentures, the Indenture, the
Trust Agreement and the Guarantee will provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Preferred
Securities. If and to the extent that the Company does not make the required
payments on the Subordinated Debentures, the Trust will not have sufficient
funds to make the related payments, including Distributions, on the Preferred
Securities. The Guarantee will not cover any such payment when the Trust does
not have sufficient funds on hand legally available therefor. In such event, a
remedy of a holder of

101

Preferred Securities is to institute a Direct Action. The obligations of the
Company under the Guarantee will be subordinate and junior in right of payment
to all Senior Debt.

SUFFICIENCY OF PAYMENTS

As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount or Prepayment Price of the
Subordinated Debentures will be equal to the sum of the Liquidation Amount or
Redemption Price, as applicable, of the Preferred Securities and Common
Securities; (ii) the interest rate and interest and other payment dates on the
Subordinated Debentures will match the Distribution rate and Distribution and
other payment dates for the Trust Securities; (iii) the Company shall pay for
all and any costs, expenses and liabilities of the Trust except the Trust's
obligations to holders of Trust Securities under such Trust Securities; and
(iv) the Trust Agreement will provide that the Trust is not authorized to
engage in any activity that is not consistent with the limited purposes
thereof.

ENFORCEMENT OF RIGHTS OF HOLDERS OF PREFERRED SECURITIES

A holder of any Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.

A default or event of default under any Senior Debt would not constitute a
default or Event of Default under the Trust Agreement. However, in the event
of payment defaults under, or acceleration of, Senior Debt, the subordination
provisions of the Indenture will provide that no payments may be made in
respect of the Subordinated Debentures until such Senior Debt has been paid in
full or any payment default thereunder has been cured or waived. Failure to
make required payments on Subordinated Debentures would constitute an Event of
Default under the Trust Agreement.

LIMITED PURPOSE OF THE TRUST

The Preferred Securities will represent preferred undivided beneficial
interests in the assets of the Trust, and the Trust exists for the sole
purpose of issuing and selling the Trust Securities, using the proceeds from
the sale of the Trust Securities to acquire the Subordinated Debentures and
engaging in only those other activities necessary, advisable or incidental
thereto. A principal difference between the rights of a holder of a Preferred
Security and a holder of a Subordinated Debentures is that a holder of a
Subordinated Debentures will be entitled to receive from the Company the
principal amount of and premium, if any, and interest on Subordinated
Debentures held, while a holder of Preferred Securities is entitled to receive
Distributions from the Trust (or, in certain circumstances, from the Company
under the Guarantee) if and to the extent the Trust has funds on hand legally
available for the payment of such Distributions.

RIGHTS UPON TERMINATION

Unless the Subordinated Debentures are distributed to holders of the Trust
Securities, upon any voluntary or involuntary termination and liquidation of
the Trust, the holders of the Trust Securities will be entitled to receive,
out of assets held by the Trust, after satisfaction of liabilities to
creditors as provided by applicable law, the Liquidation Distribution in cash.
See "Description of the Preferred Securities--Liquidation of Trust and
Distribution of Subordinated Debentures." Upon any voluntary or involuntary
liquidation or bankruptcy of the Company, the Property Trustee, as holder of
the Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated in right of payment to all Senior Debt as set forth in the
Indenture, but entitled to receive payment in full of principal (and premium,
if any) and interest, before any stockholders of the Company receive payments
or distributions. Since the Company will be the guarantor under the Guarantee
and will agree to pay for all costs, expenses and liabilities of the Trust
(other than the Trust's obligations to the holders of its Trust Securities),
the positions of a holder of Preferred Securities and a holder of Subordinated
Debentures relative to other creditors and to stockholders of the Company in
the event of liquidation or bankruptcy of the

102

Company are expected to be similar, although, in the event of bankruptcy or
insolvency proceedings involving the Company, the Company's obligations under
the Guarantee will rank subordinate and junior in right of payment to all
liabilities of the Company but senior to any obligations in respect of any
class of capital stock of the Company.

103

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

GENERAL

The following is a summary of the principal United States federal income tax
consequences of the purchase, ownership and disposition of Preferred
Securities held as capital assets by a holder who purchases such Preferred
Securities upon initial issuance. It does not deal with special classes of
holders such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors, or persons that will hold the Preferred
Securities as a position in a "straddle," as part of a "synthetic security" or
"hedge," as part of a "conversion transaction" or other integrated investment,
or as other than a capital asset. This summary also does not address the tax
consequences to persons that have a functional currency other than the U.S.
dollar (except with respect to the discussion under the caption "United States
Alien Holders") or the tax consequences to stockholders, partners or
beneficiaries of a holder of Preferred Securities. Further, it does not
include any description of any alternative minimum tax consequences or the tax
laws of any state or local government or of any foreign government that may be
applicable to the Preferred Securities.

The statements of law or legal conclusion set forth in this summary
constitute the opinion of Balch & Bingham LLP, counsel to the Company ("Tax
Counsel"). This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations thereunder, Internal Revenue
Service rulings and pronouncements and judicial decisions now in effect, all
of which are subject to change at any time. Such changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting a beneficial owner of Preferred Securities. The authorities on which
this summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of Preferred Securities may differ from the
treatment described below.

CLASSIFICATION OF THE SUBORDINATED DEBENTURES

In connection with the issuance of the Subordinated Debentures, Tax Counsel
will render its opinion generally to the effect that, under then current law
and assuming full compliance with the terms of the Indenture (and certain
other documents), and based on certain facts and assumptions contained in such
opinion, the Subordinated Debentures will be classified for United States
federal income tax purposes as indebtedness of the Company. An opinion of Tax
Counsel, however, is not binding on the Internal Revenue Service (the "IRS")
or the courts. Prospective investors should note that no rulings have been or
are expected to be sought from the IRS with respect to any of these issues and
no assurance can be given that the IRS will not take contrary positions.
Moreover, no assurance can be given that any of the opinions expressed herein
will not be challenged by the IRS or, if challenged, that such a challenge
would not be successful.

CLASSIFICATION OF THE TRUST

In connection with the issuance of the Preferred Securities, Tax Counsel
will render its opinion generally to the effect that, under then current law
and assuming full compliance with the terms of the Trust Agreement and the
Indenture (and certain other documents), the Trust will be classified for
United States federal income tax purposes as a grantor trust and not as an
association taxable as a corporation. Accordingly, for United States federal
income tax purposes, each holder of Preferred Securities generally will be
considered the owner of an undivided interest in the Subordinated Debentures,
and each holder will be required to include in its gross income any OID
accrued with respect to its allocable share of those Subordinated Debentures.

INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT

The Company has the right, under the terms of the Subordinated Debentures,
to defer payments of interest by extending interest payment periods for up to
10 consecutive semi-annual periods with respect to each Extension Period.
Because the Company ordinarily does not pay dividends on its common stock, the
likelihood

104

of exercise of that right is not considered "remote" under applicable
regulations (even though the Company has no current intention to exercise its
right to defer interest payments). As a result, interest on the Subordinated
Debentures will be reportable as OID. Holders must include their pro rata
share of the OID in income on an economic accrual basis regardless of their
method of tax accounting, even though such accrual causes amounts to be
included in income prior to the receipt of cash attributable to the interest.
Actual payments and distributions of stated interest will not be reported as
taxable income.

If (as expected) the issue price of the Subordinated Debentures equals their
stated principal amount, the total amount of OID (i.e., the excess of the
total amount of payments due on the Subordinated Debentures over their issue
price) will equal the total amount of interest payable on the Subordinated
Debentures (assuming no redemption before maturity). Accordingly, the amount
of OID which accrues in any quarter-annual period ending on a Distribution
date will approximately equal the amount of the interest that accrues on the
Subordinated Debentures during that period. For Holders who use the calendar
year as their taxable year, the amount of OID to be included in income for a
taxable year should be equal to the Distributions received in such year except
during an Extension Period or in a year in which the Holder disposes of
Preferred Securities.

The amount of OID that must be included in a Holder's income for a taxable
year is the sum of the "daily portions" of OID, allocated ratably to each day
in an accrual period, on the Holder's pro rata share of the Subordinated
Debentures for all days during the year that the Holder owns a Preferred
Security. The amount of OID allocable to each accrual period is the product of
the "adjusted issue price" of the Subordinated Debentures and their yield to
maturity. The adjusted issue price at the beginning of an accrual period
generally will equal the stated principal amount if, as expected, the issue
price is the stated principal amount and all accrued interest is paid on each
Interest Payment Date. If the Company were to exercise its right to defer any
payment of interest on the Subordinated Debentures, however, the adjusted
issue price would increase by the amount of accrued but deferred interest, and
the amount of OID accruing during subsequent accrual periods would increase
(until all deferred interest had been paid), reflecting the computing of
interest on the Subordinated Debentures.

Because income on the Preferred Securities will constitute OID, corporate
holders of the Preferred Securities will not be entitled to a dividends-
received deduction with respect to any income recognized with respect to the
Preferred Securities.

RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST

The Company will have the right at any time to liquidate the Trust and cause
the Subordinated Debentures to be distributed pro rata to the holders of the
Trust Securities. Under current law, such a distribution, for United States
federal income tax purposes, would be treated as a nontaxable event to each
holder, and each holder would receive an aggregate tax basis in its pro rata
share of the distributed Subordinated Debentures equal to such holder's
aggregate tax basis in its Preferred Securities. A holder's holding period in
the Subordinated Debentures so received in liquidation of the Trust would
include the period during which the Preferred Securities were held by such
holder. If, however, the Trust is characterized for United States federal
income tax purposes as an association taxable as a corporation at the time of
its dissolution, the distribution of the Subordinated Debentures would
constitute a taxable event to the Trust and to the holders of Preferred
Securities and a holder's holding period in Subordinated Debentures would
begin on the date such Subordinated Debentures were received.

Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Subordinated Debentures may be redeemed for cash
and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Under current law, such a redemption would, for
United States federal income tax purposes, constitute a taxable disposition of
the redeemed Preferred Securities, and a holder could recognize gain or loss
as if it sold such redeemed Preferred Securities for cash. See "--Sales of
Preferred Securities" below.

