SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended September 30, 1998 Commission file number 333-
49459
NEW SOUTH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 63-1132716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 CRESTWOOD BOULEVARD
BIRMINGHAM, ALABAMA 35210
(Address of Principal Executive Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - September 30, 1998,
December 31, 1997, and September 30, 1997..................... 3
Consolidated Income Statement - Nine months and
three months ended September 30, 1998 and 1997................ 4
Consolidated Statement of Shareholders' Equity - Nine
months ended September 30, 1998............................... 5
Consolidated Statement of Cash Flow - Nine months
ended September 30, 1998 and 1997............................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Part II. Other Information
Item 1. Legal Proceedings...................................... 28
Item 5. Other Information...................................... 28
Item 6. Exhibits and Reports on Form 8-K....................... 28
Signatures.............................................................. 29
Exhibit Index........................................................... 30
PART I
FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31, September 30,
1998 1997 1997
------------ -------------- -------------
(Unaudited) (Unaudited)
(In thousands)
ASSETS
Cash and due from banks $ 16,307 $ 16,943 $ 20,166
Time deposits in other banks 105 200 200
Investment securities available for sale 102,088 197,135 194,723
Loans held for sale 203,149 35,570 27,688
Loans, net of unearned income 675,557 727,854 670,317
Allowance for loan losses (8,908) (7,333) (6,995)
---------- -------- --------
Net loans 666,649 720,521 663,322
Premises and equipment, net 4,027 2,968 2,826
Other assets 29,960 20,716 21,065
---------- -------- --------
Total Assets $1,022,285 $994,053 $929,990
========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 76,086 $ 70,897 $ 82,698
Interest bearing 684,301 624,468 638,087
---------- -------- --------
Total deposits 760,387 695,365 720,785
Federal funds purchased and securities sold under
agreements to repurchase 34,800 40,800 47,500
Federal Home Loan Bank advances 123,419 179,420 85,388
Note payable - 10,000 10,160
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 - -
Accrued expenses, deferred revenue, and other liabilities 21,536 16,154 13,792
---------- -------- --------
Total Liabilities 974,642 941,739 877,625
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,250,189.5 at September 30, 1998
and 1,376,956 at December 31, 1997 and September 30, 1997) 1,250 1,377 1,377
Surplus 29,230 38,896 38,896
Retained earnings 16,956 11,172 10,877
Other comprehensive income 207 869 1,215
---------- -------- --------
Total Shareholders' Equity 47,643 52,314 52,365
Total Liabilities and Shareholders' Equity $1,022,285 $994,053 $929,990
========== ======== ========
See accompanying notes to consolidated financial statements (unaudited).
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except for per share data)
Interest Income:
Interest on securities available for sale $10,048 $ 6,555 $ 2,671 $ 2,863
Interest on loans 51,551 49,364 18,638 16,292
Interest on other short-term investments 358 402 113 204
------- ------- ------- -------
Total Interest Income 61,957 56,321 21,422 19,359
Interest Expense:
Interest on deposits 28,654 28,159 9,490 9,805
Interest on federal funds purchased and securities
sold under agreement to repurchase 1,792 1,509 518 491
Interest on Federal Home Loan Bank advances 6,684 5,166 2,292 1,811
Interest on notes payable 366 583 - 198
Interest expense on guaranteed preferred beneficial
interest in the Company's subordinated debentures 839 - 733 -
------- ------- ------- -------
Total Interest Expense 38,335 35,417 13,033 12,305
Net Interest Income 23,622 20,904 8,389 7,054
Provision for loan losses 3,067 2,160 1,543 641
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses 20,555 18,744 6,846 6,413
Noninterest Income:
Loan administration income 4,855 3,761 1,677 1,252
Origination fees 8,085 1,947 2,709 1,703
(Loss)/gain on sale of investment securities
available for sale (90) (169) 167 (490)
Gain on sale of loans 8,362 2,204 3,338 1,936
Other income 3,614 1,454 1,301 926
------- ------- ------- -------
Total Noninterest Income 24,826 9,197 9,192 5,327
Noninterest Expense:
Salaries and benefits 18,944 10,264 6,540 5,318
Net occupancy and equipment expense 2,818 1,057 1,055 698
Loan servicing fees paid to affiliates 3,193 2,680 1,188 907
Loss on loans serviced 614 1,058 168 366
Federal Deposit Insurance Corporation premiums 332 311 111 105
Other expense 9,561 4,367 3,045 2,142
------- ------- ------- -------
Total Noninterest Expense 35,462 19,737 12,107 9,536
------- ------- ------- -------
Income Before Income Taxes 9,919 8,204 3,931 2,204
Income tax expense 4,135 3,783 1,662 1,054
------- ------- ------- -------
Net Income $ 5,784 $ 4,421 $ 2,269 $ 1,150
======= ======= ======= =======
Weighted average shares outstanding 1,360 1,377 1,327 1,377
Earnings per share $ 4.25 $ 3.21 $ 1.71 $ 0.84
See accompanying notes to consolidated financial statements (unaudited).
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Other Total
Common Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
----------- ------------ -------------- ------------- -------------
(In thousands)
Balance at December 31, 1997 $1,377 $38,896 $11,172 $ 869 $52,314
Stock retirement (127) (9,666) (9,793)
Comprehensive Income:
Net income nine months ended September 30, 1998 - - 5,784 - 5,784
Change in unrealized gain/(loss) on securities
available for sale, net of tax - - - (662) (662)
------ ------- ------- ------ -------
Total comprehensive income - - 5,784 (662) 5,122
Balance at September 30, 1998 $1,250 $29,230 $16,956 $ 207 $47,643
====== ======= ======= ===== =======
See accompanying notes to consolidated financial statements (unaudited).
