<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------------
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 333-49459
NEW SOUTH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
-------------------------------------------------------------------------
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DELAWARE
(State or other jurisdiction of 63-1132716
incorporation or organization) (I.R.S. Employer Identification No.)
1900 CRESTWOOD BOULEVARD
BIRMINGHAM, ALABAMA 35210
(Address of Principal Executive Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - June 30, 1998,
December 31, 1997, and June 30, 1997..............3
Consolidated Income Statement - Six months and
three months ended June 30, 1998 and 1997.........4
Consolidated Statement of Shareholders' Equity - Six
months ended June 30, 1998........................5
Consolidated Statement of Cash Flow - Six months
ended June 30, 1998 and 1997......................6
Notes to Consolidated Financial Statements...........7
Independent Accountants' Review Report.................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................12
Part II. Other Information
Item 1. Legal Proceedings.............................26
Item 2. Changes in Securities and Use of Proceeds.....26
Item 5. Other Information.............................26
Item 6. Exhibits and Reports on Form 8-K..............26
Signatures.......................................................27
Exhibit Index....................................................28
2
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PART I
FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
----------- ------------ -----------
<S> <C> <C> <C>
(Unaudited) (Unaudited)
(In thousands)
ASSETS
Cash and due from banks............................................. $ 6,109 $ 16,943 $ 17,348
Time deposits in other banks........................................ 105 200 200
Investment securities available for sale............................ 186,861 197,135 111,475
Mortgage loans held for sale........................................ 75,890 35,570 -
Loans, net of unearned income....................................... 721,960 727,854 771,612
Allowance for possible loan losses.................................. (7,937) (7,333) (6,687)
---------- -------- --------
Net loans.................................................... 714,023 720,521 764,925
Premises and equipment, net......................................... 3,513 2,968 2,650
Other assets........................................................ 26,677 20,716 19,724
---------- -------- --------
Total Assets............................................. $1,013,178 $994,053 $916,322
========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing........................................... $ 90,732 $ 70,897 $ 47,170
Interest bearing.............................................. 646,721 624,468 638,138
---------- -------- --------
Total deposits............................................. 737,453 695,365 685,308
Federal funds purchased and securities sold under
agreements to repurchase....................................... 44,800 40,800 10,000
Federal Home Loan Bank advances..................................... 133,419 179,420 148,388
Note payable........................................................ - 10,000 10,000
Guaranteed preferred beneficial interests in the Company's
subordinated debentures........................................ 34,500 - -
Accrued expenses, deferred revenue, and other liabilities........... 7,646 16,154 11,594
---------- -------- --------
Total Liabilities.......................................... 957,818 941,739 865,290
Shareholders' Equity:
Common stock of $1.00 par value (authorized 1.5 million shares;
issued and outstanding 1,376,956 shares for all periods
presented)................................................ 1,377 1,377 1,377
Surplus......................................................... 38,896 38,896 38,896
Retained earnings............................................... 14,687 11,172 9,727
Other comprehensive income...................................... 400 869 1,032
---------- -------- --------
Total Shareholders' Equity................................. 55,360 52,314 51,032
Total Liabilities and Shareholders' Equity............... $1,013,178 $994,053 $ 916,322
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
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NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands, except for per share data)
<S> <C> <C> <C> <C>
Interest Income:
Interest on securities available for sale...................... $ 7,377 $ 3,692 $ 3,681 $ 1,995
Interest on loans.............................................. 32,913 33,072 16,451 17,053
Interest on other short-term investments....................... 245 198 86 96
----------- ----------- ----------- -----------
Total Interest Income..................................... 40,535 36,962 20,218 19,144
Interest Expense:
Interest on deposits........................................... 19,164 18,352 9,392 9,347
Interest on federal funds purchased and securities sold
under agreement to repurchase............................. 1,274 1,020 530 544
Interest on Federal Home Loan Bank advances.................... 4,392 3,355 2,249 1,937
Interest on notes payable...................................... 366 385 167 195
Interest expense on guaranteed preferred beneficial interest in
the Company's subordinated debentures..................... 106 - 106 -
----------- ----------- ----------- -----------
Total Interest Expense.................................... 25,302 23,112 12,444 12,023
Net Interest Income................................................ 15,233 13,850 7,774 7,121
Provision for possible loan losses............................ 1,524 1,519 875 677
----------- ----------- ----------- -----------
Net Interest Income After Provision for Possible Loan Losses....... 13,709 12,331 6,899 6,444
Noninterest Income:
Loan administration income..................................... 3,178 2,509 1,621 1,220
Origination fees............................................... 5,376 244 2,977 148
(Loss)/gain on sale of investment securities available for sale (257) 321 (36) 202
Gain on sale of loans.......................................... 5,024 268 3,269 45
Other income................................................... 2,313 528 1,134 338
----------- ----------- ----------- -----------
Total Noninterest Income.................................. 15,634 3,870 8,965 1,953
Noninterest Expense:
Salaries and benefits.......................................... 12,404 4,946 6,361 2,603
Net occupancy and equipment expense............................ 1,763 359 832 186
Loan servicing fees paid to affiliates......................... 2,005 1,773 1,014 882
Loss on loans serviced......................................... 446 692 53 387
Federal Deposit Insurance Corporation premiums................. 221 206 113 106
Other expense.................................................. 6,516 2,225 3,522 1,090
----------- ----------- ----------- -----------
Total Noninterest Expense................................. 23,355 10,201 11,895 5,254
----------- ----------- ----------- -----------
Income Before Income Taxes......................................... 5,988 6,000 3,969 3,143
Income tax expense............................................. 2,473 2,729 1,718 1,442
----------- ----------- ----------- -----------
Net Income.............................................. $ 3,515 $ 3,271 $ 2,251 $ 1,701
=========== ========== ========== ==========
Weighted average shares outstanding................................ 1,377 1,377 1,377 1,377
Earnings per share................................................. $ 2.55 $ 2.38 $ 1.63 $ 1.24
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
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NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Other Total
Common Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
----------- ------------ -------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997..................... $1,377 $38,896 $ 11,172 $ 869 $ 52,314
