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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 
20549

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FORM 10-Q

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

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For the Quarterly Period Ended March 31, 2003 Commission file number
333-49459

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

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|Delaware                                                       |  | 63-1132716                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|1900 Crestwood Boulevard                                       |  |                                     
|Birmingham, Alabama                                            |  | 35210                               
|(Address of Principal Executive Offices)                       |  | (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
|----- | ----

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act Rule 12b-2).

|Yes o | No x
|----- | ----

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NEW SOUTH BANCSHARES, INC. FORM 10-Q INDEX

|              |                       |                                                                                              | Page
|------------- | --------------------- | -------------------------------------------------------------------------------------------- | ----
|              |                       |                                                                                              |     
|Part I.       | Financial Information |                                                                                             
|              |                       |                                                                                             
|              | Item 1.               | Financial Statements (Unaudited)                                                             |     
|              |                       |                                                                                              |     
|              |                       | Consolidated Balance Sheets  March 31, 2003, December 31, 2002, and March 31, 2002          | 2   
|              |                       |                                                                                              |     
|              |                       | Consolidated Income Statements  Three months ended March 31, 2003 and 2002                  | 3   
|              |                       |                                                                                              |     
|              |                       | Consolidated Statements of Shareholders Equity  Three months ended March 31, 2003 and 2002 | 4   
|              |                       |                                                                                              |     
|              |                       | Consolidated Statements of Cash Flows  Three months ended March 31, 2003 and 2002           | 5   
|              |                       |                                                                                              |     
|              |                       | Notes to Consolidated Financial Statements                                                   | 6   
|              |                       |                                                                                              |     
|              | Item 2.               | Managements Discussion and Analysis of Financial Condition and Results of Operations        | 14  
|              |                       |                                                                                              |     
|              | Item 4.               | Controls and Procedures                                                                      | 23  
|              |                       |                                                                                              |     
|Part II.      | Other Information     |                                                                                             
|              |                       |                                                                                              |     
|              | Item 1.               | Legal Proceedings                                                                            | 24  
|              |                       |                                                                                              |     
|              | Item 6.               | Exhibits and Reports on Form 8-K                                                             | 24  
|              |                       |                                                                                              |     
|Signatures    | 25                   
|              |                      
|Exhibit Index | 28                   
|              |                       |                                                                                              |     

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NEW SOUTH BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                              |  | March 31, 2003 |           | December 31, 2002 |   | March 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | -------------- | -
|                                                                                                                                                              |  |                |           |                   |   |                |  
|                                                                                                                                                              |  | (Unaudited)    |           | (Audited)         |   | (Unaudited)    |  
|                                                                                                                                                              |  | (In thousands) |          
|ASSETS                                                                                                                                                        |  |                |           |                   |   |                |  
|Cash and due from banks                                                                                                                                       |  | $              | 21,574    |                   | $ | 7,952          |  
|Interest-bearing deposits in other banks                                                                                                                      |  |                | 1,588     |                   |   | 7,908          |  
|Federal funds sold and securities purchased under agreements to resell                                                                                        |  |                |          |                   |   |               |  
|Investment securities available for sale                                                                                                                      |  |                | 233,443   |                   |   | 254,293        |  
|Residual interest in loan securitizations                                                                                                                     |  |                | 9,453     |                   |   | 9,016          |  
|Loans available for sale                                                                                                                                      |  |                | 137,444   |                   |   | 155,687        |  
|Loans, net of unearned income                                                                                                                                 |  |                | 879,155   |                   |   | 835,351        |  
|Allowance for loan losses                                                                                                                                     |  |                | (12,211   | )                 |   | (12,312        | )
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Net Loans                                                                                                                                                     |  |                | 866,944   |                   |   | 823,039        |  
|Premises and equipment, net                                                                                                                                   |  |                | 7,397     |                   |   | 7,483          |  
|Mortgage servicing rights, net                                                                                                                                |  |                | 11,805    |                   |   | 14,145         |  
|Servicing advances                                                                                                                                            |  |                | 13,038    |                   |   | 13,063         |  
|Other assets                                                                                                                                                  |  |                | 30,509    |                   |   | 31,253         |  
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Total Assets                                                                                                                                                  |  | $              | 1,333,195 |                   | $ | 1,323,839      |  
|                                                                                                                                                              |  |                |           |                   |   |                |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                          |  |                |           |                   |   |                |  
|Deposits:                                                                                                                                                     |  |                |           |                   |   |                |  
|Noninterest-bearing                                                                                                                                           |  | $              | 75,550    |                   | $ | 84,219         |  
|Interest-bearing                                                                                                                                              |  |                | 841,967   |                   |   | 830,052        |  
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Total Deposits                                                                                                                                                |  |                | 917,517   |                   |   | 914,271        |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                                    |  |                | 156,699   |                   |   | 146,680        |  
|Federal Home Loan Bank advances                                                                                                                               |  |                | 130,023   |                   |   | 134,024        |  
|Notes payable                                                                                                                                                 |  |                | 7,244     |                   |   | 8,242          |  
|Subordinated debentures                                                                                                                                       |  |                | 50,500    |                   |   | 50,500         |  
|Accrued expenses, deferred revenue, and other liabilities                                                                                                     |  |                | 18,039    |                   |   | 16,992         |  
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Total Liabilities                                                                                                                                             |  |                | 1,280,022 |                   |   | 1,270,709      |  
|Shareholders Equity:                                                                                                                                         |  |                |           |                   |   |                |  
|Common stock of $1.00 par value (authorized: 1.5 million shares; issued and outstanding: 1,255,537.1 at March 31,
2003,December 31, 2002, and March 31, 2002) |  |                | 1,256     |                   |   | 1,256          |  
|Additional paid-in capital                                                                                                                                    |  |                | 29,475    |                   |   | 29,475         |  
|Retained earnings                                                                                                                                             |  |                | 37,534    |                   |   | 37,147         |  
|Accumulated other comprehensive loss, net                                                                                                                     |  |                | (15,092   | )                 |   | (14,748        | )
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Total Shareholders Equity                                                                                                                                    |  |                | 53,173    |                   |   | 53,130         |  
|                                                                                                                                                              |  |                |           |                   |   |                |  
|Total Liabilities and Shareholders Equity                                                                                                                    |  | $              | 1,333,195 |                   | $ | 1,323,839      |  
|                                                                                                                                                              |  |                |           |                   |   |                |  

See accompanying notes to consolidated financial statements.