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------------------------------
1998 1997
--------------- ---------------
(In thousands)
Operating Activities:
Net income $ 5,784 $ 4,421
Adjustments to reconcile net income to net cash provided by operations:
Accretion of discounts and fees (136) (466)
Provision for loan losses 3,067 2,160
Depreciation 680 268
Loss on sale of investment securities available for sale 90 169
Purchase of mortgage loans held for sale (2,484) (1,139)
Originations of mortgage loans held for sale (680,998) (139,008)
Proceeds from the sale of mortgage loans held for sale 258,423 64,966
Gain on sale of loans (8,362) (2,204)
Increase in other assets (8,578) (4,749)
Increase in accrued expenses, deferred
revenue and other liabilities 5,382 4,809
-------- --------
Net Cash Used by Operating Activities (427,132) (70,773)
Investing Activities:
Net decrease in time deposits in other banks 95 99
Proceeds from sales of investment securities available for sale 557,154 86,311
Proceeds from maturities and calls of investment securities
available for sale 62,627 14,059
Purchases of investment securities available for sale (19,806) (128,700)
Net decrease in loan portfolio (188,897) (11,366)
Purchases of premises and equipment (1,781) (700)
Proceeds from sale of premises and equipment 42 942
Purchases of real estate owned (3,160) (1,289)
Proceeds from sales of real estate owned 2,494 1,713
-------- --------
Net Cash Provided/(Used) in Investing Activities 408,768 (38,931)
Financing Activities:
Net increase in noninterest bearing deposits 5,189 43,815
Net increase in interest bearing deposits 59,833 16,302
Net (decrease)/increase in federal funds purchased and securities
sold under agreements to repurchase (6,000) 47,500
Net (decrease)/increase in note payable (10,000) 160
Proceeds from the issuance of guaranteed preferred beneficial
interests in the Company's subordinated debentures 34,500 -
Net decrease in Federal Home Loan Bank Advances (56,001) (10,000)
Repurchase and retirement of common stock (9,793) (235)
-------- --------
Net Cash Provided by Financing Activities 17,728 97,542
-------- --------
Net decrease in cash and cash equivalents (636) (12,162)
Cash and cash equivalents at beginning of period 16,943 32,328
-------- --------
Cash and Cash Equivalents at End of Period $16,307 $20,166
======== ========
Supplemental information:
Interest paid $37,623 $33,001
Income taxes paid $ 1,654 $ 3,282
See accompanying notes to consolidated financial statements (unaudited).
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. General
The consolidated financial statements conform to generally accepted
accounting principles. The accompanying interim financial statements are
unaudited; however, in the opinion of management, all adjustments necessary for
the fair presentation of the consolidated financial statements have been
included. All such adjustments are of a normal recurring nature. Certain
amounts in the prior year financial statements have been reclassified to conform
with the 1998 presentation. These reclassifications had no effect on net income
and were not material to the New South Bancshares, Inc.'s (the "Company" or "New
South") balance sheet. The Company is the holding company of New South Federal
Savings Bank (the "Bank"). The results of operations for any interim period are
not necessarily indicative of the results expected for the fiscal year ended
December 31, 1998. The notes included herein should be read in conjunction with
the notes to the consolidated financial statements included in the Company's
Form S-1 Registration Statement and amendments thereto effective June 12, 1998.
In July 1997, the loan production operations of the residential mortgage
banking unit of an affiliate were transferred into the Bank (the "Transfer").
The Transfer enabled the Bank to increase residential mortgage loan production
efficiencies while increasing its loan servicing portfolio. As a result of the
Transfer, the Bank assumed responsibility for 39 residential mortgage production
offices, associated employees, and related operating lease obligations. Under
the terms of the agreement, 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 the Bank through June 30, 2000.
2. Recent Accounting Pronouncements
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128: "Earnings
Per Share." This standard requires dual presentation of basic and diluted
earnings per share for companies with potentially dilutive securities. There
were no dilutive securities issued or outstanding for the nine month and three
month periods ended September 30, 1998 and 1997.
Derivatives and Hedging
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133:
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement will be effective for all fiscal quarters for
fiscal years beginning after June 15, 1999. Management believes the adoption of
these standards will have no material effect on the consolidated financial
statements of the Company.
Computer Software Costs
The AICPA has issued Statements of Position 98-1: "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This statement
requires capitalization of external direct costs of materials and services;
payroll and payroll-related costs for employees directly associated; and
interests costs during development of computer software for internal use
(planning and preliminary costs should be expensed). Also, capitalized costs of
computer software developed or obtained for internal use should be amortized on
a straight-line basis unless another systematic and rational basis is more
representative of the software's use. This statement is effective for financial
statements for fiscal years beginning after December 15, 1998 (prospectively)
and is not expected to have a material effect on the consolidated financial
statements of the Company.
3. Trust Preferred Securities
In June 1998, the Company sold $34,500,000 of 8.5% cumulative preferred
securities issued by New South Capital Trust I (the "Trust"). These preferred
securities are collateralized by subordinated debentures issued by the Company,
and are presented on the balance sheet as a separate line entitled "Guaranteed
preferred beneficial interests in the Company's subordinated debentures." The
debentures have a stated maturity of June 30, 2028 and are subject to early
redemption after June 30, 2003.
The sole assets of the Trust are $35,567,010 in subordinated debentures
which have the same interest rate and maturity characteristics as the trust
preferred securities. The Company owns all of the common securities of the
Trust which amount to $1,067,010.