Comprehensive Income:
Net income six months ended June 30, 1998...... - - 3,515 - 3,515
Change in unrealized gain/(loss) on
securities available for sale, net of tax... - - - (469) (469)
-------- ------- -------- ------- --------
Total comprehensive income........... - - 3,515 (469) 3,046
Balance at June 30, 1998......................... $1,377 $38,896 $ 14,687 $ 400 $ 55,360
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
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NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
--------------- ---------------
(In thousands)
<S> <C> <C>
Operating Activities:
Net income.................................................................... $ 3,515 $ 3,271
Adjustments to reconcile net income to net cash provided by operations:
Accretion of discounts and fees.......................................... (136) (259)
Provision for possible loan losses....................................... 1,524 1,519
Depreciation............................................................. 347 151
Loss/(gain) on sale of investment securities available for sale.......... 257 (321)
Purchase of mortgage loans held for sale................................. (1,753) -
Originations of mortgage loans held for sale............................ (437,021) -
Proceeds from the sale of mortgage loans held for sale................... 126,845 -
Gain on sale of loans.................................................... (5,024) (268)
Increase in other assets................................................. (5,006) (908)
(Decrease)/increase in accrued expenses, deferred
revenue and other liabilities........................................ (8,508) 623
--------- ---------
Net Cash (Used)/Provided by Operating Activities................ (324,960) 3,808
Investing Activities:
Net decrease in time deposits in other banks............................. 95 99
Proceeds from sales of investment securities available for sale.......... 351,951 22,518
Proceeds from maturities and calls of investment securities
available for sale.............................................. 41,393 7,868
Purchases of investment securities available for sale.................... (4,790) (24,590)
Net increase in loan portfolio........................................... (97,263) (112,535)
Purchases of premises and equipment...................................... (906) (407)
Proceeds from sale of premises and equipment............................. 14 942
Purchases of real estate owned........................................... (2,201) (916)
Proceeds from sales of real estate owned................................. 1,246 828
--------- ---------
Net Cash Provided/(Used) in Investing Activities................. 289,539 (106,193)
Financing Activities:
Net increase in noninterest bearing deposits............................. 19,835 8,287
Net increase in interest bearing deposits................................ 22,253 16,353
Net increase in federal funds purchased and securities
sold under agreements to repurchase................................... 4,000 10,000
Net decrease in note payable............................................. (10,000) -
Proceeds from the issuance of guaranteed preferred beneficial
interests in the Company's subordinated debentures.................... 34,500 -
Net (decrease)/increase in Federal Home Loan Bank Advances............... (46,001) 53,000
Repurchase and retirement of common stock................................ - (235)
--------- ----------
Net Cash Provided by Financing Activities.......................... 24,587 87,405
--------- ----------
Net decrease in cash and cash equivalents..................................... (10,834) (14,980)
Cash and cash equivalents at beginning of period.............................. 16,943 32,328
--------- ----------
Cash and Cash Equivalents at End of Period.................................... $ 6,109 $ 17,348
========= ==========
Supplemental information:
Interest paid............................................................ $ 25,221 $ 20,602
Income taxes paid........................................................ $ 1,654 $ 2,275
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
6
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NEW SOUTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1. General
The consolidated financial statements conform to generally accepted
accounting principles. The accompanying interim financial statements are
unaudited; however, in the opinion of management, all adjustments necessary for
the fair presentation of the consolidated financial statements have been
included. All such adjustments are of a normal recurring nature. Certain
amounts in the prior year financial statements have been reclassified to conform
with the 1998 presentation. These reclassifications had no effect on net income
and were not material to the New South Bancshares, Inc.'s (the "Company" or "New
South") balance sheet. The Company is the holding company of New South Federal
Savings Bank (the "Bank"). The notes included herein should be read in
conjunction with the notes to the consolidated financial statements included in
the Company's Form S-1 Registration Statement and amendments thereto effective
June 12, 1998.
In July 1997, the loan production operations of the residential
mortgage banking unit of an affiliate were transferred into the Bank (the
"Transfer"). The Transfer enabled the Bank to increase residential mortgage
loan production efficiencies while increasing its loan servicing portfolio. As
a result of the Transfer, the Bank assumed responsibility for 39 residential
mortgage production offices, associated employees, and related operating lease
obligations. Under the terms of the agreement, a fee is payable semi-annually
in installments over a three year period based on a decreasing percentage (.35%
to .10%) of the aggregate original principal balances of certain residential
mortgage loans originated by the Bank through June 30, 2000.
2. Recent Accounting Pronouncements
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 130: "Reporting Comprehensive Income." This
statement establishes standards for reporting the components of comprehensive
income and requires all items required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income as well as certain items
that are reported directly within a separate component of shareholders' equity
and bypass net income. The adoption of Statement No. 130 did not have a
material impact on the Company's financial condition or results of operations.
7
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Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128: "Earnings
Per Share." This standard requires dual presentation of basic and diluted
earnings per share for companies with potentially dilutive securities. There
were no dilutive securities issued or outstanding for the six month and three
month periods ended June 30, 1998 and 1997.
Derivatives and Hedging
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133: "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement will be effective for all
fiscal quarters for fiscal years beginning after June 15, 1999. Management
believes the adoption of these standards will have no material effect on the
consolidated financial statements of the Company.
3. Trust Preferred Securities
In June 1998, the Company sold $34,500,000 of 8.5% cumulative
preferred securities issued by New South Capital Trust I (the Trust). These
preferred securities are collateralized by subordinated debentures issued by the
Company, and are presented on the balance sheet as a separate line item entitled
"Guaranteed preferred beneficial interests in the Company's subordinated
debentures." The debentures have a stated maturity of June 30, 2028 and are
subject to early redemption after June 30, 2003.
The sole assets of the Trust are $35,567,010 in subordinated
debentures with the same interest rate and maturity characteristics as the trust
preferred securities. The Company owns all of the common securities of the Trust
which amount to $1,067,010.