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

|                                                                                       |  | Three months ended March 31, |       
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                       |  |                              |       
|                                                                                       |  | 2003                         |       
|                                                                                       |  |                              |       
|                                                                                       |  | (In thousands)               |       
|Interest Income:                                                                       |  |                              |       
|Interest on securities available for sale                                              |  | $                            | 3,442 
|Interest on loans                                                                      |  |                              | 17,324
|Interest on other short-term investments                                               |  |                              | 31    
|                                                                                       |  |                              |       
|Total Interest Income                                                                  |  |                              | 20,797
|Interest Expense:                                                                      |  |                              |       
|Interest on deposits                                                                   |  |                              | 8,873 
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                              | 1,627 
|Interest on Federal Home Loan Bank advances                                            |  |                              | 1,333 
|Interest on notes payable                                                              |  |                              | 108   
|Interest on subordinated debentures                                                    |  |                              | 940   
|                                                                                       |  |                              |       
|Total Interest Expense                                                                 |  |                              | 12,881
|Net Interest Income                                                                    |  |                              | 7,916 
|Provision for Loan Losses                                                              |  |                              | 845   
|                                                                                       |  |                              |       
|Net Interest Income After Provision for Loan Losses                                    |  |                              | 7,071 
|Noninterest Income:                                                                    |  |                              |       
|Loan administration income                                                             |  |                              | 686   
|Origination fees                                                                       |  |                              | 3,851 
|Gain on sale of investment securities available for sale                               |  |                              | 2,212 
|Gain on sale of loans and mortgage servicing rights                                    |  |                              | 4,601 
|Other income                                                                           |  |                              | 684   
|                                                                                       |  |                              |       
|Total Noninterest Income                                                               |  |                              | 12,034
|Noninterest Expense:                                                                   |  |                              |       
|Salaries and benefits                                                                  |  |                              | 10,834
|Net occupancy and equipment expense                                                    |  |                              | 958   
|Other expense                                                                          |  |                              | 5,281 
|                                                                                       |  |                              |       
|Total Noninterest Expense                                                              |  |                              | 17,073
|                                                                                       |  |                              |       
|Income Before Provision for Income Taxes                                               |  |                              | 2,032 
|Provision for Income Taxes                                                             |  |                              | 101   
|                                                                                       |  |                              |       
|Net Income                                                                             |  | $                            | 1,931 
|                                                                                       |  |                              |       
|Weighted average shares outstanding                                                    |  |                              | 1,256 
|Basic and diluted earnings per share:                                                  |  | $                            | 1.54  

See accompanying notes to consolidated financial statements

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NEW SOUTH BANCSHARES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(Unaudited)

|                                                               |  | Common Stock   |       | Additional Paid-In Capital |   | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |        | Total Shareholders Equity |  
|-------------------------------------------------------------- |  | -------------- | ----- | -------------------------- | - | ----------------- |  | --------------------------------------------- | ------ | -------------------------- | -
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|                                                               |  | (In thousands) |      
|Balance at January 1, 2003                                     |  | $              | 1,256 |                            | $ | 29,475            |  | $                                             | 37,147 |                            | $
|Comprehensive Income:                                          |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Net income                                                     |  |                |      |                            |   |                  |  |                                               | 1,931  |                            |  
|Other comprehensive income, net of tax                         |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Net unrealized gains on cash flow hedges (1)                   |  |                |      |                            |   |                  |  |                                               |       |                            |  
|Change in unrealized gain on securities available for sale (1) |  |                |      |                            |   |                  |  |                                               |       |                            |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Total other comprehensive loss                                 |  |                |       |                            |   |                   |  |                                               |        |                            |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Total comprehensive income                                     |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Common dividends paid ($1.23 per share)                        |  |                |      |                            |   |                  |  |                                               | (1,544 | )                          |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Balance at March 31, 2003                                      |  | $              | 1,256 |                            | $ | 29,475            |  | $                                             | 37,534 |                            | $
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Balance at January 1, 2002                                     |  | $              | 1,256 |                            | $ | 29,475            |  | $                                             | 30,962 |                            | $
|Comprehensive Income:                                          |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Net income                                                     |  |                |      |                            |   |                  |  |                                               | 2,887  |                            |  
|Other comprehensive income, net of tax                         |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Net unrealized gains on cash flow hedges (1)                   |  |                |      |                            |   |                  |  |                                               |       |                            |  
|Change in unrealized gain on securities available for sale (1) |  |                |      |                            |   |                  |  |                                               |       |                            |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Total other comprehensive income                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Total comprehensive income                                     |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Common dividends paid ($.80 per share)                         |  |                |      |                            |   |                  |  |                                               | (1,004 | )                          |  
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  
|Balance at March 31, 2002                                      |  | $              | 1,256 |                            | $ | 29,475            |  | $                                             | 32,845 |                            | $
|                                                               |  |                |       |                            |   |                   |  |                                               |        |                            |  

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(1)  See disclosure of
reclassification amount and tax effect in Notes to Consolidated Financial Statements

