SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 333-49459
NEW SOUTH BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
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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 Offices) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
-------------------------- ------------------------------------
Cumulative Trust Preferred Securities American Stock Exchange
(and the Guarantee with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
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 ___________
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 1,
1999: 1,255,537.1
DOCUMENTS INCORPORATED BY REFERENCE
None, except Exhibits
ITEM 1 BUSINESS
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 (the "Bank" or "New
South"), the Company operates two full-service retail branch offices in
Birmingham, Alabama, and 41 loan production offices located in 13 states
throughout the southeastern and eastern 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,
manufactured housing 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 or 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 900 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.
The Company funds its lending activities primarily with customer deposits
gathered through the sale of 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, but attracts the majority of its deposits
through telemarketing activities and third parties, primarily brokers.
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
W. T. Ratliff, Jr. and members of his 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 business.
Prior to the formation of the Company, New South was a wholly owned
subsidiary of 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, FLHMC, 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
41 origination offices and a network of loan correspondents and mortgage
brokers. New South also originates conforming and nonconforming residential
mortgage loans on an indirect basis through correspondents and mortgage brokers.
At December 31, 1998, the Company's loan portfolio consisted of the
following: (i) $456.5 million in residential mortgage loans, of which $172.0
million the Company classifies as conforming residential mortgage loans, and
$284.5 million the Company classifies as nonconforming residential mortgage
loans; (ii) $53.7 million in installment (automobile) loans; (iii) $144.8
million in residential construction and land loans; (iv) $155.8 million in
commercial real estate loans (the
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majority of which are originated by Collateral but funded and closed by New
South); (v) $4.6 million in commercial loans; and (vi) $14.0 million in
manufactured housing loans. Also as of such date, the Company serviced
approximately $1.5 billion of residential mortgage loans, installment
(automobile) loans and commercial real estate 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 GNMA, FHLMC, GNMA, FHA and VA.
The conforming residential mortgage loans are fixed-rate and adjustable-rate
first 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 $240,000, with a typical term of 260 months, and an
average interest rate of approximately 7.0%. At December 31, 1998, New South
had $172.0 million of conforming residential mortgage loans in its portfolio,
representing 37.7% of New South's residential mortgage loan portfolio and 21.1%
of New South's total loan portfolio.
Presently, New South originates conforming residential mortgage loans
primarily on a direct basis through 41 loan production offices located in the
States of Alabama (11), Tennessee (4), Georgia (5), North Carolina (2), Florida
(4), Texas (2), Nevada (2), Kentucky (1), Louisiana (1), Virginia (3),
Mississippi (1), and Arizona (1). These offices originate primarily single-
family residential mortgage loans 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 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 including those relating to creditworthiness, such as
acceptable debt ratios and acceptable consumer loan payment delinquencies. New
South typically originates only nonconforming residential mortgage loans with
fixed interest rates. 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. At December 31, 1998, New South had $284.5 million of
nonconforming residential mortgage loans representing 62.3% of New South's
residential mortgage loan portfolio and 34.9% 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 two 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 by analyzing 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 classifications.
New South augments its indirect originations of nonconforming residential
mortgage loans with direct originations through two loan production offices in
the States of Alabama and Virginia. These offices have historically been
operated
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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 900 dealers in the States of Alabama, Florida, Georgia,
Mississippi, Tennessee and Texas. New South's automobile dealer network
consists primarily of new car franchise dealers, with independent car dealers
making up less than 15% of the dealer network.
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 1998, 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. At December 31, 1998, prime installment
(automobile) loans constituted 97.3% of New South's installment (automobile)
loan portfolio and 6.4% of its total loan portfolio.
Nonprime Loans
New South offers a nonprime product to certain qualifying consumers who
report credit bureau scores below the "prime" threshold due to 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 1998, 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. At December 31, 1998,
nonprime installment (automobile) loans constituted 2.7% of New South's
installment (automobile) loan portfolio and .18% of New South's total loan
portfolio.
OTHER LENDING
Residential Construction and Land Loans
New South originates residential real estate construction loans as well as
providing construction and land development loans in residential subdivisions to
professional home builders and developers. Residential construction and land
loans are primarily originated on a direct basis through New South's conforming
residential mortgage loan origination offices. 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 a
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. At December 31, 1998, New South had $144.8
million of residential construction and land loans representing 17.8% of New
South's total loan portfolio.
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Commercial Real Estate Loans
Commercial real estate loans are originated primarily by Collateral on an
indirect basis through mortgage bankers, and brokers nationwide. 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 wise variety of other commercial
properties. Many of these loans may be sold in the secondary market by New
South to investors such as 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. 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 had $155.8 million in commercial real estate
loans as of December 31, 1998, representing 19.1% of New South's total loan
portfolio.
Commercial Loans
New South makes available to certain independent automobile dealers
automobile "floor plan" credit lines, which are revolving credit lines used for
financing the used automobile inventory of independent automobile dealerships.
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. 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. New South had $4.6 million in commercial
loans as of December 31, 1998, representing .56% of New South's total loan
portfolio.
Manufactured Housing
During August 1998, New South began its manufactured housing division to
provide in the Southeast direct and indirect retail financing for home only or
land and home on both new and used products. Manufactured housing loans are
originated on both a direct and indirect basis through dealers and mortgage
brokers. The average manufactured housing retail installment loan is $37,500,
with an average term of 240 months at 10.0% interest. At December 31, 1998,
manufactured housing loans were 1.7% of New South's total loan portfolio.
FUNDING ACTIVITIES
The Company funds its lending activities primarily through deposits. In
addition, a significant source of funding for New South is the sale of
residential mortgage loans and installment (automobile) loans (either in 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. New South has not built an extensive branch network and does not rely
heavily on a local retail deposit base. It 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 also distributes its deposit products through brokers to
individuals and institutional purchasers through a brokered certificate of
deposit program which offers certificates of deposits in increments of $1.0
million to $20.0 million through selected brokers who meet New South's
guidelines. At December 31, 1998, brokered certificates of deposit, including
those not solicited by New South for a fee, were $195.9 million, or 25.3% of
total deposits.
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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, 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 the existing
prices, 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, 1998, New South sold
approximately $1.2 billion in mortgage backed securities, residential mortgage
loans and installment (automobile) loans.
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, 1998 FHLB advances amounted to $198.4 million. The advances
outstanding as of December 31, 1998 bore interest at rates ranging from 5.75% to
7.89%. These advances were collateralized by stock in the FHLB and a blanket
assignment of certain residential mortgage loans owned by New South.
New South has 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 1998, there were no amounts outstanding on the line of credit.
During 1997, the Company had 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, $5.0 million was outstanding on the line of credit and $5.0 million
was outstanding on the term debt. In 1998 the $5.0 million on the line of
credit and the $5.0 million in term debt were paid in full.
Additionally, New South has a $9.25 million revolving credit facility
agreement with a commercial bank. The amounts outstanding bear interest at the
London Interbank Offering Rate plus 2 percent, payable quarterly. As of
December 31, 1998, there were no amounts outstanding under this facility.
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
collections and servicing fees generally range from 0.25% to 1.55% of each
mortgage loan principal balance at the time of payment. New South currently
services over $1.3 billion of residential mortgage loans for 17 investors.
Installment (Automobile) Loan Servicing
From time to time, New South has sold a portion of its installment
(automobile) loan originations while retaining servicing for a servicing fee
and, in some instances, a 10% participation in the loans themselves. 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
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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 $162.9 million of
installment (automobile) loans for 6 investors.
SUPERVISION AND REGULATION
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting New South and the Company. The following
summary of applicable statues and regulations does not purport to be complete
and is qualified in its entirety by reference to such statues and regulations.
The Company is a unitary thrift holding company under the Home Owners' Loan
Act, as amended ("HOLA") and, as such, is subject to Office of Thrift
Supervision ("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 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 the other activities authorized by OTS regulation.
New South is chartered as a federal savings bank which is regulated 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.
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" requirements; 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. 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.
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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 deduced in
computing core capital because they are excluded from assets under the OTS's
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.
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 DIC 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 $1.9 million net
of tax. In view of the recapitalization of the SAIF, in December 1996 the FDIC
reduced the assessment rates 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 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
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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 serve" 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, 1998, 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
9
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.
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 that is a subsidiary of a
savings and loan holding company must either give notice or obtain approval of
the OTS before payment of a proposed capital distribution depending on the
amount and nature of the capital distribution.
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 statues 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
10
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
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 Section 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 4.0%) of its net withdrawable savings deposit
plus short-term borrowings. The average daily liquidity ratio of New South for
the month ended December 31, 1998 was 4.40%. 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, 1998. 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.
11
COMPETITION
New South faces substantial competition in purchasing and originating loans
and in attracting deposits. Competitors include other thrifts 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. New South's headquarters and its
only two deposit gathering branches are located in Birmingham, Alabama.
Birmingham is served by over 17 commercial banks and thrifts, most of which are
headquartered in the Birmingham area. Four of the 100 largest commercial banks
in the United States are headquartered in Birmingham.
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. New South has consistently exceeded
regulatory minimum guidelines. New South's current ratios place New South in
the "well capitalized" category.
ITEM 2. 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 November 1998, New South
purchased an 85,000 square foot building located at 210 Automation Way. New
South plans to use the new facilities to expand its administrative and
operations facilities.
In addition, New South leases space at 2000 Crestwood Boulevard,
Birmingham, Alabama in a 15,000 square foot building. New South leases all of
its other physical locations in the normal course of business. At December 31,
1998, New South had 36 offices in 29 cities which were leased. Substantially
all leases are for periods of from one to five years. The aggregate monthly
rent is approximately $713,000.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, from time to time, has
been named in lawsuits. Certain of these lawsuits are class actions which
request unspecified or substantial damages. In each case, a class has not yet
been certified. These matters have arisen in the normal course of business and
are related to lending, collections, servicing and other activities and allege
breach of contract, breach of fiduciary duty and similar tort claims or
violations of federal or state laws. The Company believes that it has
meritorious defenses to these lawsuits. Management is of the opinion that the
ultimate resolution of these lawsuits will not have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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. The purpose of the Offer was to reduce
the number of stockholders to 75 or less, so that the Company could 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.
12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company was held by approximately 56 stockholders
as of March 1, 1999. The common stock of the Company has not been registered
under the Securities Act of 1933 (the "Securities Act"), and the Company is not
aware of the existence of any trading activity in the common stock.
Accordingly, there is no market for such common stock, and no market is expected
to develop in the foreseeable future.
From time to time in the past, the Company has purchased shares of common
stock from Company stockholders who desired to sell their shares. The Company
has never encouraged such sales and has historically paid only the then current
book value. On August 26, 1998, the Company purchased 126,766.50 shares of its
common stock at $77.25 as part of the Offer. There have been no other purchases
since that time.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following information summarizes certain select consolidated
financial information of New South as of and for its fiscal years ended
September 30, 1994 and of the Company (which was established in November 1994
with a fiscal year ended December 31) as of and for its fiscal years ended
December 31, 1998, 1997, 1996, 1995 and 1994 on a pro forma basis. The summary
below should 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 therein.
New South Bancshares, Inc.
----------------------------------------------------------------------------------
as of and for the Year Ended
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
December 31
----------------------------------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ----------------- -------------------
(In Thousands, except per share amounts)
SUMMARY OF OPERATIONS DATA:
Interest income $ 83,251 $ 75,491 $ 65,535 $ 55,064
Interest expense 51,832 47,723 43,158 37,523
----------------- ----------------- ----------------- -------------------
Net interest income 31,419 27,768 22,377 17,541
Provision for loan losses 3,944 2,954 2,492 572
----------------- ----------------- ----------------- -------------------
Net interest income after provision for loan
losses 27,475 24,814 19,885 16,969
Non-interest income:
Loan administration income 6,191 4,915 4,870 4,547
Gain on sale of loans 11,387 5,079 457 629
Other income 15,525 5,320 2,998 1,490
----------------- ----------------- ----------------- -------------------
Total 33,103 15,314 8,325 6,666
Non-interest expense:
Salaries and benefits 26,286 16,024 7,424 5,371
Other expense 22,467 15,398 15,742 12,633
----------------- ----------------- ----------------- -------------------
Total 48,753 31,422 23,166 18,004
Income before income taxes 11,825 8,706 5,044 5,631
Income taxes expense 5,088 3,990 2,482 2,265
----------------- ----------------- ----------------- -------------------
Net Income $ 6,737 $ 4,716 $ 2,562 $ 3,366
================= ================= ================= ===================
PER SHARE DATA
Earnings per share $ 5.05 $ 3.42 $ 1.84 $ 2.42
Weighted average shares outstanding 1,333 1,377 1,391 1,393
Selected Year End Balances
Total assets $ 1,142,622 $ 994,053 $ 822,980 $ 746,518
Investment securities available for sale 116,962 197,135 94,451 96,678
Loans, net of unearned income 812,877 727,854 681,730 561,611
Allowance for loan losses 9,107 7,333 5,904 4,562
Deposits 775,448 695,365 660,668 539,011
Federal Home Loan Bank Advances 198,418 179,420 95,388 104,000
Total liabilities 1,094,182 941,739 775,039 700,738
Shareholders' equity 48,440 52,314 47,941 45,780
PERFORMANCE RATIOS
Return on average assets 0.65% 0.51% 0.31% 0.47%
Return on average equity 13.71 9.17 5.22 7.75
Interest rate spread 2.77 2.74 2.53 2.28
Net interest margin 3.27 3.21 2.94 2.65
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.14 108.46 107.19 106.56
Ratio of non-interest expense to average assets 4.71 3.42 2.84 2.52
Efficiency ratio 75.56 72.94 75.45 74.38
Average equity to average assets 4.75 5.59 6.02 6.08
ASSET QUALITY DATA
Net charge-offs to average loans, net of
unearned income 0.28% 0.21% 0.18% 0.22%
Non-performing assets to total assets 0.94 0.93 1.20 0.78
Non-performing loans to total loans, net of
unearned income 1.19 1.12 1.21 0.69
Allowance for loan losses to total loans, net of
unearned income 1.12 1.01 0.87 0.81
Allowance for loan losses to total
non-performing assets 84.57 78.97 60.00 78.43
CAPITAL RATIOS(2)
Tangible capital (tier 1 to total assets) 7.01% 6.17% 6.89% 7.24%
Tier 1 capital (to risk weighted assets) 9.96 9.51 10.27 11.12
Total risk-based capital (to risk weighted
assets) 10.38 10.48 11.10 11.78
New South Federal
Savings Bank
------------------------------------------------
------------------------------------------------
---------------------- ------------------------
Pro forma September 30
---------------------- ------------------------
1994(1) 1994
---------------------- ------------------------
Summary of Operations Data:
Interest income $ 45,239 $ 44,934
Interest expense 28,628 28,234
------------------- ------------------------
Net interest income 16,611 16,700
Provision for loan losses 841 1,485
------------------- ------------------------
Net interest income after provision for loan
losses 15,770 15,215
Non-interest income:
Loan administration income 6,531 5,955
Gain on sale of loans (416) (505)
Other income 2,200 1,968
------------------- ------------------------
Total 8,315 7,418
Non-interest expense:
Salaries and benefits 5,244 5,242
Other expense 11,276 10,813
------------------- ------------------------
Total 16,520 16,055
Income before income taxes 7,565 6,578
Income taxes expense 2,937 2,785
------------------- ------------------------
Net Income $ 4,628 $ 3,793
=================== ========================
Per Share Data
Earnings per share $ 3.32 $ 3.79
Weighted average shares outstanding 1,393 1,000
Selected Year End Balances
Total assets $ 590,384 $ 575,767
Investment securities available for sale 68,000 67,323
Loans, net of unearned income 455,588 407,555
Allowance for loan losses 5,189 5,089
Deposits 464,567 485,342
Federal Home Loan Bank Advances 71,000 46,000
Total liabilities 551,501 537,504
Shareholders' equity 38,883 38,263
Performance Ratios
Return on average assets 0.79% 0.59%
Return on average equity 12.73 9.51
Interest rate spread 2.39 1.99
Net interest margin 3.00 2.64
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.96 114.10
Ratio of non-interest expense to average assets 2.81 2.48
Efficiency ratio 66.28 66.57
Average equity to average assets 6.81 6.17
Asset Quality Data
Net charge-offs to average loans, net of
unearned income 0.23% 0.09%
Non-performing assets to total assets 1.33 1.36
Non-performing loans to total loans, net of
unearned income 1.22 1.34
Allowance for loan losses to total loans, net of
unearned income 1.14 1.25
Allowance for loan losses to total
non-performing assets 66.25 65.23
Capital Ratios(2)
Tangible capital (tier 1 to total assets) 6.89% 6.65%
Tier 1 capital (to risk weighted assets) 12.27 10.32
Total risk-based capital (to risk weighted
assets) 13.26 11.04
(1) Pro forma amounts assume the formation of New South Bancshares, Inc. as of
January 1, 1994.