4. Year 2000 Project Update
The Year 2000 issue, which is common to most organizations, concerns the
inability of certain computer and operational systems to properly perform
calculations and process information containing four-digit date fields. The
Company has developed and implemented an enterprise-wide strategy to address and
mitigate potential risks resulting from the Year 2000 issue, which encompasses
the following components:
. awareness of the Year 2000 issue and communication/education of key personnel
on the approach to address potential problems;
. identification of significant systems, including both system hardware and
software, and interfaces to and from these systems;
. inventory and assessment of personal computers and shadow systems;
. assessment of potentially affected operational systems;
. establishment of a testing plan to test key internal systems and a
remediation plan to address any problems identified;
. evaluation, and testing when applicable, of the Year 2000 efforts of
significant vendors and outside service organizations providing process for
the Company; and,
. development of contingency plans, where necessary, to address potential
unidentified problems in both significant internal and external systems.
The Company is currently in the testing phase of its strategy and is
actively testing key internal systems. The Company utilizes third party service
providers for most of its critical systems; therefore, much of the Company's
remediation effort relates to monitoring and communicating with those service
providers to gain assurance that they will be able to effectively address the
Year 2000 issue. Furthermore, the Company has recently begun its evaluation of
areas that potentially could require the development of contingency plans in the
event of significant unforeseen Year 2000 problems and/or failures.
Because of the nature of operations, the external customers of the Company
would be considered its borrowers. Although there is a level of inherent risk
that a borrower may be unable to meet its obligation to the Company due to a
Year 2000 related problem, this risk is mitigated in consideration that the
Company does not have any loans which, by themselves, would materially impact
the Company's loan portfolio. The risk is further diminished in light of the
fact that the Company's loan portfolio is primarily secured by asset-based
collateral where the fair market value of such property is typically equal to or
greater than the outstanding loan balance.
The Company has estimated its total internal costs for the Year 2000 project
to be between $750,000 and $2,000,000, of which $150,000 was incurred in 1997
and approximately $780,000 has been incurred year-to-date 1998. Given the
nature and scope of the project, it is not feasible at this stage to estimate
the degree of success of the project. However, management believes the Company
has a solid plan in place to address the issue and the final outcome is not
anticipated to have a material adverse effect on the operations or the financial
condition of the Company.
5. S Corporation Election
Effective June 17, 1998, the Company commenced an offer to purchase up to
129,450 shares of its common stock at a price of $77.25 per share (the "Offer").
On August 26, 1998 the Company purchased 126,766.50 shares of its common stock
at the offer price of $77.25 per share. Total cost of the purchase was $9.8
million. The purpose of the Offer was to reduce the number of stockholders to
75 or less, so that the Company can make an S corporation election in early 1999
to take advantage of
certain benefits available to such corporations under amendments to the Internal
Revenue Code contained in the Small Business Jobs Protection Act of 1996.
Corporations which elect to be taxed as an S corporation under the Internal
Revenue Code are generally not subject to corporate taxation. Profits and losses
flow through to the S corporation stockholders directly in proportion to their
per share ownership in the entity. Accordingly, stockholders will be required to
include profits and losses from the Company on their individual income tax
returns for federal (and state and, if applicable, local) income tax purposes.
Typically S corporations declare dividends to stockholders in an amount
sufficient to enable stockholders to pay the tax on any S corporation income
included in the stockholder's individual income. These dividends are generally
not subject to tax since they result from S corporation income on which
stockholders have previously been taxed. While the Company presently intends to
declare dividends in an amount sufficient to enable stockholders to pay income
tax at the highest marginal federal, state and local income tax rate of any
stockholder of the Company for the applicable period, since the Company is
dependent on dividends from the Bank, there is no assurance that dividends to
stockholders can be timely made. The Bank also presently intends to declare
dividends in an amount sufficient to pay such dividends to stockholders;
however, the Bank is subject to strict regulatory and legal guidelines regarding
capital adequacy, dividend policies and other restrictions and rules designed to
assure the safety and soundness of the Bank and the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
New South reported net income of $5.8 million for the nine months ended
September 30, 1998, a 30.8% increase over net income of $4.4 million for the
same period of 1997. On a per share basis, earnings were $4.25 and $3.21,
respectively, for the same periods. Earnings for the nine months ended
September 30, 1998 resulted in an annualized return on average assets (ROA) of
.75% and an annualized return on average equity (ROE) of 14.39% compared to .65%
and 11.47%, respectively, for the same period of 1997. New South's operating
efficiency ratio increased from 70.21% at September 30, 1997 to 77.99% at
September 30, 1998, due to additional expenses related to the Transfer of 39
residential mortgage loan production offices from an affiliate effective July 1,
1997.
Net income for the third quarter of 1998 was $2.3 million, or $1.71 per
share, compared to $1.2 million, or $.84 per share, for the same period of 1997.
New South's ROA and ROE for the third quarter of 1998 were .88% and 18.16%,
respectively, compared to .49% and 8.82%, respectively, for the third quarter of
1997. See Table 1, "Financial Summary".
Net Interest Income
Net interest income for the nine months ended September 30, 1998 was $23.6
million, a 13.0% increase over the same period in 1997. The Company earned a
lower rate on a larger average earning asset base, however, the rate paid on
average interest bearing liabilities remained relatively stable, resulting in a
4 basis point increase in the net interest margin and a 13 basis point decrease
in the net interest spread. See Table 2, "Average Balances, Income, Expenses,
and Rates".
Net interest income benefited from an increase in the earning asset base
which was, on average, 11.87% larger in the nine months ended September 30, 1998
than the same period of 1997. The yield on earning assets declined from 8.82% in
1997 to 8.67% in 1998. The average yield on loans increased from 9.13% in 1997
to 9.30% in 1998. Growth in earning assets was concentrated in lower yielding
mortgage-backed securities, which accounted for approximately 7 basis points of
the 15 basis points decline in earning asset yields. The remainder of the
decline was the result of lower market yields earned on adjustable rate
mortgage-backed securities and callable agency debt. The change in the
composition of total assets in favor of mortgage-backed securities was a result
of the retention of two classes of a Freddie Mac Real Estate Mortgage Investment
Conduit (REMIC) security created during August 1997, as well as a securitization
of portfolio loans in March 1998.