See accompanying notes to consolidated financial statements

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

|                                                                                                      |  | Three months ended March 31, |         
|----------------------------------------------------------------------------------------------------- |  | ---------------------------- | --------
|                                                                                                      |  |                              |         
|                                                                                                      |  | 2003                         |         
|                                                                                                      |  |                              |         
|                                                                                                      |  | (In thousands)               |         
|Operating Activities:                                                                                 |  |                              |         
|Net income                                                                                            |  | $                            | 1,931   
|Adjustments to reconcile net income to net cash provided by operating activities:                     |  |                              |         
|Accretion of discounts and fees                                                                       |  |                              | (145    
|Provision for loan losses                                                                             |  |                              | 845     
|Depreciation and amortization                                                                         |  |                              | 300     
|Amortization of mortgage servicing rights                                                             |  |                              | 2,895   
|Origination of  loans available for sale                                                              |  |                              | (263,030
|Proceeds from the sale of loans available for sale and servicing rights                               |  |                              | 282,960 
|Gain on sale of investment securities available for sale                                              |  |                              | (2,212  
|Gain on sale of loans available for sale and mortgage servicing rights                                |  |                              | (4,601  
|Gain on sale of premises and equipment                                                                |  |                              | (7      
|Decrease in other  assets                                                                             |  |                              | 220     
|Decrease in accrued expenses, deferred revenue, and other liabilities                                 |  |                              | (1,672  
|                                                                                                      |  |                              |         
|Net Cash Provided by Operating Activities                                                             |  |                              | 17,484  
|Investing Activities:                                                                                 |  |                              |         
|Net decrease in interest-bearing deposits in other banks                                              |  |                              | 6,320   
|Net decrease in federal funds sold and securities purchased under agreements to resell                |  |                              |        
|Proceeds from  sales of investment securities available for sale                                      |  |                              | 89,135  
|Proceeds from maturities and calls of investment securities available for sale                        |  |                              | 31,636  
|Purchases of investment securities available for sale                                                 |  |                              | (84,752 
|Net increase in loan portfolio                                                                        |  |                              | (57,303 
|Purchases of premises and equipment                                                                   |  |                              | (503    
|Proceeds from sale of premises and equipment                                                          |  |                              | 296     
|                                                                                                      |  |                              |         
|Net Cash Used in Investing Activities                                                                 |  |                              | (15,171 
|Financing Activities:                                                                                 |  |                              |         
|Net increase (decrease) in noninterest-bearing deposits                                               |  |                              | (8,669  
|Net increase in interest-bearing deposits                                                             |  |                              | 15,197  
|Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |                              | 11,324  
|Net decrease of Federal Home Loan Bank Advances                                                       |  |                              | (4,001  
|Net decrease in notes payable                                                                         |  |                              | (998    
|Proceeds from the issuance of subordinated debentures                                                 |  |                              |        
|Dividends paid                                                                                        |  |                              | (1,544  
|                                                                                                      |  |                              |         
|Net Cash Provided by Financing Activities                                                             |  |                              | 11,309  
|                                                                                                      |  |                              |         
|Net increase (decrease) in cash and cash equivalents                                                  |  |                              | 13,622  
|Cash and cash equivalents at beginning of period                                                      |  |                              | 7,952   
|                                                                                                      |  |                              |         
|Cash and cash equivalents at end of period                                                            |  | $                            | 21,574  
|                                                                                                      |  |                              |         

See accompanying notes to consolidated financial statements.

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

Three Months Ended March 31, 2003

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 2003 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, 2002.

New South Bancshares, Inc. (Bancshares or the Company) is a unitary thrift holding company.  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.  Critical Accounting
Policies

Investment Securities Available for Sale

Investment securities available for sale consist of bonds, notes, debentures, interest only strips and certain equity securities which are classified as available for
sale and are carried at fair value.  Any unrealized gains or losses are reported as a net amount in accumulated other comprehensive income or loss (OCI), net of any tax effect.  Realized gains and losses on the sales of
investment securities available for sale are determined using the specific identification method and are included in noninterest income.  Premiums and discounts are recognized in interest income using the effective interest method over the
period to maturity.

Interest only strips (IOs) are financial investments which represent the right to receive earnings from
assets that contain excess interest income which are stripped from the underlying interest earning assets.  IOs are recorded as assets by determining the net present value of the excess interest income stream generated by the assets.  To
determine the fair value of IOs, the Company uses market prices for comparable assets and a valuation model that calculates the net present value of the estimated cash flows.  Interest income is recorded on these securities based on their
expected internal rates of return, which are reevaluated periodically, but no less frequently than quarterly.  A quarterly impairment analysis is performed using discounted cash flow methodology comparing actual to projected results. 
Declines in value judged to be other than temporary as well as realized gains and losses are reported in noninterest income.  Key assumptions used in the initial recording and on-going valuation and impairment analyses relate to prepayment
speeds, discount rates, and loss experience.

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Residual Interests in Loan Securitizations

Residual interests in loan securitizations (Residuals) are financial investments which represent the right to receive excess cash flow from loan
securitizations.  Residuals are recorded as assets by determining the net present value of the excess interest income stream generated by the assets.  To determine the fair value of Residuals, the Company uses a valuation model that
calculates the net present value of the estimated cash flows and market prices of comparable assets where appropriate.  Interest income is recorded on these securities based on their expected internal rates of return, which are reevaluated
periodically, but no less frequently than quarterly.  A quarterly impairment analysis is performed using discounted cash flow methodology comparable to yields on similar assets.  Declines in value judged to be other than temporary as well
as realized gains and losses are reported in noninterest income.  Key assumptions used in the initial recording and on-going valuation and impairment analyses relate to prepayment speeds, discount rates, and loss experience.

Loans Available for Sale

Loans available for sale are
reported at the lower of cost or fair value, as determined in the aggregate.  Gains or losses on the sales of these assets are included in noninterest income while interest collected on these assets is included in interest income. 
Typically funded mortgage loans are identified as available for sale if they arise from interest rate lock commitments (IRLCs) identified at the time New South accepts the borrowers application.

Loans

All loans are stated at principal balances outstanding, adjusted for
any amounts charged off, discounts or premiums on loans purchased from others, and discount points collected at origination.  Interest income on loans is credited to income based upon the principal amount of the loans outstanding using
contractual rates of interest.  Amortization of discounts and premiums on loans is calculated using the effective interest method and included in interest income over the period to maturity.

Certain impaired loans may be reported at the present value of expected future cash flows using the loans effective interest rate.  Others are reported at
the loans observable market price or the fair value of the collateral, if the loan is collateral dependent.  Residential mortgage loans and installment loans, primarily automobile, are evaluated collectively for impairment.

It is the policy of New South to stop accruing interest income and place the recognition of interest on a cash basis when any loan is past due more
than 90 days as to principal or interest or if the ultimate collection of either is in doubt.  Any interest previously accrued but not collected is reversed against current income when a loan is placed on a nonaccrual basis.  Generally,
New South has a mortgage lien on all property on which mortgage loans are made in order to protect New Souths interest in both the principal amounts outstanding and interest collections.  Additionally, portions of certain mortgage loan
balances are insured by private or government guaranty or insurance policies.  Loans collateralized by certificates of deposit are at least secured by account balances in the amount of the outstanding loan amount.

Allowance for Loan Losses

The allowance for loan losses is maintained at a
level considered adequate to provide for losses inherent in the portfolio.  The provision for loan losses charged to income is determined by various factors including actual loss experience, the current volume and condition of loans in the
portfolio, changes in the composition of the portfolio, known and inherent risks in the portfolio, and current and expected economic conditions.  Such provisions, less net loan charge-offs, comprise the allowance for loan losses and is
available for future loan charge-offs.  New South follows a policy of charging off loans which management determines to be uncollectible.  Subsequent recoveries are credited to the allowance.