SALES OF PREFERRED SECURITIES

A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between its adjusted tax basis in the Preferred Securities
and the amount realized on the sale of such Preferred Securities. A

105

holder's adjusted tax basis in the Preferred Securities generally will be its
initial purchase price, increased by OID previously includable in such
holder's gross income to the date of disposition and decreased by
distributions or other payments received on the Preferred Securities. Such
gain or loss generally will be a capital gain or loss and generally will be a
long-term capital gain or loss if the Preferred Securities have been held for
more than one year.

A holder that disposes of such holder's Preferred Securities between record
dates for payments of distributions thereon will be required to include
accrued but unpaid OID on the Subordinated Debentures through the date of
disposition in income as ordinary income and to add such amount to such
holder's adjusted tax basis in such holder's Preferred Securities. If the
Preferred Securities trade at a price that does not accurately reflect the
value of accrued but unpaid OID with respect to the underlying Subordinated
Debentures and the selling price is less than the holder's adjusted tax basis,
a holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.

INFORMATION REPORTING TO HOLDERS

Generally, income on the Preferred Securities will be reported to holders on
Form 1099, which forms should be mailed to holders of Preferred Securities by
January 31 following each calendar year.

BACKUP WITHHOLDING

Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31 percent unless the holder
complies with certain identification requirements. Any withheld amounts will
be allowed as a credit against the holder's United States federal income tax,
provided the required information is provided to the IRS.

PROPOSED TAX LEGISLATION

In both 1996 and 1997, the Clinton Administration proposed to amend the Code
to deny deductions of interest payments on instruments with features similar
to those of the Subordinated Debentures when issued under arrangements similar
to the Trust. That proposal was not passed by, and is not currently pending
before, Congress. There can be no assurance, however, that future legislative
proposals or other developments will not affect the ability of the Company to
deduct interest on the Subordinated Debentures. Such a change could give rise
to a Tax Event, which may permit the Company to cause a redemption of the
Preferred Securities. See "Description of the Subordinated Debentures--Special
Event Prepayment."

UNITED STATES ALIEN HOLDERS

For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S.
Holder for United States federal income tax purposes.

A "U.S. Holder" is a holder of Preferred Securities who or which is a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for federal income tax purposes, a corporation
or partnership created or organized (or treated as created or organized for
federal income tax purposes) in or under the laws of the United States or any
political subdivision thereof, an estate the income of which is includable in
its gross income for federal income tax purposes without regard to its source,
or a trust if (i) a court within the United States is able to exercise primary
supervision over the administration of the trust and (ii) one or more United
States persons have the authority to control all substantial decisions of the
trust.

Under present United States federal income tax laws: (i) payments by the
Trust or any of its Paying Agents to any holder of a Preferred Security who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that, (a) the beneficial owner of the
Preferred Security does not actually or constructively own 10 percent or more
of the total combined voting power of all classes of stock of the

106

Company entitled to vote, (b) the beneficial owner of the Preferred Security
is not a controlled foreign corporation that is related to the Company through
stock ownership, and (c) either (A) the beneficial owner of the Preferred
Security certifies to the Trust or its agent, under penalties of perjury, that
it is not a U.S. Holder and provides its name and address or (B) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Preferred Security in such capacity,
certifies to the Trust or its agent, under penalties of perjury, that such
statement has been received from the beneficial owner by it or by a Financial
Institution between it and the beneficial owner and furnishes the Trust or its
agent with a copy thereof; and (ii) a United States Alien Holder of a
Preferred Security will not be subject to United States federal withholding
tax on any gain realized upon the sale or other disposition of a Preferred
Security.

THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN UNITED STATES FEDERAL OR OTHER TAX LAWS.

ERISA CONSIDERATIONS

Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA")(a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an
investment in the Preferred Securities with assets of the Plan. Accordingly,
among other factors, the fiduciary should consider whether the investment
would satisfy the prudence and diversification requirements of ERISA and would
be consistent with the documents and instruments governing the Plan.

Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986,
as amended (the "Code") prohibit Plans, as well as individual retirement
accounts and Keogh plans subject to Section 4975 of the Code (also "Plans"),
from engaging in certain transactions involving "plan assets" with persons who
are "parties in interest" under ERISA or "disqualified persons" under the Code
("Parties in Interest") with respect to such Plan. A violation of these
"prohibited transaction" rules may result in an excise tax or other
liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans
(as defined in Section 3(32) of ERISA), certain church plans (as defined in
Section 3(33) of ERISA) and foreign plans (as described in Section 4(b)(5) of
ERISA) are not subject to the requirements of ERISA of Section 4975 of the
Code. Such plans may be subject to federal, state or local laws or regulations
which affect their ability to invest in the Preferred Securities. Any
fiduciary of such a governmental, church or foreign plan considering an
investment in the Capital Securities should determine the need for, and, if
necessary, the availability of, any exemptive relief under such laws or
regulations.

Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Trust would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the Trust
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.

Pursuant to an exception contained in the Plan Assets Regulation, the assets
of the Trust would not be deemed to be "plan assets" of investing Plans if,
immediately after the most recent acquisition of any equity interest in the
Trust, less than 25% of the value of each class of equity interests in the
Trust were held by Plans,

107

other employee benefit plans not subject to ERISA or Section 4975 of the Code
(such as governmental, church and foreign plans) and entities holding assets
deemed to be "plan assets" of any Plan (collectively, "Benefit Plan
Investors"), or if the Preferred Securities were "publicly offered securities"
for purposes of the Plan Assets Regulation. It is expected that the Preferred
Securities would be considered to be "publicly offered securities" under the
Plan Assets Regulation, although no assurance can be given in this respect.
Likewise, if the Preferred Securities are not considered "publicly offered
securities" under the Plan Asset Regulations, no assurance can be given that
the value of the Preferred Securities held by Benefit Plan Investors will be
less than 25% of the total value of such Preferred Securities at the
completion of the initial offering or thereafter, and no monitoring or other
measures will be taken with respect to the satisfaction of the conditions to
this exception. All of the Common Securities will be purchased and initially
held by the Company.

Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Preferred Securities were acquired with
"plan assets" of such Plan and the assets of the Trust were deemed to be "plan
assets" of Plans investing in the Trust. For example, if the Company is a
Party in Interest with respect to an investing Plan (either directly or by
reason of its ownership of the Bank or other subsidiaries), extensions of
credit between the Company and the Trust (as represented by the Subordinated
Debentures and the Guarantee) would likely be prohibited by Section
406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive
relief were available under an applicable administrative exemption (see
below). In addition, if the Company were considered to be a fiduciary with
respect to the Trust as a result of certain powers it holds (such as the
powers to remove and replace the Property Trustee and the Administrative
Trustees), certain operations of the Trust, including the optional redemption
or acceleration of the Subordinated Debentures, could be considered to be
prohibited transactions under Section 406(b) of ERISA and Section
4975(c)(1)(E) of the Code. IN ORDER TO AVOID SUCH PROHIBITED TRANSACTIONS,
EACH INVESTING PLAN, BY PURCHASING THE PREFERRED SECURITIES, WILL BE DEEMED TO
HAVE DIRECTED THE TRUST TO INVEST IN THE SUBORDINATED DEBENTURES AND TO HAVE
APPOINTED THE PROPERTY TRUSTEE.

The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect
prohibited transactions that may arise from the purchase or holding of the
Preferred Securities if assets of the Trust were deemed to be "plan assets" of
Plans investing in the Trust as described above. Those class exemptions are
PTCE 96-23 (for certain transactions determined by in-house asset managers),
PTCE 95-60 (for certain transactions involving insurance company general
accounts), PTCE 91-38 (for certain transactions involving bank collective
investment funds), PTCE 90-1 (for certain transactions involving insurance
company separate accounts), and PTCE 84-14 (for certain transactions
determined by independent qualified asset managers).

Because the Preferred Securities may be deemed to be equity interests in the
Trust for purposes of applying ERISA and Section 4975 of the Code, the
Preferred Securities may not be purchased or held by any Plan, any entity
whose underlying assets include "plan assets" by reason of any Plan's
investment in the entity (a "Plan Asset Entity") or any person investing "plan
assets" of any Plan, unless such purchaser or holder is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption. Any purchaser or holder of the Preferred
Securities or any interest therein will be deemed to have represented by its
purchase and holding thereof that it either (a) is not a Plan or (b) is
eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38,
90-1 or 84-14 or another applicable exemption with respect to such purchase or
holding. If a purchaser or holder of the Preferred Securities that is a Plan
or a Plan Asset Entity elects to rely on an exemption other than PTCE 96-23,
95-60, 91-38, 90-1, or 84-14, the Company and the Trust may require a
satisfactory opinion of counsel or other evidence with respect to the
availability of such exemption for such purchase and holding.

Insurance companies considering an investment in the Preferred Securities
should note that the Small Business Job Protection Act of 1996 added new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor issued proposed regulations (the
"Proposed General Accounting Regulations") in

108

December 1997, with respect to insurance policies that are supported by an
insurer's general account. The Proposed General Accounting Regulations are
intended to provide guidance on which assets held by the insurer constitute
"plan assets" of an ERISA Plan for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code.

Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering
purchasing the Preferred Securities on behalf of or with "plan assets" of any
Plan consult with their counsel regarding the potential consequences if the
assets of the Trust were deemed to be "plan assets" and the availability of
exemptive relief under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or any other
applicable exemption.

109

UNDERWRITING

Pursuant to the Underwriting Agreement, the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
and subject to the terms and conditions thereof, the underwriters named below
(the "Underwriters"), acting through J.C. Bradford & Co. and Sterne, Agee &
Leach, Inc., as representatives of the several Underwriters (the
"Representatives"), have severally agreed to purchase from New South Capital
Trust I the number of Preferred Securities set forth below opposite their
respective names.

NUMBER OF
PREFERRED
NAME OF UNDERWRITER SECURITIES
------------------- ----------

J.C. Bradford & Co............................................... 2,250,000
Sterne, Agee & Leach, Inc........................................ 750,000
---------
Total........................................................... 3,000,000
=========

The several Underwriters have agreed in the Underwriting Agreement, subject
to the terms and conditions set forth therein, to purchase all the Preferred
Securities offered hereby if any of the Preferred Securities are purchased. In
the event of default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the nondefaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.