(2) Capital ratio data for all periods presented are for New South only.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the years ended December 31, 1998 and
1997 are as follows:
1998
-----------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER QUARTER QUARTER QUARTER
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 83,251 $ 21,294 $ 21,422 $ 20,218 $ 20,317
Interest expense 51,832 13,497 13,033 12,444 12,858
Net interest income 31,419 7,797 8,389 7,774 7,459
Provision for loan losses 3,944 877 1,543 875 649
Income before income taxes 11,825 1,906 3,931 3,969 2,019
Net income 6,737 953 2,269 2,251 1,264
Per common share:
Net income(1) $ 5.05 $ 0.76 $ 1.71 $ 1.63 $ 0.92
Weighted average shares outstanding 1,333 1,250 1,327 1,377 1,377
1998
-----------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER QUARTER QUARTER QUARTER
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 75,491 $ 19,170 $ 19,359 $ 19,144 $ 17,818
Interest expense 47,723 12,306 12,305 12,023 11,089
Net interest income 27,768 6,863 7,055 7,121 6,729
Provision for loan losses 2,954 794 641 677 842
Income before income taxes 8,706 503 2,204 3,142 2,857
Net income 4,716 295 1,150 1,701 1,570
Per common share:
Net income(1) $ 3.42 $ 0.21 $ 0.84 $ 1.24 $ 1.14
Weighted average shares outstanding 1,377 1,377 1,377 1,377 1,377
(1) Per share amounts are computed based on the weighted average shares
outstanding during each quarter. Therefore, due to rounding differences
with the weighted average shares calculation and per share amounts, net
income per share for the quarters may not amount to the annual totals
shown.
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 document. The financial information provided below has been rounded in
order to simplify its presentation. However, the ratios and percentages provided
below are calculated using the detailed financial information contained in the
Consolidated Financial Statements, the Notes thereto, and the other financial
data included elsewhere in this document. All tables, graphs, and financial
statements included in this report should be considered an integral part of this
analysis.
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 purposes of the five year comparisons presented herein,
New South's financial information has been included for the twelve month period
ended September 30, 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, 1997, and 1998.
GENERAL
The Company's operations principally involve residential mortgage lending,
installment (automobile) lending, residential construction and land lending,
manufactured housing 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 or securitized basis) in
the secondary market, and the servicing of residential mortgage loans for
investors and the Company's own loan portfolio. The installment (automobile)
lending program involves indirect lending through approximately 900 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 manufactured housing lending
program primarily includes the indirect origination of mortgage loans (land and
home) and nonmortgage loans (home only), in addition to construction loans which
are in place during the preparation phase of the land. The Company conducts
deposit gathering activities in a traditional fashion through its two full
service branches located in Birmingham, Alabama, and through its telephone
banking center. 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 loan losses, noninterest income and noninterest expense.
Noninterest income consists primarily of loan administration income and
origination fees related to mortgage banking operations, net gains on the sales
of securities available for sale, net gains on the sales 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 11.7% from $727.9 million
at December 31, 1997 to $812.9 million at December 31, 1998. The increase is due
primarily to a 104.1% increase in total loan originations from 1997 to 1998.
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 original principal balance of the residential mortgage loans
originated through these loan
production offices. The percentages for the twelve month periods ending June 30,
1999 and 2000 are 0.20%, and 0.10%, respectively. The 1998 payment of $1.4
million was based on a 0.35% percentage.
Deposits are New South's largest source of funds used to support earning
assets. New South's deposits increased $80.1 million, or 11.5%, from $695.4
million at December 31, 1997 to $775.4 million at December 31, 1998. This
increase in funding allowed 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 $179.4 million at
December 31, 1997 to $198.4 million at December 31, 1998, and were secured by a
pledge of most of the Company's residential mortgage portfolio.
New South is required by the Office of Thrift Supervision ("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, 1998, New South's capital ratios place
it in the "well capitalized" category.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net interest income increased $3.7 million, or 13.1%, from $27.8 million in
1997 to $31.4 million in 1998. 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 3.2% in 1997 to
3.3% in 1998, primarily resulted from higher rates earned on loans (resulting in
part from changes in the mix of the loan portfolio, specifically increases in
the average balances of nonconforming residential mortgage and non-prime
installment (automobile) loan originations) coupled with stable funding costs.
The growth in average earning assets, which increased from $866.1 million in
1997 to $960.9 million in 1998, primarily resulted from volume generated by the
Transfer of the 39 residential mortgage loan production offices from Collateral
effective July 1, 1997, as well as a 104.1% increase in total loan originations
from 1997 to 1998.
The provision for loan losses increased $990,000, or 33.5%, from $3.0
million in 1997 to $3.9 million in 1998. This was due, in part, to a $528,000
increase in net charge-offs of installment (automobile) loans. The allowance for
loan losses as a percentage of total loans, net of unearned income, increased
from 1.0% at December 31, 1997 to 1.1% at December 31, 1998. Continued loan
growth, especially in the nonconforming residential mortgage loan portfolio and
increases in residential construction and land lending were the primary factors
contributing to the increased allowance. An increase in nonperforming loans
from $8.1 million at December 31, 1997 to $9.6 million at December 31, 1998 also
contributed to the increase. The allowance for loan losses as a percentage of
total nonperforming assets was 79.0% and 84.3% at December 31, 1997 and 1998,
respectively.
Noninterest income increased $17.8 million, or 116.2%, from $15.3 million
in 1997 to $33.1 million in 1998. The most substantial contributing factors to
the increase in noninterest income were increases in origination fees and the
gain on sale of loans, which increased $7.7 million and $6.3 million,
respectively. Another significant contributor to the increase in noninterest
income was the increase in other income of $2.8 million. This category is
primarily comprised of management fees paid by affiliates, underwriting fees,
and other income which includes miscellaneous loan income. All of these
increases were the result of the first full year of operations after the
Transfer, as well as due in part to the significant increase in total loan
production from 1997 to 1998.
Noninterest expense increased $17.3 million, or 55.2%, from $31.4 million
in 1997 to $48.7 million in 1998. Significant contributors to this increase were
increases in salaries and benefits of $10.3 million and increases in net
occupancy and equipment expense of $2.1 million. These increases are
attributable to the Transfer and the 104.1% increase in total loan originations
in 1998. Another significant contributor to the increase in noninterest expense
was a $5.2 million increase in other expense, which included an accrual of $2.3
million in 1998 related to the branch purchase fee expense to be paid to
Collateral as a part of the Transfer agreement, which was a $1.4 million
increase from 1997. Other significant components of other expense are expenses
relating to audit, legal, telephone, advertising, meals and entertainment, and
computer service expense. Increases in these categories were also attributable
to the Transfer, as well as the significant increase in total loan originations
from 1997 to 1998.
Net income increased $2.0 million, or 42.9%, from $4.7 million (or $3.42
per share) in 1997, to $6.7 million (or $5.05 per share) in 1998. Increased net
interest income and growth in noninterest income were the primary reasons for
the growth in earnings.
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 loan losses increased $462,000, or 18.5%, from $2.5
million in 1996 to $3.0 million in 1997. The allowance for 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 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 sale 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 the
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, increases in net occupancy and equipment expense of
$1.2 million, and an increase in other noninterest expense of $5.8 million.
These increases are attributable primarily to the Transfer. Other noninterest
expense includes $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.
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 in 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 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,
---------------------------------------------------------------------------
1998 1997
-------------------------------------- -----------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ----------- -------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Loans, net of unearned income(1)................ $ 766,780 $ 70,844 9.24% $ 713,935 $ 64,831 9.08%
Federal funds sold.............................. 6,109 424 6.94% 6,512 381 5.85%
Mortgage-backed securities...................... 141,751 9,098 6.42% 105,536 7,436 7.05%
Other investments............................... 46,255 2,885 6.24% 40,129 2,843 7.08%
---------- ---------- ------- ----------- ----------- ---------
Total earning assets......................... 960,895 83,251 8.66% 866,112 75,491 8.72%
Securities under repurchase agreements.......... 39 2,129
Allowance for loan losses....................... (8,072) (6,489)
Noninterest bearing assets...................... 82,995 57,875
---------- -----------
Total Assets................................. $1,035,857 $ 919,627
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other interest bearing deposits................. $ 3,020 $ 118 3.91% $ 3,095 $ 126 4.07%
Savings deposits................................ 61,657 2,691 4.36% 59,085 2,595 4.39%
Time deposits................................... 593,775 35,915 6.05% 571,221 35,011 6.13%
Other borrowings................................ 51,964 2,684 5.17% 51,624 3,149 6.10%
Federal Home Loan Bank advances................. 151,476 8,851 5.84% 113,512 6,842 6.03%
Guaranteed preferred beneficial interests
in the Company's subordinated debt.............. 18,555 1,573 8.48% 0 0 0.00%
---------- ---------- ------- ----------- ----------- ---------
Total interest bearing liabilities.......... 880,447 51,832 5.89% 798,537 47,723 5.98%
Noninterest bearing deposits.................... 91,125 57,037
Accrued expenses and other liabilities.......... 15,131 12,611
Total Shareholders' equity...................... 49,154 51,442
---------- -----------
Total liabilities and shareholders' equity...... $1,035,857 $ 919,627
========== ===========
Net interest spread............................. 2.77% 2.74%
======= =========
Net interest income............................. $ 31,419 $ 27,768
========== ===========
Net interest margin............................. 3.27% 3.21%
======= =========
1996
----------------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
----------------------------------------------
ASSETS
Loans, net of unearned income(1).................................... $ 654,607 $ 57,395 8.77%
Federal funds sold.................................................. 3,572 216 6.05%
Mortgage-backed securities.......................................... 77,506 5,603 7.23%
Other investments................................................... 26,267 2,321 8.84%
----------- -------- -----
Total earning assets............................................. 761,952 65,535 8.60%
Securities under repurchase agreements.............................. 5,024
Allowance for loan losses........................................... (4,835)
Noninterest bearing assets.......................................... 53,400
-----------
Total Assets..................................................... $ 815,541
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other interest bearing deposits..................................... $ 2,743 $ 161 5.87%
Savings deposits.................................................... 50,561 2,275 4.50%
Time deposits....................................................... 488,629 30,604 6.26%
Other borrowings.................................................... 44,835 2,707 6.04%
Federal Home Loan Bank advances..................................... 124,093 7,411 5.97%
Guaranteed preferred beneficial interests in the
Company's subordinated debt......................................... 0 0 0.00%
----------- -------- -------
Total interest bearing liabilities............................... 710,861 43,158 6.07%
Noninterest bearing deposits........................................ 48,932
Accrued expenses and other liabilities.............................. 6,668
Total Shareholders' equity.......................................... 49,080
-----------
Total liabilities and shareholders' equity.......................... $ 815,541
===========
Net interest spread................................................. 2.53%
=======
Net interest income................................................. $ 22,377
========
Net interest margin................................................. 2.94%
=======
(1) Loans classified as non-accrual are included in the average volume
classification. Loan fees for all years presented are included in the
interest amounts
Analysis of Changes in Net Interest Income
The following table sets forth the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income from 1996 to 1997 and 1997 to
1998. Changes not solely attributable to a change in rate or volume are
allocated proportionately relative to the absolute change of rate or volume.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
CHANGE DUE TO(2) CHANGE DUE TO(2)
------------------------------------------- -----------------------------------------
AVERAGE AVERAGE
YIELD/RATE BALANCE NET YIELD/RATE BALANCE NET
------------- ------------ ------------ -------------- ------------ ---------
(IN THOUSANDS)
EARNINGS ASSETS
Total loans, net of unearned
income(1)............................... $ 1,147 $ 4,866 $ 6,013 $ 2,101 $ 5,335 $ 7,436
Federal funds sold........................ 64 (21) 43 (7) 172 165
Mortgage - backed securities.............. (583) 2,245 1,662 (138) 1,971 1,833
Other investments......................... (152) 194 42 (314) 836 522
----------- ---------- ---------- ----------- --------- --------
Total interest income..................... 476 7,284 7,760 1,642 8,314 9,956
INTEREST BEARING LIABILITIES
Other interest bearing deposits........... (5) (3) (8) (60) 25 (35)
Savings deposits.......................... (16) 112 96 (53) 373 320
Time deposits............................. (451) 1,355 904 (639) 5,046 4,407
Other borrowings.......................... (486) 21 (465) 28 414 442
Federal Home Loan Bank advances........... (202) 2,211 2,009 69 (638) (569)
Guaranteed preferred beneficial interests
in the Company's subordinated debt....... - 1,573 1,573 - - -
----------- ---------- ---------- ----------- --------- --------
Total interest expense.................... (1,160) 5,269 4,109 (655) 5,220 4,565
----------- ---------- ---------- ----------- --------- --------
Net interest income....................... $ 1,636 $ 2,015 $ 3,651 $ 2,297 $ 3,094 $ 5,391
=========== ========== ========== =========== ========= ========
(1) Loans, net of unearned income includes nonaccrual loans for all years
presented.
(2) The change in interest due to both rate and volume has been allocated to
volume and the rate changes in proportion to the relationship of the
absolute dollar amount of the change in each.
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 (RSA),
interest-bearing liabilities and off balance sheet instruments (RSL), and
interest rate sensitivity analysis to manage interest rate risk. A summary of
the December 31, 1998 gap analysis for New South is provided below.