Noninterest Income and Noninterest Expenses
Year-to-date noninterest income totaled $24.8 million at September 30, 1998
compared to $9.2 million for the same period in 1997. Significant factors
contributing
to the increase included changes in the following categories: origination fees
increased $6.1 million; originated mortgage servicing rights and servicing
release fees, which are included in gain on sale of loans, increased $4.4
million and $1.6 million, respectively; loan administration income increased
$1.1 million; and affiliate management fees and underwriting fees, both of which
are included in other income, increased $.7 million and $.6 million,
respectively. Most of these increases were directly attributable to the Transfer
of the residential mortgage loan production offices.
Noninterest income for the third quarter of 1998 was $9.2 million compared to
$5.3 million for the same period of the prior year. Significant increases were
experienced in the following categories: origination fees increased $1.0
million; originated mortgage servicing rights increased $1.4 million; and loan
administration income increased $.4 million. The variances noted above were due
primarily to significant increases in production during the third quarter of
1998 compared to the third quarter of 1997. See Table 3, "Quarterly Average
Balances, Income, Expenses and Rates".
Year-to-date noninterest expenses totaled $35.5 million at September 30, 1998
compared to $19.7 million for the prior year. Due to the Transfer at July 1,
1997, where New South added approximately 300 employees to its payroll and
assumed occupancy costs related to the 39 residential mortgage loan production
offices. Consequently, year-to-date salaries and benefits expense and occupancy
and equipment expense increased $8.7 million and $1.8 million from September
1997 to September 1998, respectively. Also attributable to the Transfer was a
$1.7 million increase in other expenses such as stationery and postage,
advertising, telephone, and legal. In addition, $1.8 million was accrued for
payment to an affiliate in 1998 under the terms of the Transfer.
Noninterest expenses for the third quarter of 1998 were $12.1 million
compared to $9.5 million for the same period of the prior year. The following
expenses experienced significant increases: salaries and benefits expense
increased by $1.2 million primarily due to the addition of 102 new full time
equivalent employees from September 30, 1997 to September 30, 1998; occupancy
and equipment expense increased by $.4 million due to the addition of $1.1
million in fixed assets from September 30, 1997 to September 30, 1998. In
addition, $.4 million was accrued for payment related to the terms of the
Transfer.
Asset/Liability Management
New South maintains a formal asset/liability management process to quantify,
monitor, and mitigate interest rate risk and to maintain stability and promote
growth of net interest income under various interest rate environments. The
Company accomplishes its asset/liability management goals by producing and
maintaining assets which in the aggregate serve to maximize gross interest
income, utilizing funding strategies designed to reduce funding costs, provide
adequate liquidity, and protect the Company against severe interest rate
movements, in conjunction with an ongoing mortgage-banking focus which serves to
add liquidity and additional repricing capability to the Company's overall
portfolio.
New South uses three primary tools in the asset/liability process. The first
tool is the traditional gap analysis, which compares the repricing, maturities,
and prepayments, as applicable, of the Company's interest-bearing assets to its
interest-bearing liabilities and indicates for the Company a liability-sensitive
position in the immediate timeframe, which would indicate a benefit from falling
rates, an exposure to rising rates, and the opposite asset-sensitive position in
a longer timeframe. This liability-sensitive position is partially off-set by
interest rate swap and cap positions, which fix or limit the Bank's cost of
funds. The second tool is the market value of portfolio equity analysis, which
is required by the Office of Thrift Supervision (OTS) by virtue of the size of
the Bank. This analysis tests the net value of the Bank in eight parallel,
instantaneous interest rate shocks, against tolerance levels promulgated by the
Bank's Board of Directors. This analysis indicates exposure to rising rates
well within Board guidelines. Finally, the Company uses an earnings simulation
model which evaluates the impact of differing interest rate scenarios on the
projected business plan over 12 month and 36 month time horizons. This analysis
incorporates variables such as embedded options, changes in the relationship
between yields earned and rates paid, changes in the term structure of interest
rates, and changes in strategy as a function of interest rate movements. This
analysis indicates a neutral position for the 12 months beginning September 30,
1998, and a well-hedged position for the 36 months beginning September 30, 1998,
with minimal constriction due to interest rate movements.
The Company utilizes various off-balance sheet instruments to hedge interest
rate risk, namely interest rate caps and swaps in which the Company is a fixed
payor. The Company also uses interest rate swaps in which the Company is a
fixed receiver in conjunction with the issuance of certain structured
certificates of deposit. During July, 1998, a swap in the notional amount of
$30 million in which the Company was a fixed rate payor matured. Additionally,
in August, 1998, a swap with a notional amount of $15 million in which the
Company was a fixed rate receiver was called by the counter-party in accordance
with an option sold by the Company at the inception of the swap. The deposit
issued in conjunction with this swap position was called contemporaneously by
the Company. In July, 1998, the Bank entered into a new $10 million notional
swap with a ten year maturity callable in one year in conjunction with the
issuance of a structured certificate of deposit along the same terms. The Bank
is the fixed rate receiver in this transaction. Interest rate caps totaled $305
million, and interest rate swaps in which the Company is the fixed payor totaled
$80 million at September 30, 1998. Interest rate swaps in which the Company is
the fixed receiver totaled $40 million for the same period. See Table 4,
"Interest Rate Swaps and Caps" and Table 5, "Maturities on Caps and Interest
Rates Exchanged on Swaps".