The Representatives have advised New South Capital Trust I that they propose
initially to offer the Preferred Securities to the public at the public
offering price set forth on the cover page of this Prospectus. After the
initial public offering, the public offering price may be changed.

In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of the
Company, the Underwriting Agreement provides that the Company will pay as
compensation to the Underwriters arranging the investment therein of such
proceeds, an amount in immediately available funds of $0.35 per Preferred
Security (or $1,050,000 in the aggregate or $1,207,500 if the Underwriters'
over-allotment option is exercised) for the accounts of the several
Underwriters.

The offering of the Preferred Securities is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares.

New South Capital Trust I has granted the Underwriters an option to purchase
up to an additional 450,000 Preferred Securities at the initial public
offering price. Such option, which expires 30 days from the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent
that the Underwriters exercise such option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage thereof which
the number of shares of Preferred Securities to be purchased by it shown in
the table above bears to the total and New South Capital Trust I and will be
obligated pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such options only to cover over-allotments made in
connection with the sale of shares of Preferred Securities offered hereby. If
purchased, the Underwriters will sell such additional shares on the same terms
as those on which the shares are being offered.

To the extent that the Underwriters exercise their option to purchase
additional Preferred Securities, New South Capital Trust I will issue and sell
to the Company additional Common Securities and the Company will issue and
sell Subordinated Debentures to New South Capital Trust I in an aggregate
principal amount equal to the total aggregate Liquidation Amount of the
additional Common Securities being purchased and the additional Preferred
Securities being purchased pursuant to the option.

During a period of 120 days from the date of this Prospectus, neither New
South Capital Trust I nor the Company will, subject to certain exceptions,
without the prior written consent of the Representatives, directly or

110

indirectly, sell, offer to sell, grant any option for sale of, or otherwise
dispose of, any Preferred Securities, any security convertible into or
exchangeable into or exercisable for Preferred Securities or Subordinated
Debentures or any debt securities substantially similar to the Subordinated
Debentures or equity securities similar to the Preferred Securities (except
for the Subordinated Debentures and the Preferred Securities offered hereby).

The offering price and distribution rate have been determined by
negotiations among representatives of the Company and the Underwriters, and
the offering price of the Preferred Securities may not be indicative of the
market price following the offering. The Representative will have no
obligation to make market in the Preferred Securities, however, and may cease
marketing-making activities, if commenced, at any time.

New South Capital Trust I and the Company have agreed to indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make
in respect thereof.

VALIDITY OF SECURITIES

Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of the
Trust will be passed upon by Richards, Layton & Finger, P.A., One Rodney
Square, Wilmington, Delaware 19801, special Delaware counsel to the Company
and the Trust. The validity of the Guarantee and the Subordinated Debentures
will be passed upon for the Company by Balch & Bingham LLP, Birmingham,
Alabama. Certain legal matters will be passed upon for the Underwriters by
Alston & Bird, LLP, Washington, D.C. Certain matters relating to United States
federal income tax considerations will be passed upon for the Company by Balch
& Bingham LLP.

EXPERTS

The consolidated financial statements of New South Bancshares, Inc. at
December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

111

INDEX TO FINANCIAL STATEMENTS

The report of Ernst & Young LLP, independent auditors, and the accompanying
consolidated financial statements of the Company and subsidiary as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, are included herein in the Financial pages that follow.

PAGE
----

Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-3
Consolidated Income Statements for the three years ended December 31,
1997.................................................................... F-4
Consolidated Statements of Shareholders' Equity for the three years ended
December 31, 1997....................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 1997................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7

F-1

[LOGO OF NEW SOUTH BANCSHARES APPEARS HERE]

REPORT OF INDEPENDENT AUDITORS

Board of Directors
New South Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of New South
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New South
Bancshares, Inc. and subsidiary at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.

Ernst & Young LLP

March 17, 1998

F-2

NEW SOUTH BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)

ASSETS
Cash and due from banks.................................... $ 16,943 $ 32,328
Time deposits in other banks............................... 200 299
Investment securities available for sale................... 197,135 94,451
Mortgage loans held for sale............................... 35,570 0
Loans, net of unearned income.............................. 727,854 681,730
Allowance for possible loan losses......................... (7,333) (5,904)
-------- --------
Net Loans................................................ 720,521 675,826
Premises and equipment, net................................ 2,968 3,336
Other assets............................................... 18,728 16,740
-------- --------
Total Assets........................................... $992,065 $822,980
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing....................................... 70,897 38,883
Interest bearing.......................................... 624,468 621,785
-------- --------
Total deposits......................................... 695,365 660,668
Federal funds purchased and securities sold under
agreements to repurchase.................................. 40,800 0
Federal Home Loan Bank advances............................ 179,420 95,388
Note payable............................................... 10,000 10,000
Accrued expenses, deferred revenue, and other liabilities.. 14,166 8,983
-------- --------
Total Liabilities...................................... 939,751 775,039
Shareholders' Equity:
Common stock of $1.00 par value (authorized 1.5 million
shares; issued and outstanding 1,376,956 and 1,389,030
shares, respectively) 1,377 1,389
Surplus.................................................. 38,896 39,119
Retained earnings........................................ 11,172 6,456
Unrealized gain on securities available for sale, net of
tax..................................................... 869 977
-------- --------
Total Shareholders' Equity............................. 52,314 47,941
-------- --------
Total Liabilities and Shareholders' Equity............. $922,065 $822,980
======== ========

See accompanying notes to consolidated financial statements.

F-3

NEW SOUTH BANCSHARES, INC.

CONSOLIDATED INCOME STATEMENTS

YEARS ENDED DECEMBER 31
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)

Interest Income:
Interest on securities available for sale........ $ 10,077 $ 7,712 $ 7,553
Interest on loans................................ 64,831 57,395 47,072
Interest on other short-term investments......... 583 428 439
-------- -------- --------
Total Interest Income.......................... 75,491 65,535 55,064
Interest Expense:
Interest on deposits............................. 37,732 33,041 28,843
Interest on federal funds purchased and
securities sold under agreement to repurchase... 2,370 1,987 2,678
Interest on Federal Home Loan Bank advances...... 6,842 7,411 6,002
Interest on notes payable........................ 779 719 0
-------- -------- --------
Total Interest Expense......................... 47,723 43,158 37,523
-------- -------- --------
Net Interest Income................................ 27,768 22,377 17,541
Provision for possible loan losses............... 2,954 2,492 572
-------- -------- --------
Net Interest Income After Provision for Possible
Loan Losses....................................... 24,814 19,885 16,969
Noninterest Income:
Loan administration income....................... 4,915 4,870 4,547
Origination fees................................. 3,722 540 300
(Loss)/gain on sale of investment securities
available for sale.............................. (645) 1,689 464
Gain on sale of loans............................ 5,079 457 629
Other income..................................... 2,243 769 726
-------- -------- --------
Total Noninterest Income....................... 15,314 8,325 6,666
Noninterest Expense:
Salaries and benefits............................ 16,024 7,424 5,371
Net occupancy and equipment expense.............. 1,955 799 1,009
Loan servicing fees paid to affiliates........... 3,642 3,468 3,584
Loss on loans serviced........................... 1,423 1,271 1,694
Federal Deposit Insurance Corporation premium.... 418 4,368 1,114
Management fees paid to affiliates............... 0 1,704 1,704
Other expense.................................... 7,960 4,132 3,528
-------- -------- --------
Total Noninterest Expense...................... 31,422 23,166 18,004
-------- -------- --------
Income Before Income Taxes......................... 8,706 5,044 5,631
Income tax expense............................... 3,990 2,482 2,265
-------- -------- --------
Net Income..................................... $ 4,716 $ 2,562 $ 3,366
======== ======== ========
Weighted average shares outstanding................ 1,377 1,391 1,393
Earnings per share................................. $ 3.42 1.84 $ 2.42

See accompanying notes to consolidated financial statements.

F-4

NEW SOUTH BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

TOTAL
COMMON RETAINED UNREALIZED SHAREHOLDERS'
STOCK SURPLUS EARNINGS GAIN/(LOSS) EQUITY
------ ------- -------- ----------- -------------
(IN THOUSANDS)

Balance at December 31,
1994..................... $1,393 $39,179 $ 528 $(2,217) $38,883
Net income year ended
December 1995............ 0 0 3,366 0 3,366
Change in unrealized
gain/(loss) on securities
available for sale, net
of deferred taxes........ 0 0 0 3,531 3,531
------ ------- ------- ------- -------
Balance at December 31,
1995..................... 1,393 39,179 3,894 1,314 45,780
Net income year ended
December 1996............ 0 0 2,562 0 2,562
Stock retirement.......... (4) (60) 0 0 (64)
Change in unrealized
gain/(loss) on securities
available for sale, net
of deferred taxes........ 0 0 0 (337) (337)
------ ------- ------- ------- -------
Balance at December 31,
1996..................... 1,389 39,119 6,456 977 47,941
Net income year ended
December 1997............ 0 0 4,716 0 4,716
Stock retirement.......... (12) (223) 0 0 (235)
Change in unrealized
gain/(loss) on securities
available for sale, net
of deferred taxes........ 0 0 0 (108) (108)
------ ------- ------- ------- -------
Balance at December 31,
1997..................... $1,377 $38,896 $11,172 $ 869 $52,314
====== ======= ======= ======= =======

See accompanying notes to consolidated financial statements.