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While management uses available information to estimate inherent loss each balance sheet date, future changes to the
allowance may be necessary based upon the receipt of additional information.  In addition, the Banks regulators, as part of their normal examination process, periodically review the allowance for loan losses.  Changes to the
allowance may be required based upon the regulators judgement about information available at the time of their examination.

Mortgage Servicing
Rights

The Company sells a substantial portion of its originated loans into the secondary market by securitizing pools of loans and
through sales to private investors.  Mortgage servicing rights (MSRs) are capitalized based on relative fair values of the mortgages and MSRs when the mortgages are sold.

For the valuation of MSRs, management obtains external information, evaluates overall portfolio characteristics and monitors economic conditions to arrive at
appropriate prepayment speeds and other assumptions.  These characteristics are used to stratify the servicing portfolio on which MSRs have been recognized to determine valuation and impairment.  Impairment is recognized for the amount by
which MSRs for a stratum exceed their fair value.  The Company amortizes MSRs over the estimated lives of the underlying loans in proportion to the resultant servicing income stream.

Derivative Instruments and Hedging Activities

The Company utilizes certain
derivative instruments in its operations.  IRLCs represent commitments the Company has accepted to extend mortgage credit to borrowers (Mortgage Pipeline). IRLCs exist from the time of application and acceptance by the Company until
the commitments expiration or loan funding.  At the time of funding, the IRLCs become classified as loans available for sale.  The Company employs mortgage forward delivery contracts (Forward Contracts) and mortgage
options to hedge changes in the fair value of the Companys IRLCs and loans available for sale.  The IRLCs and their related Forward Contracts, until funding, are undesignated derivatives and do not qualify for hedge accounting treatment
under Statement of Financial Standards (SFAS) No. 133, Accounting for Derivative Instruments and for Hedging Activities (SFAS No. 133), so the change in fair value is included in the income statement.  Funded
IRLCs become loans available for sale, at which time the related Forward Contracts are designated as fair value hedges.  Accordingly, until the settlement of those Forward Contracts, no additional net gain or loss has been recognized as being
attributable to hedge ineffectiveness in the income statement.

The Companys primary funding sources are generally short-term or
priced at variable interest rates and include, among other sources of funds, certain interest-bearing time deposits and repurchase agreements included in federal funds purchased and securities sold under agreements to repurchase.  Because of
the sensitivity of these short-term funding sources, the Company utilizes interest rate swap contracts (Swaps) to change the payment characteristics of the funding source to more closely match the assets being funded.  Interest rate
caps (Caps) are utilized to limit increases in interest expense resulting from rising interest rates.  Under SFAS No. 133, the Swaps are designated as cash flow hedges resulting in changes in their fair value, net of any amounts
reclassified into the income statement, being included in accumulated other comprehensive income (loss) (OCI).  The Caps do not qualify for hedge accounting so changes in their fair value are included in the income
statement.

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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|                                                         |  | Three months ended March 31, |    
|-------------------------------------------------------- |  | ---------------------------- | ---
|                                                         |  |                              |    
|                                                         |  | 2003                         |    
|                                                         |  |                              |    
|Gains (losses) from interest rate caps                   |  | $                            | 11 
|Gains (losses) from interest rate lock contracts         |  |                              | 333
|Gains (losses) from mandatory forward delivery contracts |  |                              | 11 
|                                                         |  |                              |    
|                                                         |  | $                            | 355
|                                                         |  |                              |    

3.  Supplemental Cash Flow Information

The following summarizes supplemental noncash investing and financing activities, in thousands, for the periods indicated:

|                                                                      |  | Three months ended March 31, |       
|--------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                      |  |                              |       
|                                                                      |  | 2003                         |       
|                                                                      |  |                              |       
|Transfers of loans to foreclosed properties and repossessed assets    |  | $                            | 2,854 
|Change in unrealized gain on investment securities available for sale |  |                              | (2,210

4.  S Corporation Election

The Company has elected S Corporation status.  Corporations electing such treatment under the Internal Revenue Code generally are 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 are required to include profits and losses from the Company on their individual income tax returns for federal, and state and local, if applicable, income tax
purposes.

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 $1.5 million during the First Quarter 2003.  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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5. Comprehensive Income

Comprehensive income is
the total of net income and the change in equity during a period from transactions and other events and circumstances from nonowner sources.  Items that are recognized as components of comprehensive income are summarized in the Consolidated
Statements of Shareholders Equity.

In calculation of comprehensive income, certain reclassification adjustments are made to avoid
double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in the same or earlier periods.  The disclosure of the reclassification amounts is as follows:

|                                                                                                           |  | Three months ended March 31, 2003 |       
|---------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------
|                                                                                                           |  |                                   |       
|                                                                                                           |  | (In thousands)                    |       
|                                                                                                           |  | Before Tax Amount                 |       
|                                                                                                           |  |                                   |       
|Net unrealized gains on cash flow hedges arising during the period                                         |  | $                                 | 1,855 
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                                   | (8    
|Net unrealized gains on available for sale securities arising during the period                            |  |                                   | 2     
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                                   | (2,212
|                                                                                                           |  |                                   |       
|Total other comprehensive loss                                                                             |  | $                                 | (363  
|                                                                                                           |  |                                   |       



|                                                                                                           |  | Three months ended March 31, 2002 |       
|---------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------
|                                                                                                           |  |                                   |       
|                                                                                                           |  | (In thousands)                    |       
|                                                                                                           |  | Before Tax Amount                 |       
|                                                                                                           |  |                                   |       
|Net unrealized gains on cash flow hedges arising during the period                                         |  | $                                 | 4,713 
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                                   | (55   
|Net unrealized losses on available for sale securities arising during the period                           |  |                                   | (2,282
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                                   | (707  
|                                                                                                           |  |                                   |       
|Total other comprehensive income                                                                           |  | $                                 | 1,669 
|                                                                                                           |  |                                   |       

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##### Table of Contents

6.  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 First Quarter 2003 and First Quarter 2002 are included in the following tables.

