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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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Quarterly Report Pursuant to Section 13 or 15(D) of theSecurities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2002

Commission file number 333-49459

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New South Bancshares, Inc.(Exact name of registrant as specified in its charter)

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| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 63-1132716(I.R.S. Employer Identification No.) | 
| | --------------------------------------------------------------------- |  | ---------------------------------------------- | 

| | 1900 Crestwood BoulevardBirmingham, Alabama(Address of Principal Executive Offices) |  | 35210(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 o



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NEW SOUTH BANCSHARES, INC.FORM 10-QINDEX

|         |  |                       |  |                                                                                       | Page
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- | ----
|         |  |                       |  |                                                                                       |     
|Part I.  |  | Financial Information | 
|         |  |                       |  |                                                                                       |     
|         |  | Item 1.               |  | Financial Statements (Unaudited)                                                      |     
|         |  |                       |  |                                                                                       |     
|         |  |                       |  | Consolidated Balance Sheets  September 30, 2002 and December 31, 2001                | 2   
|         |  |                       |  |                                                                                       |     
|         |  |                       |  | Consolidated Income Statements  Three months ended September 30, 2002 and 2001       | 3   
|         |  |                       |  |                                                                                       |     
|         |  |                       |  | Consolidated Income Statements  Nine months ended September 30, 2002 and 2001        | 4   
|         |  |                       |  |                                                                                       |     
|         |  |                       |  | Consolidated Statements of Cash Flows  Nine months ended September 30, 2002 and 2001 | 5   
|         |  |                       |  |                                                                                       |     
|         |  |                       |  | Notes to Consolidated Financial Statements                                            | 6   
|         |  |                       |  |                                                                                       |     
|         |  | Item 2.               |  | Managements Discussion and Aalysis of Financial Condition and Results of Operations  | 13  
|         |  |                       |  |                                                                                       |     
|         |  | Item 4.               |  | Controls and Procedures                                                               | 25  
|         |  |                       |  |                                                                                       |     
|Part II. |  | Other Information     | 
|         |  |                       |  |                                                                                       |     
|         |  | Item 1.               |  | Legal Proceedings                                                                     | 26  
|         |  |                       |  |                                                                                       |     
|         |  | Item 5.               |  | Other Information                                                                     | 26  
|         |  |                       |  |                                                                                       |     
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                      | 26  

|               |   
|-------------- | --
|Signatures     | 27
|               |   
|Certifications | 28
|               |   
|Exhibit Index  | 30





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NEW SOUTH BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                      |  | September 30,2002 |           | December 31,2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | -
|                                                                                                                                                      |  |                   |           |                  |  
|                                                                                                                                                      |  | (Unaudited)       |           | (Audited)        |  
|                                                                                                                                                      |  | (In thousands)    |          
|                                                                                                                                                      |  |                   |           |                  |  
|ASSETS                                                                                                                                                |  |                   |           |                  |  
|Cash and due from banks                                                                                                                               |  | $                 | 35,663    |                  | $
|Federal funds sold and securities purchased under agreements to resell                                                                                |  |                   | 15,000    |                  |  
|Interest-bearing deposits in other banks                                                                                                              |  |                   | 10,025    |                  |  
|Investment securities available for sale                                                                                                              |  |                   | 256,471   |                  |  
|Residual interest in loan securitizations                                                                                                             |  |                   | 6,040     |                  |  
|Loans available for sale                                                                                                                              |  |                   | 126,077   |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Loans, net of unearned income                                                                                                                         |  |                   | 942,131   |                  |  
|Allowance for loan losses                                                                                                                             |  |                   | (13,281   | )                |  
|                                                                                                                                                      |  |                   |           |                  |  
|Net Loans                                                                                                                                             |  |                   | 928,850   |                  |  
|Premises and equipment, net                                                                                                                           |  |                   | 7,669     |                  |  
|Mortgage servicing rights, net                                                                                                                        |  |                   | 14,954    |                  |  
|Servicing advances                                                                                                                                    |  |                   | 12,603    |                  |  
|Other assets                                                                                                                                          |  |                   | 27,840    |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Total Assets                                                                                                                                          |  | $                 | 1,441,192 |                  | $
|                                                                                                                                                      |  |                   |           |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                  |  |                   |           |                  |  
|Deposits:                                                                                                                                             |  |                   |           |                  |  
|Noninterest-bearing                                                                                                                                   |  | $                 | 90,755    |                  | $
|Interest-bearing                                                                                                                                      |  |                   | 888,686   |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Total Deposits                                                                                                                                        |  |                   | 979,441   |                  |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                            |  |                   | 173,985   |                  |  
|Federal Home Loan Bank advances                                                                                                                       |  |                   | 165,024   |                  |  
|Notes payable                                                                                                                                         |  |                   | 5,339     |                  |  
|Guaranteed preferred beneficial interests in the Companys subordinated     debentures                                                                |  |                   | 50,500    |                  |  
|Accrued expenses, deferred revenue, and other liabilities                                                                                             |  |                   | 19,239    |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Total Liabilities                                                                                                                                     |  |                   | 1,393,528 |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Shareholders Equity:                                                                                                                                 |  |                   |           |                  |  
|Common stock of $1.00 par value (authorized: 1.5 million shares; issued and     outstanding: 1,255,537.1 at September 30, 2002 and December 31, 2001) |  |                   | 1,256     |                  |  
|Surplus                                                                                                                                               |  |                   | 29,475    |                  |  
|Retained earnings                                                                                                                                     |  |                   | 33,020    |                  |  
|Accumulated other comprehensive loss                                                                                                                  |  |                   | (16,087   | )                |  
|                                                                                                                                                      |  |                   |           |                  |  
|Total Shareholders Equity                                                                                                                            |  |                   | 47,664    |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|                                                                                                                                                      |  |                   |           |                  |  
|Total Liabilities and Shareholders Equity                                                                                                            |  | $                 | 1,441,192 |                  | $
|                                                                                                                                                      |  |                   |           |                  |  

See accompanying notes to consolidated financial statements



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NEW SOUTH BANCSHARES, INC.CONSOLIDATED INCOME STATEMENTS(Unaudited)

|                                                                                                              |  | For the three months endedSeptember 30, |       
|------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                                                              |  |                                         |       
|                                                                                                              |  | 2002                                    |       
|                                                                                                              |  |                                         |       
|                                                                                                              |  | (In thousands, exceptper share data)    |       
|Interest Income:                                                                                              |  |                                         |       
|Interest on securities available for sale                                                                     |  | $                                       | 4,316 
|Interest on loans                                                                                             |  |                                         | 20,145
|Interest on other short-term investments                                                                      |  |                                         | 40    
|                                                                                                              |  |                                         |       
|Total Interest Income                                                                                         |  |                                         | 24,501
|                                                                                                              |  |                                         |       
|Interest Expense:                                                                                             |  |                                         |       
|Interest on deposits                                                                                          |  |                                         | 9,491 
|Interest on federal funds purchased and securities sold under agreements to        repurchase                 |  |                                         | 1,905 
|Interest on Federal Home Loan Bank advances                                                                   |  |                                         | 1,405 
|Interest on notes payable                                                                                     |  |                                         | 103   
|Interest expense on guaranteed preferred beneficial interests in the Companys        subordinated debentures |  |                                         | 955   
|                                                                                                              |  |                                         |       
|Total Interest Expense                                                                                        |  |                                         | 13,859
|                                                                                                              |  |                                         |       
|Net Interest Income                                                                                           |  |                                         | 10,642
|                                                                                                              |  |                                         |       
|Provision for Loan Losses                                                                                     |  |                                         | 1,799 
|                                                                                                              |  |                                         |       
|                                                                                                              |  |                                         |       
|Net Interest Income After Provision for Loan Losses                                                           |  |                                         | 8,843 
|                                                                                                              |  |                                         |       
|Noninterest Income:                                                                                           |  |                                         |       
|Loan administration income                                                                                    |  |                                         | 1,433 
|Origination fees                                                                                              |  |                                         | 3,922 
|Gain on sale of investment securities available for sale                                                      |  |                                         | 1,269 
|Gain on sale of loans and mortgage servicing rights                                                           |  |                                         | 2,958 
|Other income                                                                                                  |  |                                         | 825   
|                                                                                                              |  |                                         |       
|Total Noninterest Income                                                                                      |  |                                         | 10,407
|                                                                                                              |  |                                         |       
|Noninterest Expense:                                                                                          |  |                                         |       
|Salaries and benefits                                                                                         |  |                                         | 9,805 
|Net occupancy and equipment expense                                                                           |  |                                         | 1,081 
|Other expense                                                                                                 |  |                                         | 4,994 
|                                                                                                              |  |                                         |       
|Total Noninterest Expense                                                                                     |  |                                         | 15,880
|                                                                                                              |  |                                         |       
|                                                                                                              |  |                                         |       
|Income Before Income Taxes                                                                                    |  |                                         | 3,370 
|Provision for income taxes                                                                                    |  |                                         | 190   
|                                                                                                              |  |                                         |       
|                                                                                                              |  |                                         |       
|Net Income                                                                                                    |  | $                                       | 3,180 
|                                                                                                              |  |                                         |       
|                                                                                                              |  |                                         |       
|Weighted Average Shares Outstanding                                                                           |  |                                         | 1,256 
|Earnings Per Share                                                                                            |  | $                                       | 2.53  