4. Year 2000 Project Update
The Year 2000 issue, which is common to most organizations, concerns
the inability of certain computer and operational systems to properly perform
calculations and process information containing four-digit date fields. 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 process for
the Company; and,
. development of contingency plans, where necessary, to address potential
unidentified problems in both significant internal and external systems.
8
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The Company is currently in the testing phase of its strategy and is actively
testing key internal systems. The Company utilizes third party service providers
for most of its critical systems; therefore, much of the Company's remediation
effort relates to monitoring and communicating with those service providers to
gain assurance that they will be able to effectively address the Year 2000
issue. Furthermore, the Company has recently begun its evaluation of areas that
potentially could require the development of contingency plans in the event of
significant unforeseen Year 2000 problems and/or failures.
Because of the nature of operations, the external customers of the Company
would be considered its borrowers. Although there is a level of inherent risk
that a borrower may be unable to meet its obligation to the Company due to a
Year 2000 related problem, this risk is mitigated in consideration that the
Company does not have any loans 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 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 approximately $530,000 has been incurred year-to-date 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 an adverse material effect on the operations of the Company.
5. S Corporation Election
Effective June 17, 1998, the Company commenced an offer to purchase up to
129,450 shares of its common stock at a price of $77.25 per share (the "Offer").
The purpose of the Offer is to reduce the number of stockholders to 75 or less,
so that the Company can make an S corporation election in early 1999 to
take advantage of certain benefits available to such corporations under
amendments to the Internal Revenue Code contained in the Small Business Jobs
Protection Act of 1996.
Corporations which elect to be taxed as an S corporation under the Internal
Revenue Code are generally not subject to corporate taxation. Profits and
losses flow through to the S corporation stockholders directly in proportion to
their per share ownership in the entity. Accordingly, stockholders will then be
required to include profits and losses from the Company on their individual
income tax returns for federal (and state and, if applicable, local) income tax
purposes.
Typically S corporations declare dividends to stockholders in an amount
sufficient to enable stockholders to pay the tax on any S corporation income
included in the stockholder's individual income. These dividends are generally
not subject to tax since they result from S corporation income on which the
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
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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.
10
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Independent Accountants' Review Report
Board of Directors
New South Bancshares, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of New
South Bancshares, Inc. and subsidiaries as of June 30, 1998, and the related
condensed consolidated statements of income and cash flows for the three-month
and six-month periods then ended. These financial statements are the
responsibility of the Company's management. We did not make a similar review of
the accompanying condensed consolidated balance sheet of New South Bancshares,
Inc. and subsidiaries as of June 30, 1997, or the related condensed consolidated
statements of income and cash flows for the three-month period then ended.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements at June 30, 1998, and for the
three-month and six-month periods then ended for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of New South Bancshares, Inc. as of
December 31, 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended and in our report
dated March 17, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Ernst & Young LLP
----------------------
August 6, 1998
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
New South reported net income of $3.5 million for the six months ended June 30,
1998, a 7.5% increase over net income of $3.3 million for the same period of
1997. On a per share basis, earnings were $2.55 and $2.38, respectively, for
the same periods. Year-to-date earnings resulted in an annualized return on
average assets (ROA) of .69% and an annualized return on average equity (ROE) of
12.68% compared to .74% and 12.62%, respectively, for the first half of 1997.
New South's operating efficiency ratio increased from 64.24% at June 30, 1997 to
78.91% at June 30, 1998, due to additional expenses related to the Transfer of
39 residential mortgage loan production offices from an affiliate effective July
1, 1997.
Net income for the second quarter of 1998 was $2.3 million, or $1.63 per share,
compared to $1.7 million, or $1.24 per share, for the same period of 1997. ROA
and ROE for the second quarter of 1998 were .89% and 15.97%, respectively,
compared to .74% and 13.09%, respectively, for the second quarter of 1997.
Net Interest Income
Net interest income for the six months ended June 30, 1998 was $15.2 million, a
10.0% increase over the same period in 1997. The Company earned a lower rate on
a larger average earning asset base, but the rate paid on average interest
bearing liabilities remained relatively stable, resulting in a 13 basis point
decrease in the net interest margin and a 37 basis point decrease in the net
interest spread. See Table 2.
Net interest income benefited from an increase in the earning asset base which
was, on average, approximately 14.4% larger in the six months ended June 30,
1998 than the same period of 1997, although the yield on earning assets declined
from 8.94% in 1997 to 8.57% in 1998. The average yield on loans increased from
9.20% in 1997 to 9.23% in 1998. However, growth in earning assets was
concentrated in lower yielding mortgage-backed securities, which accounted for
approximately 22 basis points of the 37 basis points decline in earning asset
yields. The remainder of the decline was the result of lower market yields
earned on adjustable rate mortgage-backed securities and callable agency debt.
The change in the composition of total assets in favor of mortgage-backed
securities was a result of the retention of two classes of a Freddie Mac Real
Estate Mortgage Investment Conduit (REMIC) security created during August 1997,
as well as the securitization of portfolio loans in March 1998.
The cost of interest bearing liabilities remained relatively stable during the
six months ending June 30, 1998. Decreases in costs associated with savings
deposits, Federal Home Loan Bank advances and other borrowings were offset by
increases in time deposits, a result of deposit growth gravitating toward longer
maturities.
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Noninterest Income and Noninterest Expenses
Year-to-date noninterest income totaled $15.6 million at June 30, 1998 compared
to $3.9 million for the same period in the prior year. Significant factors
contributing to the increase include changes in the following categories:
origination fees increased $5.1 million; originated mortgage servicing rights,
which are included in gain on sale of loans, increased $3.0 million; servicing
release fees and affiliate management fees, both of which are included in other
income, increased $1.4 million and $.5 million, respectively; and loan
administration income increased $.9 million. Most of these increases were
directly attributable to the Transfer of the residential mortgage loan
production offices.
Noninterest income for the second quarter of 1998 was $9.0 million compared to
$2.0 million for the same period of the prior year. Significant increases were
experienced in the same categories as discussed above in the year-to-date
analysis. Origination fees increased $2.8 million; originated mortgage
servicing rights increased $2.3 million; servicing release fees and affiliate
management fees increased $.7 million and $.3 million, respectively; and loan
administration income increased $.5 million. Similarly, these changes for the
quarter were due primarily to the Transfer.