SUMMARY GAP REPORT
AS OF DECEMBER, 1998
-----------------------------------------------------------------------------
IMMEDIATE OVER THREE OVER ONE OVER ONE OVER
TO THREE MONTH YEAR THROUGH YEAR THROUGH TEN
MONTH TO ONE YEAR FIVE YEARS FIVE YEARS YEARS TOTAL
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Cash and due from other banks.................. $ 66,905 $ - $ - $ - $ - $ 66,905
Time deposits in other banks................... - 5 100 - - 105
Investment securities available for sale....... 9,180 44,150 42,686 8,117 12,829 116,962
Loans held for sale............................ 115,279 - - - - 115,279
Loans net of unearned income................... 200,804 172,362 249,972 145,263 44,476 812,877
Allowance for loan losses...................... - - - - (9,107) (9,107)
---------- ---------- -------- --------- --------- -----------
Net Loans................................... 200,804 172,362 249,972 145,263 35,369 803,770
Premises and equipment, net.................... - - - - 7,860 7,860
Other assets................................... 197 590 3,144 2,751 25,059 31,741
---------- ---------- -------- --------- --------- -----------
Total Assets................................ $ 392,365 $ 217,107 $295,902 $ 156,131 $ 81,117 $ 1,142,622
========== ========== ======== ========= ========= ===========
Noninterest bearing deposits................... $ - $ - $ - $ - $ 73,873 73,873
Interest bearing deposits...................... 312,425 217,705 118,690 41,762 10,993 701,575
---------- ---------- -------- --------- --------- -----------
Total deposits.............................. 312,425 217,705 118,690 41,762 84,866 775,448
---------- ---------- -------- --------- --------- -----------
Federal funds purchased and securities sold.... -
under agreement to repurchase................. 68,800 - - - - 68,800
Federal Home Loan Bank advances................ 130,000 25,000 33,388 10,000 30 198,418
Guaranteed preferred beneficial interest in
the Company's subordinated debentures......... - - - - 34,500 34,500
Accrued expenses, deferred revenue, and
other liabilities............................. - - - - 17,016 17,016
---------- ---------- -------- --------- --------- -----------
Total Liabilities.............................. 511,225 242,705 152,078 51,762 136,412 1,094,182
---------- ---------- -------- --------- --------- -----------
Shareholders' equity........................... - - - - 48,440 48,440
---------- ---------- -------- --------- --------- -----------
Total Liabilities and shareholders' equity..... $ 511,225 $ 242,705 $152,078 $ 51,762 $ 184,852 1,142,622
========== ========== ======== ========= ========= ===========
Periodic Gap................................... $ (118,860) $ (25,598) $143,824 $ 104,369 $(103,735)
Cumulative Gap................................. $ (118,860) $ (144,458) $ (634) $ 103,735 $ -
Periodic RSA/RSL............................... 0.77 0.89 1.95 3.02 0.44
Cumulative RSA/RSL............................. 0.77 0.81 1.00 1.11 1.00
Impact of Rate Caps............................ $ 305,000 $ - $ - $ - $ -
Impact of Swaps................................ $ 25,000 $ - $ (5,000) $ (20,000) $ -
Hedged Periodic Gap............................ $ 211,140 $ (25,598) $138,824 $ 84,369 $(103,735)
Hedged Cumulative Gap.......................... $ 211,140 $ 185,542 $324,366 $ 408,735 $ 305,000
Hedged Periodic RSA/RSL........................ 1.41 0.89 1.92 2.63 0.44
Hedged Cumulative RSA/RSL...................... 1.41 1.25 1.36 1.43 1.27
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 uses an earnings simulation model to determine the effect of
several interest rate scenarios on the Company's net interest income. New
South's Asset/Liability Management Committee meets semi-monthly to monitor and
evaluate the interest rate risk position of New South, and to formulate and
implement strategies for increasing and protecting the interest rate margin and
net income.
Brokered deposits are considered to be highly interest-sensitive and are
reflected in interest rate risk analyses reviewed by the Asset/Liability
Management Committee. Additionally, both the Committee and the New South's
Board of Directors are apprised of the level of brokered deposits on an ongoing
basis.
For relatively short-term rate changes, New South can be characterized as
being in a well-hedged, or neutral, position. As of December 31, 1998, the
Company's interest rate risk management model indicated that projected net
interest income would decrease by 0.57% assuming an instantaneous increase in
interest rates of 200 basis points, or decrease by 4.37%, 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, 1998, New South had interest rate swap contracts with
notional amounts totaling $120.0 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.
Additionally, the Company has entered into $40 million in fixed-for-
variable swaps concurrent with the issuance of $40 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 has the right to call the
certificates of deposit.
In addition, New South had $305 million in interest rate cap contracts
outstanding at December 31, 1998. 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.
The following table sets forth the Company's interest rate contract
activity for the years 1996, 1997 and 1998.
INTEREST RATE SWAPS AND CAPS
INTEREST RATE SWAPS
--------------------------------------
RECEIVED PAY INTEREST
FIXED FIXED RATE CAPS TOTAL
------------------- ----------------- ----------------- ----------------
(IN THOUSANDS)
Balance at January 1, 1996 $ - $130,000 $ 40,000 $170,000
Additions - - 175,000 175,000
Maturities - (10,000) - (10,000)
Calls - - - -
Terminations - - - -
-------- -------- -------- --------
Balance at December 31, 1996 - 120,000 215,000 335,000
Additions 45,000 - 90,000 135,000
Maturities - (40,000) - (40,000)
Calls - - - -
Terminations - - - -
-------- -------- -------- --------
Balance at December 31, 1997 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 December 31, 1998 $ 40,000 $ 80,000 $305,000 $425,000
======== ======== ======== ========
The following table sets forth the relative maturities and interest rates
related to interest rate contracts outstanding at December 31, 1998.
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 $ - $ 15,000 $25,000 $ - $40,000 $ 80,000
Received rate variable 0% 5.75% 5.69% 0% 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
Received rate fixed 0% 0% 0% 0% 7.01% 7.01%
Pay rate variable - - - - 5.52 5.52
Caps
Notional amount $ - $105,000 $25,000 $95,000 $80,000 $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.
ROVISION AND ALLOWANCE FOR LOAN LOSSES
General
Management establishes allowances for the purpose of absorbing losses that
are inherent within the loan portfolio and that are expected to occur based on
management's review of historical losses, underwriting standards, changes in the
composition of the loan portfolio, changes in the economy, and other factors.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses as determined by management's continuing review and
evaluation of the loans and its judgment as to the impact of economic conditions
on the portfolio. Charges are made to the allowance for loans that are charged
off during the year while recoveries of these amounts are credited to the
account. The Company follows a policy of charging off loans determined to be
uncollectible by management.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the inherent risk in the loan portfolio. The amount of
the provision is a function of the level of loans outstanding, the mix of the
outstanding loan portfolio, the levels of classified assets and nonperforming
loans, and current and anticipated economic conditions.
The Company's allowance for loan losses is based upon management's judgment
and assumptions regarding risk elements in the portfolio, future economic
conditions and other factors affecting borrowers. The evaluation of the
allowance for loan losses includes management's identification and analysis of
loss inherent in various portfolio segments using a credit grading process and
specific reviews and evaluations of certain significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general economic conditions in the
service area with residential mortgage and installment (automobile) loan
portfolios each being evaluated collectively for impairment. The adequacy of the
allowance for loan losses and the effectiveness of the Company's monitoring and
analysis system are also reviewed periodically by the banking regulators and the
Company's independent auditors.
Based on present information and an ongoing evaluation, management
considers the allowance for loan losses to be adequate to meet presently known
and inherent risks in the loan portfolio. Management's judgment as to the
adequacy of the allowance is based upon a number of assumptions about future
events which it believes to be reasonable but which may or may not be valid.
Thus, there can be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required.
The following table sets forth certain information with respect to the
Company's allowance for loan losses and the composition of charge-offs and
recoveries for each of the last five reporting periods.
ALLOWANCE FOR LOAN LOSSES
NEW SOUTH FEDERAL
NEW SOUTH BANCSHARES, INC. SAVINGS BANK (1)
------------------------------------------------------ -------------------
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ------------------
1998 1997 1996 1995 1994
------------- ----------- ----------- ---------- ------------------
(DOLLARS IN THOUSANDS)
Loans, net of unearned income, outstanding
at end of period............................... $812,877 $727,854 $681,730 $561,611 $407,555
============= =========== =========== ========== ==================
Average loans net of unearned income............. $766,780 $713,935 $654,607 $552,698 $505,106
============= =========== =========== ========== ==================
Balance of allowance for loan losses
at beginning of period......................... $ 7,333 $ 5,904 $ 4,562 $ 5,189 $ 4,056
LOANS CHARGED OFF:
Residential mortgage........................... (186) (41) (131) (175) (74)
Installment.................................... (3,019) (2,159) (1,479) (448) (444)
Commercial Real Estate......................... - - - (813) (186)
------------- ----------- ----------- ---------- ------------------
Total charge-offs........................... (3,205) (2,200) (1,610) (1,436) (704)
------------- ----------- ----------- ---------- ------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
Residential mortgage........................... 43 15 8 62 21
Installment.................................... 992 660 400 173 194
Commercial Reat Estate......................... - - 52 2 37
------------- ----------- ----------- ---------- ------------------
Total recoveries 1,035 675 460 237 252
------------- ----------- ----------- ---------- ------------------
Net recoveries/(charge-offs)..................... (2,170) (1,525) (1,150) (1,199) (452)
Addition to allowance charged to expense......... 3,944 2,954 2,492 572 1,485
------------- ----------- ----------- ---------- ------------------
Balance of allowance for loan losses
at end of period............................... $ 9,107 $ 7,333 $ 5,904 $ 4,562 $ 5,089
============= =========== =========== ========== ==================
Allowance for loan losses to
loans net of unearned income................... 1.12% 1.01% 0.87% 0.81% 1.25%
Net charge-offs to average loans net of
unearned income 0.28 0.21 0.18 0.22 0.09
(1) New South changed it fiscal year end from September 30 to December 31 in
November of 1994 (upon the formation of the Company). Amounts shown for 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 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 LOAN LOSSES
NEW SOUTH BANCSHARES, INC.
------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ---------------------------- ---------------------------
% OF % OF % OF
LOANS TO LOANS TO LOANS TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
ALLOCATION LOANS ALLOCATION LOANS ALLOCATION LOANS
------------ -------- ------------ ---------- -------------- -----------
Residential Mortgage $ 2,326 56.03% $ 2,373 52.67% $ 1,385 61.08%
Installment (Automobile) 3,472 6.49 1,651 13.29 1,310 10.38
Residential Construction and
land....................... 499 17.81 499 12.09 499 6.96
Commercial Real Estate 2,810 19.11 2,810 21.76 2,710 21.52
Commercial...................... - 0.56 - 0.20 - 0.06
---------------------------------------------------------------------------------------------
Total........................... $ 9,107 100% $ 7,333 100% $ 5,904 100%
=============================================================================================
NEW SOUTH FEDERAL SAVINGS BANK(1)
---------------------------------
AS OF SEPTEMBER 30,
--------------------------- -----------------------
1995 1994
--------------------------- ----------------------
% OF % OF
LOANS TO LOANS TO
ALLOWANCE TOTAL ALLOWANCE TOTAL
ALLOCATION LOANS ALLOCATION LOANS
------------- ----------- ------------ ----------
Mortgage $ 875 62.95% $ 500 56.05%
Installment (Automobile) 535 6.32 348 2.81
Residential Construction and
land. ...................... - 5.51 - 3.34
Commercial Real Estate 3,152 25.14 4,241 37.69
Commercial...................... - 0.08 - -
--------- --------- ------------ --------
Total........................... $ 4,562 100% $ 5,089 100%
========= ========= ============ ========
(1) New South changed it fiscal year end from September 30 to December 31 in
November of 1994 (upon the formation of the Company). Amounts shown for 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.
Nonperforming Assets
The following table sets forth the Company's nonperforming assets for the
periods indicated.
NONPERFORMING ASSETS
NEW SOUTH FEDERAL
NEW SOUTH BANCSHARES, INC SAVING BANK(2)
------------------------------------------------------------------------------------
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- ------------------
Nonaccrual loans(1) $ 7,629 $ 6,065 $ 6,168 $ 1,639 $ 5,468
Restructured loans 2,010 2,062 2,088 2,241 -
--------- ---------- --------- --------- -------------
Total nonperforming loans 9,639 8,127 8,256 3,880 5,468
Foreclosed properties and repossessed
assets 1,129 1,159 1,585 1,937 2,334
--------- ---------- --------- --------- -------------
Total nonperforming assets $ 10,768 $ 9,286 $ 9,841 $ 5,817 $ 7,802
========= ========== ========= ========= =============
Nonperforming assets
to period end loans, net of unearned
income, and foreclosed properties 1.32% 1.28% 1.44% 1.04% 1.91%
(1) Includes all loans contractually past due 3 months or more as to principal
or 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 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 nonaccrual 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 nonaccrual status any loan that is
contractually 3 months 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 1998 on the $7.6 million of
nonaccruing loans outstanding at year end was approximately $371,000. If these
loans had been current in accordance with their original terms, approximately
$807,000 would have been earned on these loans in 1998. Additional interest
income of approximately $61,000 would have been earned in 1998 under the
original terms of the $2.0 million in restructured loans outstanding at December
31, 1998. Approximately $223,000 in interest income was actually earned in 1998
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 increased from 1.28% at December 31, 1997
to 1.33% at December 31, 1998. This increase is due to additional foreclosures
in the nonconforming residential mortgage loan portfolio.
The decrease in foreclosed properties during 1998 was due to the Company's
focus on the timely disposition of foreclosed assets and the sale to an
affiliate of a commercial property acquired through foreclosure. 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, 1997, and 1998. Foreclosed properties decreased 26.9% from
$1.6 million at December 31, 1996 to $1.2 million at December 31, 1997. There
was also a decrease of 2.6% from $1.2 million at December 31, 1997 to $1.1
million at December 31, 1998.
The following tables set forth nonperforming loans by portfolio for the
periods presented.
NONPERFORMING LOANS
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
% of % of
Average Average
Loans per Loans per
Balance Category Balance Category
------------------ --------------- ------------------ ---------------
(DOLLARS IN THOUSANDS)
Residential mortgage $7,074 1.68% $5,514 1.29%
Installment (automobile) 555 0.51 524 0.69
Commercial real estate 2,010 1.62 2,062 1.52
Commercial - - 27 1.29
------------------ --------------- ------------------ ---------------
Total Loans(1) $ 9,639 1.26 $ 8,127 1.14
================== =============== ================== ===============
(1) There were no nonperforming loans or net charge-offs in the residential
construction and land portfolio for periods presented above.
Total nonperforming loans increased from $8.1 million at December 31, 1997
to $9.7 million at December 31, 1998. 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 52.7% of nonperforming loans, net of unearned
income at December 31, 1997 to 56.0% of nonperforming loans, net of unearned
income at December 31, 1998.
The following table sets forth, for the periods indicated, loan
originations by significant category.
LOAN ORIGINATIONS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- --------- -----------
(In thousands)
Residential
Conforming (1)..................... $ 985,630 $ 304,508 $ -
Nonconforming...................... 246,581 186,150 159,077
Installment (automobile)
Prime (2).......................... 111,349 67,926 88,175
Non-prime.......................... 12,241 7,856 7,244
Manufactured housing
Mortgage........................... 1,556 - -
Non-mortgage....................... 12,420 - -
Residential construction and land..... 230,453 129,277 86,927
Commercial real estate (3)............ 135,431 155,025 61,593
Commercial............................ 4,600 1,846 5,829
---------- ---------- ----------
$1,740,261 $ 852,588 $ 408,845
========== ========== ==========
(1) Includes only those loans originated from July 1, 1997, the effective date
of the Transfer.
(2) Includes certain other non-automobile loans.
(3) Consists primarily of commercial real estate loans generated by Collateral,
for which Collateral earns an origination fee whereby the loans are funded
by New South and closed in New South's name.
NONINTEREST INCOME AND EXPENSE
Noninterest Income
Noninterest income consists primarily of fees from mortgage banking
activities, including origination fees, loan administration fees, servicing
fees, gains or losses on sales of loans, and gains or losses on securities
sales. Total noninterest income increased $17.8 million, or 116.2%, from $15.3
million in 1997 to $33.1 million in 1998. The following table sets forth, for
the periods indicated, the principal components of noninterest income.
NONINTEREST INCOME
YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Loan administration income $ 6,191 $ 4,915 $ 4,870
Origination fees 11,376 3,722 540
Gain/(loss) on sale of investment
securities available for sale (942) (645) 1,689
Gain on sale of loans 11,387 5,079 457
Other income 5,091 2,243 769
-------- -------- --------
Total noninterest income $ 33,103 $ 15,314 $ 8,325
======== ======== ========
Loan administration fees increased $1.3 million, from $4.9 million for the
twelve months ended December 31, 1997 to $6.2 million for same period in 1998.
The primary component of loan administration income is service fee income
received from various outside investors, which experienced a 42.9% increase,
from $4.9 million in 1997 to $7.0 million in 1998. This increase in service fee
income is directly related to a $488.0 million increase in the servicing
portfolio owned by the Bank. Some of the other significant components of the
loan administration income include offsets to the servicing income due to
general loan administration expenses. The following table sets forth, for the
periods indicated, a detail of loans serviced for outside parties.
LOANS SERVICED FOR OTHERS
AS OF DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS)
Government National Mortgage Association.............. $ 336,427 $ 261,581 $ 265,475
Freddie Mac........................................... 696,194 386,543 114,612
Fannie Mae............................................ 122,401 88,038 94,196
Other investors....................................... $ 332,598 263,451 316,490
========== ========== ==========
Total loans serviced for others................. $1,487,620 $ 999,613. $ 790,773
========== ========== ==========
Origination fees increased $7.7 million, from $3.7 million for the twelve
months ended December 31, 1997 to $11.4 million for same period in 1998, as
compared to a $3.2 million increase between the same period from 1996 to 1997.