See accompanying notes to consolidated financial statements



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NEW SOUTH BANCSHARES, INC. CONSOLIDATED INCOME
STATEMENTS(Unaudited)

|                                                                                                                             |  | For the nine months endedSeptember 30, |       
|---------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  | 2002                                   |       
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  | (In thousands)                         |       
|Interest Income:                                                                                                             |  |                                        |       
|Interest on securities available for sale                                                                                    |  | $                                      | 14,084
|Interest on loans                                                                                                            |  |                                        | 57,342
|Interest on other short-term investments                                                                                     |  |                                        | 130   
|                                                                                                                             |  |                                        |       
|Total Interest Income                                                                                                        |  |                                        | 71,556
|                                                                                                                             |  |                                        |       
|Interest Expense:                                                                                                            |  |                                        |       
|Interest on deposits                                                                                                         |  |                                        | 29,444
|Interest on federal funds purchased and securities sold under agreements to         repurchase                               |  |                                        | 6,180 
|Interest on Federal Home Loan Bank advances                                                                                  |  |                                        | 4,043 
|Interest on notes payable                                                                                                    |  |                                        | 442   
|Interest expense on guaranteed preferred beneficial interests in the Companys         subordinated debentures               |  |                                        | 2,662 
|                                                                                                                             |  |                                        |       
|Total Interest Expense                                                                                                       |  |                                        | 42,771
|                                                                                                                             |  |                                        |       
|Net Interest Income                                                                                                          |  |                                        | 28,785
|                                                                                                                             |  |                                        |       
|Provision for Loan Losses                                                                                                    |  |                                        | 4,885 
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Net Interest Income After Provision for Loan Losses                                                                          |  |                                        | 23,900
|                                                                                                                             |  |                                        |       
|Noninterest Income:                                                                                                          |  |                                        |       
|Loan administration income                                                                                                   |  |                                        | 5,922 
|Origination fees                                                                                                             |  |                                        | 9,431 
|Gain on sale of investment securities available for sale                                                                     |  |                                        | 2,053 
|Gain on sale of loans and mortgage servicing rights                                                                          |  |                                        | 10,453
|Other income                                                                                                                 |  |                                        | 3,063 
|                                                                                                                             |  |                                        |       
|Total Noninterest Income                                                                                                     |  |                                        | 30,922
|                                                                                                                             |  |                                        |       
|Noninterest Expense:                                                                                                         |  |                                        |       
|Salaries and benefits                                                                                                        |  |                                        | 28,384
|Net occupancy and equipment expense                                                                                          |  |                                        | 3,106 
|Other expense                                                                                                                |  |                                        | 13,803
|                                                                                                                             |  |                                        |       
|Total Noninterest Expense                                                                                                    |  |                                        | 45,293
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Income Before Provision for Income Taxes and Cumulative Effect of a Change in  Accounting Principle                          |  |                                        | 9,529 
|Provision for Income Taxes                                                                                                   |  |                                        | 503   
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Income Before Cumulative Effect of a Change in Accounting Principle                                                          |  |                                        | 9,026 
|                                                                                                                             |  |                                        |       
|Cumulative Effect of a Change in Accounting for Derivative Instruments and Hedging Activities, Net of Tax Benefit of $72,000 |  |                                        |      
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Net Income                                                                                                                   |  | $                                      | 9,026 
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Weighted Average Shares Outstanding                                                                                          |  |                                        | 1,256 
|                                                                                                                             |  |                                        |       
|Earnings Per Share:                                                                                                          |  |                                        |       
|                                                                                                                             |  |                                        |       
|Before Cumulative Effect of a Change in Accounting for Derivative Instruments and         Hedging Activities                 |  | $                                      | 7.19  
|                                                                                                                             |  |                                        |       
|Cumulative Effect of a Change in Accounting for Derivative Instruments and         Hedging Activities                        |  |                                        |      
|                                                                                                                             |  |                                        |       
|                                                                                                                             |  |                                        |       
|Earnings Per Share                                                                                                           |  | $                                      | 7.19  
|                                                                                                                             |  |                                        |       

See accompanying notes to consolidated financial statements





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NEW SOUTH BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                                                                                         |  | For the nine months EndedSeptember 30, |         
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | --------
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  | 2002                                   |         
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  | (In thousands)                         |         
|Operating Activities:                                                                                                    |  |                                        |         
|Net Income                                                                                                               |  | $                                      | 9,026   
|Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:                                            |  |                                        |         
|Accretion of discounts and fees                                                                                          |  |                                        | (446    
|Provision for loan losses                                                                                                |  |                                        | 4,885   
|Depreciation and amortization                                                                                            |  |                                        | 1,189   
|Amortization and impairment of mortgage servicing rights                                                                 |  |                                        | 5,103   
|Origination of loans available for sale                                                                                  |  |                                        | (663,070
|Proceeds from the sale of loans available for sale and servicing rights                                                  |  |                                        | 725,694 
|Gain on sale of investment securities available for sale                                                                 |  |                                        | (2,053  
|Gain on sale of loans available for sale and mortgage servicing rights                                                   |  |                                        | (10,453 
|(Increase) decrease in other assets                                                                                      |  |                                        | 4,103   
|Increase (decrease) in accrued expenses, deferred revenue, and other liabilities                                         |  |                                        | 49      
|Other, net                                                                                                               |  |                                        | 5       
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  |                                        |         
|Net Cash Provided by Operating Activities                                                                                |  |                                        | 74,032  
|                                                                                                                         |  |                                        |         
|Investing Activities:                                                                                                    |  |                                        |         
|Net decrease in interest-bearing deposits in other banks                                                                 |  |                                        | 6,113   
|Net increase in federal funds sold and securities purchased under agreements to         resell                           |  |                                        | (15,000 
|Proceeds from sales of investment securities available for sale                                                          |  |                                        | 104,064 
|Proceeds from maturities and calls of investment securities available for sale                                           |  |                                        | 51,085  
|Purchases of investment securities available for sale                                                                    |  |                                        | (123,985
|Net (increase) decrease in loan portfolio                                                                                |  |                                        | (192,242
|Purchases of premises and equipment                                                                                      |  |                                        | (944    
|Proceeds from sale of premises and equipment                                                                             |  |                                        | 40      
|Net (investment in) proceeds from sale of real estate owned                                                              |  |                                        | 213     
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  |                                        |         
|Net Cash Used in Investing Activities                                                                                    |  |                                        | (170,656
|                                                                                                                         |  |                                        |         
|Financing Activities:                                                                                                    |  |                                        |         
|Net increase in noninterest-bearing deposits                                                                             |  |                                        | 25,698  
|Net increase (decrease) in interest-bearing deposits                                                                     |  |                                        | 79,163  
|Net increase (decrease) in federal funds purchased and securities sold under         agreements to repurchase            |  |                                        | (31,148 
|Net decrease in notes payable                                                                                            |  |                                        | (4,956  
|Net increase (decrease) of Federal Home Loan Bank Advances                                                               |  |                                        | 44,999  
|Proceeds from the issuance of guaranteed preferred beneficial interests in the         Companys subordinated debentures |  |                                        | 16,000  
|Dividends paid                                                                                                           |  |                                        | (6,968  
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  |                                        |         
|Net Cash Provided by Financing Activities                                                                                |  |                                        | 122,788 
|                                                                                                                         |  |                                        |         
|                                                                                                                         |  |                                        |         
|Net Increase in Cash and Cash Equivalents                                                                                |  |                                        | 26,164  
|Cash and Cash Equivalents at Beginning of Period                                                                         |  |                                        | 9,499   
|                                                                                                                         |  |                                        |         
|Cash and Cash Equivalents at End of Period                                                                               |  | $                                      | 35,663  
|                                                                                                                         |  |                                        |         

See accompanying notes to consolidated financial statements.