Year-to-date noninterest expenses totaled $23.4 million at June 30, 1998
compared to $10.2 million for the prior year. Because of the Transfer, New
South added approximately 300 employees to its payroll and assumed occupancy
costs related to the 39 residential mortgage loan production offices.
Consequently, salaries and benefits expense and occupancy and equipment expense
increased $7.5 million and $1.4 million from June 1997 to June 1998,
respectively. Also attributable to the Transfer was $1.5 million increase in
other expenses such as stationery and postage, advertising, telephone, and
legal. Included in other noninterest expenses is $23,000 paid to an affiliate
as a management fee for services rendered, which was not paid in 1997. In
addition, $1.4 million was accrued for payment to an affiliate in 1998, under
the terms of the Transfer.
Noninterest expenses for the second quarter of 1998 were $11.9 million compared
to $5.3 million for the same period of the prior year. The following expenses
experienced significant increases: Salaries and benefits expense increased by
$3.8 million; occupancy and equipment expense increased by $.6 million; and
other expenses such as stationery and postage, advertising, telephone and legal
expenses increased by $1.0 million. These increases were directly attributable
to the Transfer. The affiliate management fee was $9,000 in the first quarter
of 1998. In addition, $.7 million was accrued for payment related to the terms
of the Transfer.
Asset/Liability Management
New South maintains a formal asset/liability management process to quantify,
monitor, and mitigate interest rate risk and to maintain stability and promote
growth of net interest income under various interest rate environments. The
Company accomplishes its asset/liability management goals by producing and
maintaining assets which in the aggregate serve to maximize gross interest
income, utilizing funding strategies designed to reduce funding costs, provide
adequate liquidity, and protect the Company against severe interest rate
movements, in
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conjunction with an ongoing mortgage-banking focus which serves to add liquidity
and additional repricing capability to the Company's overall portfolio.
New South uses three primary tools in the asset/liability process. The first
tool is the traditional gap analysis, which compares the repricing, maturities,
and prepayments, as applicable, of the Company's interest-bearing assets to its
interest-bearing liabilities and off-balance sheet items maturing or repricing
in the same timeframe. This analysis indicates for the Company a liability-
sensitive position in the immediate timeframe, which would indicate a benefit
from falling rates and an exposure to rising rates, and the opposite asset-
sensitive position in the longer timeframe. The second tool is the market value
of portfolio equity analysis, as required by the Office of Thrift Supervision
(OTS) by virtue of the size of the Bank. This analysis tests the net value of
the Bank in eight parallel, instantaneous interest rate shocks, against
tolerance levels promulgated by the Bank's Board of Directors. This analysis
indicates exposure to rising rates well within Board guidelines. Finally, the
Company uses an earnings simulation model which evaluates the impact of
differing interest rate scenarios on the projected business plan over 12 month
and 36 month time horizons. This analysis incorporates variables such as
embedded options, changes in the relationship between yields earned and rates
paid, changes in the term structure of interest rates, and changes in strategy
as a function of interest rate movements. This analysis indicates a neutral or
well-hedged position at June 30, 1998, with minimal constriction due to interest
rate movements.
The Company utilizes various off-balance sheet instruments to hedge interest
rate risk, namely interest rate caps and swaps in which the Company is a fixed
payor. The Company also uses interest rate swaps in which the Company is a
fixed receiver in conjunction with the issuance of certain structured
certificates of deposit. During the first quarter of 1998, the Company
purchased $40 million in 7% interest rate caps to replace positions maturing
during the second quarter of 1998. Additionally, the Company entered into $40
million in interest rate swaps in which the Company is the fixed payor, which
serve to replace positions maturing during the second and third quarters of
1998. No such positions were entered into during the second quarter of 1998.
Interest rate caps totaled $305 million, and interest rate swaps in which the
Company is the fixed rate payor totaled $110 million at June 30, 1998. Interest
rate swaps in which the Company is the fixed receiver totaled $45 million for
the same period. See Table 4.
Credit Quality
New South maintains an allowance for loan losses, which historically has been
sufficient to absorb losses experienced in its loan portfolio. The Company has
established a formal review process to evaluate risk in its loan portfolio and
to determine the adequacy of the allowance for loan losses. The review is
conducted on a monthly basis and includes analyses of historical performance,
assessment of the level of nonperforming and adversely rated loans, specific
analyses of certain problem loans, evaluation of loan activity during the month,
consideration of off-balance sheet exposures such as market and current economic
conditions, in addition to the review of other pertinent information. Senior
management is actively involved in this review process and is proactive in
mitigating potential risks that could result from such loans. Moreover, the
Board of
14
<PAGE>
Directors monitors the level of impaired loans through the review of the overall
performance of the loan portfolio, giving specific attention to loans that have
been classified.
Table 7 presents a five-quarter analysis of the allowance for loan losses. At
June 30, 1998, the allowance for loan losses was $7.9 million, or 1.10% of loans
net of unearned income, compared to $6.7 million, or .87% of loans net of
unearned income at June 30, 1997. The coverage ratio of the allowance for loan
losses to nonperforming loans decreased from 89.72% at June 30, 1997 to 85.46%
at June 30, 1998, as the level of nonperforming loans increased $1.8 million.
For the six months ended June 30, 1998, net charge-offs were $920,000, an
increase of $184,000 compared to the same period of 1997. Increases occurred
primarily in the noncomforming residential mortgage and non-prime installment
(automobile) segments of the loan portfolio, while the prime installment
(automobile) segment decreased. Annualized net charge-offs to average loans net
of unearned income for the six months ended June 30, 1998 was .26% compared to
.20% for the same period of the prior year. The provision for loan losses for
the six months ended June 30, 1998 was $1.5 million. Net charge-offs were
approximately 60% of the provision; the remainder of the provision is intended
to increase the overall coverage ratio despite the growth in the Company's loan
portfolio.