|                                        |  | For the three months ended March 31, 2003 |        
|--------------------------------------- |  | ----------------------------------------- | -------
|                                        |  |                                           |        
|                                        |  | Residential Mortgage Banking              |        
|                                        |  |                                           |        
|Interest income                         |  | $                                         | 12,150 
|Interest expense                        |  |                                           |       
|Intra-company funds (used) / provided   |  |                                           | (6,014 
|Provision for loan losses               |  |                                           | 1,150  
|Noninterest income                      |  |                                           | 8,359  
|Noninterest expense                     |  |                                           | 12,020 
|                                        |  |                                           |        
|Net income (loss) before income taxes   |  |                                           | 1,325  
|Provision for (benefit of) income taxes |  |                                           | 67     
|                                        |  |                                           |        
|Net income (loss)                       |  | $                                         | 1,258  
|                                        |  |                                           |        
|Depreciation and amortization, net      |  | $                                         | 110    
|Total assets                            |  |                                           | 750,608
|Capital expenditures                    |  |                                           | 303    

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##### Table of Contents

|                                        |  | For the three months ended March 31, 2002 |        
|--------------------------------------- |  | ----------------------------------------- | -------
|                                        |  |                                           |        
|                                        |  | Residential Mortgage Banking              |        
|                                        |  |                                           |        
|Interest income                         |  | $                                         | 10,862 
|Interest expense                        |  |                                           |       
|Intra-company funds (used) / provided   |  |                                           | (6,231 
|Provision for loan losses               |  |                                           | 231    
|Noninterest income                      |  |                                           | 8,411  
|Noninterest expense                     |  |                                           | 9,624  
|                                        |  |                                           |        
|Net income (loss) before income taxes   |  |                                           | 3,187  
|Provision for (benefit of) income taxes |  |                                           | 161    
|                                        |  |                                           |        
|Net income (loss)                       |  | $                                         | 3,026  
|                                        |  |                                           |        
|Depreciation and amortization, net      |  | $                                         | 121    
|Total assets                            |  |                                           | 685,070
|Capital expenditures                    |  |                                           | 110    

7.  Commitments

The following represent the Companys commitments to extend credit and letters of credit, in thousands, for the periods indicated:

|                             |  | March 31, 2003 |         | December 31, 2002 |  
|---------------------------- |  | -------------- | ------- | ----------------- | -
|                             |  |                |         |                   |  
|Letters of credit            |  | $              | 6,751   |                   | $
|Commitments to extend credit |  |                | 134,170 |                   |  

8.  Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS No. 146).  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 that are initiated after December 31, 2002, with early application encouraged.  The adoption of the statement by the Company on January 1, 2003 did not have a material impact on the consolidated financial position or results of
operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. (SFAS No. 149) amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  The new guidance amends
SFAS No. 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in
connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components.  In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging

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##### Table of Contents

relationships designated after June 30, 2003. The Company is currently assessing the impact of SFAS No. 149 on the consolidated financial position and results of
operations.

In November 2002, the FASB issued FASB Interpretation (FIN) 45  Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain
guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition
and initial measurement provisions of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002.  The adoption of these recognition provisions of FIN 45 on January 1, 2003 did not have a
material impact on the consolidated financial position or results of operations.  The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.

In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin 51, Consolidated Financial
Statement,to certain variable interest entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.  The disclosure requirements of this FIN 46 are effective for all financial statements issued after January 31, 2003.  The consolidation requirements apply to all variable interest
entities created after January 31, 2003.  In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of
annual or interim periods beginning after June 15, 2003.  The adoption of FIN 46 on January 1, 2003 did not have a material impact on the consolidated financial position or results of operations.

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##### 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, 2002.  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 March 31, 2003 as compared
to December 31, 2002, in addition to including an analysis of income for the three months ended March 31, 2003 (First Quarter 2003) as compared to the three months ended March 31, 2002 (First Quarter 2002).

In November 2002, the Company completed the securitization of approximately $126 million of automobile installment loans (the
Securitization), recording a gain of $.2 million.  The Company retained the $3.6 million residual interest associated with the Securitization.  Because it occurred late in the year, the Securitization had no impact on the First
Quarter 2002 results of operations nor on average earning assets and interest-bearing liabilities, however the year-end 2002 loan balances and First Quarter 2003 results of operations and average earning assets and interest-bearing liabilities were
affected by the full amount of the loans securitized.

The Company, through New South, provides and receives various
services from companies affiliated through common ownership.  Among the companies are Collateral Mortgage, Ltd (Collateral), Collateral Mortgage Capital, LLC (CMC), Collateral Investment Corp., Collat, Inc., and Triad
Guaranty Insurance Corporation.  Transactions with these affiliates consist of those services normally associated with New Souths lending and loan servicing activities and include management fees for executive services, facilities
management, rent, loan servicing and subservicing, and may include the purchase or sale of loans, MSRs, and retained interests in loan securitizations.  Many of the Companys affiliates maintain deposit accounts with New South. 
Management believes transactions with affiliates are conducted on a fair and equitable basis among all companies.

Forward Looking Statements

This MD&A contains certain forward looking information with respect to the financial condition, results of operations, and business of the Company, including the
Notes to Consolidated Financial Statements and statements contained in the following 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.

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Net Income and Key Performance Ratios

The Company
reported net income of $1.9 million in First Quarter 2003 and $2.9 million in First Quarter 2002.  On a per share basis, net earnings were $1.54 and $2.30, respectively, for each period.  During First Quarter 2003 the annualized return on
average assets was 0.58% and the annualized return on average equity was 14.15% compared to 0.89% and 18.86%, respectively, for First Quarter 2002.

Net Interest Income, Earning Assets and
Interest-bearing Liabilities

Net interest income for First Quarter 2003 was $7.9 million, a $.7 million, or 7.6%, decrease from $8.6
million for First Quarter 2002.  This decrease resulted primarily from a change in the mix of earning assets.  Net interest income decreased by $1.4 million as a result of a decline in the yield on earning assets of 88 basis points and a
decline in the cost of interest-bearing liabilities of 64 basis points during First Quarter 2003 as compared with First Quarter 2002.  The larger decline in yield on earning assets was attributable to a change in the mix of loans resulting from
the Securitization and the related decrease in higher rate automobile installment loans.  While the mix of loans changed, total average loans, the highest yielding asset category, increased $91.9 million in First Quarter 2003. A decrease in all
other earning assets of $75.2 million partially offset the decrease attributable to rates.  Net interest income continues to reflect the impact of the Companys interest rate swap contracts (Swaps), which decreased net interest
income by $3.9 million and $3.1 million during First Quarter 2003 and First Quarter 2002, respectively.  See Interest Sensitivity and Market Risk section for a more detailed discussion of  Swaps.

