<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
----------------------
For the Quarterly Period Ended March 31, 1999 Commission file number 333-49459
New South Bancshares, Inc.
(Exact name of registrant as specified in its charter)
------------------------------------------------------
- --------------------------------------------------------------------------------
Delaware
(State or other jurisdiction of 63-1132716
incorporation or organization) (I.R.S. Employer Identification No.)
1900 Crestwood Boulevard
Birmingham, Alabama 35210
(Address of Principal Executive Officers) (Zip Code)
(205) 951-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
<PAGE>
NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 1999 and
December 31, 1998......................................2
Consolidated Income Statement - Three months ended
March 31, 1999 and March 31, 1998......................3
Consolidated Statement of Cash Flow - Three months
ended March 31, 1999...................................4
Notes to Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................8
Part II. Other Information
Item 1. Legal Proceedings..................................15
Item 5. Other Information..................................15
Item 6. Exhibits and Reports on Form 8-K...................15
Signatures..............................................................16
Exhibit Index...........................................................17
<PAGE>
NEW SOUTH BANSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
------------------ ----------------
1999 1998
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(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,431 $ 66,905
Time deposits in other banks 105 105
Investment securities available for sale 103,330 116,962
Loans held for sale 435,650 115,279
Loans, net of unearned income 521,371 812,877
Allowance for loan losses (9,913) (9,107)
------------------ ----------------
Net loans 511,458 803,770
Premises and equipment, net 10,057 7,860
Other assets 31,780 31,741
------------------ ----------------
Total Assets $ 1,111,811 $ 1,142,622
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 78,230 $ 73,873
Interest bearing 746,048 701,575
------------------ ----------------
Total deposits 824,278 775,448
Federal funds purchased and securities sold under
agreements to repurchase 3,000 68,800
Federal Home Loan Bank advances 178,418 198,418
Notes payable 5,226 -
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 34,500 34,500
Accrued expenses, deferred revenue, and other liabilities 15,984 17,016
------------------ ----------------
Total Liabilities 1,061,406 1,094,182
Shareholders' Equity:
Common stock of $1.00 par value (authorized: 1.5 million shares;
issued and outstanding: 1,255,537.1 at March 31, 1999 and
1,250,189.5 at December 31, 1998) 1,256 1,250
Surplus 29,475 29,230
Retained earnings 20,202 17,909
Other comprehensive (loss)/income (528) 51
------------------ ----------------
Total Shareholders' Equity 50,405 48,440
================== ================
Total Liabilities and Shareholders' Equity $ 1,111,811 $ 1,142,622
================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1999 1998
-------------- ---------------
(In thousands, except
except for per share data)
<S> <C> <C>
Interest Income:
Interest on securities available for sale $ 2,012 $ 3,696
Interest on loans 19,933 16,462
Interest on other short-term investments 170 159
-------------- ---------------
Total Interest Income 22,115 20,317
Interest Expense:
Interest on deposits 10,655 9,772
Interest on federal funds purchased and securities sold
under agreement to repurchase 401 744
Interest on Federal Home Loan Bank advances 2,213 2,143
Interest on notes payable 39 199
Interest expense on guaranteed preferred beneficial interests in
the Company's subordinated debentures 733 -
-------------- ---------------
Total Interest Expense 14,041 12,858
Net Interest Income 8,074 7,459
Provision for loan losses 1,218 649
-------------- ---------------
Net Interest Income After Provision for Loan Losses 6,856 6,810
Noninterest Income:
Loan administration income 2,295 1,557
Origination fees 2,524 2,399
(Loss)/gain on sale of investment securities available for sale (770) (221)
Gain on sale of loans 5,663 1,755
Other income 1,123 1,179
-------------- ---------------
Total Noninterest Income 10,835 6,669
Noninterest Expense:
Salaries and benefits 8,398 6,043
Net occupancy and equipment expense 1,058 931
Loan servicing fees paid to affiliates 112 991
Loss on loans serviced 107 393
Federal Deposit Insurance Corporation premiums 113 108
Other expense 4,000 2,994
-------------- ---------------
Total Noninterest Expense 13,788 11,460
-------------- ---------------
Income Before Income Taxes 3,903 2,019
Income tax expense 1,610 755
-------------- ---------------
Net Income $ 2,293 $ 1,264
============== ===============
Weighted average shares outstanding 1,254 1,377
Earnings per share $ 1.83 $ 0.92
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NEW SOUTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
-------------- ------------
(In thousands)
<S> <C> <C>
Operating Activities:
Net income $ 2,293 $ 1,264
Adjustments to reconcile net income to net cash (used in) provided by operations
Accretion of discounts and fees (92) (114)
Provision for loan losses 1,218 649
Depreciation 366 149
Loss on sale of investment securities available for sale 770 221
Purchase of mortgage loans held for sale - (718)
Originations of mortgage loans held for sale (209,880) (239,084)