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NEW SOUTH BANCSHARES, INC.Notes to Consolidated Financial Statements(Unaudited)

Nine Months Ended September 30,
2002

1. General

The consolidated financial statements have been prepared using 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, and
are of a normal recurring nature. Certain amounts in the prior year financial statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect on net income and were not material to the financial
statements. 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, 2001.

New South Bancshares, Inc. (Bancshares or the Company) is a unitary thrift holding company formed in 1994. The Company has three wholly owned
subsidiaries, New South Federal Savings Bank (New South or the Bank), Collateral Agency of Texas, Inc., and New South Management Services, LLC. New South has four subsidiaries, Avondale Funding.com, inc.
(Avondale), New South Agency, Inc., New South Real Estate, LLC, and New South DIL, LLC and significant interests in four joint ventures (the New South Joint Ventures). The consolidated financial statements presented primarily
represent the accounts of Bancshares and New South. Two of the New South Joint Ventures are consolidated with their minority interests included in other accrued expenses, deferred revenues, and other liabilities. Two New South Joint Ventures are
accounted for under the equity method. All significant intercompany accounts or transactions have been eliminated upon consolidation.

2. Derivative Instruments and Hedging
Activities

In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities(SFAS No. 133). In September 2000, the FASB issued SFAS No. 138,Accounting
for Certain Derivative Instruments and Hedging Activities  an Amendment of SFAS No. 133. SFAS No. 133, as amended, replaces existing pronouncements and practices with a single, integrated accounting framework for
derivatives and hedging activities requiring companies to formally record at fair value all derivatives and to document, designate, and assess the effectiveness of transactions that receive hedge accounting. See Interest Sensitivity and Market
Risk section for a more detailed discussion of the Companys utilization of derivative instruments and hedging activities.

The Company adopted
SFAS No. 133 effective January 1, 2001 and recognized a cumulative-effect transition adjustment of approximately $1.1 million to decrease net income for the effect of the change in the accounting principle relating to derivatives that did not
receive hedge accounting treatment. Additionally, the Company recognized a cumulative effect transition adjustment to reduce accumulated other comprehensive income (OCI) by $3.2 million on a pre-tax basis. The transition adjustment to
OCI represented net unrealized losses on derivative instruments that qualified as cash flow hedges.

The Company utilizes certain derivatives in its
operations that do not qualify as hedges for accounting purposes, as described above, under SFAS No. 133. The following summarizes the impact on earnings, in thousands, from valuation adjustments relating to these derivatives for the periods
indicated:





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##### Table of Contents

|                                                 |  | Three Months EndedSeptember 30, |      
|------------------------------------------------ |  | ------------------------------- | -----
|                                                 |  |                                 |      
|                                                 |  | 2002                            |      
|                                                 |  |                                 |      
|                                                 |  |                                 |      
|Losses from interest rate caps                   |  | $                               |     
|Gains (losses) from interest rate lock contracts |  |                                 | 1,021
|Losses from mandatory forward delivery contracts |  |                                 | (785 
|                                                 |  |                                 |      
|                                                 |  | $                               | 236  
|                                                 |  |                                 |      

|                                                 |  | Nine Months EndedSeptember 30, |       
|------------------------------------------------ |  | ------------------------------ | ------
|                                                 |  |                                |       
|                                                 |  | 2002                           |       
|                                                 |  |                                |       
|                                                 |  |                                |       
|Losses from interest rate caps                   |  | $                              | (200  
|Gains (losses) from interest rate lock contracts |  |                                | 1,125 
|Losses from mandatory forward delivery contracts |  |                                | (1,536
|                                                 |  |                                |       
|                                                 |  | $                              | (611  
|                                                 |  |                                |       

During 2001, certain forward contracts relating to loans available for sale initially designated as cash flow hedges were
redesignated as fair value hedges resulting in the reclassification of $.4 million into gain on the sale of loans and mortgage servicing rights. OCI was decreased by $.3 million and $.1 million during the nine months ended September 30, 2002 and
2001, respectively from reclassification into earnings resulting from hedge ineffectiveness. Hedge ineffectiveness decreased OCI by $.2 million during the quarter ended September 30, 2002 and increased OCI by $.1 million during the quarter ended
September 30, 2001. The extent of hedge ineffectiveness is influenced by a number of factors including future interest rate volatility, hedge performance and correlation.

3. S Corporation
Election

The Company is an S Corporation, and as such generally is not subject to Federal corporate taxation. Certain states, however, do not
recognize S Corporation status; therefore, the Company incurs state income taxes for those jurisdictions. Profits and losses flow through to the S Corporation shareholders directly in proportion to their per share ownership in the entity.
Accordingly, shareholders will be required to include profits and losses from the Company on their individual income tax returns for federal, and state and local, if applicable, income tax purposes.

Typically, S Corporations declare dividends to shareholders in an amount sufficient to enable shareholders to pay the tax on any S Corporation income included in the
shareholders individual income. The Company paid dividends totaling $7.0 million during the nine months ended September 30, 2002. Generally, such dividends are not subject to tax since they result from S Corporation income on which
shareholders have previously been taxed.



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##### Table of Contents

4. Comprehensive Income

Comprehensive income is the change in equity during a
period from transactions and other events and circumstances from nonowner sources. For New South and the Company, nonowner transactions consist of changes in unrealized gains and losses on securities available for sale and changes relating to cash
flow hedges under SFAS No. 133. The following table represents, in thousands, comprehensive income for the periods indicated.

|                                                                  |  | Three Months EndedSeptember 30, |       
|----------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                  |  |                                 |       
|                                                                  |  | 2002                            |       
|                                                                  |  |                                 |       
|                                                                  |  |                                 |       
|Net income                                                        |  | $                               | 3,180 
|                                                                  |  |                                 |       
|Other comprehensive loss, net of tax:                             |  |                                 |       
|Net losses on current period cash flow hedges                     |  |                                 | (7,498
|Reclassification adjustment for amount included in net income     |  |                                 | (227  
|Unrealized gain on investment securities available for sale       |  |                                 | 5,288 
|Reclassification adjustments for net gains included in net income |  |                                 | (1,269
|                                                                  |  |                                 |       
|Other comprehensive loss                                          |  |                                 | (3,706
|                                                                  |  |                                 |       
|                                                                  |  |                                 |       
|Comprehensive loss                                                |  | $                               | (526  
|                                                                  |  |                                 |       

|                                                                                                     |  | Nine Months EndedSeptember 30, |       
|---------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                                                     |  |                                |       
|                                                                                                     |  | 2002                           |       
|                                                                                                     |  |                                |       
|                                                                                                     |  |                                |       
|Net income                                                                                           |  | $                              | 9,026 
|                                                                                                     |  |                                |       
|Other comprehensive loss, net of tax:                                                                |  |                                |       
|Cumulative effect of a change in accounting for derivative instruments and hedging        activities |  |                                |      
|Net losses on current period cash flow hedges                                                        |  |                                | (9,297
|Reclassification adjustment for amount included in net income                                        |  |                                | (279  
|Unrealized gain on investment securities available for sale                                          |  |                                | 6,635 
|Reclassification adjustments for net gains included in net income                                    |  |                                | (2,053
|                                                                                                     |  |                                |       
|Other comprehensive loss                                                                             |  |                                | (4,994
|                                                                                                     |  |                                |       
|                                                                                                     |  |                                |       
|Comprehensive income (loss)                                                                          |  | $                              | 4,032 
|                                                                                                     |  |                                |       