As discussed further in MD&A, 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 First Quarter 2003 by 306 basis points verses 234 basis points for First
Quarter 2002.

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.

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##### Table of Contents

Average Balances, Income, Expense, and Rates

|                                                                           |  | Three Months Ended March 31,       |          
|-------------------------------------------------------------------------- |  | ---------------------------------- | ---------
|                                                                           |  |                                    |          
|                                                                           |  | 2003                               |          
|                                                                           |  |                                    |          
|                                                                           |  | Average Balance                    |          
|                                                                           |  |                                    |          
|                                                                           |  | (In thousands, except percentages) |          
|Assets                                                                     |  |                                    |          
|Loans, net of unearned income(1)                                           |  | $                                  | 960,253  
|Federal funds sold                                                         |  |                                    | 10,232   
|Investment securities available for sale                                   |  |                                    | 194,696  
|Other investments                                                          |  |                                    | 62,453   
|                                                                           |  |                                    |          
|Total earning assets                                                       |  |                                    | 1,227,634
|Allowance for loan losses                                                  |  |                                    | (11,924  
|Other assets                                                               |  |                                    | 140,914  
|                                                                           |  |                                    |          
|Total Assets                                                               |  | $                                  | 1,356,624
|                                                                           |  |                                    |          
|Liabilities and Shareholders Equity                                       |  |                                    |          
|Other interest bearing deposits                                            |  | $                                  | 6,710    
|Savings deposits                                                           |  |                                    | 102,832  
|Time deposits                                                              |  |                                    | 717,066  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                    | 144,184  
|Other borrowings                                                           |  |                                    | 9,456    
|Federal Home Loan Bank advances                                            |  |                                    | 163,220  
|Subordinated debentures                                                    |  |                                    | 50,500   
|                                                                           |  |                                    |          
|Total interest bearing liabilities                                         |  |                                    | 1,193,968
|Noninterest bearing deposits                                               |  |                                    | 90,407   
|Accrued expenses and other liabilities                                     |  |                                    | 16,903   
|Shareholders equity                                                       |  |                                    | 55,346   
|                                                                           |  |                                    |          
|Total Liabilities and Shareholders Equity                                 |  | $                                  | 1,356,624
|                                                                           |  |                                    |          
|                                                                           |  |                                    |          
|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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Loans averaged $960.3 million during First Quarter 2003, compared with $868.3 million during First Quarter
2002, an increase of $92.0 million, or 10.6%, reflecting increased loan origination volume which offset the impact of the Securitization.  Specifically, automobile installment loans averaged $20.0 million during First Quarter 2003 and averaged
$118.2 million during First Quarter 2002, a decrease of $98.2 million, or 83.1%.

Investment securities available for sale
(Investments AFS) decreased 24.2% when comparing the First Quarter 2003 average of $194.7 million to the First Quarter 2002 average of $256.8 million.  Investments AFS continues to reflect the Companys strategy to more fully
leverage its core capital by maintaining a portfolio of Ginnie Mae (GNMA) securities.  The GNMA securities averaged $163.7 million during First Quarter 2003 and

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$191.6 million during First Quarter 2002.  The GNMA securities were primarily funded with certain Security Repo Agreements, which averaged $134.2 million during First
Quarter 2003 compared with $155.1 million during First Quarter 2002.

Excluding the average balance change in Investments AFS and
related funding, interest-bearing liabilities increased only $37.1 million, or 3.6%, to $1,059.7 million in First Quarter 2003 from $1,022.6 million during First Quarter 2002.  Federal Home Loan Bank (FHLB) advances averaged $163.2
million and $112.6 million during First Quarter 2003 and First Quarter 2002, respectively, an increase of $50.6 million or 45.0%.  Interest-bearing deposits averaged $826.6 million during First Quarter 2003 and $848.4 million during First
Quarter 2002, a decrease of $21.8 million, or 2.6%.  During First Quarter 2003, there has been a continued preference among customers for more liquid savings deposits compared with typically longer maturity time deposits.

Noninterest Income and Noninterest Expenses

Noninterest income totaled $12.0 million during First
Quarter 2003 compared to $10.9 million for the same period in the prior year, an increase of $1.1 million, or 10.1%.  Loan administration income totaled $.7 million during First Quarter 2003, compared with $2.4 million during First Quarter
2002, a decrease of $1.7 million, or 71.6%, reflecting an increase in amortization of servicing related assets of $1.8 million during First Quarter 2003 compared with the same period during 2002.  Origination fees totaled $3.9 million during
First Quarter 2003 and $2.6 million during First Quarter 2002, reflecting an 38.6% increase in the origination of residential mortgage loans.  Gain on sale of Investments AFS, $2.2 million during First Quarter 2003 and $.7 million during First
Quarter 2002, represent sales of specific securities.  Gain on the sales of loans and mortgage servicing rights during First Quarter 2003 totaled $4.6 million, compared with $4.1 million during First Quarter 2002, an increase of 11.7%. 
Other income was $.7 million during First Quarter 2003 and $1.1 million during First Quarter 2002, a decrease of $.4 million.

Noninterest expenses were $17.1 million during First Quarter 2003 and $14.8 million during First Quarter 2002, an increase of $2.2 million, or 15.0%.  Salaries
and benefits were $10.8 million for First Quarter 2003, a $1.5 million, or 16.8%, increase compared to $9.3 million for First Quarter 2002, reflecting increased loan origination volume.  Other noninterest expense totaled $5.3 million during
First Quarter 2003 compared with $4.6 million during First Quarter 2002, an increase of  $.7 million, or 14.9%.  During First Quarter 2003, other noninterest expense includes $.8 million attributable to payoff pass through provisions in
various loan securitizations completed by the Company.

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.