Credit Quality
New South maintains an allowance for loan losses, which historically has been
sufficient to absorb losses experienced in its loan portfolio. The Company has
established a formal review process to evaluate risk in its loan portfolio and
to determine the adequacy of the allowance for loan losses. The review is
conducted on a
monthly basis and includes analyses of historical performance, assessment of the
level of nonperforming and adversely rated loans, specific analyses of certain
problem loans, evaluation of loan activity during the month, consideration of
off-balance sheet exposures such as market and current economic conditions, in
addition to the review of other pertinent information. Senior management is
actively involved in this review process and is proactive in mitigating
potential risks that could result from such loans. Moreover, the Board of
Directors monitors the level of impaired loans through the review of the overall
performance of the loan portfolio, giving specific attention to loans which have
been classified. See Table 6, "Loans and Credit Quality".
Table 7, "Allowance for Loan Losses" presents a five-quarter analysis of the
allowance for loan losses. At September 30, 1998, the allowance for loan losses
was $8.9 million, or 1.32% of loans net of unearned income, compared to $7.0
million, or 1.04% of loans net of unearned income at September 30, 1997. The
coverage ratio of the allowance for loan losses to nonperforming loans increased
from 90.27% at September 30, 1997 to 95.40% at September 30, 1998, as the level
of nonperforming loans increased $1.6 million. In the third quarter of 1998,
management increased the provision for loan losses $.9 million due to an
increase in its loan portfolio, as well as due to the Company's expansion into
new lines of business, including manufactured housing and sub-prime automobile
loan origination.
For the nine months ended September 30, 1998, net charge-offs were $1.5
million, an increase of $423,000 compared to the same period of 1997. Increases
occurred primarily in the nonconforming residential mortgage and non-prime
installment (automobile) segments of the loan portfolio, while the prime
installment (automobile) segment decreased. Annualized net charge-offs to
average loans net of unearned income for the nine months ended September 30,
1998 were .29% compared to .19% for the same period of the prior year. The
provision for loan losses for the nine months ended September 30, 1998 was $3.1
million compared to $2.2 million for the same period of 1997. Net charge-offs
were approximately 49% of the provision; the remainder of the provision is
intended to increase the overall coverage ratio relative to the growth in the
Company's loan portfolio and the expansion into manufactured housing and sub-
prime automobile loan origination.
Table 8, "Nonperforming Assets" presents a five-quarter comparison of the
components of nonperforming assets. As a percentage of loans net of unearned
income, foreclosed properties and repossessions, nonperforming assets increased
from 1.32% at September 30, 1997 to 1.68% at September 30, 1998; the level of
nonperforming assets increased $2.5 million during the same period. This
increase was due to foreclosures in the nonconforming residential mortgage loan
portfolio.
Included in nonperforming assets at September 30, 1998 and 1997 were $7.3
million and $5.7 million, respectively, of delinquent loans, which were on a
nonaccrual basis. At September 30, 1998 and 1997, nonaccrual loans included
$2.2 million and $2.5 million, respectively, in FHA and VA guaranteed loans,
which had been repurchased out of GNMA pools. The average balance of nonaccrual
loans for the three months ended September 30, 1998 and 1997 was $6.8 million
and $5.4 million, respectively,
and $6.8 million and $5.5 million, respectively, for the nine months ended
September 30, 1998 and 1997.
Capital Adequacy
At September 30, 1998, shareholders' equity of the Company totaled $47.6
million or 4.66% of total assets. Shareholders equity has decreased $4.7 million
since December 31, 1997. The decrease is due primarily to the net of two
factors: year-to-date net income of $5.8 million and an August 26, 1998 stock
repurchase of $9.8 million. See accompanying notes to consolidated financial
statements.
Table 10, "Capital Amounts and Ratios" presents the capital amounts and risk-
adjusted capital ratios for the Bank at September 30, 1998 and 1997. These
regulatory capital requirements do not apply to thrift holding companies. At
September 30, 1998, the Bank exceeded the regulatory minimum required risk-
adjusted Tier 1 Capital Ratio of 4.00% and risk-adjusted Total Capital Ratio of
8.00%. The Bank met the regulatory definition of a "well-capitalized"
institution at September 30, 1998.