---

##### Table of Contents

5. Segment Reporting

Reportable segments consist of Residential Mortgage
Banking, Commercial Real Estate Lending, 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. Commercial Real Estate Lending consists of loans secured primarily by multi-family housing.
Automobile Lending consists of the origination and servicing of loans secured by automobiles, light trucks, and vans. 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 New Souths funding needs. Other includes unallocated corporate overhead. Residential Mortgage Banking, Commercial Real Estate Lending, and Automobile Lending retain the assets
generated by each unit, and are credited with the interest income generated by those assets unless they are actually sold in the secondary market with the results of such sales being attributed to each unit. Each unit pays a market-based funds-use
charge to Portfolio Management. The segment results include certain other overhead allocations. The results for the reportable segments of the Company for the three and nine months ended September 30, 2002 and 2001, in thousands, are included in the
following tables.

|                                            |  | For the three months ended September 30, 2002 |        
|------------------------------------------- |  | --------------------------------------------- | -------
|                                            |  |                                               |        
|                                            |  | ResidentialMortgageBanking                    |        
|                                            |  |                                               |        
|                                            |  |                                               |        
|Interest income                             |  | $                                             | 12,019 
|Interest expense                            |  |                                               |       
|Intra-company funds (used) /     provided   |  |                                               | (6,428 
|Provision for loan losses                   |  |                                               | 674    
|Noninterest income                          |  |                                               | 9,637  
|Noninterest expense                         |  |                                               | 10,800 
|                                            |  |                                               |        
|Net income (loss) before income     taxes   |  |                                               | 3,754  
|Provision for (benefit of) income     taxes |  |                                               | 191    
|                                            |  |                                               |        
|Net income (loss)                           |  | $                                             | 3,563  
|                                            |  |                                               |        
|                                            |  |                                               |        
|Depreciation and amortization, net          |  | $                                             | 129    
|Total assets                                |  |                                               | 710,723
|Capital expenditures                        |  |                                               | 225    



---

##### Table of Contents

|                                            |  | For the three months ended September 30, 2001 |        
|------------------------------------------- |  | --------------------------------------------- | -------
|                                            |  |                                               |        
|                                            |  | ResidentialMortgageBanking                    |        
|                                            |  |                                               |        
|                                            |  |                                               |        
|Interest income                             |  | $                                             | 10,113 
|Interest expense                            |  |                                               |       
|Intra-company funds (used) /     provided   |  |                                               | (4,830 
|Provision for loan losses                   |  |                                               | 101    
|Noninterest income                          |  |                                               | 8,705  
|Noninterest expense                         |  |                                               | 9,359  
|                                            |  |                                               |        
|Net income (loss) before income     taxes   |  |                                               | 4,528  
|Provision for (benefit of) income     taxes |  |                                               | 230    
|                                            |  |                                               |        
|Net income (loss)                           |  | $                                             | 4,298  
|                                            |  |                                               |        
|                                            |  |                                               |        
|Depreciation and amortization, net          |  | $                                             | 232    
|Total assets                                |  |                                               | 590,886
|Capital expenditures                        |  |                                               | 119    

|                                            |  | For the nine months ended September 30, 2002 |        
|------------------------------------------- |  | -------------------------------------------- | -------
|                                            |  |                                              |        
|                                            |  | ResidentialMortgageBanking                   |        
|                                            |  |                                              |        
|                                            |  |                                              |        
|Interest income                             |  | $                                            | 34,310 
|Interest expense                            |  |                                              |       
|Intra-company funds (used) /     provided   |  |                                              | (19,778
|Provision for loan losses                   |  |                                              | 1,360  
|Noninterest income                          |  |                                              | 26,603 
|Noninterest expense                         |  |                                              | 30,270 
|                                            |  |                                              |        
|Net income (loss) before income     taxes   |  |                                              | 9,505  
|Provision for (benefit of) income     taxes |  |                                              | 485    
|                                            |  |                                              |        
|Net income (loss)                           |  | $                                            | 9,020  
|                                            |  |                                              |        
|                                            |  |                                              |        
|Depreciation and amortization, net          |  | $                                            | 366    
|Capital expenditures                        |  |                                              | 492    





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##### Table of Contents

|                                                                                                        |  | For the nine months ended September 30, 2001 |        
|------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                                                                        |  |                                              |        
|                                                                                                        |  | ResidentialMortgageBanking                   |        
|                                                                                                        |  |                                              |        
|                                                                                                        |  |                                              |        
|Interest income                                                                                         |  | $                                            | 32,990 
|Interest expense                                                                                        |  |                                              | 2      
|Intra-company funds (used) /     provided                                                               |  |                                              | (17,408
|Provision for loan losses                                                                               |  |                                              | 244    
|Noninterest income                                                                                      |  |                                              | 30,330 
|Noninterest expense                                                                                     |  |                                              | 26,513 
|                                                                                                        |  |                                              |        
|Net income (loss) before income     taxes and cumulative effect of a     change in accounting principle |  |                                              | 19,153 
|Provision for (benefit of) income     taxes                                                             |  |                                              | 971    
|                                                                                                        |  |                                              |        
|Net income before cumulative         effect of a change in        accounting principle                  |  |                                              | 18,182 
|Cumulative effect of change in     accounting principle                                                 |  |                                              |       
|                                                                                                        |  |                                              |        
|Net income (loss)                                                                                       |  | $                                            | 18,182 
|                                                                                                        |  |                                              |        
|Depreciation and amortization, net                                                                      |  | $                                            | 654    
|Capital expenditures                                                                                    |  |                                              | 416    

6. Recent Accounting Pronouncements

In June 2001, the FASB issued
SFAS No. 141,Business Combinations(SFAS No. 141) and SFAS No. 142,Goodwill and Other Intangible Assets(SFAS No. 142). These
statements revise the standards of accounting for business combinations and related goodwill and other intangible assets. SFAS No. 141 was generally effective for business combinations after July 1, 2001 and SFAS No. 142 was effective for fiscal
years beginning after December 15, 2001 with certain provisions effective earlier. The adoption of SFAS No. 142 on January 1, 2002 did not have a significant impact on the financial statements.

In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No.
144). This statement revises the standards of accounting for the accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 was effective for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 on January 1, 2002 did not have a significant impact on the financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections(SFAS No. 145). This statement rescinded SFAS No. 4, 44, and 64, the provisions of which are either addressed in other
pronouncements or no longer applicable. SFAS No. 13 was amended to address the accounting for certain lease modifications. Adoption of SFAS No. 145 on January 1, 2002 did not have a significant impact on the financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities(SFAS No.
146). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when
the liability is incurred. The provisions of this statement are effective for exit or disposal activities



---

##### Table of Contents

that are initiated after December 31, 2002, with early application encouraged. The impact of the statement on the Companys consolidated financial position and results of operations is
not expected to be material.

In October 2002, the FASB issued SFAS No. 147,Acquisitions of Certain Financial
Institutions(SFAS No. 147). This statement amends SFAS No. 72,Accounting for Certain Acquisitions of Banking or Thrift Institutions(SFAS No. 72) and
SFAS No. 144 and FASB Interpretation No. 9,Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase
Method(Interpretation No. 9). Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation No.
9 and requires that those transactions be accounted for in accordance with SFAS No. 141 and 142. In addition, this statement amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such
as depositor and borrower relationship intangible assets and credit cardholder intangible assets. SFAS No. 147 is effective after September 30, 2002 and will not have a material impact on the Companys consolidated financial position or results
of operations.



---

##### Table of Contents

|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 Companys accounting policies are integral to the financial results discussed herein. The significant accounting policies of the Company are contained in Footnote 1 to the Consolidated Financial Statements filed
in the Companys Form 10K for the year ended December 31, 2001. 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 and financial statements included in this report should be considered
an integral part of this analysis.

The purpose of this Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is to provide an analysis of significant changes in the Companys assets, liabilities, and capital at September 30, 2002 as compared to December 31, 2001, in addition to including an analysis of income for the quarter
ended September 30, 2002 (Third Quarter 2002) and nine months ended September 30, 2002 (YTD 2002) as compared to the quarter ended September 30, 2001 (Third Quarter 2001) and nine months ended September 30, 2001
(YTD 2001).