F-5

NEW SOUTH BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)

Operating Activities:
Net income.................................. $ 4,716 $ 2,562 $ 3,366
Adjustments to reconcile net income to cash
provided by operations:
Accretion of discounts and fees........... (449) (882) (1,292)
Provision for possible loan losses........ 2,954 2,492 572
Depreciation.............................. 473 332 290
Loss/(gain) on sale of investment
securities available for sale............ 645 (1,689) (464)
Writedown of investment securities
available for sale....................... 0 62 0
Gain on sale of loans..................... (5,079) (457) (629)
Increase/(decrease) in other assets....... (2,198) (3,979) 2,656
Increase in accrued expenses, deferred
revenue and other liabilities............ 5,183 3,068 29
--------- --------- ---------
Net Cash Provided by Operating
Activities............................. 6,245 1,509 4,528
Investing Activities:
Net decrease in time deposits in other
banks...................................... 99 0 99
Net decrease/(increase) in securities
purchased under agreement to resell........ 0 4,000 (4,000)
Proceeds from sales of investment securities
available for sale......................... 167,772 93,651 62,076
Proceeds from maturities and calls of
investment securities available for sale... 55,986 19,163 8,349
Purchases of investment securities available
for sale................................... (168,737) (109,285) (64,230)
Purchase of mortgage loans held for sale.... (1,820) 0 0
Originations of mortgage loans held for
sale....................................... (290,631) 0 (42,731)
Proceeds from the sale of mortgage loans
held for sale.............................. 103,502 42,962 12
Net increase in loan portfolio.............. (47,200) (120,168) (105,550)
Purchases of premises and equipment......... (1,054) (1,160) (670)
Proceeds from sale of premises and
equipment.................................. 949 3 5
Purchases of real estate owned.............. (1,807) (1,555) (1,722)
Proceeds from sales of real estate owned.... 2,017 1,724 2,119
--------- --------- ---------
Net Cash Used in Investing Activities... (180,924) (70,665) (146,243)
Financing Activities:
Net increase/(decrease) in noninterest
bearing deposits........................... 32,014 3,708 (4,502)
Net increase in interest bearing deposits... 2,683 117,949 78,947
Net increase/(decrease) in federal funds
purchased and securities sold under
agreements to repurchase................... 40,800 (50,423) 64,811
Net change in Federal Home Loan Bank
Advances................................... 84,032 0 10,000
Repurchase and retirement of common stock... (235) (64) 0
--------- --------- ---------
Net Cash Provided by Financing
Activities............................. 159,294 71,170 149,256
--------- --------- ---------
Net increase in cash and cash equivalents..... (15,385) 2,014 7,541
Cash and cash equivalents at beginning of
year......................................... 32,328 30,314 22,773
--------- --------- ---------
Cash and Cash Equivalents at End of Year...... $ 16,943 $ 32,328 $ 30,314
========= ========= =========

See accompanying notes to consolidated financial statements.

F-6

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New South Bancshares, Inc. ("Bancshares"), formed in November 1994, is the
holding company of New South Federal Savings Bank (the "Bank") and through the
Bank provides loan and savings products primarily in the Southeast, with a
concentration in residential mortgage banking services. (See Note 16.) The
consolidated financial statements presented include the accounts of Bancshares
and the Bank, collectively ("New South"). Consequently, all significant
intercompany accounts or transactions have been eliminated upon consolidation.
Certain principles which significantly affect the determination of financial
position, results of operations and cash flows are summarized below. The
preparation of consolidated financial statements in accordance with generally
accepted accounting principles requires the use of management's estimates;
therefore, actual results may differ from the estimates used in the
consolidated financial statements. Certain amounts in the prior years
financial statements have been reclassified to conform with the 1997
presentation. These reclassifications had no effect on net income.

Cash and Due From Banks

Cash equivalents consist of short-term interest bearing and noninterest
bearing deposits due from banks with maturities of less than 90 days at the
date of purchase.

Investment Securities

All investment securities are classified as available for sale and are
carried at fair value. Any unrealized gains or losses are reflected as a
separate component of equity, net of any tax effect. Realized gains and losses
on the sales of investment securities are determined using the specific
identification method and are included in noninterest income to the extent
such gains or losses have not been previously recognized.

Mortgage Loans Held for Sale

Mortgage loans held for sale are reported at the lower of cost or market, as
determined in the aggregate. Gains or losses on the sale of these assets are
included in noninterest income, while interest collected on these assets is
included in interest income.

Loans

All loans are stated at principal balances outstanding, adjusted for any
discounts or premiums on loans purchased from others or discount points
collected at origination. Interest income on loans is computed and credited to
income based upon the principal amount of the loans outstanding using
appropriate rates of interest. Amortization of discounts and premiums on loans
is calculated using the interest method and included in interest income.

Effective January 1, 1995, New South adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS114"), as amended by Statement of Financial Accounting Standards
No. 118 ("SFAS118"), "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures". Accordingly, certain impaired loans are to be
reported at the present value of expected future cash flows using the loan's
effective interest rate, or at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. The adoption of
SFAS114 did not have a material impact on the results of operations.

It is the policy of New South to stop accruing interest income and place the
recognition of interest on a cash basis when any loan is past due more than 90
days as to principal or interest or if the ultimate collection of

F-7

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

either is in doubt. Any interest previously accrued but not collected is
reversed against current income when a loan is placed on a nonaccrual basis.
Generally, New South has a mortgage lien on all property on which mortgage,
participation or purchased loans are made, in order to protect New South's
interest in both the principal amounts outstanding and interest collections.
Additionally, portions of certain mortgage loan balances are insured by
private or government guaranty or insurance policies. Loans collateralized by
savings accounts are secured by savings account balances in excess of the
outstanding loan amount.

Allowance for Possible Loan Losses

The provision for possible loan losses charged to income is determined by
various factors including actual loss experience, the current volume and
condition of the loans in the portfolio, changes in the composition of the
portfolio, and current and expected economic conditions. Such provisions, less
net loan charge-offs, comprise the allowance for possible loan losses and is
available for future loan charge-offs. The allowance for possible loan losses
is maintained at a level considered adequate to provide for potential losses
as determined by management's continuing review and evaluation of the loans
and its judgement as to the impact of economic conditions on the portfolio.
New South follows a policy of charging off loans which management determines
to be uncollectible. Subsequent recoveries are credited to the allowance.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the double-declining balance method
over the estimated useful lives of the properties or equipment.

Foreclosed Real Estate Owned

Real estate owned arises from loan foreclosure or deed in lieu of
foreclosure and is reported at the lower of cost, the unpaid balance at the
date of acquisition plus foreclosure and other related costs, or net
realizable value. Any resultant writedown at the time of foreclosure is
charged to the allowance for loan losses. Subsequent gains or losses on the
sale or losses from valuation of these properties are credited or charged to
income. Costs of improvements made to facilitate sale are capitalized, while
costs of holding the property are charged to expense. Allowances, if any, are
recorded for any anticipated costs to dispose.

Mortgage Servicing Rights

In June 1996, the Financial Accounting Standards Board ("Board") issued
Statement of Financial Accounting Standards No. 125 ("SFAS125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. SFAS125
provides accounting and reporting standards for the transfers and servicing of
financial assets and the extinguishments of liabilities based on a consistent
application of a financial-components approach focusing on control.

SFAS125 requires entities that sell or securitize mortgage loans with
mortgage servicing rights (MSRs) retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loan based on their
relative fair values (Originated Mortgage Servicing Rights or OMSRs).
Servicing rights acquired separately are capitalized at their cost (Purchased
Mortgage Servicing Rights or PMSRs). The resulting capitalized MSRs are
assessed for impairment periodically based on fair value with any impairment
recognized through a valuation allowance. MSRs are amortized against
noninterest income in proportion to, and over the period of, estimated net
servicing income based on the historical and projected prepayments of the
underlying loans.

F-8

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The fair values of OMSRs are based on an analysis of various loan
characteristics, including interest rates, maturities, and product types.
These characteristics are used to stratify the servicing portfolio on which
OMSRs have been recognized to determine valuation and impairment for loans
whose characteristics are similar in nature.

New South implemented SFAS125 during calendar year 1997. The adoption did
not have a material impact on the results of operations.

Income Taxes

The consolidated financial statements have been prepared on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes and for purposes of computing income taxes
currently payable, deferred taxes are provided on such temporary differences.
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of events that have been recognized in the financial statements
or tax returns. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be realized or settled.

Bancshares and the Bank have entered into a tax sharing agreement by which a
consolidated return is filed each calendar year.

Earnings Per Share

Effective December 31, 1997, New South adopted Statement of Financial
Accounting Standards 128, "Earnings Per Share". This standard requires dual
presentation of basic and diluted earnings per share for companies with
potentially dilutive securities. There are no dilutive securities issued or
outstanding for the years ended December 31, 1995, 1996 and 1997.

Off-Balance Sheet Financial Instruments

New South has from time to time utilized various off-balance sheet
instruments, such as interest rate swaps and caps, which are designated to
hedge imbalances in sensitivity to fluctuating interest rates for designated
assets and liabilities. To qualify as a hedge used to manage interest rate
risk, the following criteria must be met: (1) the asset or liability to be
hedged exposes the institution, as a whole, to the interest rate risk, (2) the
instrument alters or reduces sensitivity to interest rate changes and (3) the
instrument is designated and effective as a hedge. If the designated asset or
liability being hedged is terminated, matures or is sold, any realized or
unrealized gain or loss from the related off-balance sheet investment product
would be recognized in income coincident with the extinguishment or
termination. Any changes in market value are recognized in other operating
revenues.

New South has entered into interest rate swap agreements to modify the
interest characteristics of some of its mortgage loans, mortgage-backed
securities and certificates of deposit. These agreements involve the exchange
of amounts based on a fixed interest rate for amounts based on variable
interest rates over the life of the agreement without an exchange of the
notional amount upon which the payments are based. The differential to be paid
or received as interest rates change is accrued and recognized as an
adjustment of interest income or expense related to the assets or liabilities
being hedged. The related amounts payable to or receivable from counterparties
are included in other liabilities or assets.

New South has purchased and sold interest rate cap agreements to modify the
interest characteristics of designated liabilities. The strike price of these
agreements exceeded the current market levels at the date of inception. The
interest rate indices specified by the agreements have been and are expected
to be highly correlated with the interest rates New South incurs on its
liabilities. Payments to be paid or received as a result

F-9

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

of the specified interest rate index exceeding the strike price are accrued in
other liabilities or assets and are recognized as an adjustment of interest
expense. The cost of these agreements is amortized to interest expense ratably
during the life of the agreement.

Recent Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130: "Reporting Comprehensive
Income" and SFAS No. 131: "Disclosures about Segments of an Enterprise and
Related Information". Both of these standards will be effective in financial
statements for periods beginning after December 15, 1997. Management believes
the adoption of these standards will have no material effect on the
consolidated financial statements of New South.