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##### Table of Contents

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 March 31, 2003, New South had Swaps with notional amounts
totaling $380 million.  $360 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 March 31, 2003, $120 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.  These Swaps have decreased $20
million from December 31, 2002 due to the maturity of one Swap.  Additionally, the Company has entered into $20 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.  The Company entered into one new Swap during First Quarter 2003 resulting in a $10 million increase since December 31, 2002.  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 $75 million in Caps outstanding at March 31, 2003.  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 8.0%, therefore short-term interest rates
levels would have to increase significantly before the Caps would provide the Company with a material benefit.  At March 31, 2003, 90 day LIBOR was 1.28%.  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 First Quarter 003, the Company did not purchase any additional Caps.

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##### Table of Contents

Asset Quality

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

|                                                                                          |  | March 31, 2003                     |        | December 31, 2002 |  
|----------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | ----------------- | -
|                                                                                          |  |                                    |        |                   |  
|                                                                                          |  | (In thousands, except percentages) |       
|Nonaccrual loans                                                                          |  | $                                  | 23,818 |                   | $
|Restructured loans                                                                        |  |                                    | 1,424  |                   |  
|                                                                                          |  |                                    |        |                   |  
|Total nonperforming loans                                                                 |  |                                    | 25,242 |                   |  
|Foreclosed properties and repossessed assets                                              |  |                                    | 7,055  |                   |  
|                                                                                          |  |                                    |        |                   |  
|Total nonperforming assets                                                                |  | $                                  | 32,297 |                   | $
|                                                                                          |  |                                    |        |                   |  
|Allowance for loan losses to period-end nonperforming loans                               |  |                                    | 48.38  | %                 |  
|Allowance for loan losses to period-end nonperforming assets                              |  |                                    | 37.81  | %                 |  
|Nonperforming assets to period-end loans and foreclosed properties and repossessed assets |  |                                    | 3.64   | %                 |  
|Nonperforming loans to period-end loans                                                   |  |                                    | 2.87   | %                 |  

Nonperforming assets totaled $32.3
million at March 31, 2003, an increase of $0.4 million from $31.9 million at December 31, 2002.  Nonaccrual loans decreased $1.4 million, or 5.4%, to $23.8 million at March 31, 2003 from $25.2 million at December 31, 2002, due to the
foreclosure of one commercial property which was included in nonaccrual loans at December 31, 2002.  Nonaccrual loans include $9.4 million of individual mortgage loans associated with one residential development.  Foreclosed properties and
repossessed assets totaled $7.1 million at March 31, 2003 and $5.3 million at December 31, 2002, an increase of $1.8 million, reflecting primarily the foreclosure of the one commercial property noted above.

As of March 31, 2003, servicing termination triggers were exceeded in two of the securitizations for which the Company has retained the servicing.  At March 31,
2003, the Companys servicing asset was $1.7 million for these securitizations.  The Company has advised the respective bond insurance companies of the matter and neither bond insurance company has 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.  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

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level of loans outstanding, the mix of the outstanding loan portfolio, the levels of classified assets and nonperforming loans, and current and anticipated economic conditions.

The Companys allowance for loan losses is based upon managements judgment and assumptions regarding risk elements in the
portfolio, future economic conditions, and other factors affecting borrowers.  The evaluation of the allowance for loan losses includes managements identification and analysis of loss inherent in various portfolio segments using a credit
grading process and specific reviews and evaluations of certain significant problem credits.  In addition, management monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general economic
conditions in the service area with residential mortgage and 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 March 31, 2003, as previously discussed, nonaccrual loans
included $9.4 million of individual mortgage loans associated with one development.  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.  Based upon current information, management believes that sufficient provision has been made for any loss, but as more reliable information becomes available as to the ultimate
resolution of these loans 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.

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|                                                                     |  | Three Months Ended March 31, |        
|-------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                     |  |                              |        
|                                                                     |  | 2003                         |        
|                                                                     |  |                              |        
|Loans, net of unearned income                                        |  | $                            | 879,155
|                                                                     |  |                              |        
|Average loans, net of unearned income                                |  | $                            | 960,253
|                                                                     |  |                              |        
|Balance of allowance for loan losses at beginning of period          |  | $                            | 12,312 
|Loans charged off:                                                   |  |                              |        
|Residential mortgage                                                 |  |                              | 255    
|Installment                                                          |  |                              | 1,133  
|Commercial                                                           |  |                              | 118    
|                                                                     |  |                              |        
|Total charge-offs                                                    |  |                              | 1,506  
|                                                                     |  |                              |        
|Recoveries of loans previously charged off:                          |  |                              |        
|Residential mortgage                                                 |  |                              | 128    
|Installment                                                          |  |                              | 432    
|Commercial                                                           |  |                              |       
|                                                                     |  |                              |        
|Total recoveries                                                     |  |                              | 560    
|                                                                     |  |                              |        
|Net charge-offs                                                      |  |                              | 946    
|Provision for loan losses                                            |  |                              | 845    
|                                                                     |  |                              |        
|Balance of allowance for loan losses at end of period                |  | $                            | 12,211 
|                                                                     |  |                              |        
|Allowance for loan losses to period-end loans                        |  |                              | 1.39   
|Net charge-offs to average loans, net of unearned income, annualized |  |                              | 0.40   

The provision for loan losses was $.8
million for First Quarter 2003 compared with $1.6 million for First Quarter 2002, a decrease of $.8 million.  The decrease in the provision for loan losses reflects the impact of the Securitization on the mix of loans, specifically the lower
level of automobile installment loans.  As a percentage of loans, net of unearned income, the allowance for loan losses decreased to 1.39% at March 31, 2003 from 1.49% at March 31, 2002.   The decrease resulted from increases in the
balances of the Companys loans and the impact of the Securitization.

Net charge-offs of loans were $.9 million during First
Quarter 2003 and $1.5 million during First Quarter 2002, reflecting the impact of the Securitization.