TABLE 1
FINANCIAL SUMMARY
As of and for the
Nine Months Ended
September 30,
-----------------------------------
1998 1997 % Change
---------- -------- --------
(In thousands)
Balance sheet summary
End-of-period balances:
Loans, net of unearned income $ 675,557 $670,317 0.8%
Loans held for sale 203,149 27,688 633.7
Investment securities available for sale 102,088 194,723 (47.6)
Total assets 1,022,285 929,990 9.9
Total deposits 760,387 720,785 5.5
Shareholders' equity 47,643 52,365 (9.0)
Year-to-date average balances
Loans, net of unearned income 741,421 722,686 2.6
Total investment securities 206,381 125,453 64.5
Total assets 1,021,520 908,662 12.4
Total deposits 738,271 685,385 7.7
Shareholders' equity 53,595 51,396 4.3
As of and for the As of and for the
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1998 1997 % Change 1998 1997 % Change
---------- -------- -------- ---------- -------- --------
(In thousands, except for per share data)
Earnings summary
Net income $ 5,784 $ 4,421 30.8% $2,269 $1,150 97.3%
Per common share 4.25 3.21 32.5 1.71 0.84 104.7
Selected ratios
Return on average assets (annualized) 0.75% 0.65% 0.88% 0.49%
Return on average equity (annualized) 14.39 11.47 18.16 8.82
Average equity to average assets 5.25 5.66 4.87 5.51
End of period equity to assets 4.66 5.63 4.66 5.63
Allowance for loan losses to loans net of
unearned income 1.32 1.04 1.32 1.04
Efficiency ratio 77.99 70.21 76.28 77.97
Common stock data
Average common shares outstanding 1,360 1,377 1,327 1,377
TABLE 2
AVERAGE BALANCES, INCOME, EXPENSES AND RATES
As of and for the Nine Months As of and for the Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
1998 1997
-------------------------------- --------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ------- ------ -------- -------- ------
(Dollars in thousands)
Assets
Loans, net of unearned income $ 741,421 $51,551 9.30% $722,686 $49,364 9.13%
Federal funds sold 7,227 305 5.64 5,524 242 5.86
Mortgage-backed securities 161,456 7,937 6.57 88,891 4,739 7.13
Other investment securities 44,925 2,164 6.44 36,562 1,976 7.23
---------- ------- ---- -------- ------- ----
Total earning assets 955,029 61,957 8.67% 853,663 56,321 8.82%
Securities under repurchase agreements 30 2,846
Allowance for loan losses (7,716) (6,302)
Noninterest bearing assets 74,177 58,455
---------- --------
Total assets $1,021,520 $908,662
========== ========
Liabilities and Shareholders' Equity
Other interest bearing deposits $ 3,015 $ 83 3.68% $ 3,110 $ 79 3.40%
Savings deposits 61,088 1,973 4.32 59,697 1,985 4.45
Time deposits 583,811 26,598 6.09 571,463 26,095 6.11
Other borrowings 51,433 2,158 5.61 45,730 2,092 6.12
Federal Home Loan Bank advances 149,632 6,684 5.97 114,015 5,166 6.06
Guaranteed preferred beneficial interests
in the Company's subordinated debentures 13,871 839 8.09 - - -
---------- ------- ---- -------- ------- ----
Total interest bearing liabilities 862,850 38,335 5.94% 794,015 35,417 5.96%
Noninterest bearing deposits 90,357 51,115
Accrued expenses and other liabilities 14,718 12,136
Total shareholders' equity 53,595 51,396
---------- --------
Total liabilities and shareholders' equity $1,021,520 $908,662
========== ========
Net interest spread 2.73% 2.86%
==== ====
Net interest income $23,622 $20,904
======= =======
Net interest margin 3.31% 3.27%
==== ====
TABLE 3
QUARTERLY AVERAGE BALANCES, INCOME, EXPENSES AND RATES
As of and for the Three Months Ended
---------------------------------------------------------------
September 30, 1998 June 30, 1998
------------------------------ ----------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- -------- ------ --------- -------- ------
(Dollars in thousands)
Assets
Loans, net of unearned income $ 785,215 $ 18,638 9.42% $ 713,016 $16,451 9.25%
Federal funds sold 6,896 98 5.64 5,089 71 5.60
Mortgage-backed securities 125,256 2,098 6.65 190,709 2,928 6.16
Other investment securities 39,341 588 5.93 45,086 768 6.84
---------- -------- ---- ---------- ------- ----
Total earning assets 956,708 21,422 8.88% 953,900 20,218 8.50%
Securities under repurchase agreements 2 88
Allowance for loan losses (8,170) (7,548)
Noninterest bearing assets 77,481 70,537
---------- ----------
Total assets $1,026,021 $1,016,977
========== ==========
Liabilities and Shareholders' Equity
Other interest bearing deposits $ 2,824 $ 41 5.76% $ 3,028 $ 15 1.99%
Savings deposits 63,459 647 4.04 58,885 664 4.52
Time deposits 579,335 8,802 6.03 581,716 8,713 6.01
Other borrowings 43,905 518 4.68 48,282 697 5.79
Federal Home Loan Bank advances 147,321 2,292 6.17 155,562 2,249 5.80
Guaranteed preferred beneficial interests
in the Company's subordinated debentures 35,567 733 8.18 5,654 106 7.52
---------- -------- ---- ---------- ------- ----
Total interest bearing liabilities 872,411 13,033 5.93% 853,127 12,444 5.85%
Noninterest bearing deposits 90,435 94,717
Accrued expenses and other liabilities 13,187 12,735
Total shareholders' equity 49,988 56,398
---------- ----------
Total liabilities and stockholder's equity $1,026,021 $1,016,977
========== ==========
Net interest spread 2.95% 2.65%
==== ====
Net interest income $ 8,389 $ 7,774
======== =======
Net interest margin 3.48% 3.27%
==== ====
As of and for the Three Months Ended
----------------------------------------------------------------
March 31, 1998 December 31, 1997
------------------------------ -----------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- -------- ------ --------- -------- ------
(Dollars in thousands)
Assets
Loans, net of unearned income $ 725,373 $16,462 9.20% $688,115 $15,466 8.92%
Federal funds sold 9,726 136 5.67 9,446 137 5.75
Mortgage-backed securities 168,882 2,911 6.99 154,930 2,699 6.91
Other investment securities 50,469 808 6.49 50,675 868 6.80
