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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





Quarterly Report Pursuant to Section 13 or 15(D) of the


Securities Exchange Act of 1934





For the Quarterly Period Ended June 30, 2002 Commission file number 333-49459





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New South Bancshares, Inc.


(Exact name of registrant as specified in its charter)








Delaware (State or other
jurisdiction of incorporation or organization)

63-1132716 (I.R.S. Employer
Identification No.)1900 Crestwood Boulevard Birmingham, Alabama (Address of Principal Executive Offices)

35210 (Zip
Code)





(205) 951-4000


(Registrants telephone number, including area code)





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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈ .





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NEW SOUTH BANCSHARES, INC.





FORM 10-Q


INDEX





PagePart I.    Financial InformationItem 1.

Financial Statements (Unaudited)Consolidated Balance SheetsJune 30, 2002 and December 31, 2001

2Consolidated Income StatementsThree months ended June 30, 2002 and 2001

3Consolidated Income StatementsSix months ended June 30, 2002 and 2001

4Consolidated Statements of Cash FlowSix months ended June 30, 2002 and 2001

5Notes to Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

13Part II.    Other InformationItem 1.

Legal Proceedings

25Item 4.

Submission of Matters to a Vote of Security Holders

25Item 5.

Other Information

25Item 6.

Exhibits and Reports on Form 8-K

25Signatures

26Exhibit Index

27







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NEW SOUTH BANCSHARES, INC.





CONSOLIDATED BALANCE SHEETS





June 30, 2002


December 31, 2001(Unaudited)


(Audited)(In thousands)ASSETSCash and due from banks

$
23,004


$
9,499Federal funds sold and securities purchased under agreements to resell


20,000



Interest-bearing deposits in other banks


2,673



16,138Investment securities available for sale


275,112



302,608Residual interest in loan securitizations


5,920



8,594Loans available for sale


84,538



118,267Loans, net of unearned income


922,824



789,238Allowance for loan losses


(13,094
)


(12,613
)Net Loans


909,730



776,625Premises and equipment, net


7,794



7,959Mortgage servicing rights, net


16,764



19,777Servicing advances


11,962



17,160Other assets


25,044



28,694Total Assets

$
1,382,541


$
1,305,321LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing

$
67,841


$
65,057Interest-bearing


883,336



808,000Total Deposits


951,177



873,057Federal funds purchased and securities sold under agreements to repurchase


183,055



196,749Federal Home Loan Bank advances


125,025



120,025Notes payable


5,339



10,295Guaranteed preferred beneficial interests in the Companys subordinated debentures


50,500



34,500Accrued expenses, deferred revenue, and other liabilities


17,560



20,095Total Liabilities


1,332,656



1,254,721Shareholders Equity:Common stock of $1.00 par value (authorized: 1.5 million shares; issued and outstanding: 1,255,537.1 at June 30, 2002
and December 31, 2001)


1,256



1,256Surplus


29,475



29,475Retained earnings


31,535



30,962Accumulated other comprehensive loss


(12,381
)


(11,093
)Total Shareholders Equity


49,885



50,600Total Liabilities and Shareholders Equity

$
1,382,541


$
1,305,321





See accompanying notes to consolidated financial statements




2




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NEW SOUTH BANCSHARES, INC.





CONSOLIDATED INCOME STATEMENTS


(Unaudited)


For the three months ended June 30,2002

2001(In thousands, except per
share data)Interest Income:Interest on securities available for sale

$
4,690

$
3,708Interest on loans


19,177


16,765Interest on other short-term investments


45


265Total Interest Income


23,912


20,738Interest Expense:Interest on deposits


9,761


12,222Interest on federal funds purchased and securities sold under agreements to repurchase


2,118


473Interest on Federal Home Loan Bank advances


1,350


1,323Interest on notes payable


147


229Interest expense on guaranteed preferred beneficial interests in the Company's subordinated debentures


959


733Total Interest Expense


14,335


14,980Net Interest Income


9,577


5,758Provision for loan losses


1,475


1,010Net Interest Income After Provision for Loan Losses


8,102


4,748Noninterest Income:Loan administration income


2,074


3,362Origination fees


3,159


3,197Gain on sale of investment securities available for sale


77


Gain on sale of loans and mortgage servicing rights


3,837


4,049Other income


1,168


1,750Total Noninterest Income


10,315


12,358Noninterest Expense:Salaries and benefits


9,303


8,639Net occupancy and equipment expense


1,055


1,214Other expense


4,939


4,605Total Noninterest Expense


15,297


14,458Income Before Income Taxes


3,120


2,648Provision for income taxes


161


138Net Income

$
2,959

$
2,510Weighted average shares outstanding


1,256


1,256Earnings per share

$
2.36

$
2.00





See accompanying notes to consolidated financial statements




3




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##### Table of Contents




NEW SOUTH BANCSHARES, INC.