These increases are attributable to the Transfer of the 39 residential mortgage
loan production offices from Collateral, which was effective on July 1, 1997;
hence, 1998 was the first full year of residential mortgage loan production
operations in New South. Moreover, the increase between 1997 and 1998 was also
attributable to a 151.1% increase in mortgage-related production.
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, generate capital to sustain specific capital
levels as required by the Company's regulators, as well as to achieve continued
growth through the funding of new loan originations. Originated mortgage
servicing rights are capitalized as a result of mortgage loan sales where the
servicing rights have been retained as a part of the terms of the sale.
Originated mortgage servicing rights increased $5.8 million from 1997 to 1998,
as compared to a $900,000 increase from 1996 to 1997. This increase is included
as a part of the gain on sale of loans. The increase is attributable to the
Transfer where the Company began to originate a higher volume of residential
mortgage loans, but more specifically to the ongoing sale of mortgage loans to
outside parties.
An increase of $6.3 million was experienced in the gain on sales of loans
between 1997 and 1998, as compared to a $4.6 million increase in this same
category between 1996 and 1997. The increase in both years relates to the
increased loan sales which was primarily due to the increased loan origination
volume as a result of the Transfer. The 1998 increase can also be attributed to
an economic climate conducive to increased mortgage loan originations in 1998.
A significant component of the increase includes income related to the
capitalization of originated mortgage servicing rights which were discussed in
the previous paragraph. Although the majority of the gain represents loan sales
into the secondary market as a part of the Company's ongoing operations, there
have been two significant structured securitization transactions. The first
transaction occurred in August 1997 whereby the Company securitized and sold
$215.0 million of nonconforming residential mortgage loans in a FHLMC Real
Estate Mortgage Investment Conduit ("REMIC"). This sale transaction, and the
related servicing assets created thereby, resulted in a gain of $1.8 million.
The second transaction occurred in December 1998 when the Company securitized
and sold $125.0 million of automobile installment loans into a Motor Vehicle
Trust. This transaction and the underlying residual interest that was retained
resulted in a $786,000 gain.
Other noninterest income increased $2.8 million, from $2.2 million for the
twelve months ended December 31, 1997 to $5.1 million for the same period in
1998, as compared to a $1.5 million increase from the same period in 1996 when
compared to 1997. One component of the other noninterest income category is
management fees received from affiliates for general management and other
services provided by New South. Management fee income was $60,000, $315,000,
and $1.1 million for the years ended December 31, 1996, 1997, and 1998,
respectively. The significant increase between 1997 and 1998 was due to the
transfer of senior management from Collateral to the Bank during 1997
8
which was effected in conjunction with the Transfer. Other primary components
contributing to the increase in noninterest income relate to other loan fee
income generated as a result of the Transfer. Underwriting fees are a
significant component of these fees which were $392,000 and $1.1 million for the
years ended December 31, 1997 and 1998, respectively. Moreover, other income,
which primarily consists of various miscellaneous loan fees received, was
$65,000, $367,000, and $1.4 million for the years ended December 31, 1996, 1997,
and 1998, respectively. Another factor contributing to the increase in the
noninterest income category was a $196,000 increase in the gain on the sale of
foreclosed properties between 1997 and 1998, and a $203,000 increase in the same
category between 1996 and 1997. This increase is largely due to increased
foreclosure activity, timely dispositions, and more extensive use of competitive
bidding to maximize profits. Moreover, the increase between 1997 to 1998 is also
attributable to the sale to an affiliate of a commercial property acquired
through foreclosure.
Noninterest Expense
Noninterest expense consists primarily of salaries and benefits, occupancy
and equipment costs, servicing fee expense, and other noninterest expenses.
Total noninterest expense increased $17.3 million, or 55.2%, from $31.4 million
in 1997 to $48.8 million in 1998. The following table sets forth, for the
periods indicated, the principal components of noninterest expense.
NONINTEREST EXPENSE
YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
Salaries and benefits $ 26,286 $ 16,024 $ 7,424
Net occupancy and equipment expense 4,024 1,955 799
Loan servicing fees paid to affiliates 4,480 3,642 3,468
Loss on loans serviced 398 1,423 1,271
Federal Deposit Insurance Corporation
premium 439 418 4,368
Management fees paid to affiliates - - 1,704
Other expense 13,126 7,960 4,132
-------- -------- -------
Total noninterest expenses $ 48,753 $ 31,422 $ 23,166
======== ======== =======
The most significant contributor to the overall increase in total
noninterest expenses during 1997 and 1998 was the Transfer. 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. As a result of
the Transfer, in addition to an overall increase in total loan originations of
104.1% in 1998 which resulted in the addition of approximately 93 employees,
salaries and benefits increased $10.3 million and net occupancy and equipment
expense increased $2.1 million from 1997 to 1998. Also attributable to 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 the additional personnel added in 1998 as a result of increased production,
this created a need for expanded office space. In response to this need, New
South purchased an 88,000 square foot building, which is approximately two miles
from its existing Corporate headquarters in Irondale, Alabama for a purchase
price of $3.7 million. As a part of the purchase agreement, the Company will
take over occupancy of the building from its existing owners in June 1999.
New South pays a servicing fee to Collateral pursuant to a Subservicing
Agreement covering all conforming residential mortgage loans for which New South
holds the mortgage servicing rights. Loan servicing fees paid to Collateral
increased $838,000, or 23.0%, from $3.6 million in 1997 to $4.5 million in 1998.
This increase in service fee expense is directly related to a $488.0 million
increase in the servicing portfolio owned by the Bank in 1998. The Subservicing
Agreement with Collateral terminated effective January 1, 1999 when the
servicing function of Collateral was transferred to New South. Therefore,
beginning in 1999, New South will no longer pay a subservicing fee to Collateral
and will begin to service loans for Collateral, and thus, will begin to receive
a subservicing fee from Collateral at that time.
The Company paid a one-time pre-tax SAIF assessment of $3.2 million to the
FDIC in 1996. Thus, there was a $4.0 million decrease in FDIC premiums from 1996
to 1997 which was primarily attributable to the SAIF assessment, and
accordingly, there was only a slight change between 1997 and 1998.
The Company paid $1.7 million in management fees to Collateral during 1996.
In conjunction with the Transfer, senior management was transferred from
Collateral to New South. Due to the Transfer, there were no management fees
paid in 1997 or 1998.
Other noninterest expense increased $5.2 million, or 64.9%, from $8.0
million in 1997 to $13.1 million in 1998. A significant portion of the increase
is due to the additional loan production offices added as a part of the
Transfer. Specific components which increased as a part of the Transfer include
increases in general office supplies and postage of $769,000, telephone expense
of $437,000, legal fees of $396,000, meals, entertainment, and travel expense
of $241,000, computer service fees of $260,000, and audit fees of $121,000.
Additionally, the Company accrued $2.3 million in 1998 related to the branch
purchase fee expense to be paid to Collateral as a part of the Transfer, which
was a
9
$1.4 million increase from 1997. Moreover, the Company continued to focus on
advertising as a means of marketing its financial products during 1998, which
produced an increase of $297,000 in advertising expense from 1997 to 1998. There
was also a $285,000 increase in dealer incentives relating to the origination of
installment (automobile) and manufactured housing loans. This increase is
attributed to a 63.1% increase in installment (automobile) loan originations in
1998, in addition to the Company initiating a manufactured housing loan program
in August 1998.
Other noninterest expense increased $3.8 million from $4.1 million for the
twelve months ended December 31, 1996 to $8.0 million during the same period in
1997. Increases in specific components included in this category which are
attributable primarily to the Transfer, include increases in 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. Moreover, also included in other noninterest expense in 1997 is a
$891,000 expense which represents a fee paid to Collateral under the terms of an
agreement related to the Transfer. In addition, the Company began its first mass
media advertising campaign in 1997. Total expenses for the advertising campaign
were $395,000.
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 $85.0 million, or 11.7%, from $727.9 million at December 31, 1997 to
$812.9 million at December 31, 1998.
The following table sets forth the composition of the loan portfolio by
category at the dates indicated.
LOANS BY CATEGORY
NEW SOUTH FEDERAL
NEW SOUTH BANCSHARES, INC. SAVINGS BANK(1)
----------------------------------------------------------- -------------------
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------------------------------------- -------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
Residential mortgage
Conforming $172,009 $252,568 $214,865 $278,749 $222,773
Nonconforming 284,477 132,700 203,405 77,106 9,726
-------- -------- -------- -------- --------
Total residential mortgage
loans 456,486 385,268 418,270 355,855 232,499
Installment (automobile)
Prime(2) 52,232 84,769 61,323 29,769 10,626
Non-prime 1,436 12,147 9,668 5,749 815
-------- -------- -------- -------- --------
Total installment (automobile)
loans 53,668 96,916 70,991 35,518 11,441
Residential construction and land 144,771 87,889 47,423 30,941 13,602
Commercial real estate 155,765 158,377 146,700 141,196 153,612
Commercial 4,579 1,467 403 408 472
-------- -------- -------- -------- --------
Total loans 815,269 729,917 683,787 563,918 411,626
Less unearned income 2,392 2,063 2,057 2,307 4,071
-------- -------- -------- -------- --------
Loans net of unearned income $812,877 $727,854 $681,730 $561,611 $407,555
======== ======== ======== ======== ========
(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 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.
The principal component of the Company's loan portfolio is residential
mortgage loans. At December 31, 1998, residential mortgage loans comprised
56.2%of the total loan portfolio, net of unearned income, compared to 52.9% of
the total loan portfolio at December 31, 1997. 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 900 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 below the prime threshold due to delinquencies on certain
accounts. See "Business--Installment (Automobile) Lending."
As a percentage of loans, net of unearned income, total installment
(automobile) loans decreased from 13.3% at December 31, 1997 to 6.6% at December
31, 1998. This decline in the portfolio is the direct result of a $125.0
securitization of automobile installment loans into a Motor Vehicle Trust in
December 1998. Overall, automobile loan originations increased from $75.8
million in 1997 to $123.6 million 1998. This growth in originations is the
result of the Company's strategy to increase production for this portfolio
through additional relationships with new dealers in new markets and the
marketing of its 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, these loans increased
from 12.1% at December 31, 1997 to 17.8% at December 31, 1998. 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."
The Company 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."
The Company initiated a manufactured housing loan program in August
1998. The program primarily includes the indirect origination of mortgage loans
(land and home) and nonmortgage loans (home only), in addition to construction
loans which are in place during the preparation phase of the land. Total
manufactured housing loan originations totaled $14.0 million in 1998. As a
percentage of loans, net of unearned income, manufactured housing loans
comprised 1.7% of the portfolio at December 31, 1998. It is the Company's
intention to continue to expand production and build its portfolio of
manufactured housing loans.
The amounts of total gross loans, excluding residential mortgage and
installment (automobile), outstanding at December 31, 1997 and at December 31,
1998 based on remaining scheduled repayments of principal due in (1) one year or
less, (2) more than one year but less than five years, and (3) more than five
years are shown in the following tables. Amounts are classified according to
sensitivity to changes in interest rates.
MATURITY AND INTEREST RATE SENSITIVITY OF SELECT LOAN CATEGORIES
AT DECEMBER 31, 1998
------------------------------------------------------------------------------------------------
DUE AFTER ONE YEAR BUT
DUE IN ONE YEAR OR LESS WITHIN FIVE YEARS DUE AFTER FIVE YEARS
------------------------------------ ----------------------------------- --------------------
FIXED VARIABLE SUB- FIXED VARIABLE SUB- FIXED VARIABLE
RATE RATE TOTAL RATE RATE TOTAL RATE RATE
--------- ---------- ---------- --------- ---------- --------- -------- --------
(IN THOUSANDS)
Residential construction and land $ - $144,771 $144,771 $ - $ - $ - $ - $ -
Commercial real estate 7,484 9,462 16,946 24,330 52,211 76,541 60,504 1,774
Commercial - 4,579 4,579 - - - - -
--------- ---------- ---------- --------- --------- --------- -------- --------
$7,484 $158,812 $166,296 $24,330 $52,211 $76,541 $60,504 $ 1,774
========= ========== ========== ========= ========= ========= ======== ========
---------
SUB-
TOTAL TOTAL
--------- ----------
Residential construction and land $ - $144,771
Commercial real estate 62,278 155,765
Commercial - 4,579
--------- ----------
$62,278 $305,115
========= ==========
AT DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
DUE AFTER ONE YEAR BUT
DUE IN ONE YEAR OR LESS WITHIN FIVE YEARS DUE AFTER FIVE YEARS
------------------------------ ------------------------------ ----------------------------
FIXED VARIABLE SUB- FIXED VARIABLE SUB- FIXED VARIABLE SUB-
RATE RATE TOTAL RATE RATE TOTAL RATE RATE TOTAL
-------- ---------- -------- --------- --------- ------- -------- -------- -------
(IN THOUSANDS)
Residential construction and land $ - $ 87,889 $ 87,889 $ - $ - $ - $ - $ - $ -
Commercial real estate 3,985 6,845 10,830 39,152 37,939 77,091 58,010 12,446 70,456
Commercial - 1,467 1,467 - - - - - -
------- ---------- -------- --------- --------- ------- ------- -------- -------
$ 3,985 $ 96,201 $100,186 $ 39,152 $ 37,939 $77,091 $58,010 $ 12,446 $70,456
======= ========== ======== ========= ========= ======= ======= ======== =======
TOTAL
--------
Residential construction and land $ 87,889
Commercial real estate 158,377
Commercial 1,467
--------
$247,733
========
Investment Securities
Investment securities are a significant component of the Company's total
earning assets. Total investment securities averaged $188.0 million for 1997,
compared to $145.7 million in 1998. At December 31, 1998, 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,
-----------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ------------------
Mortgage-backed securities ("MBS")........................ $ 54,067 $140,059 $70,516
U. S. Treasury and federal agency securities.............. 43,905 39,593 12,495
Other securities.......................................... 18,990 17,483 11,440
------------------- -------------------- ------------------
Total securities available for sale................... $116,962 $197,135 $94,451
=================== ==================== ==================
The following table sets forth the scheduled maturities and average yields
of securities held at December 31, 1998.
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(2)
----------- ---------- --------- -------- ---------- -------- ------- ------- ---------
(Dollars in thousands)
Mortgage-backed
securities(1)................... $ - - % $ 42 6.50% $ 43 7.83% $ 53,982 6.51% $ 54,067
U. S. Treasury and federal
agency.......................... 1,547 5.90 42,358 5.93 - - - - 43,905
Other securities................ 2,168 14.22 6,393 12.95 - - 185 12.00 8,746
-------- -------- -------- -------- --------
Total........................... $ 3,715 10.75% $ 48,793 6.85% $ 43 7.83% $ 54,167 6.53% $106,718
======== ======== ======== ======== ========
Percentage of total
portfolio........................ 3.48% - 45.72% - 0.04% - 50.76% -
(1) Maturity of MBS and interest only strips were detemined based on
contractual maturity.
(2) Federal Home Loan Bank Stock of $10,244,000 is not included.
At December 31, 1998, 46.2% of the securities portfolio consisted of
mortgage-backed securities. Generally, these securities consist of pooled,
homogeneous 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, 1998,
37.5% 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 $84.2 million, or 10.6%, to
$882.7 million in 1998 from $798.5 million in 1997. This increase was due to an
increase in average interest bearing deposits which increased $25.1 million, or
4.0%, to $658.5 million in 1998 from $633.4 million in 1997. The increase was
also due to the increase in average Federal Home Loan Bank advances which
increased $38.0 million, or 33.4%, to $151.5 million in 1998 from $113.5 million
in 1997.