2. CASH AND DUE FROM BANKS AND CASH FLOWS

New South maintains cash balances with the Federal Reserve when required.
There was no reserve requirement at December 31, 1997. As of December 31,
1996, reserve requirements amounted to $550,000.

Cash was held in reserve for potential losses related to securitized
automobile loans. At December 31, 1997 and 1996, this restricted cash amounted
to $1,158,000 and $3,656,000, respectively.

Interest expense paid for 1997, 1996 and 1995 was $45,916,000, $41,250,000
and $37,160,000, respectively. Income taxes paid for 1997, 1996 and 1995 were
$4,082,000, $3,131,000 and $1,009,000, respectively.

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

The fair value and amortized cost of securities available for sale and the
related unrealized gains and losses for each category are presented below:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
(IN THOUSANDS)

Mortgage-backed securities......... $138,816 $1,474 $(231) $140,059
U.S. Treasury and federal agency
securities........................ 39,391 204 (2) 39,593
Other.............................. 17,481 16 (14) 17,483
-------- ------ ----- --------
Total investment securities
available for sale.............. $195,688 $1,694 $(247) $197,135
======== ====== ===== ========

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
(IN THOUSANDS)

Mortgage-backed securities......... $ 68,926 $1,777 $(187) $ 70,516
U.S. Treasury and federal agency
securities........................ 12,497 33 (35) 12,495
Other.............................. 11,399 41 0 11,440
-------- ------ ----- --------
Total investment securities
available for sale.............. $ 92,822 $1,851 $(222) $ 94,451
======== ====== ===== ========

F-10

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The contractual maturities of the securities available for sale are
presented in the following table for 1997 and 1996:

1997 1996
------------------ -----------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- -------
(IN THOUSANDS)

Due in one year or less............... $ 5,252 $ 5,256 $ 3,990 $ 3,992
Due after one year through five
years................................ 41,823 42,038 17,457 17,644
Due after five years through ten
years................................ 52,069 51,927 134 122
Due after ten years................... 87,111 88,481 65,640 67,092
Equity securities..................... 9,433 9,433 5,601 5,601
-------- -------- ------- -------
$195,688 $197,135 $92,822 $94,451
======== ======== ======= =======

Net unrealized gains on investment securities available for sale at December
31, 1997, 1996 and 1995 amounted to $1,447,000, $1,629,000 and $2,191,000,
respectively. Deferred taxes relating to the net unrealized gains at years
ending 1997, 1996 and 1995 amounted to $578,000, $652,000 and $877,000,
respectively.

Gross realized gains on securities available for sale for 1997, 1996 and
1995 were $1,464,000, $2,210,000 and $841,000, respectively. Gross realized
losses on securities for 1997, 1996 and 1995 were $2,109,000, $521,000 and
$377,000, respectively. The gross proceeds for the sales of securities
available for sale in 1997, 1996 and 1995 were $167,772,000, $93,651,000 and
$62,076,000, respectively.

At December 31, 1997 and 1996, New South had securities of $8,367,000 and
$7,646,000 pledged to secure state and municipal deposits, respectively.

There were no securities classified as trading securities during 1997, 1996
or 1995; therefore, no unrealized gains or losses on this security
classification have been included in income.

During 1995, the Financial Accounting Standards Board allowed companies to
reassess their investment classifications as determined under Statement of
Financial Accounting Standards No. 115, " Accounting for Certain Investments
in Debt and Equity Securities". This permitted a one time reclassification of
securities. As a result, management reclassified all securities to available
for sale. Securities reclassified from held for investment to held for sale on
December 13, 1995 had an amortized cost of $23,311,000 and unrealized gains of
$496,000.

4. LOANS

The composition of the loan portfolio as of December 31, 1997 and 1996 was
as follows:

1997 1996
-------- --------
(IN THOUSANDS)

Mortgage................................................ $566,433 $587,773
Installment............................................. 96,916 70,991
Construction............................................ 65,101 24,620
Commercial.............................................. 1,467 403
-------- --------
729,917 683,787
Less:
Unearned income....................................... 2,063 2,057
Allowance for possible loan losses.................... 7,333 5,904
-------- --------
Net loans............................................. $720,521 $675,826
======== ========

F-11

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The undisbursed portion of mortgage and construction loans was $58,369,000
and $35,612,000 at December 31, 1997 and 1996, respectively.

5. ALLOWANCE FOR POSSIBLE LOAN LOSSES

Management establishes allowances for the purpose of absorbing potential
losses that may exist within the loan portfolio and that may be expected to
occur based on management's review of the economy, historical losses,
underwriting standards, changes in the composition of the loan portfolio and
other factors. Charges are made to the allowance for loans that are written-
off during the year while recoveries of these amounts are credited to the
account. Provisions for potential losses are also credited to the account and
are charged against current income.

A summary of the activity in the allowance for possible loan loss accounts
for the years ended December 31, 1997, 1996 and 1995 is presented below:

1997 1996 1995
------ ------ ------
(IN THOUSANDS)

Balance at beginning of year......................... $5,904 $4,562 $5,189
Add: Provision for possible loan losses.............. 2,954 2,492 572
Deduct: Loans charged off............................ 2,200 1,610 1,436
Loan recoveries...................................... (675) (460) (237)
------ ------ ------
Net charge-offs...................................... 1,525 1,150 1,199
------ ------ ------
Balance at end of year............................... $7,333 $5,904 $4,562
====== ====== ======

6. MORTGAGE SERVICING RIGHTS

During 1997, the Bank recorded OMSRs of $939,000. Amortization related to
these servicing rights amounted to $28,000 for 1997. The fair value of OMSRs
at December 31, 1997 amounted to $968,000. Based on New South's analysis,
there was no impairment of OMSRs at December 31, 1997. Prior to 1997, New
South had no OMSRs as they were recorded at a related company, Collateral
Mortgage, Ltd. (See Note 16.)

The balance of unamortized PMSRs from the acquisition of servicing
agreements with third parties was $470,000 and $546,000 at December 31, 1997
and 1996. No purchased mortgage servicing rights were capitalized during 1997,
1996 or 1995. The amount amortized during 1997, 1996 and 1995 was $76,000,
$96,000 and $89,000.

F-12

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. DEPOSITS

The composition of the deposit base at December 31, 1997 and 1996 is
summarized in the following table:

WEIGHTED
AVERAGE 1997 1996
RATE AT ---------------- ----------------
DECEMBER 31, 1997 AMOUNT PERCENT AMOUNT PERCENT
----------------- -------- ------- -------- -------
(IN THOUSANDS)

Noninterest bearing
demand................... $ 70,897 10.2% $ 38,883 6.0%
Interest bearing
transaction accounts..... 4.00% 3,932 0.6 2,166 0.4
Money market accounts..... 4.31 54,027 7.8 50,328 7.5
Statement savings......... 4.25 3,851 0.5 5,223 0.8
Certificates of deposit:
4% to 4.99%............. 4.88 62 0.0 9,218 1.4
5% to 5.99%............. 5.64 325,136 46.8 383,079 58.0
6% to 6.99%............. 6.25 155,683 22.4 98,053 14.8
7% to 8.99%............. 7.43 77,911 11.2 69,529 10.5
More than 9%............ 9.44 3,866 0.5 4,189 0.6
-------- ----- -------- -----
Total deposits........ $695,365 100.0% $660,668 100.0%
======== ===== ======== =====

The aggregate amount of certificates of deposit in denominations greater
than $100,000 was approximately $202,685,000 and $191,517,000 at December 31,
1997 and 1996, respectively. Accrued interest payable on deposits at December
31, 1997 and 1996 amounted to $2,783,000 and $3,489,000, respectively,
primarily earned on certificates of deposit.

The scheduled maturities of certificates of deposit at December 31, 1997
were as follows:

1997
--------------
(IN THOUSANDS)

1998........................................................ $377,555
1999........................................................ 59,787
2000........................................................ 35,987
2001........................................................ 9,769
2002 and thereafter......................................... 79,560
--------
$562,658
========

The following table notes the breakdown of interest expense on deposits for
the years ended December 31:

1997 1996 1995
------- ------- -------
(IN THOUSANDS)

Interest bearing transaction accounts............. $ 126 $ 161 $ 107
Money market accounts............................. 2,350 2,051 2,094
Statement savings................................. 245 225 201
Certificates of deposit........................... 35,011 30,604 26,441
------- ------- -------
$37,732 $33,041 $28,843
======= ======= =======

F-13

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

In 1997, Federal Funds agreements were arranged with three commercial banks
totaling $30,000,000 in available credit. At December 31, 1997, $6,000,000 was
outstanding, bearing interest at six percent. From time to time, sales of
securities under agreements to repurchase are used to facilitate the
management of interest rate risk and liquidity. At December 31, 1997,
mortgage-backed securities with a book and market value of $36,323,000 were
sold under such an agreement with SunTrust Capital Markets, Inc. This
agreement matures daily. Accrued interest receivable on this security amounted
to $196,000. At December 31, 1996, there were no such agreements outstanding.
These agreements, when utilized, are treated as financings with the
obligations to repurchase the securities sold reflected as a liability in the
financial statements. The dollar amount of the securities underlying the
agreements remain in the various asset accounts. These securities are held by
the counterparty to the repurchase agreements. The table below provides
information relating to repurchase activity for 1997 and 1996:

1997 1996
------- -------
(IN THOUSANDS)

Activity for the year:
Average balance of agreements outstanding.............. $41,177 $35,502
Maximum outstanding at any month-end................... $63,100 $52,000
Ending balance......................................... $34,800 $ 0
Average interest rate at period-end.................... 7.30% 0%

9. FEDERAL HOME LOAN BANK ADVANCES, LINES OF CREDIT AND NOTE PAYABLE

As of December 31, 1997 and 1996, Federal Home Loan Bank ("FHLB") advances
amounted to $179,420,000 and $95,388,000, respectively. The advances
outstanding at December 31, 1997 bear interest at rates ranging from 5.75
percent to 7.89 percent. The advances are collateralized by stock in the
Federal Home Loan Bank and a blanket assignment of mortgage loans. Scheduled
maturities for the advances outstanding as of December 31, 1997 are as
follows, in thousands:

1998................................ $161,000
2001................................ 3,388
2003................................ 5,000
2005................................ 10,000
2017................................ 32
--------
$179,420
========

During 1997, the bank entered into a $20,000,000 warehousing line of credit
agreement with a commercial bank. Borrowings are to be secured by pledging
specific mortgage loans and will bear a market interest rate. During 1997,
there were no amounts outstanding on the line of credit.