CONSOLIDATED INCOME STATEMENTS


(Unaudited)





For the six months ended June
30,2002

2001(In thousands)Interest Income:Interest on securities available for sale

$
9,768

$
8,133Interest on loans


37,197


37,790Interest on other short-term investments


90


491Total Interest Income


47,055


46,414Interest Expense:Interest on deposits


19,953


25,754Interest on federal funds purchased and securities sold under agreements to repurchase


4,275


936Interest on Federal Home Loan Bank advances


2,638


4,035Interest on notes payable


339


477Interest expense on guaranteed preferred beneficial interests in the Companys subordinated debentures


1,707


1,466Total Interest Expense


28,912


32,668Net Interest Income


18,143


13,746Provision for Loan Losses


3,086


2,813Net Interest Income After Provision for Loan Losses


15,057


10,933Noninterest Income:Loan administration income


4,489


5,902Origination fees


5,913


5,653Gain on sale of investment securities available for sale


784


Gain on sale of loans and mortgage servicing rights


7,955


9,930Other income


2,290


2,773Total Noninterest Income


21,431


24,258Noninterest Expense:Salaries and benefits


18,579


16,997Net occupancy and equipment expense


2,025


2,333Other expense


9,725


8,812Total Noninterest Expense


30,329


28,142Income Before Provision for Income Taxes and Cumulative Effect of a Change in Accounting Principle


6,159


7,049Provision for Income Taxes


313


359Income Before Cumulative Effect of a Change in Accounting Principle


5,846


6,690Cumulative Effect of a Change in Accounting for Derivative Instruments and Hedging Activities, Net of Tax Benefit of
$72





1,124Net Income

$
5,846

$
5,566Weighted average shares outstanding


1,256


1,256Earnings per shareBefore Cumulative Effect of a Change in Accounting for Derivative Instruments and Hedging Activities

$
4.65

$
5.32Cumulative Effect of a Change in Accounting for Derivative Instruments and Hedging Activities

$


$
0.89Net Income

$
4.65

$
4.43





See accompanying notes to consolidated financial statements




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NEW SOUTH BANCSHARES, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For the six months ended June 30,2002


2001(In thousands)Operating Activities:Net income

$
5,846


$
5,566Adjustments to reconcile net income to net cash used in operating activities:Accretion of discounts and fees


(366
)


(968
)Provision for loan losses


3,086



2,813Depreciation and amortization


765



984Amortization and impairment of mortgage servicing rights


2,664



1,814Origination of loans available for sale


(365,467
)


(702,446
)Proceeds from the sale of loans available for sale and servicing rights


442,085



714,209Gain on sale of investment securities available for sale


(784
)


Gain on sale of premises and equipment






(18
)Gain on sale of loans available for sale and mortgage servicing rights


(7,955
)


(9,930
)(Increase) decrease in other assets


6,724



(9,507
)Decrease in accrued expenses, deferred revenue, and other liabilities


(2,324
)


(4,142
)Net Cash Provided by (Used in) Operating Activities


84,274



(1,625
)Investing Activities:Net (increase) decrease in interest-bearing deposits in other banks


13,465



(36,200
)Net increase in federal funds sold and securities purchased under agreements to resell


(20,000
)


(4,150
)Proceeds from sales of investment securities available for sale


41,291



Proceeds from maturities and calls of investment securities available for sale


28,137



15,515Purchases of investment securities available for sale


(63,235
)


(88,473
)Net (increase) decrease in loan portfolio


(145,406
)


185,471Purchases of premises and equipment


(641
)


(562
)Proceeds from sale of premises and equipment


41



60Net (investment in) proceeds from sale of real estate owned


2,473



(51
)Net Cash Provided by (Used in) Investing Activities


(143,875
)


71,610Financing Activities:Net increase (decrease) in noninterest-bearing deposits


2,784



(4,943
)Net increase (decrease) in interest-bearing deposits


76,094



(44,309
)Net increase (decrease) in federal funds purchased and securitiessold under agreements to repurchase


(16,543
)


30,010Net decrease in notes payable


(4,956
)


(1,271
)Net increase (decrease) of Federal Home Loan Bank Advances


5,000



(38,389
)Proceeds from the issuance of guaranteed preferred beneficial interests in the Company's subordinated
debentures


16,000



Dividends paid


(5,273
)


(8,600
)Net Cash Provided by (Used in) Financing Activities


73,106



(67,502
)Net increase in cash and cash equivalents


13,505



2,483Cash and cash equivalents at beginning of period


9,499



14,286Cash and cash equivalents at end of period

$
23,004


$
16,769





See accompanying notes to consolidated financial statements.




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##### Table of Contents




NEW SOUTH BANCSHARES, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


Six Months Ended June 30, 2002





1.    General





The consolidated financial statements have been prepared using generally accepted accounting principles. The accompanying interim
financial statements are unaudited; however, in the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included, and are of a normal recurring nature. Certain amounts in the
prior year financial statements have been reclassified to conform with the 2002 presentation. These reclassifications had no effect on net income and were not material to the financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2001.