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 this discussion 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.

Net Income and Key Performance Ratios

The Company
reported net income of $3.2 million for both Third Quarter 2002 and Third Quarter 2001. On a per share basis, net earnings were $2.53 and $2.57, respectively, for each period. During Third Quarter 2002 the annualized return on average assets was
0.88% and the annualized return on average equity was 19.97% compared to 1.08% and 23.03%, respectively, for Third Quarter 2001.

Net income totaled $9.0
million for YTD 2002, a 2.7% increase from net income of $8.8 million for same period in 2001. On a per share basis, net earnings were $7.19 and $7.00, respectively, for the same periods. YTD 2001 results of operations included a transition
adjustment relating to the cumulative effect of a change in accounting principle for derivative instruments and hedging activities of $1.1 million, or $.89 per share and the securitization gain discussed in the following paragraph. During YTD 2002
the annualized return on average assets was 0.88% and the annualized return on average equity was 19.23% compared to 0.99% and 20.57%, respectively, for YTD 2001.



---

##### Table of Contents

During 2001, the Company completed the securitization of approximately $254 million of primarily residential nonconforming mortgage
loans, $229 million in the first quarter and $25 million in the second quarter 2001 (the Securitization), recording a gain of $3.7 million. The nature and timing of the Securitization had a significant impact on the Third Quarter 2001
and YTD 2001 results of operations as well as Third Quarter 2001 and YTD 2001 averages. The residual interest in the amount of $7.9 million associated with the Securitization was sold to an affiliated company at fair market value.

Net Interest Income, Earning Assets and Interest-bearing Liabilities

Net interest income for Third Quarter 2002 was $10.6
million, a $3.4 million, or 47.2%, increase from $7.2 million for Third Quarter 2001. This increase was primarily attributable to an increase in average earning assets of $214.1 million, to $1,290.3 million during Third Quarter 2002, compared with
$1,076.2 million during Third Quarter 2001, reflecting the Securitization. Net interest income was also affected by a decline in the cost of interest-bearing liabilities of 138 basis points compared with a smaller decrease in the yield on interest
earning assets of 69 basis points. The larger decline in the cost of interest-bearing liabilities compared with yield on earning assets reflects the repricing characteristics of certain time deposits and the impact of short-term interest rates as
more fully discussed below. The impact of the increase in average earning assets was offset with comparable increases in the level of average interest-bearing liabilities of $222.9 million to $1,268.2 million during Third Quarter 2002, compared with
$1,045.3 million during Third Quarter 2001. Overall, this movement in volumes and rates resulted in an increase in the net interest rate margin of 60 basis points during the Third Quarter 2002 compared with the same period in 2001. Net interest
income increased despite the impact of the Companys interest rate swap contracts (Swaps), which decreased net interest income by $3.1 million during Third Quarter 2002, compared with a decrease of $1.4 million during Third Quarter
2001. See Interest Sensitivity and Market Risk section for a more detailed discussion of Swaps.

As discussed further herein, a significant
portion of the Companys securities sold under agreements to repurchase (Security Repo Agreements) have been converted from short term to longer term liabilities through the use of Swaps. The impact of the Swaps on Security Repo
Agreements increased their cost for Third Quarter 2002 by 212 basis points verses 64 basis points for Third Quarter 2001. Swaps increased Security Repo Agreements cost for YTD 2002 by 220 basis points compared with 50 basis points for YTD
2001.

Net interest income for YTD 2002 was $28.8 million, a $7.8 million or 37.2% increase from $21.0 million for YTD 2001. This increase was attributable to
an increase in average earning assets of $181.1 million, to $1,256.0 million during YTD 2002, compared with $1,074.9 million during YTD 2001. The impact of the increase in average earning assets was offset with comparable increases in the level of
average interest-bearing liabilities of $176.8 million to $1,228.0 million during YTD 2002, compared with $1,051.2 million during YTD 2001. The timing of the Securitization had less impact on the year to date periods than on the quarterly periods
discussed above. During YTD 2002, the cost of interest-bearing liabilities declined by 141 basis points compared with a 93 basis point decrease in the yield on interest earning assets. The combined movement in volumes and rates resulted in an
increase in the net interest rate margin of 45 basis points during YTD 2002 compared with YTD 2001. The Companys Swaps decreased net interest income by $9.2 million during YTD 2002, compared with a decrease of $2.5 million during YTD 2001. See
Interest Sensitivity and Market Risk section for a more detailed discussion of Swaps.

The significant change in the impact of the Swaps on the
net interest rate margin is due to the significant decline in short-term interest rates over the last 24 months. The Federal Reserve Bank has lowered short-term interest rates 11 times since January 1, 2001, resulting in a 475 basis point decrease
in the federal funds rate. These decreases have resulted in declining yields or costs on all classes of interest-bearing assets and liabilities. Due to a steepening of the yield curve, the short-term interest-bearing assets and liabilities were
significantly impacted as can be seen in the yield on federal funds sold and the cost of other interest-bearing deposits.



---

##### Table of Contents

The following tables set forth, for the periods indicated, certain information related to the Companys average balance sheet and
its average yields on assets and average costs of liabilities. Such yields or costs are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily
balances throughout the periods indicated.



---

##### Table of Contents

Average Balances, Income, Expense, and Rates

|                                                                                    |  | For the three months ended September 30, |          
|----------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------
|                                                                                    |  |                                          |          
|                                                                                    |  | 2002                                     |          
|                                                                                    |  |                                          |          
|                                                                                    |  | AverageBalance                           |          
|                                                                                    |  |                                          |          
|                                                                                    |  | (In thousands, except percentages)       |          
|                                                                                    |  |                                          |          
|Assets                                                                              |  |                                          |          
|Loans, net of unearned income(1)                                                    |  | $                                        | 986,282  
|Federal funds sold                                                                  |  |                                          | 9,970    
|Investment securities available for sale                                            |  |                                          | 239,610  
|Other investments                                                                   |  |                                          | 54,472   
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Total earning assets                                                                |  |                                          | 1,290,33 
|Allowance for loan losses                                                           |  |                                          | (12,714  
|Other assets                                                                        |  |                                          | 149,129  
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Total Assets                                                                        |  | $                                        | 1,426,749
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Liabilities and Shareholders Equity                                                |  |                                          |          
|Other interest bearing deposits                                                     |  | $                                        | 9,585    
|Savings deposits                                                                    |  |                                          | 110,524  
|Time deposits                                                                       |  |                                          | 771,132  
|Federal funds purchased and securities        sold under agreements to repurchase   |  |                                          | 177,202  
|Other borrowings                                                                    |  |                                          | 7,110    
|Federal Home Loan Bank advances                                                     |  |                                          | 142,211  
|Guaranteed preferred beneficial interests        in the Companys subordinated debt |  |                                          | 50,500   
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Total interest bearing liabilities                                                  |  |                                          | 1,268,264
|                                                                                    |  |                                          |          
|Noninterest bearing deposits                                                        |  |                                          | 87,888   
|Accrued expenses and other liabilities                                              |  |                                          | 16,025   
|Shareholders equity                                                                |  |                                          | 54,572   
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Total Liabilities and Shareholders Equity                                          |  | $                                        | 1,426,749
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Net interest rate spread                                                            |  |                                          |          
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Net interest income                                                                 |  |                                          |          
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|                                                                                    |  |                                          |          
|Net interest rate margin                                                            |  |                                          |          
|                                                                                    |  |                                          |          

| |  |  | (1) |  | Loans classified as nonaccrual are included in the average volume classification. Loan fees for all periods presented are included in the interest amounts for loans.
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