Proceeds from the sale of mortgage loans held for sale 131,275 59,041
Gain on sale of loans (5,663) (1,755)
(Increase)/decrease in other assets 538 (699)
Increase in accrued expenses, deferred
revenue and other liabilities (1,032) (2,267)
-------------- ------------
Net Cash Used in Operating Activities (80,207) (183,313)
Investing Activities:
Net decrease in time deposits in other banks - 95
Proceeds from sales of investment securities available for sale 130,112 162,238
Proceeds from maturities and calls of investment securities
available for sale 24,433 17,491
Purchases of investment securities available for sale (9,363) (1,623)
Net (increase)/decrease in loan portfolio (77,814) 10,206
Purchases of premises and equipment (2,577) (351)
Proceeds from sale of premises and equipment 14 3
Net investment in real estate owned (579) (819)
-------------- ------------
Net Cash Provided by Investing Activities 64,226 187,240
Financing Activities:
Net increase in noninterest bearing deposits 4,357 31,478
Net increase in interest bearing deposits 44,473 36,599
Net decrease in federal funds purchased and securities
sold under agreements to repurchase (65,800) (26,000)
Net increase in note payable 5,226 -
Repayments of Federal Home Loan Bank Advances (20,000) (51,001)
Net proceeds from the issuance of common stock 251 -
-------------- ------------
Net Cash Used in by Financing Activities (31,493) (8,924)
-------------- ------------
Net decrease in cash and cash equivalents (47,474) (4,997)
Cash and cash equivalents at beginning of period 66,905 16,943
-------------- ------------
Cash and Cash Equivalents at End of Period $ 19,431 $11,946
============== ============
Supplemental information:
Interest paid $ 13,513 $12,718
Income taxes paid $ 132 $ 498
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NEW SOUTH BANCSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended March 31, 1999
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 1999 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"). These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Annual Report on Form 10-K for the year ended December 31,
1998.
2. Recent Accounting Pronouncements
Start-up Costs
The AICPA has issued Statement of Position (SOP) 98-5 Reporting on the
Costs of Start-up Activities. This SOP provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred and the
initial application of this SOP should be reported as the cumulative effect of a
change in accounting principle. This SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. Earlier application is
encouraged in fiscal years for which annual financial statements previously have
not been issued. Management does not believe that the adoption of this statement
will have a material impact on the presentation of the Company's financial
condition or results of operations.
3. S Corporation Election
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 are 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 charged off $1,189,000 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
<PAGE>
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
ensure the safety and soundness of the Bank and the Company.
4. Servicing Transfer
Effective January 1, 1999, the residential mortgage servicing
operations, and all of the related employees of Collateral Mortgage, Ltd.
("Collateral"), an affiliate, were transferred to New South. As a result of this
transfer, New South assumed responsibility for a $2.6 billion loan servicing
portfolio, of which New South owns the servicing rights for $1.4 billion of this
portfolio. Under the terms of the transfer, New South also purchased the net
fixed assets related to the servicing operations at net book value, which
totaled approximately $220,000.
5. Avondale Funding Corporation
On February 17, 1999, the Bank 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"). Among other
activities, AFSB 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.
Under the terms of the Agreement, the Bank 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, the Bank 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 the Bank. 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 the Bank. In accordance with the Agreement, the
Bank was assigned the rights and obligations of all outstanding contracts,
leases, software license agreements, and all 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.
6. Comprehensive Income
The Company adopted SFAS No. 130 Reporting Comprehensive Income,
effective January 1, 1998. SFAS No. 130 established standards for reporting and
display of
<PAGE>
comprehensive income and its components. The Company has classified all of its
securities as available for sale in accordance with Financial Accounting
Standards Board Statement No. 115. As of March 31, 1999, the net unrealized loss
on these securities was $528,000 compared to a net unrealized gain of $319,000
at March 31, 1998. Pursuant to Statement No. 115, any unrealized gain or loss
activity of available for sale securities is to be recorded as an adjustment to
a separate component of shareholders' equity, net of income tax effect.
Accordingly, for the three month periods ended March 31, 1999 and 1998, the
Company recognized a corresponding adjustment as a component of equity. Since
comprehensive income is a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the period, this change in
unrealized loss/gain serves to increase or decrease comprehensive income. The
following table represents comprehensive income for the three month period ended
March 31, 1999 and 1998.