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





2.    Derivative Instruments and Hedging Activities





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





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





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




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##### Table of Contents




Three Months Ended June 30,2002


2001Gains (losses) from interest rate caps

$
(100
)

$
192Gains (losses) from interest rate lock contracts


322



(122
)Losses from mandatory forward delivery contracts


(526
)


(134
)$
(304
)

$
(64
)Six Months Ended June 30,2002


2001Losses from interest rate caps

$
(200
)

$
(101
)Gains (losses) from interest rate lock contracts


104



(133
)Gains (losses) from mandatory forward delivery contracts


(751
)


3$
(847
)

$
(231
)





OCI was decreased by $.1 million and increased by $.2 million
during the six months ended 2002 and 2001, respectively from reclassification into earnings resulting from hedge ineffectiveness. Hedge ineffectiveness decreased OCI by $.05 million during the quarter ended June 30, 2002 and increased OCI by $.1
million during the quarter ended June 30, 2001. The extent of hedge ineffectiveness is influenced by a number of factors including future interest rate volatility, hedge performance and correlation.





3.    S Corporation Election





The Company is an S Corporation, and as such generally is not subject to Federal corporate taxation. Certain states, however, do not recognize S Corporation status; therefore, the Company incurs state
income taxes for those jurisdictions. Profits and losses flow through to the S Corporation shareholders directly in proportion to their per share ownership in the entity. Accordingly, shareholders 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 $5.3 million during the six months ended June 30, 2002. Generally, such dividends are not subject to tax since they result from S Corporation income on which shareholders have previously been taxed.




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##### Table of Contents




4.    Comprehensive Income





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





Three Months Ended June 30,2002


2001Net income

$
2,959


$
2,510Other comprehensive income (loss), net of tax:Net gains (losses) on current period cash flow hedges


(6,276
)


1,159Reclassification adjustment for amount included in net income






75Unrealized gain on investment securities available for sale


3,480



428Reclassification adjustments for net gains included in net income


(77
)


Other comprehensive income (loss)


(2,873
)


1,662Comprehensive income

$
86


$
4,172Six Months Ended June
30,2002


2001Net income

$
5,846


$
5,566Other comprehensive loss, net of tax:Cumulative effect of a change in accounting for derivative instruments and hedging activities






(3,222
)Net losses on current period cash flow hedges


(1,799
)


(1,540
)Reclassification adjustment for amount included in net income


(52
)


(199
)Unrealized gain on investment securities available for sale


1,347



1,778Reclassification adjustments for net gains included in net income


(784
)


Other comprehensive loss


(1,288
)


(3,183
)Comprehensive income

$
4,558


$
2,383




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##### Table of Contents




5.    Segment Reporting





Reportable segments consist of Residential Mortgage Banking, Commercial Real Estate Lending, Automobile Lending, and Portfolio Management.





Residential Mortgage Banking originates and services single-family mortgage loans. These loans are originated through the Companys
network of retail loan origination offices and through brokers and correspondents. Commercial Real Estate Lending consists of loans secured primarily by multi-family housing. Automobile Lending consists of the origination and servicing of loans
secured by automobiles, light trucks, and vans. These loans are primarily acquired on an indirect basis through automobile dealers. Portfolio Management oversees the Companys overall portfolio of marketable assets as well as the New
Souths funding needs. Residential Mortgage Banking, Commercial Real Estate Lending, and Automobile Lending retain the assets generated by each unit, and are credited with the interest income generated by those assets unless they are actually
sold in the secondary market with the results of such sales being attributed to each unit. Each unit pays a market-based funds-use charge to Portfolio Management. The segment results include certain other overhead allocations. The results for the
reportable segments of the Company for the three and six months ended June 30, 2002 and 2001, in thousands, are included in the following tables.




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##### Table of Contents




For the three months ended June 30, 2002Residential Mortgage Banking


Commercial Real
Estate Lending


Automobile Lending


Portfolio Management


Other


ConsolidatedInterest income

$
11,429


$
3,404


$
4,130


$
4,576


$
373


$
23,912Interest expense






131







13,250



954



14,335Intra-company funds (used) / provided


(7,119
)


(1,486
)


(1,273
)


9,625



253



Provision for loan losses


455



10



1,085







(75
)


1,475Noninterest income


9,222



102



287



518



186



10,315Noninterest expense


10,513



64



1,279



851



2,590



15,297Net income (loss) before income taxes


2,564



1,815



780



618



(2,657
)


3,120Provision for (benefit of) income taxes


133



92



40



30



(134
)


161Net income (loss)

$
2,431


$
1,723


$
740


$
588


$
(2,523
)

$
2,959Depreciation and amortization, net

$
116


$



$
25


$
10


$
231


$
382Total assets


673,128



180,301



159,683



319,216



50,213



1,382,541Capital expenditures


157







5



71



73



306For the three months ended June 30, 2001Residential Mortgage Banking


Commercial Real
Estate Lending


Automobile Lending


Portfolio Management


Other


ConsolidatedInterest income

$
9,577


$
3,465


$
3,610


$
3,875


$
211


$
20,738Interest expense






114







14,018



848



14,980Intra-company funds (used) / provided


(4,746
)


(1,591
)


(1,204
)


7,560



(19
)


Provision for loan losses


(10
)


50



200







770



1,010Noninterest income


11,797



105



281



(1,386
)


1,561



12,358Noninterest expense


8,915



66



1,420



961



3,096



14,458Net income (loss) before income taxes


7,723



1,749



1,067



(4,930
)


(2,961
)


2,648Provision for (benefit of) income taxes


386



92



54



(240
)


(154
)


138Net income (loss)

$
7,337


$
1,657


$
1,013


$
(4,690
)