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. 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
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
Time $ 593,775 $ 571,221 $ 488,629
Savings 61,657 59,085 50,561
Non-interest bearing 91,125 57,037 48,932
Interest-bearing demand 3,020 3,095 2,743
---------- ---------- ----------
Total average deposits $ 749,577 $ 690,438 $ 590,865
========== ========== ==========
The increase in average deposits is primarily due to the increase in
average time deposits, which increased $22.6 million, or 4.0%, from $571.2
million at December 31, 1997 to $593.8 million at December 31, 1998.
Contributing to the 1998 increase in average time deposits was the Company's
advertising campaign designed to increase its reputation in the Birmingham,
Alabama market as a provider of nationally competitive interest rates on
certificates of deposit.
There was also an increase in non-interest bearing demand deposits of $34.1
million, or 59.8%, from $57.0 million at December 31, 1997 to $91.1 million at
December 31, 1998. This increase consisted of a $13.1 million increase in
average official checks outstanding related to the Transfer of the 39
residential mortgage loan production offices from Collateral. Moreover, there
was a $18.9 million increase experienced in custodial deposits from Collateral
related to its mortgage servicing operations.
The Bank experienced deposit growth of $15 million during the fourth
quarter of 1998, despite a decline in brokered deposits totaling approximately
$25 million. Growth was confined to maturities of one year and less, with the
most substantial growth occurring in the six and three month maturities.
Additionally, the Super Money Market account, which is a highly-competitive,
high balance, tiered-rate account, grew approximately 72%, with much of that
growth accomplished due to the migration from certificates of deposit as
customers apparently prefer the money market account to the fixed maturity
accounts as certificate rates have declined. The primary reason for the
December, 1998 growth was the nationally competitive rates paid by the Bank in
certain maturities. The decline in brokered deposits is primarily due to
Depository Trust Corporation ("DTC") deposits, which the Bank allowed to mature
without replacement, although brokered deposits as a percentage of total
deposits has declined from 33.0% at December 31, 1997 to 25.0% at December 31,
1998. However, out of state deposits continue to dominate deposit-gathering
efforts, even as the level of brokered deposits has declined, which indicates
that the Bank's primary customer is one seeking nationally-competitive rates.
During 1998, deposits grew approximately $80 million, consisting of $69.3
million of growth in certificates of deposit. DTC brokers obtained for the Bank
approximately $164 million in deposits during 1998, compared to $380 in 1997.
The maturity distribution of the Company's time deposits over $100,000 at
December 31, 1998 is set forth in the following table.
CERTIFICATES OF DEPOSITS GREATER THAN $100,000
MATURITY SCHEDULE
(IN THOUSANDS)
Three months or less $ 48,406
Over three months through six months 31,146
Over six months through twelve months 7,963
Over twelve months 53,103
----------
$ 140,618
==========
Approximately 34.4% of the Company's time deposits over $100,000 had
scheduled maturities within three months and approximately 22.2% had maturities
between three and 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
--------- ----------- ------- ---------------- ---------
AS OF AND FOR THE YEAR BEGINNING JANUARY 1, 1996
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 ENDING 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 ENDING 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
AS OF AND FOR THE YEAR ENDING DECEMBER 31, 1998
Federal funds purchased and securities sold
under agreement to repurchase $ 47,827 $ 85,573 $ 68,800 5.52% 4.85%
Federal Home Loan Bank advances 151,476 231,418 198,418 5.38 5.84
Average FHLB advances for 1998 were $151.5 million compared to $113.5
million for 1997, an increase of $38.0 million. The Company intends to continue
to use these advances as a significant funding source. Total advances were
$198.4 million at December 31, 1998.
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. The following table sets forth the specific
capital amounts and ratios for the indicated periods:
Analysis of Capital
AS OF DECEMBER 31,
-------------------------------
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
Tier 1 capital $ 79,891 $ 61,221
Tier 2 capital 3,430 6,237
------------- -------------
Total qualifying capital $ 83,321 $ 67,458
============= =============
Risk-weighted assets (including off-balance
sheet exposure) $ 802,409 $ 643,884
Tier 1 leverage ratio 7.00% 6.17%
Total risk-based capital ratio 10.38% 10.48%
Tier 1 risk-based capital ratio 9.96% 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 customers 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 4%. New South management monitors liquidity closely and continues to
ensure liquidity ratios are in excess of the minimum requirements.
The Company depends on deposits, including brokered certificates of
deposit, FHLB advances, and reverse repurchase agreements, as primary sources of
liquidity. Brokered deposits approximated 25.3% of total deposits as of December
31, 1998. These brokered deposits are either deposits solicited by the Company
from seven national and regional brokerage firms, which accounted for
approximately $195.9 million of deposits at December 31, 1998, or are
unsolicited and are brought to New South by virtue of the Company's competitive
rates and willingness to accept brokered deposits. The former category of
brokered deposits is utilized as an alternative funding source that is often
cheaper than retail deposits or other funding sources. However, management is
cognizant that this funding source is highly interest-sensitive and it never
considers brokered deposits either singly or as a whole to be a permanent
funding source. In the unlikely event that the Company is unable to replace or
maintain a current level of brokered certificate of deposit funding, the Company
can either increase efforts in the retail deposit market, or can utilize any of
the various alternative funding sources available. There is no given month in
which the inability to replace brokered deposits would unduly constrain New
South's liquidity, given alternative funding sources. As of December 31, 1998,
alternative funding sources included $30.0 million of unused credit for Federal
funds purchases, $9.3 million of unused revolving credit facilities, a $20.0
million unused warehousing line of credit from another financial institution,
and $51.3 million in unused FHLB borrowing capacity. The Company also had $26.3
million mortgage-backed securities available to serve as security for
borrowings. Reliance on all funding sources is monitored on an ongoing basis to
assure no undue reliance upon a single source and to assure that adequate
reserve sources are available if needed.
YEAR 2000 PROJECT
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. New
South 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
processing for the Company; and,
. development of contingency plans, where necessary, to address
potential unidentified problems in both significant internal and
external 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. The Company has
actively participated, when possible, in the testing of the software provided by
the third party service providers. When active participation has not been
available, the Company has closely monitored the testing strategy of the
applicable service providers, and has gained assurance that their testing
procedures are adequate.
Because of the nature of operations, the primary external customers of the
Company would be considered its borrowers and depositors. 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 because
the Company does not have any loans that, 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 is currently in the final part of the testing phase of its year
2000 strategy and is actively testing key internal systems, in addition to
identifying and testing crucial shadow systems which include spreadsheets and
other underlying systems. Moreover, the Company is also in the process of
drafting contingency plans in the event of significant unforeseen year 2000
problems and/or failures in critical processing areas. These contingency plans
include written documentation of procedures necessary to minimize losses through
implementation of alternate processing procedures in an expeditious manner. The
contingency plans include such information as decision-making authority (i.e.,
personnel authorized to declare existing systems incapable of processing and, if
necessary, effect the implementation of developed contingency procedures), key
personnel to be involved if contingency plans are implemented, contact
information of any outside parties to be involved, detailed procedures necessary
to implement alternate processing, and interim controls which should be
implemented while contingency plans are in place.
The Company has estimated its total internal costs for the year 2000
project to be between $750,000 and $2.0 million, of which $150,000 was incurred
in 1997 and $901,000 was incurred in 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 of the Company.
The foregoing information constitutes a Year 2000 Readiness Disclosure
pursuant to the Year 2000 Information and Readiness Disclosure Act.
FORWARD LOOKING STATEMENTS
This management discussion and analysis contains certain forward looking
information with respect to the financial condition, results of operations, and
business of the Company, including the Notes to Consolidated Financial
Statements and statements contained in the discussion above with respect to
security maturities, loan maturities, loan growth, expectations for and the
impact of interest rate changes, the adequacy of the allowance for loan losses,
expected loan losses, and the impact of inflation, unknown trends, or regulatory
action. The Company cautions readers that forward looking statements, including
without limitation those noted above, are subject to risks and uncertainties
that could cause actual results to differ materially from those indicated in the
forward looking statements. Factors that may cause actual results to differ
materially from those contemplated include, among others, the stability of
interest rates, the rate of growth of the economy in the Company's market area,
the success of the Company's marketing efforts, the ability to expand into new
segments of the market area, competition, changes in technology, the strength of
the consumer and commercial credit sectors, levels of consumer confidence, the
impact of regulation applicable to the Company, and the performance of stock and
bond markets.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New South Bancshares, Inc,:
We have audited the accompanying consolidated balance sheet of NEW SOUTH
BANCSHARES, INC. AND SUBSIDIARIES (a Delaware corporation) as of December 31,
1998 and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended. The consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New South
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
February 26, 1999
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 two 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
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
ERNEST & YOUNG LLP
March 17, 1998
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
1998 1997
--------------- --------------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 66,905 $ 16,943
Time deposits in other banks 105 200
Investment securities available for sale 116,962 197,135
Loans held for sale 115,279 35,570
Loans, net of unearned income 812,877 727,854
Allowance for loan losses (9,107) (7,333)
-------------- -------------
Net loans 803,770 720,521
Premises and equipment, net 7,860 2,968
Other assets 31,741 20,716
-------------- -------------
Total Assets $ 1,142,622 $ 994,053
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 73,873 $ 70,897
Interest bearing 701,575 624,468
-------------- -------------
Total deposits 775,448 695,365
Federal funds purchased and securities sold under
agreements to repurchase 68,800 40,800
Federal Home Loan Bank advances 198,418 179,420
Note payable - 10,000
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 -
Accrued expenses, deferred revenue, and other liabilities 17,016 16,154
-------------- -------------
Total Liabilities 1,094,182 941,739
Commitments and Contingencies (Note 18)
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,250,189.5 at December 31, 1998
and 1,376,956 at December 31, 1997) 1,250 1,377
Surplus 29,230 38,896
Retained earnings 17,909 11,172
Other comprehensive income 51 869
-------------- -------------
Total Shareholders' Equity 48,440 52,314
-------------- -------------
Total Liabilities and Shareholders' Equity $ 1,142,622 $ 994,053
=============== =============
See accompanying notes to consolidated financial statements.
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest Income:
Interest on securities available for sale $ 11,927 $10,077 $7,712
Interest on loans 70,844 64,831 57,395
Interest on other short-term investments 480 583 428
----------- ------------ -----------
Total Interest Income 83,251 75,491 65,535
Interest Expense:
Interest on deposits 38,724 37,732 33,041
Interest on federal funds purchased and securities sold
under agreement to repurchase 2,318 2,370 1,987
Interest on Federal Home Loan Bank advances 8,851 6,842 7,411
Interest on notes payable 366 779 719
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 1,573 - -
----------- ------------ -----------
Total Interest Expense 51,832 47,723 43,158
Net Interest Income 31,419 27,768 22,377
Provision for loan losses 3,944 2,954 2,492
----------- ------------ -----------
Net Interest Income After Provision for Loan Losses 27,475 24,814 19,885
Noninterest Income:
Loan administration income 6,191 4,915 4,870
Origination fees 11,376 3,722 540
(Loss)/gain on sale of investment securities available for sale (942) (645) 1,689
Gain on sale of loans 11,387 5,079 457
Other income 5,091 2,243 769
----------- ------------ -----------
Total Noninterest Income 33,103 15,314 8,325
Noninterest Expense:
Salaries and benefits 26,286 16,024 7,424
Net occupancy and equipment expense 4,024 1,955 799
Loan servicing fees paid to affiliates 4,480 3,642 3,468
Loss on loans serviced 398 1,423 1,271
Federal Deposit Insurance Corporation premiums 439 418 4,368
Other expense 13,126 7,960 5,836
----------- ------------ -----------
Total Noninterest Expense 48,753 31,422 23,166
----------- ------------ -----------
Income Before Income Taxes 11,825 8,706 5,044
Income tax expense 5,088 3,990 2,482
----------- ------------ -----------
Net Income $ 6,737 $ 4,716 $2,562
=========== ============ ===========
Weighted average shares outstanding 1,333 1,377 1,391
Earnings per share $ 5.05 $ 3.42 $ 1.84
See accompanying notes to consolidated financial statements.
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
Operating Activities:
Net income $ 6,737 $ 4,716 $ 2,562
Adjustments to reconcile net income to net cash (used in) provided by operations
Accretion of discounts and fees (423) (449) (882)
Provision for loan losses 3,944 2,954 2,492
Depreciation 1,182 473 332
Loss/(gain) on sale of investment securities available for sale 942 645 (1,689)
Writedown of investment securities available for sale - - 62
Purchase of mortgage loans held for sale (2,756) (1,820) -
Originations of mortgage loans held for sale (1,013,667) (290,631) -
Proceeds from the sale of mortgage loans held for sale 424,335 103,502 42,962
Gain on sale of loans (11,387) (5,079) (457)
Increase in other assets (10,756) (2,198) (5,967)
Increase in accrued expenses, deferred
revenue and other liabilities 862 5,183 5,056
------------ ----------- ----------
Net Cash (Used in) Provided by Operating Activities (600,987) (182,704) 44,471
Investing Activities:
Net decrease in time deposits in other banks 95 99 -
Net decrease in securities purchased under agreement to resell - - 4,000
Proceeds from sales of investment securities available for sale 674,201 167,772 93,651
Proceeds from maturities and calls of investment securities
available for sale 88,120 55,986 19,163
Purchases of investment securities available for sale (49,026) (168,737) (109,285)
Net increase in loan portfolio (197,886) (47,200) (120,168)
Purchases of premises and equipment (6,099) (1,054) (1,160)
Proceeds from sale of premises and equipment 25 949 3
Net (investment in) proceeds from sale of real estate owned (269) 210 169
------------ ----------- ----------
Net Cash Provided by (Used in) Investing Activities 509,161 8,025 (113,627)
Financing Activities:
Net increase in noninterest bearing deposits 2,976 32,014 3,708
Net increase in interest bearing deposits 77,107 2,683 117,949
Net increase/(decrease) in federal funds purchased and securities
sold under agreements to repurchase 28,000 40,800 (50,423)
Repayment of note payable (10,000) - -
Proceeds from the issuance of guaranteed preferred beneficial
interests in the Company's subordinated debentures 34,500 - -
Proceeds from (repayments of) Federal Home Loan Bank Advances 18,998 84,032 -
Repurchase and retirement of common stock (9,793) (235) (64)
------------ ----------- ----------
Net Cash Provided by Financing Activities 141,788 159,294 71,170
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 49,962 (15,385) 2,014
Cash and cash equivalents at beginning of period 16,943 32,328 30,314
------------ ----------- ----------
Cash and Cash Equivalents at End of Period $ 66,905 $ 16,943 $ 32,328
============ =========== ==========
Supplemental information:
Interest paid $ 54,458 $ 45,916 $ 41,250
Income taxes paid $ 5,649 $ 4,082 $ 3,131
See accompanying notes to consolidated financial statements.
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------- ----------- ---------- -------------- ---------------
(IN THOUSANDS)
Balance at December 31, 1995 $ 1,393 $ 39,179 $ 3,894 $ 1,314 $ 45,780
Comprehensive Income:
Net income - - 2,562 - 2,562
Change in unrealized gain/(loss) on securities
available for sale, net of tax - - - (337) (337)
Total comprehensive income 2,225
Stock repurchase and retirement (4) (60) - - (64)
------- -------- -------- ------- --------
Balance at December 31, 1996 1,389 39,119 6,456 977 47,941
Comprehensive Income:
Net income - - 4,716 - 4,716
Change in unrealized gain/(loss) on securities
available for sale, net of tax - - - (108) (108)
Total comprehensive income 4,608
Stock repurchase and retirement (12) (223) - - (235)
------- -------- -------- ------- --------
Balance at December 31, 1997 1,377 38,896 11,172 869 52,314
Comprehensive Income:
Net income - - 6,737 - 6,737
Change in unrealized gain/(loss) on securities
available for sale, net of tax - - - (818) (818)
Total comprehensive income 5,919
Stock repurchase and retirement (127) (9,666) (9,793)
------- -------- -------- ------- --------
Balance at December 31, 1998 $ 1,250 $ 29,230 $ 17,909 $ 51 $ 48,440
======= ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 1998
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. Prior to the formation
of Bancshares, the Bank was a wholly owned subsidiary of Collateral Mortgage,
Ltd. ("Collateral"), an affiliated company. The consolidated financial
statements presented include the accounts of Bancshares and the Bank,
collectively ("New South" or the "Company"). Consequently, all significant
intercompany accounts or transactions have been eliminated upon consolidation.