Bancshares has a $15,000,000 credit facilities agreement from a commercial
bank consisting of a $10,000,000 revolving credit line and $5,000,000 in term
debt secured by the stock of the Bank. The amounts outstanding bear interest
at the London Interbank Offering Rate plus two percent, payable quarterly.
Bancshares receives dividends from the Bank in amounts necessary to cover the
required interest payments and any principal payments due on the debt. As of
December 31, 1997 and 1996, $5,000,000 was outstanding on the line of credit

F-14

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and $5,000,000 was outstanding on the term debt. The available limit on the
line of credit decreases annually until March 31, 2003. Required payments on
the term debt are shown in the following table, in thousands:

2003.................................. 350
2004.................................. 2,325
2005.................................. 2,325
------
$5,000
======

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires the disclosure of estimated fair
values for all financial instruments, both assets and liabilities on and off-
balance sheet, for which it is practicable to estimate their value along with
pertinent information on those financial instruments for which such values are
not available.

Fair value estimates are made at a specific point in time and are based on
relevant market information which is continuously changing. Because no quoted
market prices exist for a significant portion of New South's financial
instruments, fair values for such instruments are based on management's
assumptions with respect to future economic conditions, estimated discount
rates, estimates of the amount and timing of future cash flows, expected loss
experience, and other factors. These estimates are subjective in nature
involving uncertainties and matters of significant judgement; therefore, they
cannot be determined with precision. Changes in the assumptions could
significantly affect the estimates.

For purposes of this disclosure, the carrying value approximates or is equal
to the fair value of financial instruments for the balance sheet lines
captioned: cash and due from banks, time deposits in other banks, investment
securities available for sale, federal funds purchased and securities sold
under agreements to repurchase, and note payable.

The carrying amount and estimated fair values of other financial instruments
at December 31 is summarized as follows:

DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------
ESTIMATED
CARRYING ESTIMATED CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
-------- ---------- -------- ---------
(IN THOUSANDS)

Financial Assets:
Mortgage loans held for sale...... $ 35,570 $ 35,570 $ 0 $ 0
Loans, net of unearned income..... 720,521 744,855 675,826 690,781
Financial liabilities:
Deposits.......................... 695,365 700,548 660,668 662,549
FHLB advances..................... 179,420 182,236 95,388 96,250
Off-balance sheet financial
instruments:
Unrealized gains/(losses):
Interest rate swap agreements... 0 3,148 0 (55)
Interest rate cap agreements.... 0 92 0 13

F-15

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following methods and assumptions were used by New South in estimating
its fair value disclosures for financial instruments:

Investment Securities Available for Sale and Mortgage Loans Held for Sale--
Fair values for securities and mortgage loans held for sale are based on
quoted market prices, where available. Where quoted market prices are not
available, fair values are based on quoted market prices of similar
instruments, adjusted for any significant differences between the quoted
instruments and the instruments being valued.

Loans--The fair values of variable rate loans that reprice frequently and
have no significant change in credit risk are assumed to approximate carrying
amounts. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality and estimates of maturity
based on New South's historical experience. The carrying amount of accrued
interest receivable approximates its fair value.

Deposits--The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings accounts, and money market and
interest-bearing checking accounts is, by definition, equal to the amount
payable on demand (carrying amount). Fair values for fixed rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates of deposit to a
schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Advances--The fair values of these advances are
determined using discounted cash flow analyses which apply interest rates
currently offered.

Off-Balance Sheet Instruments--Fair values for New South's off-balance sheet
instruments such as interest rate swaps and interest rate caps are determined
using various methods. Fair values of interest rate swaps and caps are
determined with the use of pricing models or formulas using current
assumptions if there are no relevant market comparables.

11. EMPLOYEE BENEFIT PLAN

Substantially all full-time employees with six months of service are
eligible to participate in New South's 401(k) Profit Sharing Plan. Under the
plan, employees elect to defer a portion of their wages, with New South
matching deferrals at the rate of 25 percent of the first 8 percent of the
employee's salary deferred. New South contributed $138,000, $49,000 and
$40,000 for the years ended December 31, 1997, 1996 and 1995, respectively, to
the plan.

F-16

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. INCOME TAXES

At December 31, 1997 deferred income taxes reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The valuation allowances for net deferred tax assets did not change in 1997.
Significant components of New South's deferred tax assets and liabilities as
of December 31, 1997 and 1996 are listed below.

DECEMBER 31
----------------
1997 1996
------- -------
(IN THOUSANDS)

Deferred tax assets:
Loan loss allowance................................... $ 2,933 $ 2,162
Other................................................. 2,119 738
------- -------
Total deferred tax assets........................... 5,052 2,900
------- -------
Deferred tax liabilities:
Tax deferred dividends................................ 494 494
Originated mortgage servicing rights.................. 364 0
Other................................................. 641 658
------- -------
Total deferred tax liabilities...................... 1,499 1,152
------- -------
Net deferred tax assets before valuation allowance...... 3,553 1,748
Valuation allowance................................... (1,988) (1,988)
------- -------
Net deferred tax asset/(liability).................. $ 1,565 $ (240)
======= =======

Applicable income taxes for financial reporting purposes differs from the
amount computed by applying the statutory federal income tax rate of 34
percent for the reasons below:

YEARS ENDED DECEMBER 31
-----------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)

Tax computed at statutory federal income tax
rate........................................... $ 2,960 $ 1,817 $ 2,069
Increase in taxes resulting from:
State income tax, net of federal benefit...... 255 107 161
Other, net.................................... 775 558 35
------- ------- -------
Total....................................... $ 3,990 $ 2,482 $ 2,265
======= ======= =======

F-17

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The provisions for income taxes included in the consolidated statements of
income are summarized below:

CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)

1997
Federal.......................................... $4,225 $(621) $3,604
State............................................ 513 (127) 386
------ ----- ------
Total.......................................... $4,738 $(748) $3,990
====== ===== ======
1996
Federal.......................................... $2,217 $ 35 $2,252
State............................................ 230 0 230
------ ----- ------
Total.......................................... $2,447 $ 35 $2,482
====== ===== ======
1995
Federal.......................................... $2,050 $ (47) $2,003
State............................................ 262 0 262
------ ----- ------
Total.......................................... $2,312 $ (47) $2,265
====== ===== ======

For 1995, New South was allowed a special bad debt deduction that was
limited to eight percent of taxable income in prior years before the special
bad debt deduction and subject to certain limitations based on the aggregate
qualifying loans and deposit account balances at the end of the year. For 1996
and 1997, the bad debt deduction was limited to an amount equal to the actual
net charge-off's occurring during the year. If the amounts that qualified as
deductions for federal income tax purposes for years prior to 1998 are later
used for purposes other than bad debt losses, including distributions on
liquidation, they will be subject to federal income tax at the then current
corporate rate. The amount of bad debt deductions allowed for tax purposes in
years 1988 through 1995 in excess of net actual charge-offs is required to be
added back to taxable income pro rata over a six year period, beginning with
tax year ended December 31, 1998.

13. REGULATORY CAPITAL REQUIREMENTS

Various capital measures used within the banking industry are indicators of
capital adequacy. Among these are leverage, tangible, and risk-based capital
ratios. These ratios adjust reported asset and capital amounts by various
nonqualifying regulatory assets such as certain purchased mortgage servicing
rights and certain nonqualifying intangibles. Regulatory authorities set these
minimum ratio standards for banking institutions in order to monitor the
capital strength of the institutions. Should the Bank's capital ratios decline
below these minimum standards, it would become subject to a series of
increasingly restrictive regulatory actions. The Bank has consistently
exceeded these minimum guidelines, and it is the intention of management to
continue to monitor these ratios to insure regulatory compliance and maintain
adequate capital for the Bank. The Bank's current regulatory ratios place the
Bank in the "well capitalized" category. The capital levels for the Bank under
these various measures are noted in the table for December 31, 1997 and 1996.
Management believes, as of December 31, 1997, that the Bank meets all capital
adequacy guidelines to which it is subject.

F-18

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

MINIMUM ACTUAL ACTUAL
REQUIREMENT DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- --------- --------
(IN THOUSANDS)

Leverage capital, Tier 1
to total assets:
New South Federal
Savings Bank........... $29,758 3.00% $ 61,221 6.17% $ 56,825 6.90%
Total assets............ 991,939 822,980
Tangible capital, Tier 1
to total assets:
New South Federal
Savings Bank........... 14,879 1.50% 61,221 6.17% 56,825 6.90%
Total assets............ 991,939 822,980
Total risk-based capital
to risk adjusted assets:
New South Federal
Savings Bank........... 51,511 8.00% 67,458 10.48% 61,429 11.14%
Risk adjusted assets.... 643,884 551,459
Leverage capital Tier 1 to
risk adjusted assets:
New South Federal
Savings Bank........... 25,755 4.00% 61,221 9.51% 56,825 10.30%
Risk adjusted assets.... 643,884 551,459

Total capital for Bancshares at December 31, 1997 and 1996 was $52,314,000
and $47,941,000, respectively. Regulatory capital requirements do not apply to
thrift holding companies.

14. OFF-BALANCE SHEET RISK AND COMMITMENTS

New South is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the needs of its customers and
to reduce its own exposure to fluctuations in interest rates. The financial
instruments may include commitments to extend credit, standby letters of
credit, interest rate caps and floors, interest rate swaps, forward and
futures contracts and commitments to purchase loans. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the financial statements. The contract or
notional amounts of these instruments reflect the extent of involvement New
South has in the particular class of financial instrument.

New South's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. New South uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate caps, floors and swap agreements and for
forward and futures contracts, the contract or notional amounts do not
represent exposure to credit loss. New South controls the credit risk of its
interest rate swap agreements and forward and futures contracts through credit
approvals, limits and monitoring procedures. Generally, New South will require
collateral, margin deposits or other security to support financial instruments
with credit or interest risk.