$
(2,807
)

$
2,510Depreciation and amortization, net

$
208


$



$
31


$
9


$
245


$
493Total assets


558,787



151,871



125,220



229,111



93,602



1,158,591Capital expenditures


103







75



1



84



263




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##### Table of Contents

For the six months ended June 30, 2002Residential Mortgage Banking


Commercial Real
Estate Lending


Automobile Lending


Portfolio Management


Other


ConsolidatedInterest income

$
22,291


$
6,540


$
7,938


$
9,462


$
824


$
47,055Interest expense






265







26,888



1,759



28,912Intra-company funds (used) / provided


(13,350
)


(2,765
)


(2,444
)


18,003



556



Provision for loan losses


686



10



2,205







185



3,086Noninterest income


17,821



257



829



2,167



357



21,431Noninterest expense


20,325



121



2,718



1,709



5,456



30,329Net income (loss) before income taxes


5,751



3,636



1,400



1,035



(5,663
)


6,159Provision for (benefit of) income taxes


294



185



71



52



(289
)


313Net income (loss)

$
5,457


$
3,451


$
1,329


$
983


$
(5,374
)

$
5,846Depreciation and amortization, net

$
237


$



$
47


$
19


$
462


$
765Capital expenditures


267







108



103



163



641For the six months ended June 30, 2001Residential Mortgage Banking


Commercial Real
Estate Lending


Automobile Lending


Portfolio Management


Other


ConsolidatedInterest income

$
22,877


$
6,815


$
7,082


$
8,884


$
756


$
46,414Interest expense


2



226







30,723



1,717



32,668Intra-company funds (used) / provided


(12,578
)


(3,622
)


(2,583
)


18,863



(80
)


Provision for loan losses


143



50



1,275







1,345



2,813Noninterest income


21,744



207



831



(924
)


2,400



24,258Noninterest expense


17,273



147



2,594



2,153



5,975



28,142Net income (loss) before income taxes and cumulative effect of a change in accounting principle


14,625



2,977



1,461



(6,053
)


(5,961
)


7,049Provision for (benefit of) income taxes


741



153



74



(305
)


(304
)


359Net income before cumulative effect of a change in accounting principle


13,884



2,824



1,387



(5,748
)


(5,657
)


6,690Cumulative effect of change in accounting principle














1,124







1,124Net income (loss)

$
13,884


$
2,824


$
1,387


$
(6,872
)

$
(5,657
)

$
5,566Depreciation and amortization, net

$
422


$



$
61


$
19


$
482


$
984Capital expenditures


287







78



2



195



562




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##### Table of Contents




6.    Recent Accounting Pronouncements





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





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





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





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The impact of the statement on the Companys
consolidated financial position and results of operations is not expected to be material.




12




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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 10-K for the year ended December 31, 2001. The financial information provided below has been rounded in order to simplify its
presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Consolidated Financial Statements, the Notes thereto, and the other financial data included elsewhere in this
document. All tables and financial statements included in this report should be considered an integral part of this analysis.





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





Forward
Looking Statements





This management discussion and analysis contains certain forward looking information with
respect to the financial condition, results of operations, and business of the Company, including the Notes to Consolidated Financial Statements and statements contained in this discussion with respect to security maturities, loan maturities, loan
growth, expectations for and the impact of interest rate changes, the adequacy of the allowance for loan losses, expected loan losses, and the impact of inflation, unknown trends, or regulatory action. The Company cautions readers that forward
looking statements, including without limitation those noted above, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. Factors that may cause actual
results to differ materially from those contemplated include, among others, the stability of interest rates, the rate of growth of the economy in the Companys market area, the success of the Companys marketing efforts, the ability to
expand into new segments of the market area, competition, changes in technology, the strength of the consumer and commercial credit sectors, levels of consumer confidence, the impact of regulation applicable to the Company, and the performance of
stock and bond markets.





Net Income and Key Performance Ratios





The Company reported net income of $3.0 million for Second Quarter 2002, a 17.9% increase from net income of $2.5 million for Second
Quarter 2001. On a per share basis, net earnings were $2.36 and $2.00, respectively, for the same periods. During Second Quarter 2002 the annualized return on average assets was 0.86% and the annualized return on average equity was 18.84% compared
to 0.90% and 17.71%, respectively, for Second Quarter 2001.





Net income totaled $5.8 million for YTD 2002, a 5.0%
increase from net income of $5.6 million for same period in 2001. On a per share basis, net earnings were $4.65 and $4.43, respectively, for the same periods. YTD 2001 results of operations included a transition adjustment relating to the cumulative
effect of a change in accounting principle for derivative instruments and hedging activities of $1.1 million, or $.89 per share and the securitization gain discussed following. During YTD 2002 the annualized return on average assets was 0.87% and
the annualized return on average equity was 18.85% compared to 0.94% and 19.22%, respectively, for YTD 2001.