Certain accounting principles which significantly affect the determination of
financial position, results of operations and cash flows are summarized below.
Certain amounts in the prior years financial statements have been reclassified
to conform with the 1998 presentation. These reclassifications had no effect on
net income.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant changes
in the near term relate to the estimate of prepayment speeds in connection with
the valuation of mortgage servicing rights and estimation of the allowance for
loan losses. In connection with the valuation of mortgage servicing rights,
management obtains external information, evaluates the overall portfolio
characteristics and monitors economic conditions.
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
Investment securities consist of bonds, notes, debentures and certain equity
securities which are classified as available for sale and are carried at fair
value. Any unrealized gains or losses are reported as a net amount in other
comprehensive income, 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. Any premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
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.
6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
LOANS
All loans are stated at principal balances outstanding, adjusted for any
amounts charged off and 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
over the remaining period to maturity.
Certain impaired loans are reported at the present value of expected future
cash flows using the loan's effective interest rate. Others are reported at the
loan's observable market price, or the fair value of the collateral, if the loan
is collateral dependent. Residential mortgage loans and installment loans,
primarily automobile, are evaluated collectively for impairment. At December 31,
1998 and 1997, the recorded investment in loans that were considered to be
impaired under Statement of Financial Accounting Standards ("SFAS") No. 114 were
$1,681,000 and $1,441,00, respectively (all of which were carried on a non-
accrual basis). The related allowances for loan losses on impaired loans were
$1,022,000 and $1,096,000 at December 31, 1998 and 1997, respectively.
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 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. The amount of
interest income earned in 1998 on nonaccrual loans outstanding at year end was
approximately $371,000. If these loans had been current in accordance with their
original terms, approximately $807,000 would have been earned on these loans in
1998.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for losses inherent in the portfolio. The provision for 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, known and inherent risks in the
portfolio, and current and expected economic conditions. Such provisions, less
net loan charge-offs, comprise the allowance for loan losses and is available
for future loan charge-offs. 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.
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
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 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
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, generate capital to sustain specific capital
levels as required by the Company's regulators, as well as to achieve continued
growth through the funding of new loan originations. Originated mortgage
servicing rights ("OMSR's") are capitalized based on their fair value in
connection with mortgage loan sales where the servicing rights are retained as a
part of the terms of the sale. The Company amortizes OMSR's over the estimated
lives of the amortizing underlying loans, which range from 6 to 7 years,
using a method which is in proportion to the estimated servicing income.
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. Impairment is recognized
for the amount by which OMSR's for a stratum exceed their fair value.
RECOGNITION OF INCOME
Loan administration income primarily represents fees earned in connection
with the servicing of real estate mortgage loans for investors. Such income is
recognized concurrent with the scheduled receipt of the related mortgage
payments and is based on the outstanding principal balances of the loans
serviced.
The Company recognizes loan origination fees from residential loans
immediately. The results of this practice are not materially different than the
results which would have been obtained by deferring the origination fees and
related loan origination costs until the residential loans are sold.
Gains or losses on sales of mortgages are recognized based upon the
difference between the selling price and the carrying value of the related
mortgage loans sold.
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
8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
INCOME TAXES, CONTINUED
realized or settled. As changes in the laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes in
the period of enactment.
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 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 are no
dilutive securities issued or outstanding for the years ended December 31, 1998,
1997 and 1996 and, accordingly, basic and diluted presentations are the same.
Weighted average shares outstanding at December 31, 1998, 1997 and 1996 were
1,333,000, 1,377,000, and 1,391,000, respectively.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest Rate Swaps and Caps
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 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.
9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, CONTINUED
Other Off-Balance Sheet Instruments
In the ordinary course of business New South has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit, letters
of credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
RECENT ACCOUNTING STANDARDS
The AICPA has issued Statement 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.
In June 1998, the Financial Accounting Standards Board ("FASB") 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 (collectively referred to as derivatives), and for hedging activities.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designed anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of this Statement is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this Statement. This Statement should not be
applied retroactively to financial statements of prior periods. Management
believes there will be no material effect on the consolidated financial
statements from adoption of this pronouncement.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After The Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement, an amendment to SFAS No. 65,
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability to sell or
hold those investments. This Statement is effective the first fiscal quarter
beginning after December 15, 1998. The Company adopted the provisions of this
Statement on January 1, 1999. Based on the Company's current operating
activities, management does not believe that adoption of this Statement will
have a material impact on the presentation of the Company's financial condition
or results of operation.
2. CASH AND DUE FROM BANKS AND CASH FLOWS
--------------------------------------
New South maintains cash balances with the Federal Reserve when required. As
of December 31, 1998, reserve requirements amounted to $4,769,000. There was no
reserve requirement at December 31, 1997.
10
2. CASH AND DUE FROM BANKS AND CASH FLOWS, CONTINUED
--------------------------------------
Cash was held in reserve for potential losses related to securitized
automobile loans. At December 31, 1998 and 1997, this restricted cash amounted
to $2,000 and $1,158,000, 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 FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- - ------------------- --------- ---------- ---------- -----
(In thousands)
MORTGAGE-BACKED SECURITIES $ 54,064 $ 256 $ (253) $ 54,067
U.S. TREASURY AND FEDERAL
AGENCY SECURITIES 43,860 136 (91) 43,905
OTHER 18,958 46 (14) 18,990
-------- ------ ------- --------
TOTAL INVESTMENT SECURITIES
AVAILABLE FOR SALE $116,882 $ 438 $ (358) $116,962
======== ====== ======= ========
Gross Gross
Amortized Unrealized Unrealized Fair
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
======== ====== ===== ========
The contractual maturities of the securities available for sale are presented
in the following table for 1998 and 1997:
1998 1997
-------------------------------------- ----------------------------------------
(In thousands)
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
----------------- -------------- --------------- ---------------
Due in one year or less $ 3,706 $ 3,715 $ 5,252 $ 5,256
Due after one year through five years 48,725 48,793 41,823 42,038
Due after five years through ten 42 43 52,069 51,927
years
Due after ten years 54,165 54,167 87,111 88,481
Equity securities 10,244 10,244 9,433 9,433
-------- -------- -------- --------
$116,882 $116,962 $195,688 $197,135
======== ======== ======== ========
11
3. INVESTMENT SECURITIES AVAILABLE FOR SALE, CONTINUED
----------------------------------------
Net unrealized gains on investment securities available for sale at December
31, 1998, 1997 and 1996 amounted to $80,000, $1,447,000 and $1,629,000,
respectively. Deferred taxes relating to the net unrealized gains at years
ending 1998, 1997 and 1996 amounted to $29,000, $578,000 and $652,000,
respectively.
Gross realized gains on securities available for sale for 1998, 1997 and 1996
were $4,619,000, $1,464,000 and $2,210,000, respectively. Gross realized losses
on securities for 1998, 1997 and 1996 were $5,561,000, $2,109,000 and $521,000,
respectively. The gross proceeds from the sales of securities available for sale
in 1998, 1997 and 1996 were $674,201,000, $167,772,000 and $93,651,000,
respectively.
At December 31, 1998 and 1997, New South had securities of $4,500,000 and
$8,367,000 pledged to secure state and municipal deposits, respectively.
There were no securities classified as trading securities during 1998, 1997
or 1996; therefore, no gains or losses on this security classification have been
included in income.
4. COMPREHENSIVE INCOME
--------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income is the change in equity during a period from transactions
and other events and circumstances from nonowner sources. For New South,
changes in other nonowner transactions consist entirely of changes in unrealized
gains and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as part
of net income and other comprehensive income in that period or earlier periods.
The following table reflects the reclassification amounts and the related tax
effect for the three years ended December 31:
1998
----------------------
BEFORE AFTER
TAX TAX TAX
AMOUNT EFFECT AMOUNT
----------------------
(IN THOUSANDS)
Unrealized gains (losses) arising during
the period $ 356 $ 131 $225
Less reclassification adjustments for
(gains) losses included in net income 942 349 593
----------------------
Net unrealized gain (loss) on securities $1,298 $ 480 $818
======================
12
4. COMPREHENSIVE INCOME, CONTINUED
--------------------
1997
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------------------
(In thousands)
Unrealized gains (losses) arising during
the period $ (816) $(302) $ (514)
Less reclassification adjustments for 645 239 406
(gains) losses included in net income
---------------------------------------------
Net unrealized gain (loss) on securities $ (171) $ (63) $ (108)
=============================================
1996
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------------------
(In thousands)
Unrealized gains (losses) arising during
the period $ 1,154 $ 427 $ 727
Less reclassification adjustments for (1,689) (625) (1,064)
(gains) losses included in net income
---------------------------------------------
Net unrealized gain (loss) on securities $ (535) $(198) $ (337)
=============================================
5. LOANS
-----
New South's primary line of business is the origination (and subsequent sale)
of residential mortgage loans which New South classifies as conforming and
nonconforming residential mortgage loans. Conforming 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 residential first mortgage loans with 15 year or 30 year terms
generally secured by owner-occupied residences. Nonconforming 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 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. 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. 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.
New South'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 manufactured housing lending program primarily includes
the indirect
13
5. LOANS, CONTINUED
-----
origination of mortgage loans (land and home) and nonmortgage loans (home only),
in addition to construction loans which are in place during the preparation
phase of the land.
The composition of the loan portfolio as of December 31, 1998 and 1997 was as
follows:
1998 1997
--------- ----------
(In thousands)
Residential Mortgage:
Conforming $ 172,009 $ 252,568
Nonconforming 284,477 132,700
------------ -----------
Total residential mortgage loans 456,486 385,268
Installment (automobile)
Prime 52,232 84,769
Non-prime 1,436 12,147
------------ -----------
Total installment (automobile) loans 53,668 96,916
Residential construction and land 144,771 87,889
Commercial real estate 155,765 158,377
Commercial 4,579 1,467
------------ -----------
Total loans 815,269 729,917
Less unearned income 2,392 2,063
------------ -----------
Loans net of unearned income $ 812,877 $ 727,854
============ ===========
The undisbursed portion of mortgage and construction loans was $86,237,000
and $58,369,000 at December 31, 1998 and 1997, respectively.
6. ALLOWANCE FOR LOAN LOSSES
-------------------------
Management establishes allowances for the purpose of absorbing losses
inherent within its loan portfolio, 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 losses are also credited to the account
and are charged against current income.
14
6. ALLOWANCE FOR LOAN LOSSES, CONTINUED
-------------------------
A summary of the activity in the allowance for loan loss accounts for the
years ended December 31, 1998, 1997 and 1996 is presented below:
1998 1997 1996
---------------- ----------------- ----------------
(In thousands)
Balance at beginning of year $ 7,333 $5,904 $4,562
Add: Provision for loan losses 3,944 2,954 2,492
Deduct: Loans charged off 3,205 2,200 1,610
Loan recoveries (1,035) (675) (460)
---------------- ---------------- ----------------
Net charge-offs 2,170 1,525 1,150
---------------- ---------------- ----------------
Balance at end of year $ 9,107 $7,333 $5,904
================ ================ ================
7. DEPOSITS
--------
The composition of the deposit base at December 31, 1998 and 1997 is
summarized in the following table:
1998 1997
------------------------------------------------------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
(In thousands)
Noninterest bearing demand $ 73,873 9.5% $ 70,897 10.2%
Interest bearing transaction accounts 3,712 0.5 3,932 0.6
Money market accounts 61,544 7.9 54,027 7.8
Statement savings 4,337 0.6 3,851 0.5
Certificates of deposit:
3% to 3.99% 44 0.0 0 0.0
4% to 4.99% 30,355 3.9 62 0.0
5% to 5.99% 430,289 55.5 325,136 46.8
6% to 6.99% 103,446 13.3 155,683 22.4
7% to 8.99% 65,030 8.4 77,911 11.2
More than 9% 2,818 0.4 3,866 0.5
--------- --------- -------- --------
Total deposits $ 775,448 100.0% $695,365 100.0%
========= ========= ======== ========
The aggregate amounts of certificates of deposit in denominations greater
than $100,000 were approximately $140,618,000 and $202,685,000 at December 31,
1998 and 1997, respectively. Accrued interest payable on deposits at December
31, 1998 and 1997 amounted to $1,633,000 and $2,783,000, respectively, primarily
earned on certificates of deposit.
15
7. DEPOSITS, CONTINUED
--------
The scheduled maturities of certificates of deposit at December 31, 1998
were as follows:
Maturity 1998
----------------------------- ---------------
(In thousands)
1999 $460,502
2000 69,075
2001 21,473
2002 23,627
2003 and thereafter 57,305
--------
$631,982
========
The following table notes the breakdown of interest expense on deposits for the
years ended December 31:
1998 1997 1996
-------------- --------------- --------------
(In thousands)
Interest bearing transaction accounts $ 82 $ 126 $ 161
Money market accounts 2,543 2,350 2,051
Statement saving 184 245 225
Certificates of deposit 35,915 35,011 30,604
-------------- ------------- ------------
$ 38,724 $ 37,732 $ 33,041
============== ============= ============
8. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
--------------------------------------------------------------------------
In 1998, Federal Funds agreements were arranged with four commercial banks
totaling $40,000,000 in available credit. At December 31, 1998 there were
$10,000,000 outstanding on Federal Funds purchased agreements. 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, 1998,
mortgage-backed securities with book and market values of $32,900,000 and
$25,900,000, respectively, were sold under such agreements. This agreement
matures daily. Accrued interest receivable on this security amounted to
$74,000. At December 31, 1997, mortgage-backed securities with a book and
market value of $36,323,000 were sold under such an agreement. This agreement
also matured daily. Accrued interest receivable on this security amounted to
$196,000. 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 1998 and 1997:
1998 1997
--------------- --------------
(In thousands)
Activity for the year:
Average balance of agreements outstanding $45,548 $41,177
Maximum outstanding at any month-end $65,573 $63,100
Ending balance $58,800 $34,800
Average interest rate at period-end 5.61% 7.30%
16
9. FEDERAL HOME LOAN BANK ADVANCES, LINES OF CREDIT AND NOTE PAYABLE
-----------------------------------------------------------------
As of December 31, 1998 and 1997, Federal Home Loan Bank ("FHLB") advances
amounted to $198,418,000 and $179,420,000, respectively. The advances
outstanding at December 31, 1998 bear interest at rates ranging from 4.85
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, 1998 are as follows,
in thousands:
1999 $105,000
2001 28,388
2003 30,000
2005 10,000
2008 25,000
2017 30
--------
$198,418
========
The table below provides information relating to Federal Home Loan Bank
Advance activity for 1998 and 1997.
1998 1997
-------------- --------------
(In thousands)
Activity for the year:
Average balance of agreements outstanding $151,476 $113,572
Maximum outstanding at any month-end $231,418 $179,420
Ending balance $198,418 $179,420
Average interest rate at period-end 5.38% 6.07%
In 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 1998,
there were no amounts outstanding on the line of credit.
During 1997, Bancshares had 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, $5,000,000 was outstanding on
the line of credit and $5,000,000 was outstanding on the term debt. In 1998, the
$5,000,000 on the line of credit and the $5,000,000 in term debt were paid in
full, and replaced with $9,250,000 revolving credit facility agreement from a
commercial bank. The amounts outstanding bear interest at the London Interbank
Offering Rate plus two percent, payable quarterly. There were no amounts
outstanding at December 31, 1998.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
SFAS 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.