Three Months Ended
March 31,
-------------------
1999 1998
------ ------
Net income $2,293 $1,264
Other comprehensive income (loss), net of tax:
Unrealized loss on securities (579) (550)
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Comprehensive income $1,714 $ 714
====== ======
7. 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.
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.
<TABLE>
<CAPTION>
Segment Reporting Analysis
For the three months ended March 31, 1999
In thousands
-----------------------------------------------------------------------------
Residential Automobile Portfolio
Mortgage Banking Lending Management Other Consolidated
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income 3,245 28 18,608 234 22,115
Interest expense 181 10 13,818 32 14,041
Intra-Company funds-use (charge)/credit (2,598) (6) 2,664 (60) 0
Provision for loan loss 0 0 1,210 8 1,218
Noninterest income 11,391 313 (1,299) 430 10,835
Noninterest expense 8,940 1,449 825 2,574 13,788
Intra-company loan service fees 215 65 (280) 0 0
Effects of intra-company loan sales 1,717 387 2,104 0 0
Net income before income taxes 4,849 (672) 1,736 (2,010) 3,903
Provision for income taxes 1,800 (249) 644 (585) 1,610
Net income after income taxes 3,049 (423) 1,092 (1,425) 2,293
Depreciation and amortization (net) 585 63 159 93 900
Total assets 253,395 7,894 820,262 30,260 1,111,811
Capital expenditures 528 21 0 2,028 2,577
</TABLE>
Due to the information system constraints, presentation of comparable
information for the period ended March 31, 1998 is not practicable.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Basis of Presentation
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and the other
financial data included elsewhere in this document. The financial information
provided below has been rounded in order to simplify its presentation. However,
the ratios and percentages provided below are calculated using the detailed
financial information contained in the Consolidated Financial Statements, the
Notes thereto, and the other financial data included elsewhere in this document.
All tables, graphs, and financial statements included in this report should be
considered an integral part of this analysis.
The purpose of this discussion is to provide an analysis of significant
changes in the Company's assets, liabilities, and capital at March 31, 1999 as
compared to December 31, 1998, in addition to including an analysis of income
for the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998.
Net Income and Key Performance Ratios
New South reported net income of $2.3 million for the three months
ended March 31, 1999, an 81.3% increase over net income of $1.3 million for the
same period of 1998. On a per share basis, earnings were $1.83 and $.92,
respectively, for the same periods. Year-to-date earnings resulted in an
annualized return on average assets (ROA) of .80% and an annualized return on
average equity (ROE) of 19.15% compared to .50% and 9.42%, respectively, for the
same period of 1998.
Net Interest Income
Net interest income for the three months ended March 31, 1999 was $8.1
million, an 8.2% increase over net interest income of $7.5 million for the same
period in 1998. This increase is primarily attributable to an increase in the
average earning asset base due to new loan originations, with the most
significant increases occurring in the residential mortgage and consumer
mortgage loan categories. Moreover, the Company benefited from a slight increase
in the yield on most of its loan portfolio categories due to increases in market
rates during the first quarter of 1999.
The Company experienced a slight decrease on the cost of its average
interest bearing liabilities during the quarter ended March 31, 1999. This
decrease is primarily attributable to the Company lowering rates offered on its
deposit accounts in anticipation of decreased funding needs due to increased
loan sales, including a $440.0 million securitization and sale of mortgage loans
which is anticipated to occur in the second quarter of 1999.
Noninterest Income and Noninterest Expenses
Year-to-date noninterest income totaled $10.8 million at March 31, 1999
compared to $6.7 million for the same period in the prior year. The most
significant component of this increase is attributable to an increase in the
capitalization of originated mortgage servicing rights, which increased $3.9
million to $4.6 million for the three months ended March 31, 1999 compared to
$681,000 for the same period in 1998. The increase in this category is due to
the transfer of the servicing function from Collateral at January 1, 1999 (see
footnote 4). Because of the transfer, New South is no longer required to pay a
sub-servicing fee to
<PAGE>
Collateral for the servicing of its residential mortgage loans. Accordingly, the
inherent value of New South's servicing rights have increased and New South
changed its net capitalization factor from 85 basis points to 120 basis points.
The increase in this factor, coupled with increased sales of residential
mortgage loans, has contributed to the significant increase in the
capitalization of originated mortgage servicing rights.