13




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##### Table of Contents




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





Net Interest Income, Earning Assets and Interest-bearing Liabilities





Net interest income for Second Quarter 2002 was $9.6 million, a $3.8 million, or 66.3%, increase from $5.8 million for Second
Quarter 2001. This increase was primarily attributable to an increase in average earning assets of $274.0 million, to $1,265.7 million during Second Quarter 2002, compared with $991.7 million during Second Quarter 2001, reflecting the
Securitization. Net interest income was also affected by a decline in the cost of interest-bearing liabilities of 148 basis points compared with a smaller decrease in the yield on interest earning assets of 81 basis points. The larger decline in the
cost of interest-bearing liabilities compared with yield on earning assets reflects the repricing characteristics of certain time deposits and the impact of short-term interest rates as more fully discussed below. The impact of the increase in
average earning assets was offset with comparable increases in the level of average interest-bearing liabilities of $256.4 million to $1,236.6 million during Second Quarter 2002, compared with $980.2 million during Second Quarter 2001. Overall, this
movement in volumes and rates resulted in an increase in the net interest rate margin of 70 basis points during the Second Quarter 2002 compared with the same period in 2001. Net interest income increased despite the impact of the Companys
interest rate swap contracts (Swaps), which decreased net interest income by $3.1 million during Second Quarter 2002, compared with a decrease of $.8 million during Second Quarter 2001. 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
Agreement increased interest expense for Second Quarter 2002 by 227 basis points verses 39 basis points for Second Quarter 2001. Swaps increased Security Repo Agreement interest expense for YTD 2002 by 224 basis points compared with 24 basis points
for YTD 2001.





Net interest income for YTD 2002 was $18.1 million, a $4.4 million or 32.0% increase from $13.7
million for YTD 2001. This increase was attributable to an increase in average earning assets of $164.3 million, to $1,238.5 million during YTD 2002, compared with $1,074.2 million during YTD 2001. The impact of the increase in average earning
assets was offset with comparable increases in the level of average interest-bearing liabilities of $153.0 million to $1,207.3 million during YTD 2002, compared with $1,054.3 million during YTD 2001. The timing of the Securitization had less impact
on the year to date periods than on the quarterly periods discussed above. During YTD 2002, the cost of interest-bearing liabilities declined by 142 basis points compared with a 105 basis point decrease in the yield on interest earning assets. The
combined movement in volumes and rates resulted in an increase in the net interest rate margin of 37 basis points during YTD 2002 compared with YTD 2001. The Companys Swaps decreased net interest income by $6.5 million during YTD 2002,
compared with a decrease of $1.0 million during YTD 2001. See Interest Sensitivity and Market Risk section for a more detailed discussion of Swaps.





The significant change in the impact of the Swaps on the margin is due to the significant decline in short-term interest rates over the last 18 months. The Federal Reserve Bank has lowered short-term
interest rates 11 times since January 1, 2001, resulting in a 475 basis point decrease in the federal funds rate. These decreases have resulted in declining yields or costs on all classes of interest-bearing assets and liabilities. Due to a
steepening of the yield curve, the short-term interest-bearing assets and liabilities were significantly impacted as can be seen in the yield on federal funds sold and the cost of other interest-bearing deposits.





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




14




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##### Table of Contents

derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances throughout the periods
indicated.





Average Balances, Income, Expense, and Rates





For the three months ended June 30,2002


2001Average Balance


Income/ Expense

Yield/ Rate


Average Balance


Income/ Expense

Yield/ Rate(In thousands, except percentages)AssetsLoans, net of unearned income(1)

$
951,517


$
19,177

8.08
%

$
748,286


$
16,765

8.99
%Federal funds sold


7,960



45

2.27



23,243



265

4.57Investment securities available for sale


240,420



3,652

6.09



147,749



2,340

6.35Other investments


65,845



1,038

6.32



72,420



1,368

7.58Total earning assets


1,265,742



23,912

7.58



991,698



20,738

8.39Allowance for loan losses


(12,553
)








(13,402
)Other assets


132,130









137,112Total Assets

$
1,385,319








$
1,115,408Liabilities And Shareholders EquityOther interest bearing deposits

$
8,845



41

1.86


$
4,860



71

5.86Savings deposits


106,126



571

2.16



75,765



753

3.99Time deposits


758,304



9,149

4.84



710,682



11,398

6.43Federal funds purchased and securities sold under agreements to repurchase


181,714



2,119

4.68



43,551



477

4.39Other borrowings


11,389



146

5.14



10,277



225

8.78Federal Home Loan Bank advances


119,694



1,350

4.52



100,549



1,323

5.28Guaranteed preferred beneficial interests in the Companys subordinated debt


50,500



959

7.62



34,500



733

8.55Total interest bearing liabilities


1,236,572



14,335

4.65



980,184



14,980

6.13Noninterest bearing deposits


77,736









66,831Accrued expenses and other liabilities


16,174









16,217Shareholders equity


54,837









52,176Total Liabilities and Shareholders Equity

$
1,385,319








$
1,115,408Net interest rate spread








2.93
%








2.26
%Net interest income





$
9,577








$
5,758Net interest rate margin








3.03
%








2.33
%


---

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



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##### Table of Contents

Average Balances, Income, Expense, and Rates





For the six months ended June 30,2002


2001Average Balance


Income/ Expense

Yield/ Rate


Average Balance


Income/ Expense

Yield/ Rate(In thousands, except percentages)AssetsLoans, net of unearned income(1)