---------- ------- ---- -------- ------- ----
Total earning assets 954,450 20,317 8.63% 903,166 19,170 8.42%
Securities under repurchase agreements 0 0
Allowance for loan losses (7,421) (7,044)
Noninterest bearing assets 74,480 56,832
---------- --------
Total assets $1,021,509 $952,954
========== ========
Liabilities and Shareholders' Equity
Other interest bearing deposits $ 3,197 $ 27 3.43% $ 1,119 $ 13 4.61%
Savings deposits 60,893 662 4.41 57,271 646 4.48
Time deposits 590,506 9,083 6.24 570,506 8,916 6.20
Other borrowings 62,314 943 6.14 69,114 1,056 6.06
Federal Home Loan Bank advances 145,997 2,143 5.95 112,023 1,675 5.93
Guaranteed preferred beneficial interests
in the Company's subordinated debentures - - - - - -
---------- ------- ---- -------- ------- ----
Total interest bearing liabilities 862,907 12,858 6.04% 810,033 12,306 6.03%
Noninterest bearing deposits 85,869 74,611
Accrued expenses and other liabilities 18,289 14,003
Total shareholders' equity 54,444 54,307
---------- --------
Total liabilities and stockholder's equity $1,021,509 $952,954
========== ========
Net interest spread 2.59% 2.39%
==== ====
Net interest income $ 7,459 $ 6,864
======= =======
Net interest margin 3.17% 3.02%
==== ====
As of and for the Three Months Ended
------------------------------------
September 30, 1997
------------------------------------
Average Income/ Yield/
Balance Expense Rate
---------- -------- ------
(Dollars in thousands)
Assets
Loans, net of unearned income $ 718,724 $16,292 8.99%
Federal funds sold 8,860 150 6.72
Mortgage-backed securities 115,966 2,065 7.07
Other investment securities 48,616 852 6.95
---------- ------ ----
Total earning assets 892,166 19,359 8.61%
Securities under repurchase agreements 1,196
Allowance for loan losses (6,759)
Noninterest bearing assets 60,556
----------
Total assets $ 947,159
==========
Liabilities and Shareholders' Equity
Other interest bearing deposits $ 3,000 $ 16 2.12%
Savings deposits 60,207 680 4.48
Time deposits 587,621 9,109 6.15
Other borrowings 44,732 689 6.11
Federal Home Loan Bank advances 118,649 1,811 6.06
Guaranteed preferred beneficial interests
in the Company's subordinated debentures - - -
---------- ------- ----
Total interest bearing liabilities 814,209 12,305 6.00%
Noninterest bearing deposits 68,183
Accrued expenses and other liabilities 12,586
Total shareholders' equity 52,181
----------
Total liabilities and stockholder's equity $ 947,159
==========
Net interest spread 2.61%
====
Net interest income $ 7,054
=======
Net interest margin 3.14%
====
TABLE 4
INTEREST RATE SWAPS AND CAPS
Interest Rate Swaps
-------------------
Receive Pay Interest
Fixed Fixed Rate Caps Total
------- ------- --------- --------
(In thousands)
Balance at January 1, 1998 $45,000 $80,000 $305,000 $430,000
Additions 10,000 40,000 40,000 90,000
Maturities - (40,000) (40,000) (80,000)
Calls (15,000) - - (15,000)
Terminations - - - -
------- ------- -------- --------
Balance at September 30, 1998 $40,000 $80,000 $305,000 $425,000
======= ======= ======== ========
TABLE 5
MATURITIES ON CAPS AND INTEREST RATES EXCHANGED ON SWAPS
Year of Maturity
-------------------------------------------------------------------------
2002 &
1998 1999 2000 2001 Thereafter Total
---- ------- ------- ------- ---------- --------
(Dollars in thousands)
Notional amount of pay fixed swaps $ - $15,000 $25,000 $ - $40,000 $ 80,000
Receive rate variable - 5.75% 5.69% - 5.50% 5.61%
Pay rate fixed - 5.70 5.99 - 5.89 5.89
Notional amount of receive fixed swap $ - $ - $ - $ - $40,000 $ 40,000
Receive rate fixed - - - - 7.01% 7.01%
Pay rate variable - - - - 5.52 5.52
Caps
Notional amount $ - $ 105,000 $25,000 $95,000 $80,000 $305,000
TABLE 6
LOANS AND CREDIT QUALITY
Net Charge-Offs
Loans Nonperforming Loans Nine Months Ended
As of September 30, As of September 30, September 30,
-------------------------- ---------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- ------- ------- ------ ------
(In thousands)
Residential mortgage
Conforming $ 111,516 $ 260,546 $ 4,580 $ 3,080 $ - $ -
Nonconforming 273,594 87,795 2,235 2,321 114 14
--------- --------- ------- ------- ------ ------
Total residential mortgage
loans 385,110 348,341 6,815 5,401 114 14
Installment (automobile)
Prime 26,899 72,312 337 192 814 949
Non-prime 780 11,490 165 89 564 106
--------- --------- ------- ------- ------ ------
Total installment
(automobile) loans 27,679 83,802 502 281 1,378 1,055
Residential construction and land 131,721 84,868 1 - - -
Commercial real estate 129,834 155,109 2,020 2,067 - -
Commercial 3,055 290 - - - -
--------- --------- ------- ------- ------ ------
Total loans 677,399 672,410 9,338 7,749 1,492 1,069
Less unearned income (1,842) (2,093) - - - -
--------- --------- ------- ------- ------ ------
Loans, net of unearned income $ 675,557 $ 670,317 $ 9,338 $ 7,749 $1,492 $1,069
========= ========= ======= ======= ====== ======
TABLE 7
ALLOWANCE FOR LOAN LOSSES
As of and for the Three Months Ended
----------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
1998 1998 1998 1997 1997
------------- --------- ---------- ------------ -------------
(Dollars in thousands)
Loans, net of unearned income, outstanding
at end of period $ 675,557 $721,960 $ 651,003 $ 727,854 $ 670,317
========= ======== ========= ========= ==========
Average loans net of unearned income $ 785,215 $713,016 $ 725,373 $ 688,115 $ 718,724
========= ======== ========= ========= ==========
Balance of allowance for loan losses
at beginning of period $ 7,937 $ 7,467 $ 7,333 $ 6,995 $ 6,687
Loans charged off:
Residential mortgage (6) (78) (73) (14) (11)
Installment (Automobile) (815) (610) (651) (622) (493)
--------- -------- --------- --------- ----------