17
10. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
-----------------------------------
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, accrued
interest receivable and payable, 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 is summarized as follows:
DECEMBER 31,
-------------------------------------------
1998 1997
--------------------- --------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
-------- ----------- -------- ----------
(In thousands)
Financial Assets:
Loans held for sale $115,279 $115,279 $ 35,570 $ 35,570
Loans, net of unearned income 812,877 832,386 727,854 744,855
Financial liabilities:
Deposits 775,448 786,304 695,365 700,548
FHLB advances 198,418 201,196 179,420 182,236
Off-balance sheet financial instruments:
Unrealized gains/(losses):
Interest rate swap agreements 0 (566) 0 3,148
Interest rate cap agreements 0 123 0 92
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.
18
10. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
-----------------------------------
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.
Commitments to Extend Credit and Standby Letters of Credit - The value of
----------------------------------------------------------
these unrecognized financial instruments is estimated based on the fee income
associated with the commitments which, in the absence of credit exposure, is
considered to approximate their settlement value. As no significant credit
exposure exists and because such fee income is not material to New South's
financial statements at December 31, 1998 and 1997, the fair value of these
commitments is not presented.
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 up to 3 percent of the first 8 percent of the employees' salary
deferred. New South contributed $323,000, $138,000, and $49,000 to the plan for
the years ended December 31, 1998, 1997 and 1996, respectively.
12. INCOME TAXES
------------
The provisions for income taxes included in the consolidated statements of
income are summarized below:
Current Deferred Total
------- -------- ------
(In thousands)
1998
Federal $3,740 $ 792 $4,532
State 458 98 556
------ ----- ------
Total $4,198 $ 890 $5,088
====== ===== ======
1997
Federal $4,225 $(621) $3,604
State 513 (127) 386
------ ----- ------
Total $4,738 $(748) $3,990
====== ===== ======
19
12. INCOME TAXES, CONTINUED
------------
Current Deferred Total
--------- -------- -------
(In thousands)
1996
Federal $2,217 $35 $2,252
State 230 0 230
------ --- ------
Total $2,447 $35 $2,482
====== === ======
At December 31, 1998 and 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
1998.
Significant components of New South's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are listed below.
1998 1997
------------ -----------
(In thousands)
Deferred tax assets:
Loan loss allowance $ 3,955 $ 2,933
REMIC income 2,388 1,230
Other 793 889
---------- ----------
Total deferred tax assets 7,136 5,052
---------- ----------
Deferred tax liabilities:
Tax deferred dividends 469 494
Originated mortgage servicing rights 2,539 364
Unrealized gain on securities
Available for sale 29 578
Other 887 63
---------- ----------
Total deferred tax liabilities 3,924 1,499
---------- ----------
Net deferred tax assets
before valuation allowance 3,212 3,553
Valuation allowance 1,988 1,988
---------- ----------
Net deferred tax asset $ 1,224 $ 1,565
========== ==========
20
12. INCOME TAXES, CONTINUED
------------
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:
1998 1997 1996
----------- --------------- ------------
(In thousands)
Tax computed at statutory
Federal income tax rate $ 4,020 $ 2,960 $ 1,817
Increase in taxes resulting from:
State income tax, net of federal benefit 320 255 107
Other, net 748 775 558
---------- ---------- ----------
Total $ 5,088 $ 3,990 $ 2,482
========== ========== ==========
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.
Subsequent to year-end, the Company has elected to be treated under the
provisions of Sub Chapter S of the Internal Revenue Code. (See note 19.)
13. CAPITAL
-------
Various regulatory 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, 1998 and 1997.
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy guidelines to which it is subject.
21
13. CAPITAL, CONTINUED
-------
MINIMUM TO BE WELL
REQUIREMENT ACTUAL CAPITALIZED
------------------ ------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------ ------------------- ------------------
(IN THOUSANDS)
AS OF DECEMBER 31, 1998:
- - -----------------------
TIER I CAPITAL
(TIER 1 TO TOTAL ADJUSTED ASSETS) $ 34,219 3.00% $ 79,891 7.00% $ 57,031 5.00%
TANGIBLE CAPITAL
(TIER 1 TO TOTAL ADJUSTED ASSETS) 17,109 1.50% 79,891 7.00% N/A N/A
TOTAL RISK-BASED CAPITAL
TO RISK WEIGHTED ASSETS 64,193 8.00% 83,321 10.38% 80,241 10.00%
TIER I CAPITAL
(TIER 1 TO RISK WEIGHTED ASSETS) N/A N/A 79,891 9.96% 48,145 6.00%
As of December 31, 1997:
- - -----------------------
Tier I capital
(Tier 1 to total adjusted assets) $ 29,758 3.00% $ 61,221 6.17% $ 49,597 5.00%
Tangible capital
(Tier 1 to total adjusted assets) 14,879 1.50% 61,221 6.17% N/A N/A
Total risk-based capital
to risk weighted assets 51,511 8.00% 67,458 10.48% 64,388 10.00%
Tier I capital
(Tier 1 to risk weighted assets) N/A N/A 61,221 9.51% 38,633 6.00%
Total capital for Bancshares at December 31, 1998 and 1997 was $48,440,000
and $52,314,000, respectively. Regulatory capital requirements do not apply to
thrift holding companies.
The following table is a reconciliation of the Bank's shareholder's equity
to tangible capital as required by the Office of Thrift Supervision.
1998 1997
----------- ---------
Shareholder's equity $ 81,166 $ 62,090
Deferred Tax asset (See Note 21) (1,224) -
Unrealized gains on securities
available for sale (51) (869)
---------- --------
Tangible and Tier I capital 79,891 61,221
Allowance for loan losses 8,732 6,257
Equity investments in land (112) 0
Low level recourse deduction (5,190) -
---------- --------
Total risk based capital $ 83,321 $ 67,478
========== ========
22
13. CAPITAL, CONTINUED
-------
1998 1997
---------- --------
Total assets and total adjusted assets $1,140,619 $991,938
Total risk weighted assets 802,409 643,884
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 appropriate 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
$18,434,000 and $40,162,000 as of December 31, 1998 and 1997, respectively. Of
the 1998 pipeline, $9,404,000 were fixed rate commitments with market risk and
$9,030,000 were adjustable commitments with no market risk. For 1997,
$30,724,000 were fixed rate commitments and $9,438,000 were adjustable
commitments. Adequate sources of funds were available at December 31, 1998 to
fund anticipated closings from the mortgage pipeline.
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
23
14. OFF-BALANCE SHEET RISK AND COMMITMENTS, CONTINUED
--------------------------------------
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. The effective notional amounts outstanding at December 31, 1998
and 1997 were $120,000,000 and $125,000,000, respectively. During 1998, the
average notional amount of rate swaps was $140,000,000; the average rate
received under the contracts was 6.01% and the average rate paid was 5.80%,
resulting in a reduction in interest expense $892,000. During 1997, the average
notional outstanding amount was $133,750,000 and the average rates received and
paid were 6.11% and 5.88%, respectively and reduced interest expense by
$562,000. At December 31, 1998 and 1997, the net accrued receivables were
$600,000 and $274,000, respectively. At December 31, 1998, the effective
notional amounts and contractual maturates of rate swaps were as follows:
Effective
Notional Liabilities / Assets
Amount Expiration Hedged
-----------------------------------------------------
(In Thousands)
$ 15,000 1999 Loans
25,000 2000 Loans
20,000 2003 Loans
20,000 2005 Loans
30,000 2007 Deposits
10,000 2008 Deposits
--------
$120,000
========
Interest rate cap and floor agreements are used to modify and/or reduce New
South's interest rate risk. As of December 31, 1998 and 1997, 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.
During 1998, New South purchased a $40,000,000 rate cap from a commercial bank.
The rate cap was purchased to replace a $40,000,000 rate cap, which matured
during March of 1998. The effective notional amounts outstanding were
$305,000,000 at December 31, 1998 and 1997. The results of the rate caps were
an increase in interest expense of $824,000, $782,000 and $552,000 in 1998,
1997 and 1996, respectively. The estimated fair value of the rate caps were
$123,000 and $92,000 at December 31, 1998 and 1997,
24
14. OFF-BALANCE SHEET RISK AND COMMITMENTS, CONTINUED
--------------------------------------
respectively. The weighted average maturity of the rate caps were 2 years and 3
years at December 31, 1998 and 1997, respectively.
The following table summarizes the contract or notional amounts of the
various off-balance sheet instruments and commitments as of December 31, 1998
and 1997:
1998 1997
------- -------
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $98,481 $66,703
Standby letters of credit 20,362 20,162
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 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 $2,300 per loan in 1998, $850 per loan in 1997 and $400 per loan
in 1996. Total losses of this nature for 1998, 1997 and 1996 amounted to
$89,000, $71,000 and $34,000, respectively.
The outstanding mortgage and installment loan amounts serviced for others
as of December 31, 1998 and 1997 are summarized below:
1998 1997
-------- --------
(In thousands)
Government National Mortgage Association $336,427 $261,581
Federal Home Loan Mortgage Corporation 696,194 386,543
Federal National Mortgage Association 122,401 88,038
Other investors 332,598 263,451
Custodial escrow balances maintained in connection with loan servicing were
approximately $5,837,000 at December 31, 1998 and $3,253,000 at December 31,
1997.
New South sold approximately $125,000,000 of consumer auto loans during
1998, $23,000,000 in 1997 and $50,000,000 in 1996, retaining the servicing on
these loans. The outstanding loan amounts serviced on consumer auto loans at
December 31, 1998 and 1997 were $162,860,000 and $70,357,000, respectively.
During 1998 and 1997, the Bank recorded OMSRs of $6,295,000 and $939,000,
respectively. Amortization related to these servicing rights amounted to
$524,000 for 1998 and $28,000 for 1997,
25
15. LOAN SERVICING, CONTINUED
--------------
respectively. The fair value of OMSRs at December 31, 1998 and 1997 amounted to
$10,951,000 and $968,000. Based on New South's analysis, there was no
impairment of OMSRs at December 31, 1998 or 1997. Prior to 1997, New South had
no OMSRs as they were recorded at a related company, Collateral Mortgage, Ltd.
(See Note 16.)
The balances of unamortized Purchased Mortgage Servicing Rights ("PMSRs")
from the acquisition of servicing agreements with third parties were $359,000
and $470,000 at December 31, 1998 and 1997. No purchased mortgage servicing
rights were capitalized during 1998, 1997, or 1996. The amounts amortized
during 1998, 1997 and 1996 were $111,000, $76,000 and $96,000, 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
amounted to $1,704,000. Senior management and other support functions, for which
these fees were assessed and which had previously been a part of Collateral,
transferred to New South during 1997. As a result, New South collected $971,000
and $222,000 in management fees from Collateral in 1998 and 1997, respectively.
Additionally, management fees were received during 1998, 1997, and 1996 in the
amounts of $64,000, $60,000 and $60,000 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, 1998 and 1997, Collateral had on deposit with New South approximately
$54,338,000 and $39,919,000, respectively, in noninterest bearing accounts.
Collateral and its affiliates also maintain normal business checking and
money market accounts at New South. At December 31, 1998 and 1997, these
accounts totaled approximately $1,236,000 and $1,590,000, 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 for third party
investors. Servicing fees paid to Collateral during 1998, 1997 and 1996 amounted
to $4,480,000, $3,642,000 and $3,468,000, respectively. For an additional
discussion of the subservicing agreement with Collateral, see Note 15.
New South purchased $55,831,000 and $106,269,000 in mortgage loans from
Collateral during 1997 and 1996, respectively, and sold $20,571,000 and
$20,561,000 in mortgage loans to Collateral during the same periods. During
1998, no mortgage loans were sold to or purchased from Collateral. 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. Management believes the fees received from
Collateral for these services are comparable to those charged by third parties.
26
16. RELATED PARTY TRANSACTIONS, CONTINUED
--------------------------
On December 31, 1998, New South sold a mobile home park acquired through
foreclosure to Collateral Agency, Inc., an affiliate, and realized a gain of
$203,000 on the transaction. In June 1997, New South sold an office rental
property which had been acquired through foreclosure to Collateral Agency, Inc.
The property was sold at market price, and New South realized a gain of $158,000
on the transaction.
New South had $457,000 and $597,000 in loans outstanding to senior officers
at December 31, 1998 and 1997, respectively. During 1998, there were no
advances on loans to senior officers, and paydowns were $140,000.
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; the fee for 1998 was
$2,305,000. In 1998 and 1997, New South paid $622,000 and $316,000,
respectively, to Collateral for the use of furniture and equipment in the
origination and support areas.
In September 1998, New South entered into a joint venture with a developer.
In accordance with the agreement, the joint venture will originate residential
mortgage loans which will subsequently be purchased by New South at market.
During 1998, New South purchased $810,000 of residential mortgage loans from the
joint venture.
27
17. PARENT ONLY FINANCIAL INFORMATION
---------------------------------
Financial information and operating results for New South Bancshares, Inc.,
parent only, is presented at December 31, 1998 and 1997 as follows:
1998 1997
------- -------
(In thousands)
BALANCE SHEETS:
- - --------------
Assets:
Cash $ 52 $ 81
Investment in subsidiaries:
New South Federal Savings Bank 81,166 62,090
Collateral Agency of Texas 189 194
Other Assets 1,561 1
------- -------
Total Assets $82,968 $62,366
======= =======
Liabilities:
Note payable $ 0 $10,000
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 0
Accrued expenses and other liabilities 0 6
Accounts payable-intercompany 28 46
------- -------
Total Liabilities 34,528 10,052
------- -------
Shareholders' Equity:
Common stock 1,250 1,377
Surplus 29,230 38,896
Retained earnings 17,909 11,172
Other comprehensive income 51 869
------- -------
Total Shareholders' Equity 48,440 52,314
------- -------
Total Liabilities and Shareholders' Equity $82,968 $62,366
======= =======
28
17. PARENT ONLY FINANCIAL INFORMATION, CONTINUED
---------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
----------- -------- --------
(In thousands)
INCOME STATEMENTS:
- - -----------------
Income:
Dividends from subsidiaries $ 900 $ 1,125 $ 2,500
Interest on other short-term investments 175 8 20
Other income 0 10 0
-------- ------- -------
Total Income 1,075 1,143 2,520
Expenses:
Interest on note payable 366 779 719
Interest expense on guaranteed preferred beneficial
interests in the Company's subordinated debentures 1,573 0 0
Other expense 114 46 35
-------- ------- -------
Total Expenses 2,053 825 754
-------- ------- -------
Income/(loss) before equity in undistributed earnings
of subsidiaries (978) 318 1,766
Equity in undistributed earnings of subsidiaries 7,715 4,398 796
-------- ------- -------
Net Income $ 6,737 $ 4,716 $ 2,562
======== ======= =======
STATEMENTS OF CASH FLOW:
- - -----------------------
Operating activities:
Net income $ 6,737 $ 4,716 $ 2,562
Equity in undistributed earnings of subsidiaries (7,715) (4,398) (796)
(Increase)/decrease in other assets (1,560) 0 1
(Decrease)/increase in other payables (6) 0 2
(Decrease)/increase in intercompany payables (18) 36 10
-------- ------- -------
Net Cash Provided by/(Used in) Operating Activities (2,562) 354 1,779
Investing activities:
Capital contributions to Subsidiaries (12,174) (194) (2,000)
-------- ------- -------
Net Cash Used in Investing Activities (12,174) (194) (2,000)
Financing activities:
Repayment of notes payable (10,000) 0 0
Purchase and retirement of common stock (9,793) (234) (64)
Issue of Guaranteed preferred beneficial interests in
the Company's subordinated debentures 34,500 0 0
-------- ------- -------
Net Cash Provided by/(Used in) Financing Activities 14,707 (234) (64)
Net decrease in cash and cash equivalents (29) (74) (285)
Cash and Cash equivalents at beginning of year 81 155 440
-------- ------- -------
Cash and Cash Equivalents at End of Year $ 52 $ 81 $ 155
======== ======= =======
29
18. CONTINGENCIES
-------------
Various legal proceedings are pending against New South. Some of the
proceedings are class action lawsuits and seek relief on alleged damages that
are substantial. In each case, a class has not been certified. These actions
arise in the ordinary course of New South's business and include actions
relating to its lending and servicing activities. Some of these issues are
complex and for other reasons, it may take a number of years to resolve the
actions. Although the outcome of any litigation cannot be predicted with
certainty, management considers that any potential liability resulting from the
proceedings would not have a material adverse impact on the financial condition
of New South.