$
910,151


$
37,197

8.24
%

$
817,795


$
37,790

9.32
%Federal funds sold


11,249



90

1.61



20,432



491

4.85Investment securities available for sale


248,589



7,576

6.15



163,331



5,413

6.68Other investments


68,490



2,192

6.45



72,663



2,720

7.55Total earning assets


1,238,479



47,055

7.66



1,074,221



46,414

8.71Allowance for loan losses


(12,423
)








(13,268
)Other assets


122,654









127,219Total Assets

$
1,348,710








$
1,188,172Liabilities and Shareholders EquityOther interest bearing deposits

$
7,724



80

2.09


$
4,365



135

6.24Savings deposits


100,844



1,094

2.19



72,560



1,553

4.32Time deposits


752,346



18,779

5.03



747,985



24,066

6.49Federal funds purchased and securities sold under agreements to repurchase


177,066



4,275

4.87



36,613



936

5.16Other borrowings


10,119



339

6.76



10,957



477

8.78Federal Home Loan Bank advances


116,157



2,638

4.58



147,278



4,035

5.52Guaranteed preferred beneficial interests in the Companys subordinated debt


43,077



1,707

7.99



34,500



1,466

8.55Total interest bearing liabilities


1,207,333



28,912

4.83



1,054,258



32,668

6.25Noninterest bearing deposits


67,953









62,954Accrued expenses and other liabilities


16,654









15,334Shareholders equity


56,770









55,626Total Liabilities and Shareholders Equity

$
1,348,710








$
1,188,172Net interest rate spread








2.83
%








2.46
%Net interest income





$
18,143








$
13,746Net interest rate margin








2.95
%








2.58
%


---

|(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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Securitization had a significant impact on loan levels during 2001. Loans averaged
$951.5 million during Second Quarter 2002, compared with $748.3 million during Second Quarter 2001, an increase of 27.2% and $910.2 million during YTD 2002, compared with $817.8 million during YTD 2001, an increase of 11.3%.





Investment securities available for sale (Investments AFS) increased 62.7% when comparing the Second Quarter 2002 average of
$240.4 million to the Second Quarter 2001 average of $147.7 million. Investments AFS




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##### Table of Contents

averaged $248.6 million during YTD 2002 compared with $163.3 million during YTD 2001, an increase of 52.2%. The increase in Investments AFS
reflects the Companys strategy to more fully leverage its core capital. The Company purchased a portfolio of Ginnie Mae (GNMA) securities beginning in the second quarter of 2001 and has increased this portfolio from inception of
the strategy. The GNMA securities averaged $195.4 million during Second Quarter 2002 and $46.3 million during Second Quarter 2001. The GNMA securities averaged $194.4 million during YTD 2002 and $15.6 million during YTD 2001. The GNMA securities
were primarily funded with certain Security Repo Agreements, which averaged $170.9 million during Second Quarter 2002 compared with $45.4 million during Second Quarter 2001. The Security Repo Agreements averaged $163.1 million during YTD 2002 and
$15.3 million during YTD 2001.





Excluding the average balance change in Investments AFS and related funding,
interest-bearing liabilities increased $130.9 million, or 14.0%, to $1,065.7 million in Second Quarter 2002 from $934.8 million during Second Quarter 2001. Federal Home Loan Bank (FHLB) advances averaged $119.7 million and $100.5 million
during Second Quarter 2002 and Second Quarter 2001, respectively, an increase of $19.2 million or 19.0%. FHLB advances averaged $116.2 million during YTD 2002 and $147.3 million during YTD 2001, a decrease of $31.1 million, or 21.1%.
Interest-bearing deposits averaged $873.3 million during Second Quarter 2002 and $791.3 million during Second Quarter 2001, an increase of $82.0 million, or 10.4%. Interest-bearing deposits averaged $860.9 million during YTD 2002 and $824.9 million
during YTD 2001, an increase of $36.0 million, or 4.4%. During both Second Quarter 2002 and YTD 2002, there has been a shift to more liquid savings deposits from typically longer maturity time deposits from the same periods in 2001.





Noninterest Income and Noninterest Expenses





Noninterest income totaled $10.3 million during Second Quarter 2002 compared to $12.4 million for the same period in the prior year, a decrease of $2.0 million, or 16.5%.
Loan administration income totaled $2.1 million during Second Quarter 2002, compared with $3.4 million during Second Quarter 2001, a decrease of $1.3 million, or 38.3%, reflecting lower levels of loans serviced for others and a different delivery
method for sales of originated conforming mortgage loan servicing rights. Origination fees totaled $3.2 million during both the Second Quarter 2002 and Second Quarter 2001, despite a 36.7% decline in the origination of residential mortgage loans,
due to increases in origination fees relating to construction lending, automobile floorplan lending, and application fees charged in certain residential mortgage lending markets. Gain on sale of Investments AFS, represents the sale of specific
securities during Second Quarter 2002. The Company sold higher coupon GNMA securities and bought lower coupon GNMA securities to reduce the Companys prepayment risk on the GNMA securities purchased at prices above par value. Gain on the sales
of loans and mortgage servicing rights during Second Quarter 2002 totaled $3.8 million compared with $4.0 million during Second Quarter 2001, which included $.3 million related to the Securitization, a decrease of $.2 million. Other income was $1.2
million during Second Quarter 2002 and $1.8 million during Second Quarter 2001, a decline of $.6 million, or 33.3% as a result of lower residential mortgage loan originations.