Table 8 presents a five-quarter comparison of the components of nonperforming
assets. As a percentage of loans net of unearned income, foreclosed properties
and repossessions, nonperforming assets increased from 1.19% at June 30, 1997 to
1.60% at June 30, 1998; the level of nonperforming assets increased $2.4 million
during the same period. This increase was due to a combination of the decreased
loan portfolio size because of loan sales and additional foreclosures in the
nonconforming residential mortgage loan portfolio.
Included in nonperforming assets at June 30, 1998 and 1997 were $7.3 million and
$5.4 million, respectively, of delinquent loans, which were on a nonaccrual
basis. At June 30 1998 and 1997, nonaccrual loans included $2.8 million in FHA
and VA guaranteed loans, which had been repurchased out of GNMA pools. The
average balance of nonaccrual loans for the three months ended June 30, 1998 and
1997 was $7.2 million and $5.0 million, respectively, and $6.7 million and $5.5
million, respectively, for the six months ended June 30, 1998 and 1997.
Capital Adequacy
At June 30, 1998, shareholders' equity of the Company totaled $55.4 million or
5.46% of total assets. Since December 31, 1997, shareholders' equity has
increased $3.0 million primarily as a result of $3.5 million of net income.
Table 10 presents the capital amounts and risk-adjusted capital ratios for the
Bank at June 30, 1998 and 1997, as regulatory capital requirements do not apply
to thrift holding companies. At June 30, 1998, the Bank exceeded the regulatory
minimum required risk-adjusted Tier 1 Capital Ratio of 4.00% and risk-adjusted
Total Capital Ratio of 8.00%. The Bank met the regulatory definition of a "well-
capitalized" institution at June 30, 1998.
15
<PAGE>
TABLE 1
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
As of and for the
Six Months Ended
June 30,
-------------------------------------------
1998 1997 % Change
--------------- -------------- ----------
(In thousands)
<S> <C> <C> <C>
Balance sheet summary
End-of-period balances:
Loans, net of unearned income.................... $ 721,960 $771,612 (6.4)%
Mortgage loans held for sale..................... 75,890 - 100.0
Investment securities available for sale......... 186,861 111,475 67.6
Total assets..................................... 1,013,178 916,322 10.6
Total deposits................................... 737,453 685,308 7.6
Shareholders' equity............................. 55,360 51,032 8.5
Year-to-date average balances
Loans net of unearned income..................... 719,160 724,700 (0.8)%
Total investment securities...................... 227,618 105,564 115.6
Total assets..................................... 1,019,230 889,094 14.6
Total deposits................................... 739,399 667,458 10.8
Shareholders' equity............................. 55,426 51,833 6.9
As of and for the As of and for the
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------------------- ---------------------------------
1998 1997 % Change 1998 1997 % Change
---------- ----------- ---------- ---------- ---------- ----------
(In thousands, except for per share data)
Earnings summary
Net income......................................... $ 3,515 $3,271 7.5% $2,251 $1,701 32.3%
Per common share................................... 2.55 2.38 7.5 1.63 1.24 32.3
Selected ratios
Return on average assets (annualized).............. 0.69% 0.74% 0.89% 0.74%
Return on average equity (annualized).............. 12.68 12.62 15.97 13.09
Average equity to average assets................... 5.44 5.83 5.55 5.66
End of period equity to assets..................... 5.46 5.57 5.46 5.57
Allowance for possible loan losses to loans net of
unearned income............................... 1.10 0.87 1.10 0.87
Efficiency ratio................................... 78.91 64.24 74.82 64.11
Common stock data
Average common shares outstanding.................. 1,377 1,377 1,377 1,377
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
AVERAGE BALANCES, INCOME, EXPENSES AND RATES
AS OF AND FOR THE SIX MONTHS AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1997
---------------------------------- --------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------- --------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned income..................... $ 719,160 $ 32,913 9.23% $724,700 $33,072 9.20%
Federal funds sold................................ 7,395 205 5.59 3,828 92 4.85
Mortgage-backed securities........................ 179,856 5,839 6.55 75,129 2,674 7.18
Other investment securities....................... 47,762 1,578 6.66 30,435 1,124 7.45
---------- -------- ---- -------- ------- ----
Total earning assets.......................... 954,173 40,535 8.57 834,092 36,962 8.94
Securities under repurchase agreements............ 44 3,685
Allowance for possible loan losses................ (7,485) (6,070)
Noninterest bearing assets........................ 72,498 57,387
---------- --------
Total assets.................................. $1,019,230 $889,094
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other interest bearing deposits................... $ 3,112 $ 31 2.01% $ 3,166 $ 42 2.68%
Savings deposits.................................. 59,883 1,337 4.50 59,437 1,709 5.80
Time deposits..................................... 586,087 17,796 6.12 563,249 16,601 5.94
Other borrowings.................................. 55,259 1,640 5.99 46,237 1,405 6.13
Federal Home Loan Bank advances................... 150,806 4,392 5.87 111,659 3,355 6.06
Guaranteed preferred beneficial interests
in the Company's subordinated debentures......... 2,843 106 7.52 - - -
---------- -------- ---- -------- ------- ----
Total interest bearing liabilities............ 857,990 25,302 5.95 783,748 23,112 5.95
Noninterest bearing deposits...................... 90,317 41,606
Accrued expenses and other liabilities............ 15,497 11,907
Total shareholders' equity........................ 55,426 51,833
---------- --------
Total liabilities and shareholders' equity........ $1,019,230 $889,094
========== ========
Net interest spread............................... 2.62% 2.99%
==== ====
Net interest income............................... $ 15,233 $13,849
======== =======
Net interest margin............................... 3.22% 3.35%
==== ====
</TABLE>
17
<PAGE>
TABLE 3
QUARTERLY AVERAGE BALANCES, INCOME, EXPENSES AND RATES
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------
JUNE 30, 1998 MARCH 31, 1998
-------------------------------- -------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Assets
Loans, net of unearned income............... $ 713,016 $ 16,451 9.25% $ 725,373 $16,462 9.20%