Total charge-offs (821) (688) (724) (636) (504)
--------- -------- --------- --------- ----------
Recoveries of loans previously charged off:
Residential mortgage 2 29 12 2 2
Installment (Automobile) 247 254 197 178 169
--------- -------- --------- --------- ----------
Total recoveries 249 283 209 180 171
--------- -------- --------- --------- ----------
Net charge-offs (572) (405) (515) (456) (333)
Addition to allowance charged to expense 1,543 875 649 794 641
--------- -------- --------- --------- ----------
Balance of allowance for loan losses
at end of period $ 8,908 $ 7,937 $ 7,467 $ 7,333 $ 6,995
========= ======== ========= ========= ==========
Allowance for loan losses to
loans net of unearned income 1.32% 1.10% 1.15% 1.01% 1.04%
Net charge-offs to average loans net of
unearned income (annualized) 0.29 0.23 0.28 0.27 0.19
TABLE 8
NONPERFORMING ASSETS
As of
------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
1998 1998 1998 1997 1997
------------- -------- --------- ------------ -------------
(Dollars in thousands)
Nonaccrual loans(1) $ 7,318 $ 7,253 $ 6,116 $ 6,065 $ 5,682
Restructured loans 2,020 2,034 2,048 2,062 2,067
------- ------- ------- -------- --------
Total nonperforming loans 9,338 9,287 8,164 8,127 7,749
------- ------- ------- -------- --------
Foreclosed properties 1,822 2,117 1,940 1,159 945
Repossessions 231 185 156 275 188
------- ------- ------- -------- --------
Total nonperforming assets $11,391 $11,589 $10,260 $ 9,561 $ 8,882
======= ======= ======= ======== ========
Nonperforming assets
to period end loans, net of
unearned income, foreclosed
properties and repossessions 1.68% 1.60% 1.57% 1.31% 1.32%
(1) Includes all loans contractually past due 90 days or mor e as to principal and interest.
TABLE 9
SECURITIES AVAILABLE FOR SALE
As of September 30,
-------------------
1998 1997
-------- --------
(In thousands)
Mortgage-backed securities $ 63,511 $144,843
U.S.Treasury and federal agency securities 25,689 39,441
Other securities 12,888 10,439
-------- --------
Total securities available for sale $102,088 $194,723
======== ========
TABLE 10
CAPITAL AMOUNTS AND RATIOS
As of September 30, 1998 As of September 30, 1997
------------------------------ ----------------------------
Amount Ratio Amount Ratio
------------- ------------- ------------ -----------
(Dollars in thousands)
Leverage capital, Tier 1 to total assets:
New South Federal Savings Bank $ 80,136 7.85% $ 61,346 6.63%
Total assets 1,020,443 925,178
Tangible capital, Tier 1 to total assets:
New South Federal Savings Bank $ 80,136 7.85% $ 61,346 6.63%
Total assets 1,020,443 925,178
Total risk-based capital to risk adjusted assets:
New South Federal Savings Bank $ 88,137 11.17% $ 67,297 11.54%
Risk adjusted assets 789,233 583,047
Leverage capital Tier 1 to risk adjusted assets:
New South Federal Savings Bank $ 80,136 10.15% $ 61,346 10.52%
Risk adjusted assets 789,233 583,047
Regulatory capital requirements do not apply to thrift holding companies;
therefore, capital amounts and ratios in the above table apply solely to the
Bank. Total capital for the Company at September 30, 1998 and 1997 was $47.6
million and $52.4 million, respectively.
Part II
Other Information
Item 1. Legal Proceedings
The Company, from time to time in the ordinary course of business, has been
named in lawsuits. The Company believes it has meritorious defenses to these
lawsuits. Certain of these lawsuits are class actions, which request
unspecified or substantial damages. 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. Although the outcome of any litigation cannot
be predicted with certainty, the Company is not aware of any litigation that
will have a material adverse effect on its financial position.
Item 5. Other Information
The Bank currently performs all servicing associated with nonconforming
residential mortgage loans and installment (automobile) loans that it
originates. However, pursuant to a subservicing agreement between the Bank and
an affiliate, an affiliate performs all servicing on behalf of the Bank in
connection with conforming residential mortgage loans originated by the Bank.
The Bank may terminate this subservicing agreement at some point in the near
future. At this time, which remains to be determined, all current employees of
the affiliate performing these functions will become employees of the Bank,
causing all servicing functions to be performed centrally by the Bank for an
affiliate. The Bank currently has plans to sale certain installments
(automobile) loans on a securitized basis through a private placement estimated
at approximately $130 million.
ITEM 6. Exhibits and Reports on Form 8-K
ITEM 6(A)--EXHIBITS
The exhibits listed in the Exhibit Index at page 30 of this Form 10-Q are
filed herewith or are incorporated by reference herein.
ITEM 6(B)--REPORTS on Form 8-K
A report on Form 8-K was filed by the Company during the period July 1,
1998 to September 30, 1998. The report was filed on October 13, 1998 regarding
the Company's change in accountants. No financial statements were filed with
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, New
South Bancshares, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
November 6, 1998 By: /s/ ROBERT M. COUCH
-------------------
Robert M. Couch
Executive Vice President
November 6, 1998 By: /s/ SUZANNE H. MOORE
--------------------
Suzanne H. Moore
Vice President and Controller
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference:
*3(a) Certificate of Incorporation
*3(b) By-laws
*4 Indentures, Trust Agreement
*10 Material Contracts
*11 Statement RE Computation of Per Share Earnings
27. Financial Data Schedule
* Filed with the Company's Form S-1 Registration Statement filed April 6,
1998 registration number 333-49459