Average Balances, Income, Expense, and Rates

|                                                                                    |  | For the nine months ended September 30, |          
|----------------------------------------------------------------------------------- |  | --------------------------------------- | ---------
|                                                                                    |  |                                         |          
|                                                                                    |  | 2002                                    |          
|                                                                                    |  |                                         |          
|                                                                                    |  | AverageBalance                          |          
|                                                                                    |  |                                         |          
|                                                                                    |  | (In thousands, except percentages)      |          
|                                                                                    |  |                                         |          
|Assets                                                                              |  |                                         |          
|Loans, net of unearned income(1)                                                    |  | $                                       | 935,807  
|Federal funds sold                                                                  |  |                                         | 10,818   
|Investment securities available for sale                                            |  |                                         | 245,563  
|Other investments                                                                   |  |                                         | 63,766   
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Total earning assets                                                                |  |                                         | 1,255,954
|Allowance for loan losses                                                           |  |                                         | (12,521  
|Other assets                                                                        |  |                                         | 131,576  
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Total Assets                                                                        |  | $                                       | 1,375,009
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Liabilities and Shareholders Equity                                                |  |                                         |          
|Other interest bearing deposits                                                     |  | $                                       | 8,351    
|Savings deposits                                                                    |  |                                         | 104,106  
|Time deposits                                                                       |  |                                         | 758,677  
|Federal funds purchased and securities        sold under agreements to repurchase   |  |                                         | 177,112  
|Other borrowings                                                                    |  |                                         | 9,105    
|Federal Home Loan Bank advances                                                     |  |                                         | 124,937  
|Guaranteed preferred beneficial interests        in the Companys subordinated debt |  |                                         | 45,662   
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Total interest bearing liabilities                                                  |  |                                         | 1,227,950
|                                                                                    |  |                                         |          
|Noninterest bearing deposits                                                        |  |                                         | 74,671   
|Accrued expenses and other liabilities                                              |  |                                         | 16,442   
|Shareholders equity                                                                |  |                                         | 55,946   
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Total Liabilities and Shareholders Equity                                          |  | $                                       | 1,375,009
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Net interest rate spread                                                            |  |                                         |          
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Net interest income                                                                 |  |                                         |          
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|                                                                                    |  |                                         |          
|Net interest rate margin                                                            |  |                                         |          
|                                                                                    |  |                                         |          

| |  |  | (1) |  | Loans classified as nonaccrual are included in the average volume classification. Loan fees for all periods presented are included in the interest amounts for loans.
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

The Securitization had a significant impact on loan levels during 2001. Loans averaged $986.3 million during Third Quarter 2002,
compared with $765.4 million during Third Quarter 2001, an increase of 28.9% and $935.8 million during YTD 2002, compared with $800.2 million during YTD 2001, an increase of 17.0%.

Investment securities available for sale (Investments AFS) increased 5.3% when comparing the Third Quarter 2002 average of $239.6 million to the Third Quarter
2001 average of $227.6 million. Investments AFS averaged $245.6 million during YTD 2002 compared with $185.0 million during YTD 2001, an increase of 32.7%. The increase in Investments AFS reflects the Companys strategy to more fully leverage
its core capital. The Company purchased a portfolio of Ginnie Mae (GNMA) securities beginning in the second quarter of 2001 and has increased this portfolio from inception of the strategy. The GNMA securities averaged $194.5 million
during Third Quarter 2002 and $121.1 million during Third Quarter 2001. The GNMA securities averaged $195.1 million during YTD 2002 and $91.3 million during YTD 2001. The GNMA securities were primarily funded with certain Security Repo Agreements,
which averaged $172.5 million during Third Quarter 2002 compared with $118.3 million during Third Quarter 2001. The Security Repo Agreements averaged $166.4 million during YTD 2002 and $89.2 million during YTD 2001.

Excluding the average balance change in Investments AFS and related funding, interest-bearing liabilities increased $168.8 million, or 18.2%, to $1,095.8 million in Third
Quarter 2002 from $927.0 million during Third Quarter 2001. Federal Home Loan Bank (FHLB) advances averaged $142.2 million and $106.9 million during Third Quarter 2002 and Third Quarter 2001, respectively, an increase of $35.3 million or
33.1%. FHLB advances averaged $124.9 million during YTD 2002 and $133.7 million during YTD 2001, a decrease of $8.8 million, or 6.5%. Interest-bearing deposits averaged $891.2 million during Third Quarter 2002 and $757.6 million during Third Quarter
2001, an increase of $133.6 million, or 17.6%. Interest-bearing deposits averaged $871.1 million during YTD 2002 and $802.2 million during YTD 2001, an increase of $68.9 million, or 8.6%. During both Third Quarter 2002 and YTD 2002, there has been a
shift to more liquid savings deposits from typically longer maturity time deposits from the same periods in 2001.

Noninterest Income and Noninterest Expenses

Noninterest income totaled $10.4 million during Third Quarter 2002 compared to $11.7 million for the same period in the prior year, a decrease of $1.3 million, or 11.2%.
Loan administration income totaled $1.4 million during Third Quarter 2002, compared with $2.7 million during Third Quarter 2001, a decrease of $1.3 million, or 46.3%, reflecting lower levels of loans serviced for others and a change in the delivery
method for sales of originated conforming mortgage loan servicing rights from mini-bulk to servicing-released on a flow basis. Origination fees totaled $3.9 million during Third Quarter 2002 and $3.1 million during Third Quarter 2001, reflecting an
11.3% increase in the origination of residential mortgage loans, and emphasis on charging application fees in certain residential mortgage lending markets. Gain on sale of Investments AFS, $1.3 million during Third Quarter 2002 and $.6 million
during Third Quarter 2001, represents sales of specific securities. The Company sold higher coupon GNMA securities and bought lower coupon GNMA securities to reduce the Companys prepayment risk on the GNMA securities with market values above
par value. Gain on the sales of loans and mortgage servicing rights during Third Quarter 2002 totaled $3.0 million, as reduced by a $.7 million impairment provision for the writedown of various servicing related assets, compared with $4.3 million
during Third Quarter 2001, a decrease of $1.3 million. Other income was $.8 million during Third Quarter 2002 and $1.1 million during Third Quarter 2001, a decline of $.3 million attributable to charging application fees, as discussed above, instead
of a series of miscellaneous fees.

Noninterest income totaled $30.9 million during YTD 2002 compared to $35.8 million for the same period in the prior year,
a decrease of $4.9 million, or 13.6%. Loan administration income was $5.9 million during YTD 2002, compared with $8.6 million during YTD 2001, a decrease of $2.7 million, or 30.9%, again reflecting lower levels of serviced loans and a different loan
servicing sales delivery method as discussed above. Origination fees were $9.4 million and $8.6 million for YTD 2002 and YTD 2001, respectively, an increase of $.8 million, despite a 9.1% decline in the origination of residential mortgage loans, due
to increases in origination fees relating to construction lending, automobile



---

##### Table of Contents

floorplan lending, and application fees charged in certain residential mortgage lending markets. As noted above, gain on sale of Investments AFS represents the sale of specific securities
and totaled $2.1 million during YTD 2002 and $.6 million during YTD 2001. Gain on the sales of loans and mortgage servicing rights during YTD 2002 totaled $10.5 million, reduced by a $1.2 million impairment provision for the writedown of servicing
related assets, compared with $14.2 million during YTD 2001, which included $3.4 million related to the Securitization credited to the residential mortgage banking segment, a decrease of $3.7 million, or 26.6%. Other income, reflecting the lower
residential mortgage origination volume noted above, declined by $.8 million to $3.1 million during YTD 2002 from $3.9 during YTD 2001, again attributable to a shift to an application fee instead of miscellaneous fees.

Noninterest expenses were $15.9 million during Third Quarter 2002 and $14.6 million during Third Quarter 2001, an increase of $1.3 million, or 9.13%. Noninterest expenses
were $45.3 million during YTD 2002 and $42.5 million during YTD 2001, an increase of $2.8 million, or 6.6%. Salaries and benefits were $9.8 million for Third Quarter 2002, a $1.4 million, or 16.3%, increase compared to $8.4 million for Third Quarter
2001. Salaries and benefits were $28.4 million for YTD 2002, a $3.0 million or 11.6%, increase compared to $25.4 million for YTD 2001. The changes in salaries and benefits were attributable to increased staffing, bonus accruals, increased 401K
Company matching contributions resulting from plan modifications, and increased health care costs.

Interest Sensitivity and Market Risk

Interest
Sensitivity

Through policies established by the Asset/Liability Management Committee (ALCO) 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. ALCO uses a combination of traditional
gap analysis, which compares the repricings, maturities, and prepayments, as applicable, of New Souths interest-earning assets, interest-bearing liabilities and derivative instruments, and interest rate sensitivity analysis to manage interest
rate risk.