Federal funds sold.......................... 5,089 71 5.60 9,726 136 5.67
Mortgage-backed securities.................. 190,709 2,928 6.16 168,882 2,911 6.99
Other investment securities................. 45,086 768 6.84 50,469 808 6.49
---------- -------- ---- ---------- ------- ----
Total earning assets................... 953,900 20,218 8.50 954,450 20,317 8.63
Securities under repurchase agreements...... 88 -
Allowance for possible loan losses.......... (7,548) (7,421)
Noninterest bearing assets.................. 70,537 74,480
---------- ----------
Total assets........................... $1,016,977 $1,021,509
========== ==========
Liabilities and Shareholders' Equity
Other interest bearing deposits............. $ 3,028 $ 15 1.99% $ 3,197 $ 27 3.43%
Savings deposits............................ 58,885 664 4.52 60,893 662 4.41
Time deposits............................... 581,716 8,713 6.01 590,506 9,083 6.24
Other borrowings............................ 48,282 697 5.79 62,314 943 6.14
Federal Home Loan Bank advances............. 155,562 2,249 5.80 145,997 2,143 5.95
Guaranteed preferred beneficial interests
in the Company's subordinated debentures... 5,654 106 7.52 - - -
---------- -------- ---- ---------- ------- ----
Total interest bearing liabilities...... 853,127 12,444 5.85 862,907 12,858 6.04
Noninterest bearing deposits................ 94,717 85,869
Accrued expenses and other liabilities...... 12,735 18,289
Total shareholders' equity.................. 56,398 54,444
---------- ----------
Total liabilities and stockholder's equity.. $1,016,977 $1,021,509
========== ==========
Net interest spread....................... 2.65% 2.59%
==== ====
Net interest income....................... $ 7,774 $ 7,459
======= =======
Net interest margin....................... 3.27% 3.17%
==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------
DECEMBER 31, 1997
-------------------------------------
Average Income/ Yield/
Balance Expense Rate
-------------------------------------
<S> <C> <C> <C>
Assets
Loans, net of unearned income............... $688,115 $15,466 8.92%
Federal funds sold.......................... 9,446 137 5.75
Mortgage-backed securities.................. 154,930 2,699 6.91
Other investment securities................. 50,675 868 6.80
-------- ------- ----
Total earning assets.................... 903,166 19,170 8.42
Securities under repurchase agreements...... -
Allowance for possible loan losses.......... (7,044)
Noninterest bearing assets.................. 56,832
--------
Total assets............................ $952,954
========
Liabilities and Shareholders' Equity
Other interest bearing deposits............. $ 1,119 $ 13 4.61%
Savings deposits............................ 57,271 646 4.48
Time deposits............................... 570,506 8,916 6.20
Other borrowings............................ 69,114 1,056 6.06
Federal Home Loan Bank advances............. 112,023 1,675 5.93
Guaranteed preferred beneficial interests
in the Company's subordinated debentures... - - -
-------- ------- ----
Total interest bearing liabilities...... 810,033 12,306 6.03
Noninterest bearing deposits................ 74,611
Accrued expenses and other liabilities...... 14,003
Total shareholders' equity.................. 54,307
--------
Total liabilities and stockholder's equity.. $952,954
========
Net interest spread....................... 2.39%
====
Net interest income....................... $ 6,864
=======
Net interest margin....................... 3.02%
====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
SEPTEMBER 30, 1997 JUNE 30, 1997
---------------------------------- ------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans, net of unearned income............... $718,724 $16,292 8.99% $742,898 $17,053 9.21%
Federal funds sold.......................... 8,860 150 6.72 3,796 43 4.54
Mortgage-backed securities.................. 115,966 2,065 7.07 75,207 1,350 7.20
Other investment securities................. 48,616 852 6.95 35,826 698 7.81
-------- ------- ---- -------- ------- ----
Total earning assets.................... 892,166 19,359 8.61 857,727 19,144 8.95
Securities under repurchase agreements...... 1,196 3,637
Allowance for possible loan losses.......... (6,759) (6,314)
Noninterest bearing assets.................. 60,556 62,408
-------- --------
Total assets............................ $947,159 $917,458
======== ========
Liabilities and Shareholders' Equity
Other interest bearing deposits............. $ 3,000 $ 16 2.12% $ 3,199 $ 18 2.26%
Savings deposits............................ 60,207 680 4.48 61,892 700 4.54
Time deposits............................... 587,621 9,109 6.15 564,452 8,629 6.13
Other borrowings............................ 44,732 689 6.11 48,269 739 6.14
Federal Home Loan Bank advances............. 118,649 1,811 6.06 128,850 1,937 6.03
Guaranteed preferred beneficial interests
in the Company's subordinated debentures... - - - - - -
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities...... 814,209 12,305 6.00 806,662 12,023 5.98
Noninterest bearing deposits................ 68,183 46,167
Accrued expenses and other liabilities...... 12,586 12,664
Total shareholders' equity.................. 52,181 51,965
-------- --------
Total liabilities and stockholder's equity.. $947,159 $917,458
======== ========
Net interest spread....................... 2.61% 2.97%
==== ====
Net interest income....................... $ 7,054 $ 7,121
========= =======
Net interest margin....................... 3.14% 3.33%
==== ====
</TABLE>
18
<PAGE>
TABLE 4
INTEREST RATE SWAPS AND CAPS
<TABLE>
<CAPTION>
Interest Rate Swaps
---------------------------
Receive Pay Interest
Fixed Fixed Rate Caps Total
------------ --------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1998........ $45,000 $ 80,000 $305,000 $430,000
Additions.................... - 40,000 40,000 80,000
Maturities................... - (10,000) (40,000) (50,000)
Calls........................ - - - -
Terminations................. - - - -
------------ --------------- -------------- -------------
Balance at June 30, 1998............ $45,000 $110,000 $305,000 $460,000
============ ============== ============== ==============
</TABLE>
19
<PAGE>
TABLE 5
MATURITIES IN CAPS AND INTEREST RATES EXCHANGED ON SWAPS
<TABLE>
<CAPTION>
Year of Maturity
----------------------------------------------------------------------------------------
2002 &
1998 1999 2000 2001 Thereafter Total
------------ --------------- ------------ ------------ ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Notional amount of pay fixed swaps..... $30,000 $ 15,000 $25,000 $ - $40,000 $110,000
Receive rate variable............. 5.72% 5.56% 5.69% - 5.69% 5.69%
Pay rate fixed.................... 6.27 5.70 5.99 - 5.89 5.99