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##### Table of Contents

Capital

Shareholders equity of the Company
totaled $53.2 million at March 31, 2003 and $53.1 million at December 31, 2002 and was 4% of total assets at each period.   The increase is attributable to net income of $1.9 million earned during First Quarter 2003 offset by a $.3 million
increase in accumulated other comprehensive loss, and by dividends paid of $1.5 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.

|                                                            |  | As of March 31, 2003                   |         | As of December 31, 2002 |  
|----------------------------------------------------------- |  | -------------------------------------- | ------- | ----------------------- | -
|                                                            |  |                                        |         |                         |  
|                                                            |  | (In thousands, except for percentages) |        
|Shareholders equity                                        |  | $                                      | 95,932  |                         | $
|Minority interest in consolidated subsidiaries              |  |                                        | 225     |                         |  
|Accumulated other comprehensive loss                        |  |                                        | 15,092  |                         |  
|Servicing rights capital haircut                            |  |                                        | (428    | )                       |  
|                                                            |  |                                        |         |                         |  
|Tier 1 capital                                              |  |                                        | 110,821 |                         |  
|Allowance for loan losses                                   |  |                                        | 9,802   |                         |  
|                                                            |  |                                        |         |                         |  
|Tier 2 capital                                              |  |                                        | 9,802   |                         |  
|Low level recourse deduction                                |  |                                        | 4,303   |                         |  
|                                                            |  |                                        |         |                         |  
|Total deductions                                            |  |                                        | 4,303   |                         |  
|                                                            |  |                                        |         |                         |  
|Total risk-based capital                                    |  | $                                      | 116,320 |                         | $
|                                                            |  |                                        |         |                         |  
|Risk-weighted assets (including off-balance sheet exposure) |  | $                                      | 877,702 |                         | $
|Tier 1 leverage ratio                                       |  |                                        | 8.38    | %                       |  
|Tier 1 risk-based capital ratio (1)                         |  |                                        | 12.14   |                         |  
|Total risk-based capital ratio                              |  |                                        | 13.25   |                         |  

(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.

Liquidity

Liquidity management involves monitoring the Companys sources and uses of funds in order
to meet its day-to-day cash flow requirements while maximizing profits.  Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing
liabilities.  Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the customers it serves.

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Liquidity management is made more complex because different balance sheet components are subject to varying degrees
of management control.  For example, the timing of maturities in the investment securities available for sale portfolio is predictable and is, therefore, subject to a high degree of control at the time investment decisions are made. 
However, net deposit inflows and outflows are less predictable and are not subject to the same degree of control.

The Company depends
on deposits, including brokered certificates of deposit, FHLB advances, federal funds lines, and Security Repo Agreements as primary sources of liquidity.  Brokered deposits approximated 44.3% of total deposits as of March 31, 2003.  These
brokered deposits are either deposits solicited by the Company from national and regional brokerage firms, which accounted for approximately $406.5 million of deposits at March 31, 2003, or are unsolicited and are brought to New South by the
Companys competitive rates.  The solicited brokered deposits are utilized as alternative funding sources that are often cheaper than retail deposits or other funding sources.  However, this funding source is highly interest rate
sensitive and, as such, the Bank never considers brokered deposits, either singly or as a whole, to be a permanent funding source.  In the unlikely event that the Company is unable to replace or maintain its current level of brokered
certificate of deposit funding, the Company can either increase efforts in the retail deposit market or can utilize any of the various alternative funding sources available.

As of March 31, 2003, alternative funding sources included $35.0 million of available lines to purchase federal funds, $3.3 million unused warehousing lines of credit
from other financial institutions related to the New South Joint Ventures, and $110.0 million in unused FHLB borrowing capacity.  The ability to draw on certain of these funding sources is subject to having sufficient collateral.  The
Company also had $40.0 million of unpledged investment securities available for sale to serve as security for additional borrowings.  Management anticipates continued utilization of loan sales or securitizations to provide additional liquidity
in the future.  Reliance on all funding sources is monitored on an ongoing basis to insure no reliance upon a single source is imprudent and to insure that adequate reserve sources are available, if needed.

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.

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##### 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, based upon consultation with legal counsel, 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 6.  Exhibits and Reports on Form 8-K

ITEM
6(A)EXHIBITS

The exhibits listed in the Exhibit Index at page 28 of this Form 10-Q are filed herewith or are incorporated by
reference herein.

ITEM 6(B)REPORTS on Form 8-K

No report on Form 8-K was filed by the Company during the period January 1, 2003 to March 31, 2003.

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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.

|May 14, 2003 |  | By: | /s/ ROBERT M. COUCH                             
|------------ |  | --- | ------------------------------------------------
|             |  |     |                                                 
|             |  |     | Robert M. Couch Executive Vice President        
|             |  |     |                                                 
|May 14, 2003 |  | By: | /s/ ROGER D. MURPHREE                           
|             |  |     |                                                 
|             |  |     | Roger D. Murphree Acting Chief Financial Officer

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##### Table of Contents

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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 quartely 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 have:                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                   
|   | a)                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                   
|   | b)                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                   
|   | c)                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                   
|5. | The registrants other certifying officers 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 (or persons performing the equivalent functions):                                                                                                                                   
|  
|   | a)                                                                                                                                                                                                                                                                                                                                                                                
|  
|   | b)                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                   
|6. | The registrants other certifying officers and I have indicated in this quarterly report whether 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:  May 14, 2003

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

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##### Table of Contents

CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER

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 quartely 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 have:                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | a)                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | b)                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | c)                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|5. | The registrants other certifying officers 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 (or persons performing the equivalent functions):                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | a)                                                                                                                                                                                                                                                                                                                                                                               
|  
|   | b)                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|6. | The registrants other certifying officers and I have indicated in this quarterly report whether 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: May 14, 2003

| | /s/  ROGER D. MURPHREE                          
| | ------------------------------------------------
| |                                                 
| | Roger D. Murphree Acting Chief Financial Officer

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EXHIBIT INDEX

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

| | *3.1  |  | Certificate of Incorporation of New South Bancshares, Inc.                                                                                                 
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | *3.2  |  | By-Laws of New South Bancshares, Inc.                                                                                                                      
| | *4.1  |  | Certificate of Trust of New South Capital Trust I                                                                                                          
| | *4.2  |  | Initial Trust Agreement of New South Capital Trust I                                                                                                       
| | **4.3 |  | Form of Junior Subordinated Indenture between the Company and Bankers Trust Company, as Debenture Trustee                                                  
| | 99.1  |  | Certification Pursuant to 18 U.S.C. Section 1350, as to Section 906 of the Sarbanes-Oxley Act of 2002 by William T. Ratliff, III, Chief Executive Officer. 
| | 99.2  |  | Certification Pursuant to 18 U.S.C. Section 1350, as to Section 906 of the Sarbanes-Oxley Act of 2002 by Roger D. Murphree, Acting Chief Financial Officer.

---

*          Filed with Registration Statement on Form S-1, filed April 6, 1999,
registration No.333-49459

**        Filed with Amendment No. 1 to the Registration Statement on Form S-1, filed May 13, 1999

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