Noninterest income totaled $21.4 million during YTD 2002 compared to $24.3 million for the same period in the prior year, a decrease of $2.8 million, or 11.7%. Loan
administration income was $4.5 million during YTD 2002, compared with $5.9 million during YTD 2001, a decrease of $1.4 million, or 23.9%, again reflecting lower levels of serviced loans and a different loan servicing sales delivery method.
Origination fees were $5.9 million and $5.7 million for YTD 2002 and YTD 2001, respectively, an increase of $.2 million, despite a 19.8% decline in the origination of residential mortgage loans, due to increases in origination fees relating to
construction lending, automobile floorplan lending, and application fees charged in certain residential mortgage lending markets. As noted above, gain on sale of Investments AFS, represents the sale of specific securities during YTD 2002. Gain on
the sales of loans and mortgage servicing rights during YTD 2002 totaled $8.0 million compared with $9.9 million during YTD 2001, which included $3.4 million related to the Securitization credited to the residential mortgage banking segment, a
decrease of $1.9 million, or 19.9%. Excluding the gain from the Securitization, gains increased by $1.5 million as a result of the final quarterly sale of servicing rights to a large mortgage company under a contract which expired during January
2002. Other income, reflecting the lower residential mortgage origination volume noted above, declined by $.5 million to $2.3 million during YTD 2002 from $2.8 during YTD 2001.







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##### Table of Contents




Noninterest expenses were $15.3 million during Second Quarter 2002 and $14.5
million during Second Quarter 2001, an increase of $.8 million, or 5.8%. Noninterest expenses were $30.3 million during YTD 2002 and $28.1 million during YTD 2001, an increase of $2.2 million, or 7.8%. Salaries and benefits were $9.3 million for
Second Quarter 2002, a $.7 million, or 7.7%, increase compared to $8.6 million for Second Quarter 2001. Salaries and benefits were $18.6 million for YTD 2002, a $1.6 million or 9.3%, increase compared to $17.0 million for YTD 2001. The changes in
salaries and benefits were attributable to increased staffing, bonus accruals, increased 401K Company matching contributions resulting from plan modifications, and increased health care costs. Other noninterest expenses totaled $4.9 million in
Second Quarter 2002 and $4.6 million in Second Quarter 2001, an increase of $.3 million, or 7.3%, including a $.5 million impairment provision for the writedown of various servicing related assets. Other noninterest expenses totaled $9.7 million
during YTD 2002 and $8.8 million during YTD 2001, an increase of $.9 million, or 10.4%, reflecting the writedown of servicing related assets and losses and expenses associated with foreclosed properties and repossessed assets which have been
significantly impacted by the recent economic slowdown.





Interest Sensitivity and Market Risk





Interest Sensitivity





Through policies established by the Asset/Liability Management Committee (ALCO) formed by New Souths Board of Directors, the Company monitors and manages the repricing and maturity of
its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. ALCO uses a combination of traditional gap analysis, which compares the repricings, maturities, and
prepayments, as applicable, of New Souths interest-earning assets, interest-bearing liabilities and derivative instruments, and interest rate sensitivity analysis to manage interest rate risk.





The Companys interest rate sensitivity analysis evaluates interest rate risk based on the impact on the net interest income and
market value of portfolio equity (MVPE) of various interest rate scenarios. The MVPE analysis is required quarterly by the Office of Thrift Supervision (OTS) by virtue of the Companys asset size. The Company also uses
an earnings simulation model to determine the effect of several interest rate scenarios on the Companys net interest income. ALCO meets semi-monthly to monitor and evaluate the interest rate risk position of New South and to formulate and
implement strategies for increasing and protecting the net interest rate margin and net income.





Brokered deposits
are considered to be highly interest-sensitive and are reflected in interest rate risk analyses reviewed by ALCO. Additionally, both ALCO and New Souths Board of Directors are apprised of the level of brokered deposits on an ongoing basis.





The Company uses interest rate contracts, primarily Swaps and interest rate caps (Caps), to reduce or
modify interest rate risk. The impact of these instruments is incorporated into the interest rate risk management model. The Company manages the credit risk of its Swaps, Caps, and forward contracts through a review of creditworthiness of the
counterparties to such contracts, Board established credit limits for each counterparty, and monitoring by ALCO.





At June 30, 2002, New South had Swaps with notional amounts totaling $405 million. $380 million of the Swaps were receive variable/pay fixed swap contracts designed to convert variable rate funding to a fixed rate, thus reducing the
impact of an upward movement in interest rates on the net interest rate margin. At June 30, 2002, $140 million and $240 million of these Swaps were designated as cash flow hedges under SFAS No. 133 of Security Repo Agreements and certain time
deposits, respectively. Additionally, the Company has entered into $25 million of receive fixed/pay variable Swaps utilized as cash flow hedges under SFAS No. 133 for certain brokered certificates of deposit included in the Companys overall
funding. These Swaps have decreased $20 million, net, from December 31, 2001 resulting from termination of three Swaps totaling $30 million by the counterparties and the execution of one new Swap of $10 million. These Swaps reduce the current cost
of these liabilities and convert them to an adjustable rate. These Swaps are callable at the option of the counterparty, and if called, the Company has the right to call the certificates of deposit.