Year-to-date noninterest expenses totaled $13.8 million at March 31,
1999, a $2.3 million, or 20.3%, increase compared to $11.5 million for the same
period in 1998. The most significant factor contributing to this increase
related to salaries and benefits which were $8.4 million for the three months
ended March 31, 1999, a $2.4 million increase compared to $6.0 million for the
same period in the prior year. The increase in salaries and benefits is
primarily attributable to the transfer of the servicing function from Collateral
which resulted in an addition of 66 employees on January 1, 1999.
Interest Sensitivity
Through policies established by the 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.
The Company's interest rate sensitivity analysis evaluates interest
rate risk based on the impact on the net interest income and market value of
portfolio equity ("MVPE") of various interest rate scenarios. The MVPE analysis
is required quarterly by the Office of Thrift Supervision ("OTS") by virtue of
the Company's asset size. The Company also uses an earnings simulation model to
determine the effect of several interest rate scenarios on the Company's net
interest income. 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 Asset/Liability Management
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
<PAGE>
counterparties to such contracts, (ii) Board established credit limits for each
counterparty, and (iii) monitoring by the Asset/Liability Management Committee.
At March 31, 1999, New South had interest rate swap contracts with
notional amounts totaling $95 million. Of these, $65 million were
variable-for-fixed swap contracts designated as hedges against New South's loan
portfolio. These contracts effectively convert $65 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 $30 million in
fixed-for-variable swaps concurrent with the issuance of $30 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 March 31, 1999. As discussed above, the Company is exposed to
rising liability costs due to the relatively short-term nature of its liability
portfolio. The interest rate cap contracts serve as hedges against increases in
costs of liabilities.
Provision and Allowance for Loan Losses
Management establishes allowances for the purpose of absorbing losses
that are inherent within the loan portfolio and that are expected to occur based
on management's review of historical losses, underwriting standards, changes in
the composition of the loan portfolio, changes in the economy, and other
factors. The allowance for loan losses is maintained at a level considered
adequate to provide for losses as determined by management's continuing review
and evaluation of the loans and its judgment as to the impact of economic
conditions on the portfolio. Charges are made to the allowance for loans that
are charged off during the year while recoveries of these amounts are credited
to the account. The Company follows a policy of charging off loans determined to
be uncollectible by 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
<PAGE>
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.
At March 31, 1999, the allowance for loan losses was $9.9 million, a
8.9% increase compared to $9.1 million at December 31, 1998. As a percentage of
loans, net of unearned income, the allowance for loan losses was 1.9% and 1.1%
at March 31 1999 and December 31, 1998, respectively. The increase in the
allowance for loan losses during the period is primarily attributable to the
Company reserving approximately $900,000 for an anticipated write-off of
purchased mortgages on which the Company's title has been questioned.
Net charge-offs totaled $412,000 during the three months ended March
31, 1999 compared to $515,000 for the same period in 1998. As a percentage of
loans, net of unearned income, net charge-offs were .08% for both periods. The
decrease in charge-offs is primarily attributable to improved economic
conditions.
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
decreased $291.5 million, or 35.9%, from $812.9 million at December 31, 1998 to
$521.4 million at March 31, 1999. The decrease is primarily attributable to the
transfer of $369.0 million in loans, net of unearned income to loans held for
sale in anticipation of a $440.0 million securitization and sale of mortgage
loans which is expected to occur in the second quarter of 1999.
Total loan originations during the quarter which were $355.0 million.
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. Such loan sales totaled $245.4 million for the three
months ended March 31, 1999.
Investment Securities
Investment securities are a significant component of the Company's
total earning assets. Total investment securities were $103.3 million at March
31, 1999, a 11.7% decrease compared to $117.0 million at December 31, 1998. The
decrease is primarily attributable to $12.9 million in principal received
related to a class of a Freddie Mac Real Estate Mortgage Investment Conduit
(REMIC) security which was created in August 1997, in addition to the maturities
of other specific securities which were not replaced with new security issues.
At March 31, 1999, 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.
<PAGE>
Funding Sources
Deposits are New South's largest source of funds used to support
earning assets. The Company has been able to attract deposits by offering
nationally competitive rates. New South's deposits increased $48.8 million, or
6.3%, from $775.4 million at December 31, 1998 to $824.3 million at March 31,
1999. This increase in deposits was primarily used to fund new loan
originations.
The Company also uses FHLB advances as an alternative low cost funding
source. FHLB advances are secured by a pledge of most of the Company's
residential mortgage portfolio. These advances were $178.4 million at March 31,
1999, a 10.1% decrease compared to $198.4 million at December 31, 1998. The
decrease at March 31, 1999 is primarily attributable to the Company receiving
proceeds from the sale of $70.7 million in consumer mortgage loans during March,
1999.