Commitments to extend credit ("mortgage pipeline") are agreements to lend to
customers as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
mortgage pipeline consists of both fixed rate commitments and floating rate
obligations. The fixed rate commitments result in market risk, while floating
rate commitments contain no market risk. New South controls this market risk
through mandatory forward commitments to sell loans and other financial
instruments designed to hedge this type of interest rate exposure. The market
risk associated with these mandatory forward commitments exists to the extent
loans are not available at appropiate rates. New South's mandatory forward
commitments are considered in the lower of cost or market calculation for the
balance sheet category of loans held for sale. The total mortgage pipeline was
$40,162,000 as of December 31, 1997. Of this pipeline,

F-19

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

$30,724,000 were fixed rate commitments and $9,438,000 were adjustable
commitments with market risk for 1997. Adequate sources of funds were
available at December 31, 1997 to fund anticipated closings from the mortgage
pipeline. There were no loans in the mortgage pipeline in 1996. (See Note 16.)

Commitments to purchase loans are agreements to buy mortgage loans on a
specified date at an amount stated as a percentage of the note amount of the
loans to be purchased. On these commitments, New South uses the same policies
to control credit and interest rate risk as it does for other commitments to
extend credit.

Standby letters of credit are conditional commitments issued by New South to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, such as
a bond financing. While some of the guarantees are short-term in nature, most
extend for more than one year and expire in decreasing amounts. The credit
risk in standby letters of credit is substantially the same as that for
extending loan facilities to customers. New South holds various assets as
collateral, including real estate and mortgage-backed securities, supporting
those commitments for which collateral is deemed necessary.

Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. One party to the transaction will pay a fixed
rate of interest to the other party and receive from that party a floating
rate of interest, both based on the same notional value, at specified
intervals. Whether New South enters the agreement as the party to pay either
the fixed rate or the floating rate is determined by management's assessment
of New South's obligations and overall interest rate risk exposure and,
consequently, can vary greatly over time. Entering into interest rate swap
agreements involves not only the risk of dealing with counterparties and their
ability to meet the terms of the contracts but also the interest rate risk
associated with unmatched positions. Notional principal amounts are often used
to express the volume of these transactions; however, the amounts potentially
subject to credit risk are much smaller. Market values are a better indication
of credit risk exposure. Generally, New South will enter into interest rate
swap agreements with firms that are rated investment grade or better by a
nationally recognized investment rating service.

Interest rate cap and floor agreements are used to modify and/or reduce New
South's interest rate risk. As of December 31, 1997 and 1996, New South had
interest rate cap agreements with commercial banks and major investment
banking firms covering New South's interest rate exposure on short-term
liabilities.

The following table summarizes the contract or notional amounts of the
various off-balance sheet instruments and commitments as of December 31, 1997
and 1996:

1997 1996
-------- --------
(IN THOUSANDS)

Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit........................... $ 66,703 $ 37,871
Standby letters of credit.............................. 20,162 16,735
Financial instruments whose notional amounts exceed the
amount of credit risk:
Interest rate swap agreements.......................... 125,000 120,000
Interest rate cap agreements........................... 305,000 215,000

15. LOAN SERVICING

Mortgage and installment loans serviced for others are not recorded on New
South's books and, accordingly, are not reflected in the accompanying
financial statements. New South is obligated to service the unpaid principal

F-20

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

balances of these loans. New South has entered into a subservicing agreement
with Collateral to service the majority of these mortgage loans for New South.

Collateral, as a subservicer for all FHA/VA loans, is required to advance,
from its own funds, escrow and foreclosure costs on the loans it services.
Portions of these advances are not recoverable for loans serviced for the
Government National Mortgage Association ("GNMA"). New South reimburses
Collateral for any of the nonrecoverable losses as part of the subservicing
agreement. The average GNMA FHA/VA loss resulting from these advances and
relating to loans that subsequently went into foreclosure amounted to
approximately $850 per loan in 1997, $400 per loan in 1996 and $1,800 per loan
in 1995. Total losses of this nature for 1997, 1996 and 1995 amounted to
$71,000, $34,000 and $83,000, respectively.

The outstanding mortgage loan amounts serviced for others as of December 31,
1997 and 1996 are summarized below:

1997 1996
-------- --------
(IN THOUSANDS)

Government National Mortgage Association................ $261,581 $265,475
Federal Home Loan Mortgage Corporation.................. 188,463 114,612
Federal National Mortgage Association................... 88,038 94,196
Other investors......................................... 391,174 215,886

Custodial escrow balances maintained in connection with loan servicing were
approximately $3,253,000 at December 31, 1997 and $2,717,000 at December 31,
1996.

New South sold approximately $23,000,000 of consumer auto loans during 1997,
$50,000,000 in 1996 and $70,000,000 in 1995, retaining the servicing on these
loans. The outstanding loan amounts serviced on consumer auto loans at
December 31, 1997 and 1996 was $70,357,000 and $100,604,000, respectively.

16. RELATED PARTY TRANSACTIONS

Due to the nature of their businesses, the daily operations of New South and
Collateral Mortgage, Ltd. ("Collateral"), an affiliate, are closely involved
operationally. Management, systems, and facilities are shared, and,
accordingly, there are numerous intercompany transactions. Management monitors
all activity to ensure that all transactions are made in a fair and equitable
manner to both New South and Collateral. Management fees paid to Collateral
during 1996 and 1995 amounted to $1,704,000 for each year. Senior management
and other support functions, which had previously been a part of Collateral,
transferred to New South during the year. As a result, New South collected
$222,000 in management fees from Collateral in 1997. Additionally, a
management fee was received during 1997, 1996, and 1995 in the amount of
$60,000 for each year from Triad Guaranty Insurance Corporation, an affiliate,
for services provided. These fees are due quarterly and bear no interest.

In connection with its loan servicing activities, Collateral is required to
maintain escrow accounts as trustee for investors and mortgagors. At December
31, 1997 and 1996, Collateral had on deposit with New South approximately
$39,919,000 and $28,065,000, respectively, in noninterest bearing accounts. In
1996, New South had $17,000,000 in noninterest bearing deposit accounts with
various banks at the direction of Collateral.

Collateral and its affiliates also maintain normal business checking and
money market accounts at New South. At December 31, 1997 and 1996, these
accounts totalled approximately $1,590,000 and $3,420,000, respectively.

New South, prior to June 1997, purchased a portion of its mortgage loans
from Collateral at cost. In addition, Collateral services these mortgage loans
and subservices loans which New South is obligated to service

F-21

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

for third party investors. Servicing fees paid to Collateral during 1997, 1996
and 1995 amounted to $3,642,000, $3,468,000 and $3,584,000, respectively. For
an additional discussion of the subservicing agreement with Collateral, see
Note 15.

New South purchased $55,831,000, $106,269,000 and $127,211,000 in mortgage
loans from Collateral during 1997, 1996 and 1995, respectively, and sold
$20,571,000, $20,561,000 and $16,473,000 in mortgage loans to Collateral
during the same periods. All transactions were recorded at cost with no gains
or losses.

New South's Trust Department acts as document custodian for Collateral's
mortgage banking activities, holding various securities on behalf of mortgage
investors and warehousing banks. The fees received from Collateral for these
services are comparable to those charged by third parties.

In June 1997, New South sold an office rental property which had been
acquired through foreclosure to Collateral Agency, Inc., an affiliate. The
property was sold at market price, and New South realized a gain of $158,000
on the transaction.

At December 31, 1997, New South had $597,000 in loans outstanding to senior
officers.

In July 1997, the loan production operations of the residential mortgage
banking unit of Collateral were transferred into New South. As a result of
this change, New South assumed responsibility for 39 residential loan
production offices, associated employees, and related operating lease
obligations. Under the terms of an agreement with Collateral, a fee is payable
semi-annually in installments over a three year period based on a decreasing
percentage (.35% to .10%) of the aggregate original principal balances of
certain residential mortgage loans originated by New South through June 30,
2000. The fee for the period July 1, 1997 through December 31, 1997 was
$891,000. In 1997, New South paid $316,000 to Collateral for the use of
furniture and equipment in the origination and support areas.

F-22

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

17. PARENT ONLY FINANCIAL INFORMATION

Financial information and operating results for New South Bancshares, Inc.,
parent only, is presented as follows:

DECEMBER DECEMBER
1997 1996
-------- --------
(IN THOUSANDS)

BALANCE SHEETS:
Assets:
Cash..................................................... $ 81 $ 155
Investment in New South Federal Savings Bank............. 62,091 57,802
Investment in Collateral Agency of Texas................. 194 0
------- -------
Total Assets........................................... $62,366 $57,957
======= =======
Liabilities:
Note payable............................................. $10,000 $10,000
Accrued expenses and other liabilities................... 6 6
Accounts payable-intercompany............................ 46 10
------- -------
Total Liabilities...................................... 10,052 10,016
Shareholders' Equity:
Common stock............................................. 1,377 1,389
Surplus.................................................. 38,896 39,119
Retained earnings........................................ 11,172 6,456
Unrealized gain on securities available for sale......... 869 977
------- -------
Total Shareholders' Equity............................. 52,314 47,941
------- -------
Total Liabilities and Shareholders' Equity............. $62,366 $57,957
======= =======

F-23

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)