19. SUBSEQUENT EVENTS
-----------------
Sub Chapter S
Effective January 1, 1999, the Company elected S corporation status.
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 local, if applicable, income tax
purposes. Due to the S corporation election, the Company will charge off
$1,244,000 in deferred tax assets in the first quarter of 1999.
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.
Servicing Transfer
Effective January 1, 1999, the Collateral servicing operations, and all of
the related employees, were transferred to New South. As a result of this
transfer, New South assumed responsibility for a $4,723,709,000 loan servicing
portfolio, of which New South owns the servicing rights for $2,333,584,000 of
this portfolio. Under the terms of the transfer, New South also purchased the
net assets related to the servicing operations at net book value, which totaled
$220,000.
Avondale Funding Corporation
On February 17, 1999, New South entered into an Asset Purchase Agreement
(the "Agreement") to acquire the assets associated with the national mortgage
origination activities of Avondale Federal Savings Bank ("AFSB"). Avondale
originated first and second lien residential mortgages and home equity lines of
credit through an established network of brokers and correspondents, where the
application and approval process occurred primarily over the Internet through
the use of customized loan underwriting software.
30
19. SUBSEQUENT EVENTS, CONTINUED
-----------------
Avondale Funding Corporation, continued
Under the terms of the Agreement, New South issued a promissory note (the
"Note") in the amount of $1,947,000 to AFSB as consideration for the purchased
assets. Interest on the note accrues at 6% annually. Under the terms of the
Note, New South is to make quarterly payments of principal and interest to AFSB
equal to 20 basis points of both the aggregate original principal balance of all
mortgage loans originated and the outstanding balance of all home equity lines
of credit originated through the purchased systems subsequent to the purchase by
New South. Payments are to be made on the tenth day of April, July, October,
and January, with the first payment beginning on April 10, 1999, and, unless the
Note is repaid in full earlier, the final balance outstanding is to be paid on
January 10, 2000. During the first year of the Note, the obligation to pay is
without recourse to New South. In accordance with the Agreement, New South
shall also be assigned the rights and obligations of any outstanding contracts,
leases, software license agreements, and any other contractual agreements in
existence at the purchase date relating to the purchased assets.
Concurrent with the purchase of the assets, New South organized a wholly-
owned subsidiary, Avondale Funding Corporation, in which it intends to hold the
purchased assets and continue to operate the national mortgage origination
business.
31
20. SEGMENT REPORTING
-----------------
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1998. Reportable segments consist of
Residential Mortgage Banking, Automobile Lending, and Portfolio Management. The
accounting policies for each segment are the same as those used by the Company
as described in Note 1 - Significant Accounting Policies.
Residential Mortgage Banking originates and services single-family mortgage
loans. These loans are originated through the Company's network of retail loan
origination offices and through brokers and correspondents. Automobile Lending
consists of originating and servicing loans on automobiles. These loans are
primarily acquired on an indirect basis through automobile dealers. Portfolio
management oversees the Company's overall portfolio of marketable assets as well
as the Bank's funding needs. Residential Mortgage Banking and Automobile
Lending sell permanent, marketable loans to Portfolio Management at market-based
prices. Portfolio Management then sells, securitizes, or retains the loans
based on the Company's needs and market conditions. Certain short-term and
floating rate loans are retained by the originating unit, which is credited with
the interest income generated by those loans. The originating unit pays a
market-based funds-use charge to Portfolio Management. The segment results
include certain other overhead allocations. The results for the three
reportable segments of the Company are included in the following table.
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
RESIDENTIAL AUTOMOBILE PORTFOLIO
MORTGAGE BANKING LENDING MANAGEMENT OTHER CONSOLIDATED
----------------- ----------- ----------- -------- ------------
(IN THOUSANDS)
Interest Income $ 14,461 $ 486 $ 67,677 $ 627 $ 83,251
Interest expense 475 27 51,507 (177) 51,832
Intra-Company funds/use (charge)/credit (8,657) (192) 9,027 (178) 0
Provision for loan losses 0 0 3,944 0 3,944
Noninterest income 29,690 913 313 2,187 33,103
Noninterest expense 33,237 5,522 3,130 6,864 48,753
Intra-company loan service fees 1,130 1,045 (2,175) 0 0
Effects of intra-company loan sales 3,714 2,685 (6,399) 0 0
---------------------------------------------------------------
Net income before income taxes 6,626 (612) 9,862 (4,051) 11,825
Provision for income taxes 2,877 (266) 4,281 (1,804) 5,088
---------------------------------------------------------------
Net Income after income taxes $ 3,749 $ (346) $ 5,580 $(2,247) $ 6,737
===============================================================
Depreciation and amortization (net) $ 1,249 $ 262 $ 668 $ 271 $ 2,450
Total assets 301,131 8,178 747,620 85,693 1,142,622
Capital expenditures 1,610 427 0 4,062 6,099
Due to the Transfer of the 39 residential mortgage production branches,
along with the related support operations and executive management, presentation
of comparable information for the periods ended December 31, 1997 and December
31, 1996 is not practicable.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors ("Board of Directors") is divided into
three classes, and each of the Company's five 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 in the annual
meeting of stockholders. The directors, executive officers and other key
employees of the Company and their ages as of March 31, 1999, are as follows:
Name Age Position
- - ---- --- --------
DIRECTORS ELECTED TO SERVE UNTIL ANNUAL MEETING IN 2000 (CLASS I)
William T. Ratliff, Jr. 74 Director and Vice President of the Company;
Director of New South
DIRECTOR ELECTED TO SERVE UNTIL ANNUAL MEETING IN 2001 (CLASS II)
J.K.V. Ratliff 69 Director and Vice President of the Company
DIRECTOR ELECTED TO SERVE UNTIL ANNUAL MEETING IN 1999 (CLASS III)
William T. Ratliff, III 45 Chairman of the Board and President of the Company;
Chairman of the Board and Chief Executive Officer of New South
Robert M. Couch 41 Director and Executive Vice President of the Company;
Director, President and Chief
Operating Officer of New South
David W. Whitehurst 49 Director of the Company and New South
EXECUTIVE OFFICERS WHO ARE NOT ALSO DIRECTORS
Suzanne H. Moore 43 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 43 Vice President of the Company and Senior 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 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 its inception
in 1993 and Chairman of the Board of Triad Guaranty
15
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, and a Director since July 1998. 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.
Mr. David W. Whitehurst has been a Director of the Company since July of
1998. He has been Executive Vice President, Chief Financial Officer, Treasurer
and a Director of Triad Guaranty, Inc. since 1993, and served as Secretary of
Triad Guaranty, Inc. from 1993 until 1996. Mr. Whitehurst has also been a Vice
President and Director of Triad Guaranty, Inc. since 1989, Executive Vice
President of CIC since 1995 (Vice President from 1990 to 1995), was Chief
Financial Officer of CIC from 1990 through 1995, was Executive Vice President of
Southwide Life Insurance Corp. from 1992 until 1996 and has been a director of
New South since 1989. Since January 1997, Mr. Whitehurst has been the
President, Treasurer and a Director of Southland National Insurance Corp. and
its subsidiaries, all of which are affiliates. Mr. Whitehurst joined Collateral
in 1989 and served as Vice President of Collateral and its affiliates until
1992, when he began devoting all of his time to CIC and its affiliates.
Ms. Suzanne H. Moore has been Executive 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.
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
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 1, 1995. 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 New
South's commercial real estate lending activities. Mr. Roberts has also served
as Executive Vice President and Chief Operating Officer 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. Lizabeth R. Nichols has been Vice President of the Company since August
1998 and has been Senior Vice President and General Counsel of New South since
November 1998. From February 1998 to November 1998 Ms. Nichols served as Vice
President and General Counsel. From January 1997 to January 1998, Ms. Nichols
served as Vice President
16
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.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation earned by the named
Executive Officers of New South during the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
Name and All other
Principal Position Salary Bonus Compensation(1)
- - ------------------ ------ ----- ---------------
William T. Ratliff, III
President of the Company........... $127,000 $225,000 0
Robert M. Couch
Executive Vice President of the
Company........................... 216,000(2) 180,000 0
David E. Mewbourne
Executive Vice President of New
South............................. 190,000 150,000 0
Roger D. Murphree
Senior Vice President of New South 98,916 35,030 0
Lizabeth R. Nichols
Vice President of Company.......... 89,583 35,096 0
____________________
(1) Does not include amounts contributed by the Company to the Executive
Officer's 401(k) plan, the maximum amount which will be contributed
to one individual is $7,410.34.
(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."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of March 1, 1999 (unless
otherwise noted) with respect to (i) persons the Company believes to be the
beneficial owners of 5% or more of the Company's common stock, (ii) each current
director and each of the executive officers named in the Summary Compensation
Table contained herein, and (iii) all directors and executive officers of the
Company, as a group:
17
AMOUNT AND NATURE OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) BENEFICIALLY OWNED(1)
- - ------------------------------------ ----------------------- ---------------------
Mary R. Johnson-Butterworth
4731 Old Leeds Road
Birmingham, Alabama 35213........................... 104,088(2) 8.29%
W.T. Ratliff, Jr.
2621 Altadena Road
Birmingham, Alabama 35243........................... 258,953 20.62%
J.K.V. Ratliff
46 Greenway Road
Birmingham, Alabama 35213........................... 180,507 14.38%
William T. Ratliff, III
3944 Forest Glen Drive
Birmingham, Alabama 35213........................... 135,543(3) 10.80%
Amelie L. Ratliff
5 Fuller Street, #1
Brookline, Massachusetts 02446-2452................. 98,860 7.87%
Daniel T. Ratliff
31315 Pine Run Drive
Ono Island
Orange Beach, Alabama 36561......................... 108,590(4) 8.65%
Carlton McCoy Ray
9949 Southwind Drive
Indianapolis, Indiana 46256......................... 98,360 7.83%
Thomas E. Gester
3020 Briarcliff Road
Birmingham, Alabama 35223........................... 1,000 *
Robert M. Couch
8 Club View Drive
Birmingham, Alabama 35223........................... 5,347.60 *
All current directors and executive officers as a group
(11 individuals) 991,248.60 78.95%
_______________________
* Less than one percent
(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 5,115 shares held by Mrs. Johnson-Butterworth as custodian for the
benefit of her minor children.
(3) Includes 22,271 shares held by Mr. Ratliff, III as custodian for the
benefit of his minor children, nieces and nephews.
(4) Includes 10,230 shares held by Mr. Daniel T. Ratliff as custodian for the
benefit of his minor children.
18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1997, any significant business or personal
relationship with the Company or New South, except as described below. The
terms of each of the transactions presented herein are similar to those that
could have been obtained through negotiations with unaffiliated third parties.
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. During 1998 these fees totaled $2.3
million. In addition, New South paid Collateral $622,000 during 1998 under the
terms of a Lease Agreement effective July 1, 1997 for the furniture and fixtures
associated with the 39 loan production offices.
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. New South paid Collateral $4.5 million in fees
under the Subservicing Agreement in 1998. This Subservicing Agreement with
Collateral was terminated on December 31, 1998.
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 FHLMC 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 $191,000 in fees from Collateral in 1998 for custodial and
safekeeping services.
Collateral maintains deposits with New South in the normal course of
business. At December 31, 1998, these deposits totaled $54.3 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, 1998,
amounts totaling approximately $1.2 million were maintained in such accounts at
New South in the normal course of business.
Lease Agreements. New South leases furnished office space from certain
affiliates. Under the terms of two Commercial Lease Agreements, New South paid
Collateral $566,000 in rent for lease of office space at 2000 Crestwood
Boulevard, 1900 Crestwood Boulevard, and the Southwide Life Building during
1998. The Commercial Lease Agreements are each for terms of one year and are
automatically renewable. Either party may terminate same with sixty days
notice.
19
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. Amounts payable from Collateral under this Administrative
Services Agreement in 1998 were $971,000. 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 60% of Mr. Couch's total compensation is
attributable to services performed for or on behalf of New South.
Investment Advisory Agreements. In 1998, Collateral received fees of
$253,700 and $15,500, 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 a mobile home park to
Collateral Agency, Inc., an affiliate, for a purchase price of $800,000 in 1998.
New South realized a gain of $203,000 on the transaction.
Other. In September 1998, New South entered into a joint venture with a
developer to form DPH Mortgage, Ltd. ("DPH"). In accordance with the agreement,
DPH will originate residential mortgage loans which will subsequently be
purchased by New South at fair market value. During 1998, New South purchased
$810,000 of residential mortgage loans from DPH.
INDEBTEDNESS OF MANAGEMENT
Certain directions 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.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 23 of this Form 10-K
are filed herewith or are incorporated herein by reference. No
management contract or compensatory plan or arrangement is required to
be filed as an exhibit to this form. The Registrant will furnish a
copy of any of the exhibits listed upon the payment of $5.00 per
exhibit to cover the cost of the Registrant in furnishing the exhibit.
(b) Reports on Form 8-K:
A Report on Form 8-K was filed by the Company 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 Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEW SOUTH BANCSHARES, INC.
/s/ Robert M. Couch
-----------------------------------
By: Robert M. Couch
Executive Vice President
21
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH DATE
SIGNED
Chairman and President March 31, 1999
- - -------------------------
William T. Ratliff, III *
/s/ Robert M. Couch Director and Executive Vice March 31, 1999
- - ------------------------- President
Robert M. Couch
/s/ Suzanne H. Moore Vice President (Controller) March 31, 1999
- - -------------------------
Suzanne H. Moore
Director and Vice President March 31, 1999
- - -------------------------
William T. Ratliff, Jr. *
Director and Vice President March 31, 1999
- - -------------------------
J. K. V. Ratliff *
Director March 31, 1999
- - -------------------------
David W. Whitehurst*
* Lizabeth R. Nichols hereby signs this Report on March 31, 1999 on behalf of
each of the indicated persons for whom she is attorney-in-fact pursuant to
powers of attorney duly executed by such persons and filed with the
Securities and Exchange Commission.
/s/ Lizabeth R. Nichols
------------------------
Lizabeth R. Nichols
Attorney-In-Fact
22
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ----------- ----------------------
*1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of New South Bancshares, Inc.
*3.2 By-Laws of New South Bancshares, Inc.
*4.1 Certificate of Trust of New South Capital Trust I
*4.2 Initial Trust Agreement of New South Capital Trust I
**4.3 Form of Junior Subordinated Indenture between the Company and
Bankers Trust Company, as Debenture Trustee
**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 S& Bingham LLP regarding certain
federal income tax matters
**10.1 Asset Purchase Agreement dated July 1, 1997
**10.2 Lease Agreement dated July 1, 1997
**10.3 Sub Servicing Agreement dated December 31, 1986
**10.4 Loan/Mortgage -- Securities Master Participation Agreement dated
March 30, 1988
**10.5 Commercial Lease Agreement dated April 20, 1993
**10.6 Commercial Lease Agreement dated January 1, 1998
**10.7 Administrative Services Agreement dated January 1, 1991
**10.8 Real Estate Purchase Agreement dated June 6, 1997
**10.9 Loan Participation Agreement dated November 25, 1997
***10.10 Stock Purchase Agreement dated December 31, 1997
**12.1 Computation of ratio of earnings to fixed charges
****16 Letter from Ernst & Young, LLP
*21.1 List of Subsidiaries of New South Bancshares, Inc.
***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
- - ---------------------
* Filed with Registration Statement on Form S-1, filed April 6, 1998,
registration No. 333-49459
** Filed with Amendment No. 1 to the Registration Statement on Form S-1,
filed May 13, 1998
*** Filed with Amendment No. 2 to the Registration Statement of Form S-1,
filed My 26, 1998
**** Filed with Amendment to Form 8-K, filed November 19, 1998
23