Capital
At March 31, 1999 shareholders' equity of the Company totaled $50.4
million, or 4.5% of total assets, compared to $48.4 million, or 4.2% of total
assets at December 31, 1998. The increase is primarily attributable to the net
income of $2.3 million earned during the period.
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 the Bank
consists of common stockholders' equity, excluding the unrealized gain(loss) on
securities available-for-sale, minus certain intangible assets. The Bank's Tier
2 capital consists of the general reserve for loan losses subject to certain
limitations. Consolidated regulatory capital requirements do not apply to thrift
holding companies. The following table sets forth the specific capital amounts
and ratios for the indicated periods.
Analysis of Capital
<TABLE>
<CAPTION>
As of March 31, As of December 31,
----------------------------------
1999 1998
--------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Tier 1 capital $ 84,150 $ 79,891
Tier 2 capital 3,353 3,430
--------- ---------
Total qualifying capital $ 87,503 $ 83,321
========= =========
Risk-weighted assets (including off-balance
sheet exposure) $798,577 $ 802,409
Tier 1 leverage ratio 7.60% 7.00%
Total risk-based capital ratio 10.96% 10.38%
Tier 1 risk-based capital ratio 9.99% 9.96%
</TABLE>
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.
<PAGE>
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 by the fact that
the Company's loans are 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,
<PAGE>
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 $1.5 million and $2.0 million, of which $1.1 million was
incurred prior to 1999 and approximately $200,000 has been incurred in the first
quarter of 1999. 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.
<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. 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. Although the outcome of any such
litigation cannot be predicted with certainty, 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 operation.
Item 5. Other Information
The Bank currently has plans to sell certain nonconforming residential
mortgage loans, manufactured housing loans, first and second lien residential
mortgages, and home equity loans on a securitized basis estimated at
approximately $440 million.
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 January
1, 1999 to March 31, 1999.
<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.
May 12, 1999 By: /s/ ROBERT M. COUCH
-------------------------
Robert M. Couch
Executive Vice President
May 12, 1999 By: /s/ SUZANNE H. MOORE
-------------------------
Suzanne H. Moore
Vice President and Controller
<PAGE>
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference:
*3.1 Certificate of Incorporation of New South Bancshares, Inc.
*3.2 By-Laws of New South Bancshares, Inc.
*4.1 Certificate of Trust of New South Capital Trust I
*4.2 Initial Trust Agreement of New South Capital Trust I
**4.3 Form of Junior Subordinated Indenture between the
Company and Bankers Trust Company, as Debenture Trustee
**10 Material Contracts
*****24.1 Power of Attorney
27. 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 on Form S-1,
filed May 26, 1998
***** Filed with Report on Form 10-K, filed April 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 19,431 66,905
<INT-BEARING-DEPOSITS> 105 105
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 538,980 232,241
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 521,371 812,877
<ALLOWANCE> 9,913 9,107
<TOTAL-ASSETS> 1,111,811 1,142,622
<DEPOSITS> 824,278 775,448
<SHORT-TERM> 149,946 248,799
<LIABILITIES-OTHER> 15,984 17,016
<LONG-TERM> 71,198 52,919
0 0
0 0
<COMMON> 1,256 1,250
<OTHER-SE> 49,149 47,190
<TOTAL-LIABILITIES-AND-EQUITY> 1,111,811 1,142,622
<INTEREST-LOAN> 19,933 16,462
<INTEREST-INVEST> 2,012 3,696
<INTEREST-OTHER> 170 159
<INTEREST-TOTAL> 22,115 20,317
<INTEREST-DEPOSIT> 10,655 9,772
<INTEREST-EXPENSE> 14,041 12,858
<INTEREST-INCOME-NET> 8,074 7,459
<LOAN-LOSSES> 1,218 649
<SECURITIES-GAINS> 4,893 1,534
<EXPENSE-OTHER> 13,788 11,460
<INCOME-PRETAX> 3,903 2,019
<INCOME-PRE-EXTRAORDINARY> 3,903 2,019
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,293 1,264
<EPS-PRIMARY> 1.83 .92
<EPS-DILUTED> 1.83 0.92
<YIELD-ACTUAL> 3,36 3,27
<LOANS-NON> 6,176 7,629
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 1,991 2,010
<LOANS-PROBLEM> 8,167 9,639
<ALLOWANCE-OPEN> 9,107 7,333
<CHARGE-OFFS> 412 3,205
<RECOVERIES> 308 1,035
<ALLOWANCE-CLOSE> 9,913 9,107
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