The Companys interest rate sensitivity analysis evaluates interest rate risk based on the impact on the net interest income and market value
of portfolio equity (MVPE) of various interest rate scenarios. The MVPE analysis is required quarterly by the 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. ALCO 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 net 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 ALCO. Additionally, both ALCO and New Souths Board of Directors are apprised of the level of brokered deposits on an ongoing basis.

The Company uses interest rate contracts, primarily Swaps and interest rate caps (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 Swaps, Caps, and forward contracts through a review of creditworthiness of the counterparties to such contracts, Board established
credit limits for each counterparty, and monitoring by ALCO.

At September 30, 2002, New South had Swaps with notional amounts totaling $405 million. $380
million of the Swaps were receive variable/pay fixed swap contracts designed to convert variable rate funding to a fixed rate, thus reducing the impact of an upward movement in interest rates on the net interest rate margin. At September 30, 2002,
$140 million and $240 million of these Swaps were designated as cash flow hedges under SFAS No. 133 of Security Repo Agreements and certain time deposits, respectively. Additionally, the Company has entered into $25 million of receive fixed/pay
variable Swaps utilized as cash flow hedges under SFAS No. 133 for certain brokered certificates of deposit included in the Companys overall funding. These Swaps have decreased $20 million, net, from December 31, 2001 resulting from
termination of three Swaps totaling $30 million by the



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##### Table of Contents

counterparties and the execution of one new Swap of $10 million. 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, and if called, the Company has the right to call the certificates of deposit.

New South also had $245 million in Caps
outstanding at September 30, 2002. The Company is exposed to rising liability costs due to the short-term nature of its liability portfolio. The Caps generally serve to mitigate the Companys risk against increases in the costs of liabilities.
The weighted average LIBOR based strike rate for the Caps is 7.56%, therefore short-term interest rates levels would have to increase significantly before the Caps would provide the Company with a material benefit. At September 30, 2002, 90 day
LIBOR was 1.79%. Under SFAS No. 133, the Caps do not qualify for hedge accounting. Accordingly, changes in the market value of the Caps are recorded through the income statement versus OCI. During Third Quarter 2002 there was no change in the market
value of the Caps. During Third Quarter 2001, the Companys other income was reduced by $.3 million for changes in the market value of the Caps. During YTD 2002 and YTD 2001, other income was reduced by $.2 million and $.4 million,
respectively. During YTD 2002, the Company did not purchase any additional Caps.



---

##### Table of Contents

Asset Quality

The following table summarizes nonperforming assets as of the dates
indicated.

Nonperforming Assets

|                                                                                              |  | September 30,2002                  |        | December 31,2001 |  
|--------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | ---------------- | -
|                                                                                              |  |                                    |        |                  |  
|                                                                                              |  | (In thousands, except percentages) |       
|                                                                                              |  |                                    |        |                  |  
|Nonaccrual loans                                                                              |  | $                                  | 24,147 |                  | $
|Restructured loans                                                                            |  |                                    | 1,440  |                  |  
|                                                                                              |  |                                    |        |                  |  
|                                                                                              |  |                                    |        |                  |  
|Total nonperforming loans                                                                     |  |                                    | 25,587 |                  |  
|Foreclosed properties and repossessed assets                                                  |  |                                    | 5,535  |                  |  
|                                                                                              |  |                                    |        |                  |  
|Total nonperforming assets                                                                    |  | $                                  | 31,122 |                  | $
|                                                                                              |  |                                    |        |                  |  
|                                                                                              |  |                                    |        |                  |  
|Allowance for loan losses to period-end nonperforming loans                                   |  |                                    | 51.91  | %                |  
|Allowance for loan losses to period-end nonperforming assets                                  |  |                                    | 42.67  | %                |  
|Nonperforming assets to period-end loans and foreclosed properties and     repossessed assets |  |                                    | 3.28   | %                |  
|Nonperforming loans to period-end loans                                                       |  |                                    | 2.72   | %                |  

Nonperforming assets totaled $31.1 million at September 30, 2002, an increase of $4.3 million,
or 16.0%, from $26.8 million at December 31, 2001. Nonaccrual loans increased $8.8 million, or 57.9%, to $24.1 million at September 30, 2002 from $15.3 million at December 31, 2001, attributable primarily to the concentration of individual mortgage
loans in one development totaling $7.1 million. Restructured loans were $1.4 million at September 30, 2002, down $4.4 million, or 75.1%, from $5.8 million at December 31, 2001 as a result of a decrease in the number and volume of restructured loans.
These previously classified restructured loans were removed from the nonperforming assets due to the financial performance of the borrower and improvements in the collateral value of the assets securing the loans.

As of September 30, 2002, a servicing termination trigger was exceeded in one of the securitizations for which the Company has retained the servicing. At September 30,
2002, the Companys servicing asset was $.8 million for this securitization. The Company has advised the bond insurance company of the matter and the bond insurance company has not expressed any intent to exercise their contractual right to
replace New South as their servicer. There can be no assurances that the bond insurance company will not exercise their contractual right in the future, which would require New South to write-off any remaining servicing asset for which it no longer
performed the servicing function.

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.



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##### Table of Contents

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 servicing area with residential mortgage and automobile installment loan portfolios each being evaluated
collectively for impairment. The adequacy of the allowance for loan losses and the effectiveness of the Companys monitoring and analysis system are also reviewed periodically by the OTS.

At September 30, 2002, as previously discussed, nonaccrual loans includes $7.1 million of individual mortgage loans in one development. This amount is expected to increase
to $9.4 million based on repurchase obligations for certain of these loans which have been previously sold. Several factors, including the number of parties involved, the early stage of evaluation, anticipated litigation, and the time expected to
reach resolution of each loan, make the estimation of losses, if any, uncertain. During Third Quarter 2002, an additional loan loss provision of $.8 million was made due to the uncertainty associated with these loans. Based upon current information,
management believes that sufficient provision has been made for any loss, but as more information becomes available additional provisions could be required.

Based on present information and its ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio. Managements judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it believes to be reasonable but which may or may not be valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan
losses or that additional increases in the allowance for loan losses will not be required.

The following table analyzes activity in the allowance for loan
losses for the periods indicated.



---

##### Table of Contents

Analysis of the Allowance for Loan LossesFor the nine months ended September 30,(In thousands, except
percentages)

|                                                                     |  | 2002 |         | 2001 |  
|-------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Average loans, net of unearned income                                |  | $    | 935,807 |      | $
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Balance of allowance for loan losses at beginning of period          |  | $    | 12,613  |      | $
|                                                                     |  |      |         |      |  
|Loans charged off:                                                   |  |      |         |      |  
|Residential mortgage                                                 |  |      | 1,628   |      |  
|Installment                                                          |  |      | 4,558   |      |  
|Commercial real estate                                               |  |      | 6       |      |  
|                                                                     |  |      |         |      |  
|Total charge-offs                                                    |  |      | 6,192   |      |  
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Recoveries of loans previously charged off:                          |  |      |         |      |  
|Residential mortgage                                                 |  |      | 724     |      |  
|Installment                                                          |  |      | 1,251   |      |  
|Commercial real estate                                               |  |      |        |      |  
|                                                                     |  |      |         |      |  
|Total recoveries                                                     |  |      | 1,975   |      |  
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Net charge-offs                                                      |  |      | 4,217   |      |  
|Provision for loan losses                                            |  |      | 4,885   |      |  
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Balance of allowance for loan losses at end of period                |  | $    | 13,281  |      | $
|                                                                     |  |      |         |      |  
|                                                                     |  |      |         |      |  
|Net charge-offs to average loans, net of unearned income, annualized |  |      | 0.60    | %    |  

The provision for loan losses was $4.9 million for YTD 2002 compared with $3.8 million for YTD
2001, an increase of $1.1 million. The increase in the provision for loan losses reflects the $.8 million provision previously discussed and higher average loans during YTD 2002, compared with YTD 2001, which included the impact of the
Securitization. At September 30, 2002 and December 31, 2001, the allowance for loan losses was $13.3 million and $12.6 million, respectively. As a percentage of loans, net of unearned income, the allowance for loan losses decreased to 1.41% at
September 30, 2002 from 1.60% at December 31, 2001. The decrease resulted from increases in the balances of the Companys loans.