INCOME STATEMENTS:
Income:
Dividends from New South Federal Savings
Bank...................................... $1,125 $2,500 $ 450
Interest on other short-term investments... 8 20 21
Other income............................... 10 0 0
------ ------ -------
Total Income............................. 1,143 2,520 471
Expenses:
Interest on note payable................... 779 719 446
Other expense.............................. 46 35 29
------ ------ -------
Total Expenses........................... 825 754 475
Income/(loss) before equity in undistributed
earnings of New South Federal Savings Bank.. 318 1,766 (4)
Equity in undistributed earnings of New South
Federal Savings Bank........................ 4,398 796 3,370
------ ------ -------
Net Income............................... $4,716 $2,562 $ 3,366
====== ====== =======
STATEMENTS OF CASH FLOW:
Operating activities:
Net income................................. $4,716 $2,562 $ 3,366
Equity in undistributed earnings of New
South Federal Savings Bank................ (4,398) (796) (3,370)
(Increase)/decrease in other assets........ 0 1 (1)
Increase in other payables................. 0 2 3
Increase in intercompany payables.......... 36 10 0
------ ------ -------
Net Cash Provided/(Used) by Operating
Activities.............................. 354 1,779 (2)
Investing activities:
Investment in Collateral Agency of Texas... (194) 0 0
Capital contribution to New South Federal
Savings Bank.............................. 0 (2,000) (10,000)
------ ------ -------
Net Cash Used in Investing Activities.... (194) (2,000) (10,000)
Financing activities:
Increase in notes payable.................. 0 0 10,000
Purchase and retirement of common stock.... (234) (64) 0
------ ------ -------
Net Cash Provided/(Used) by Financing
Activities.............................. (234) (64) 10,000
Net decrease in cash and cash equivalents.... (74) (285) (2)
Cash and cash equivalents at beginning of
year........................................ 155 440 442
Cash and Cash Equivalents at End of Year..... $ 81 $ 155 $ 440
====== ====== =======

18. CONTINGENCIES

Various legal proceedings are pending against New South. Some of the
proceedings seek relief on alleged damages that are substantial. These actions
arise in the ordinary course of New South's business and include actions
relating to its lending and servicing activities. Because some of these issues
are complex and for other reasons, it may take a number of years to resolve
the actions. Based on legal counsel's opinion, management considers that any
potential liability resulting from the proceedings would not have material
impact on the financial condition of New South.

F-24

NEW SOUTH BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

19. YEAR 2000 COMPLIANCE (UNAUDITED)

New South is heavily dependent upon complex computer systems for all phases
of its operations. The year 2000 issue concerns the inability of certain
software and data bases to properly recognize date sensitive information
beginning January 1, 2000. This problem could result in a material disruption
to the company's operations, if not corrected. New South uses third party
vendors for the software and hardware that runs each of its core systems. As a
result, much of the cost of year 2000 compliance is the responsibility of
those vendors. The company has assessed and developed a detailed strategy to
prevent or at least minimize problems related to the year 2000 issues. In
1997, resources were committed and implementation began to modify the affected
information systems. Total costs related to the project are estimated to range
between $750,000 and $2,000,000, of which $150,000 was spent in 1997.
Implementation is currently on schedule. The degree of success of this project
cannot be determined at this time. However, management believes that the final
outcome will not have a material adverse effect on the operations of the
company.

20. SUBSEQUENT EVENTS

New South Bancshares has received approval from the Office of Thrift
Supervision to form a subsidiary, New South Agency, Inc., to market insurance
products. Operations are anticipated to begin in the second quarter of 1998.

The Board of Directors of Bancshares has authorized a $30,000,000 issue of
Trust Preferred Securities. No filings have been made at the time of these
financial statements.

21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The quarterly results of operations for the years ended December 31, 1997
and 1996 are as follows:

1997
----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Interest income................... $ 19,170 $ 19,359 $ 19,144 $ 17,818
Interest expense.................. 12,303 12,303 12,026 11,091
Net interest income............... 6,867 7,056 7,118 6,727
Provision for loan losses......... 794 641 677 842
Income before income taxes........ 508 2,204 3,141 2,853
Net income........................ 295 1,150 1,701 1,570
Per common share:
Weighted average shares
outstanding.................... 1,377 1,377 1,377 1,378
Net income........................ $ 0.21 $ 0.83 $ 1.24 $ 1.14

1996
----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------

Interest income................... $ 17,982 $ 17,745 $ 14,980 $ 14,828
Interest expense.................. 11,572 11,360 10,400 9,826
Net interest income............... 6,410 6,385 4,580 5,002
Provision for loan losses......... 1,170 535 331 456
Income before income taxes........ 2,464 (891) 1,740 1,731
Net income........................ 1,451 (684) 917 878
Per common share:
Weighted average shares
outstanding.................... 1,389 1,390 1,393 1,393
Net income........................ $ 1.04 $ (0.49) $ 0.66 $ 0.63

F-25

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE PREFERRED SECURI-
TIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE PREFERRED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGA-
TION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

----------------

TABLE OF CONTENTS

PAGE
----

Available Information.................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 14
The Company.............................................................. 28
The Trust................................................................ 29
Accounting Treatment..................................................... 30
Use of Proceeds.......................................................... 30
Ratios of Earnings to Fixed Charges...................................... 31
Capitalization........................................................... 32
Selected Consolidated Financial Data..................................... 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Business................................................................. 53
Supervision and Regulation............................................... 65
Security Ownership of Certain Beneficial Owners.......................... 74
Directors and Executive Officers......................................... 75
Security Ownership of Management......................................... 76
Executive Compensation................................................... 77
Certain Relationships and Related Transactions........................... 78
Description of the Preferred Securities.................................. 80
Description of the Subordinated Debentures............................... 90
Description of the Guarantee............................................. 98
Relationship Among the Preferred Securities, the Subordinated Debentures
and the Guarantee....................................................... 101
Certain Federal Income Tax Consequences.................................. 102
ERISA Considerations..................................................... 106
Underwriting............................................................. 108
Validity of Securities................................................... 109
Experts.................................................................. 109
Index to Financial Statements............................................ F-1

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,000,000 PREFERRED SECURITIES

NEW SOUTH
CAPITAL TRUST I

% CUMULATIVE TRUST
PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10.00
PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY

LOGO

NEW SOUTH
BANCSHARES, INC.

----------------

PROSPECTUS

----------------

J.C.Bradford&Co.

Sterne, Agee & Leach, Inc.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Registration fee under the Securities Act of 1933, as amended..... $10,177
Trustees' fee and expenses........................................ 7,500
Printing and engraving............................................ 65,000
Accounting services............................................... 110,000
Legal fees of Registrant's counsel................................ 100,000
Miscellaneous..................................................... 57,323
--------
Total......................................................... $350,000
========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under Section 145 of the Delaware General Corporation Law (the "DGCL"),
directors, advisory directors and officers of a Delaware corporation are
entitled to indemnification permitted by the statute as provided in such
corporation's certificate of incorporation, by-laws, resolutions and other
proper action.

Article Seventh of the Company's Certificate of Incorporation provides that
no director shall be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty of such director, except (i)
for breach of the director's duty of loyalty to the Company or its
stockholders, (ii) pursuant to Section 174 of the Delaware General Corporation
Law, or (iii) for any transaction from which the director derived an improper
personal benefit.

In addition, Article VIII of the Company's By-Laws provide that each person
who was or is a party, or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that
he or she is or was a director or an officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan (an
"indemnitee"), whether the basis for such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified to the fullest extent authorized by the General Corporation Law of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the Company
to provide broader indemnification rights than such law permitted the Company
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith. Article VIII goes on to provide that this
right to indemnification shall include the right to be paid in advance by the
Company the expenses incurred in defending such a proceeding in advance of its
final disposition, subject to the limitations on such advancements of
expenses, if any, which may be imposed by the Delaware General Corporation
Law. Article VIII goes on to provide that the Company's Board of Directors may
grant rights to indemnification to any employee or agent of the Company to the
fullest extent of the provisions of this Article with respect to
indemnification and advancement of expenses of directors and officers of the
Company.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The Company has not sold any securities with the past three years.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

An index to Exhibits appears at pages II-5 through II-6 hereof.

II-1

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-2

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on April 6, 1998.

New South Bancshares, Inc.

/s/ Robert M. Couch
By: _________________________________
Robert M. Couch, Executive Vice
President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 6, 1998.

SIGNATURE TITLE

* Chairman and
- ------------------------------------- President
William T. Ratliff, III

/s/ Robert M. Couch Executive Vice
- ------------------------------------- President
Robert M. Couch

/s/ Suzanne H. Moore Vice President
- ------------------------------------- (Controller)
(Suzanne H. Moore)

* Director and Vice
- ------------------------------------- President
(William T. Ratliff, Jr.)

* Director and Vice
- ------------------------------------- President
(J.K.V. Ratliff)

* Lizabeth R. Nichols hereby signs this Registration Statement on Form S-1 on
April 6, 1998 behalf of each of the indicated persons for whom she is
attorney-in-fact pursuant to a power of attorney filed herewith.

/s/ Lizabeth R. Nichols
_____________________________________
Lizabeth R. Nichols, Attorney-In-
Fact

II-3

New South Capital Trust I

/s/ Lizabeth R. Nichols
By: _________________________________
Lizabeth R. Nichols,
Administrative Trustee

II-4

INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ----

1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of New South Bancshares, Inc.
3.2 Bylaws 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
4.4 Form of Amended and Restated Trust Agreement of New South
Capital Trust I
4.5 Form of Preferred Security Certificate for New South Capital
Trust I (included as Exhibit A-1 of Exhibit 4.4)
4.6 Form of Guarantee Agreement for New South Capital Trust I
*5.1 Opinion of Balch & Bingham LLP as to legality of the Junior
Subordinated Debentures and the Guarantees to be issued by the
Company
*5.2 Opinion of Richards, Layton & Finger, P.A. as to legality of
the Preferred Securities to be issued by New South Capital
Trust I
*8.1 Opinion and consent of Balch & Bingham LLP regarding certain
federal income tax matters
*10.1 Material contracts
*12.1 Computation of ratio of earnings to fixed charges
21.1 List of Subsidiaries of New South Bancshares, Inc.
23.1 Consent of Ernst & Young LLP, Independent Certified Public
Accountants
*23.2 Consent of Balch & Bingham (included in the opinion in Exhibit
8.1)
*23.3 Consent of Richards, Layton & Finger, P.A. (included in the
opinion in Exhibit 5.2)
24.1 Power of Attorney
*25.1 Form T-1 Statement of Eligibility of Bankers Trust Company to
act as trustee under (i) the Junior Subordinated Indenture (ii)
the Amended and Restated Trust Agreement of New South Capital
Trust I and (iii) the Guarantee for the benefit of the holders
of Preferred Securities of New South Capital Trust I
*27.1 Financial Data Schedule

- --------
* To be filed by amendment