Notional amount of receive fixed swap.. $ - $ - $ - $ - $45,000 $ 45,000
Receive rate fixed................ - - - - 6.97% 6.97%
Pay rate variable................. - - - - 5.62 5.62
Caps
Notional amount................... $ - $105,000 $25,000 $95,000 $80,000 $305,000
</TABLE>
20
<PAGE>
TABLE 6
LOANS AND CREDIT QUALITY
<TABLE>
<CAPTION>
Loans Nonperforming Loans Net Charge-Offs
As of June 30, As of June 30, Six Months Ended June 30,
-------------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
--------------- --------------- ------------ ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage
Conforming................................ $ 115,668 $214,536 $4,476 $3,846 $ - $ -
Nonconforming............................. 226,402 260,437 2,386 1,307 110 5
--------- -------- ------ ------ ----- ----
Total residential
mortgage loans......................... 342,070 474,973 6,862 5,153 110 5
Installment (automobile)
Prime..................................... 115,967 68,442 306 127 472 666
Non-prime................................. 15,435 10,795 85 101 338 65
--------- -------- ------ ------ ----- ----
Total installment
(automobile) loans..................... 131,402 79,237 391 228 810 731
Residential construction and land........... 117,450 71,815 - - - -
Commercial real estate...................... 130,142 147,417 2,034 2,072 - -
Commercial.................................. 2,772 253 - - - -
--------- -------- ------ ------ ----- ----
Total loans............................. 723,836 773,695 9,287 7,453 920 736
Less unearned income........................ (1,876) (2,083) - - - -
--------- -------- ------ ------ ----- ----
Loans, net of unearned income........... $ 721,960 $771,612 $9,287 $7,453 $ 920 $736
========= ======== ====== ====== ===== ====
</TABLE>
21
<PAGE>
TABLE 7
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
-------- --------- ------------ ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income, outstanding
at end of period........................................ $721,960 $651,003 $727,854 $670,317 $771,612
======== ======== ======== ======== ========
Average loans net of unearned income...................... $713,016 $725,373 $688,115 $718,724 $742,898
======== ======== ======== ======== ========
Balance of allowance for possible loan losses
at beginning of period.................................. $ 7,467 $ 7,333 $ 6,995 $ 6,687 $ 6,208
Loans charged off:
Residential mortgage.................................... (78) (73) (14) (11) (8)
Installment (Automobile)................................ (610) (651) (622) (493) (388)
-------- -------- -------- -------- --------
Total charge-offs..................................... (688) (724) (636) (504) (396)
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Residential mortgage.................................... 29 12 2 2 5
Installment (Automobile)................................ 254 197 178 169 193
-------- -------- -------- -------- --------
Total recoveries...................................... 283 209 180 171 198
-------- -------- -------- -------- --------
Net charge-offs........................................... (405) (515) (456) (333) (198)
Addition to allowance charged to expense.................. 875 649 794 641 677
-------- -------- -------- -------- --------
Balance of allowance for possible loan losses
at end of period........................................ $ 7,937 $ 7,467 $ 7,333 $ 6,995 $ 6,687
======== ======== ======== ======== ========
Allowance for possible loan losses to
loans net of unearned income............................ 1.10% 1.15% 1.01% 1.04% 0.87%
Net charge-offs to average loans net of
unearned income (annualized)............................ 0.23 0.28 0.27 0.19 0.11
</TABLE>
22
<PAGE>
TABLE 8
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
1998 1998 1997 1997 1997
------- -------- ------------ ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans(1)............................. $ 7,253 $ 6,116 $6,065 $5,682 $5,381
Restructured loans.............................. 2,034 2,048 2,062 2,067 2,072
------- ------- ------ ------ ------
Total nonperforming loans.................. 9,287 8,164 8,127 7,749 7,453
------- ------- ------ ------ ------
Foreclosed properties........................... 2,117 1,940 1,159 945 1,573
Repossessions................................... 185 156 275 188 182
------- ------- ------ ------ ------
Total nonperforming assets................. $11,589 $10,260 $9,561 $8,882 $9,208
======= ======= ====== ====== ======
Nonperforming assets
to period end loans, net of unearned
income, foreclosed properties and
repossessions.............................. 1.60% 1.57% 1.31% 1.32% 1.19%
</TABLE>
(1) Includes all loans contractually past due 90 days or more as to
principal or interest.
23
<PAGE>
TABLE 9
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
<S> <C> <C>
As of June 30,
--------------------------------
1998 1997
--------------- ---------------
(In thousands)
Mortgage-backed securities............................... $ 143,679 $ 69,356
U.S.Treasury and federal agency securities............... 30,094 30,781
Other securities......................................... 13,088 11,338
--------------- ---------------
Total securities available for sale.............. $ 186,861 $ 111,475
============== ==============
</TABLE>
24
<PAGE>
TABLE 10
CAPITAL AMOUNTS AND RATIOS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1998 AS OF JUNE 30, 1997
---------------------------------- -------------------------------
AMOUNT RATIO AMOUNT RATIO
------------- -------------- ------------ ------------
(Dollars in thousands)
Leverage capital, Tier 1 to total assets:
New South Federal Savings Bank................ $ 75,062 7.36% $ 59,989 6.55%
Total assets.................................. 1,020,196 916,322
Tangible capital, Tier 1 to total assets:
New South Federal Savings Bank................ $ 75,062 7.36% $ 59,989 6.55%
Total assets.................................. 1,020,196 916,322
Total risk-based capital to risk adjusted assets:
New South Federal Savings Bank................ $ 82,043 11.29% $ 65,656 11.34%
Risk adjusted assets.......................... 727,009 579,033
Leverage capital, Tier 1 to risk adjusted assets:
New South Federal Savings Bank................ $ 75,062 10.32% $ 59,989 10.36%
Risk adjusted assets.......................... 727,009 579,033
</TABLE>
Regulatory capital requirements do not apply to thrift holding companies;
therefore, capital amounts and ratios in the above table apply solely to New
South Federal Savings Bank. Total capital for New South Bancshares at June 30,
1998 and 1997 was $55.4 million and $51.0 million, respectively.