Net charge-offs of
residential mortgage loans were $.9 million during YTD 2002 and $2.3 million during YTD 2001, with the YTD 2001 figure being impacted by higher losses in the Avondale portfolio. Net charge-offs of installment loans were $3.3 million during YTD 2002
and $3.0 million during YTD 2001 resulting from sensitivity of these assets and borrowers to depressed economic conditions beginning during the second half of 2001.



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##### Table of Contents

Capital

At September 30, 2002 shareholders equity of the Company totaled $47.7
million, or 3.3% of total assets, compared to $50.6 million, or 3.9% of total assets at December 31, 2001. The decrease is attributable to net income of $9.0 million earned during YTD 2002 offset by a $4.9 million decrease in accumulated other
comprehensive loss, and by dividends paid of $7.0 million.

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 zero to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital of the Bank consists of common shareholders equity,
excluding accumulated other comprehensive loss, plus minority interest in consolidated subsidiaries, and 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 of New South for the indicated periods.

Analysis
of Capital

|                                                            |  | As ofSeptember 30,2002                |         | As ofDecember 31,2001 |  
|----------------------------------------------------------- |  | ------------------------------------- | ------- | --------------------- | -
|                                                            |  |                                       |         |                       |  
|                                                            |  | (In thousands,except for percentages) |        
|                                                            |  |                                       |         |                       |  
|Shareholders equity                                        |  | $                                     | 88,607  |                       | $
|Minority interest in consolidated subsidiaries              |  |                                       | 197     |                       |  
|Accumulated other comprehensive loss                        |  |                                       | 16,087  |                       |  
|Servicing rights capital haircut                            |  |                                       | (1,335  | )                     |  
|                                                            |  |                                       |         |                       |  
|Tier 1 capital                                              |  |                                       | 103,556 |                       |  
|                                                            |  |                                       |         |                       |  
|Qualifing portion of allowance for loan losses              |  |                                       | 11,533  |                       |  
|                                                            |  |                                       |         |                       |  
|Tier 2 capital                                              |  |                                       | 11,533  |                       |  
|                                                            |  |                                       |         |                       |  
|Low level recourse deduction                                |  |                                       |        |                       |  
|Other                                                       |  |                                       |        |                       |  
|                                                            |  |                                       |         |                       |  
|Total deductions                                            |  |                                       |        |                       |  
|                                                            |  |                                       |         |                       |  
|                                                            |  |                                       |         |                       |  
|Total risk-based capital                                    |  | $                                     | 115,089 |                       | $
|                                                            |  |                                       |         |                       |  
|                                                            |  |                                       |         |                       |  
|Risk-weighted assets (including off-balance sheet exposure) |  | $                                     | 970,899 |                       | $
|Tier 1 leverage ratio                                       |  |                                       | 7.27%   |                       |  
|Total risk-based capital ratio                              |  |                                       | 11.85   |                       |  
|Tier 1 risk-based capital ratio (1)                         |  |                                       | 10.67   |                       |  

| |  |  | (1) |  | Tier 1 capital utilized in the Tier 1 capital ratio is reduced by the low level recourse deduction.
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------

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 the Bank in the well capitalized regulatory category.

24



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##### Table of Contents

The Company completed the issuance of $16 million of Trust Preferred Securities (TPS) through a private placement with an
investment bank which closed on March 26, 2002. Part of the proceeds from the sale of TPS were used to repay the Companys working capital loans and purchase a residual interest in a loan securitization owned by the Bank in the amount of $5.7
million, its fair market value and other corporate purposes, including partial use of the proceeds to make an additional $5.0 million capital investment in the Bank. The TPS bear an interest rate of 90-day LIBOR plus 360 basis points and will not
exceed 11% for the first five years they are outstanding. The effective interest rate at September 30, 2002 was 5.39%. The TPS are callable at the Companys option, at par, beginning March 26, 2007 and mature March 26, 2032.

Liquidity

The Company operated with sufficient liquidity during Third Quarter 2002 and expects liquidity levels to remain
sufficient throughout 2002. In particular, at September 30, 2002, the Company had $65.0 million in unused FHLB borrowing capacity. In addition, the Company has available other sources of funding such as federal funds lines and securities which could
be pledged as collateral for Security Repo Agreements.

In November 2002, the Bank anticipates closing a securitization of approximately $126 million, which
represents substantially all of its automobile installment loan portfolio. A gain is anticipated, the ultimate amount of which is uncertain and dependent upon several factors, including but not limited to, prevailing interest rates at the time of
pricing, assumptions relating to expected loss experience, and the rate used to discount expected cash flows. Proceeds associated with this securitization are expected to be used to reduce short-term funding including FHLB advances and securities
sold under agreements to repurchase. Prefunding provisions of this securitization relate to $10 million of additional automobile installment loans, which are expected from new loan originations during the fourth quarter of 2002. Because the yield on
these loans are among the highest of the Bank, the decreased loan balances going forward will decrease net interest income and the net interest rate margin into 2003.

Item 4.    
Controls and Procedures

The Chief Executive Officer and Chief Financial Officer of the Company have concluded, based on their
evaluation as of a date within ninety (90) days prior to the date of the filing of this quarterly report on Form 10-Q, that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding required disclosure.

There were no significant changes in
the Companys internal controls or in other factors that significantly affect these controls subsequent to the date of such evaluation.



---

##### Table of Contents

Part II

Other Information

|Item 1. | Legal Proceedings
|------- | -----------------

The Company, from time to time, has been named in ordinary, routine litigation. Certain of
these lawsuits are class actions requesting 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. The Company believes that it has meritorious defenses to these lawsuits. Management is of the opinion that the ultimate resolution of these lawsuits will not have a material adverse effect on the Companys financial condition or
results of operations.

|Item 5. | Other Information
|------- | -----------------

None.

|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------

ITEM 6(A)EXHIBITS

The exhibits listed in the Exhibit Index at page 30 of this Form 10-Q are filed herewith or are incorporated by reference herein.

ITEM 6(B) REPORTS on Form 8-K

A report on Form 8-K was filed by the
Company during the period July 1, 2002 to September 30, 2002. The report was filed on August 14, 2002 containing Chief Executive Officer and Chief Financial Officer certifications required by section 906 of Sarbanes-Oxley Act of 2002 in connection
with filing of the Companys Quarterly Report on Form 10-Q for the period ending June 30, 2002. No financial statements were filed with this report.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, New South Bancshares, Inc. has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  |  | 
|----------------- |  | 
|November 14, 2002 |  | 
|                  |  | 
|                  |  | 

|                  |  | 
|----------------- |  | 
|November 14, 2002 |  | 
|                  |  | 
|                  |  | 



---

##### Table of Contents

NEW SOUTH BANCSHARES, INC.

Chief Financial Officer Certification

I, Roger D.
Murphree, certify that:

|1. |  | I have reviewed this quarterly report on Form 10-Q of New South Bancshares, Inc.;                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;                                                          
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | c)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of
directors:                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

|/s/ Roger D. Murphree  
|-----------------------
|                       
|Roger D. Murphree      
|Chief Financial Officer

28





---

##### Table of Contents

NEW SOUTH BANCSHARES, INC.

Chief Executive Officer Certification

I, William T. Ratliff, III, certify that:

|1. |  | I have reviewed this quarterly report on Form 10-Q of New South Bancshares, Inc.;                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;                                                          
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                                                                             
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | c)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants
board of directors:                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | a)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|   |  | b)                                                                                                                                                                                                                                                                                                                                                                                      
|   |  |                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 14, 2002

|/s/ William T. Ratliff, III
|---------------------------
|                           
|William T. Ratliff, III    
|Chief Executive Officer    

29







---

##### Table of Contents

EXHIBIT INDEX

The following is a list of exhibits including items incorporated by reference:

|Exhibit No. |  | Description                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------
|            |  |                                                                                                          
|*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

______________

| | * |  |  |  | Filed with Registration Statement on Form S-1, filed April 6, 1999, registration No. 333-49459
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| | ** |  |  | Filed with Amendment No. 1 to the Registration Statement on Form S-1, filed May 13, 1999
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