25
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, from time to time, has
been named in lawsuits. The Company believes it has meritorious defenses to
these lawsuits. Certain of these lawsuits are class actions, which request
unspecified or substantial damages. In each case, a class has not yet been
certified. Because these issues are complex and for other reasons, it may take
years to resolve these actions. Although the outcome of any litigation cannot be
predicted with certainty, the Company is not aware of any litigation that will
have a material adverse effect on its financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds.
(1) On June 12, 1998 the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1
(File No. 333-49459).
(2) The Offering date was June 12, 1998.
(3) Not applicable.
(4) (i) The Offering has terminated and all of the securities
registered have been sold.
(ii) Managing Underwriters: J.C. Bradford & Co.; Sterne, Agee &
Leach, Inc.
(iii) Title of Class of Securities Registered: Junior Subordinated
Deferrable Interest Debentures, Guarantee relating to Trust
Preferred Securities issued by New South Capital Trust I
(co-registrant).
(iv) Amount registered (principal amount)................ $34,500,000
Aggregate price of the offering amount
registered.......................................... $34,500,000
Amount sold (principal amount)...................... $34,500,000
Aggregate offering price of the amount sold
to date............................................. $34,500,000
(v) Estimate of Expenses:
Underwriters' commissions........................... $ 1,207,500
All other expenses (estimated)...................... $ 350,000
Total expenses paid by issuer....................... $ 1,557,500
All of the total expenses paid by issuer of $1,557,500 were
comprised of direct or indirect payments to others.
(vi) Net Offering Proceeds:.............................. $32,942,500
(vii) Use of Net Offering Proceeds: The Company has repaid $10
million in debt outstanding with a commercial lender. Another
$10 million has been injected into the Bank as equity. The
remaining funds have been reserved to fund the aforementioned
tender offer.
The repayment of debt mentioned above was a direct payment to
others. The injection of capital into the Bank and the
anticipated payments to certain common stockholders in
connection with the aforementioned tender offer may be deemed to
be direct or indirect payments to directors, officers, and
persons owning 10 percent or more of any class of equity
securities of the issuer.
(viii) Material Change in the Use of Proceeds: Not applicable.
ITEM 5. OTHER INFORMATION
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 purpose
of the Offer is to reduce the number of stockholders to 75 or less, so that the
Company can make an S corporation election in order 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.
The Company will use up to $10 million of the proceeds from its recently
completed sale of trust preferred securities to fund the repurchase of common
stock pursuant to the Offer. In addition, members of management may be offered
the opportunity to purchase some or all of any excess on the same terms as the
Offer.
During the second quarter of 1998, the Company embarked upon an
expansion into two new lines of business, direct and indirect lending on
manufactured housing and indirect lending to automobile purchasers who have
"sub-prime" credit. It is the Company's intent that both expansions will occur
gradually and neither will have a material effect on the Company's financial
condition or results of operations in the near future.
On July 21, 1998, the Bank entered into a letter of intent to purchase
an 85,000 square foot building located at 210 Automation Way. A definitive
agreement has not yet been executed and the transaction has not been closed. The
Bank plans to use the building to expand its administrative and operations
facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(A)--EXHIBITS
The exhibits listed in the Exhibit Index at page 28 of this Form 10-Q
are filed herewith or are incorporated by reference herein.
ITEM 6(B)--REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the period April
1, 1998 to June 30, 1998.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, New
South Bancshares, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
August 13, 1998 By: /s/ ROBERT M. COUCH
----------------------------------
Robert M. Couch
Executive Vice President
August 13, 1998 By: /s/ SUZANNE H. MOORE
----------------------------------
Suzanne H. Moore
Vice President and Controller
27
<PAGE>
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference:
27. Financial Data Schedule
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 6,109 17,348
<INT-BEARING-DEPOSITS> 105 200
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 262,751 111,475
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 721,960 771,612
<ALLOWANCE> (7,937) (6,687)
<TOTAL-ASSETS> 1,013,178 916,322
<DEPOSITS> 737,453 685,308
<SHORT-TERM> 84,800 78,000
<LIABILITIES-OTHER> 7,646 11,594
<LONG-TERM> 127,919 90,388
0 0
0 0
<COMMON> 1,377 1,377
<OTHER-SE> 53,983 49,655
<TOTAL-LIABILITIES-AND-EQUITY> 1,013,178 916,322
<INTEREST-LOAN> 32,913 33,072
<INTEREST-INVEST> 7,377 3,692
<INTEREST-OTHER> 245 198
<INTEREST-TOTAL> 40,535 36,962
<INTEREST-DEPOSIT> 19,164 18,352
<INTEREST-EXPENSE> 25,302 23,112
<INTEREST-INCOME-NET> 15,233 13,850
<LOAN-LOSSES> 1,524 1,519
<SECURITIES-GAINS> 4,767 589
<EXPENSE-OTHER> 23,355 10,201
<INCOME-PRETAX> 5,988 6,000
<INCOME-PRE-EXTRAORDINARY> 5,988 6,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,515 3,271
<EPS-PRIMARY> 2.55 2.38
<EPS-DILUTED> 2.55 2.38
<YIELD-ACTUAL> 3.22 3.35
<LOANS-NON> 7,253 5,381
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 2,034 2,072
<LOANS-PROBLEM> 9,287 7,453
<ALLOWANCE-OPEN> 7,333 5,904
<CHARGE-OFFS> 1,412 1,060
<RECOVERIES> 492 324
<ALLOWANCE-CLOSE> 7,937 6,687
<ALLOWANCE-DOMESTIC> 7,937 6,687
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