18




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##### Table of Contents




New South also had $245 million in Caps outstanding at June 30, 2002. The Company
is exposed to rising liability costs due to the short-term nature of its liability portfolio. The Caps generally serve to mitigate the Companys risk against increases in the costs of liabilities. The weighted average LIBOR based strike rate
for the Caps is 7.56%, therefore short-term interest rates levels would have to increase significantly before the Caps would provide the Company with a material benefit. At June 30, 2002, 90 day LIBOR was 1.86%. 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 Second Quarter 2002 and Second Quarter 2001, the Companys other income was reduced by $.1 million
and increased by $.2 million, respectively, for changes in the market value of the Caps. During YTD 2002 and YTD 2001, other income was reduced by $.2 million and $.1 million, respectively. During YTD 2002, the Company did not purchase any
additional Caps.




19




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##### Table of Contents




Asset Quality





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





Nonperforming Assets





June 30, 2002


December 31, 2001(In thousands, except percentages)Nonaccrual loans

$
17,376


$
15,291Restructured loans


1,448



5,786Total nonperforming loans


18,824



21,077Foreclosed properties and repossessed assets


5,651



5,748Total nonperforming assets

$
24,475


$
26,825Allowance for loan losses to period-end nonperforming loans


69.56
%


59.84
%Allowance for loan losses to period-end nonperforming assets


53.50
%


47.02
%Nonperforming assets to period-end loans and foreclosed properties and repossessed assets


2.64
%


3.37
%Nonperforming loans to period-end loans


2.04
%


2.67
%








Nonperforming assets
totaled $20.2 million at June 30, 2002, a decrease of $6.6 million, or 24.8%, from $26.8 million at December 31, 2001 as a result of a decrease in the number and volume of restructured loans. These previously classified restructured loans were
removed from the nonperforming assets due to the financial performance of the borrower and improvements in the collateral value of the assets securing the loans. Foreclosed properties decreased by $2.5 million, or 43.0%, to $3.3 million at June 30,
2002 from $5.7 million at December 31, 2001 as a result of property sales.





As of June 30, 2002, a servicing
termination trigger was exceeded in one of the securitizations for which the Company has retained the servicing. At June 30, 2002, the Companys servicing asset was $.9 million for this securitization. The Company has advised the bond insurance
company of the matter and the bond insurance company has not expressed any intent to exercise their contractual right to replace New South as their servicer. There can be no assurances that the bond insurance company will not exercise their
contractual right in the future, which would require New South to write-off any remaining servicing asset for which it no longer performed the servicing function.





Provision and Allowance for Loan Losses





Management
establishes allowances for the purpose of absorbing losses that are inherent within the loan portfolio and that are expected to occur based on managements review of historical losses, underwriting standards, changes in the composition of the
loan portfolio, changes in the economy, and other factors. The allowance for loan losses is maintained at a level considered adequate to provide for losses as determined by managements continuing review and evaluation of the loans and its
judgment as to the impact of economic conditions on the portfolio. 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.




20




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##### Table of Contents




Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Companys income statement, are made periodically to maintain the allowance at an appropriate level based on managements analysis of the inherent risk in the loan portfolio. The amount of the provision is a function
of the level of loans outstanding, the mix of the outstanding loan portfolio, the levels of classified assets and nonperforming loans, and current and anticipated economic conditions.





The Companys allowance for loan losses is based upon managements judgment and assumptions regarding risk elements in the portfolio, future economic conditions,
and other factors affecting borrowers. The evaluation of the allowance for loan losses includes managements identification and analysis of loss inherent in various portfolio segments using a credit grading process and specific reviews and
evaluations of certain significant problem credits. In addition, management monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general economic conditions in the service area with residential mortgage
and 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.





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





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




21




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##### Table of Contents




Analysis of the Allowance for Loan Losses


For the six months ended June 30,


(In thousands, except percentages)





2002


2001Average loans, net of unearned income

$
910,151


$
817,795Balance of allowance for loan losses at beginning of period

$
12,613


$
13,513Loans charged off:Residential mortgage


673



3,009Installment


3,148



2,657Commercial real estate


6



Total charge-offs


3,827



5,666Recoveries of loans previously charged off:Residential mortgage


417



162Installment


805



895Commercial real estate






Total recoveries


1,222



1,057Net charge-offs


2,605



4,609Addition to allowance charged to expense


3,086



2,813Balance of allowance for loan losses at end of period

$
13,094


$
11,717Net charge-offs to average loans, net of unearned income, annualized


0.58
%


1.14
%





The provision for loan losses was $3.1 million for YTD 2002
compared with $2.8 million for YTD 2001, an increase of $.3 million. The increase in the provision for loan losses reflects higher average loans during YTD 2002, compared with YTD 2001, which included the impact of the Securitization. At June 30,
2002 and December 31, 2001, the allowance for loan losses was $13.1 million and $12.6 million, respectively. As a percentage of loans, net of unearned income, the allowance for loan losses decreased to 1.42% at June 30, 2002 from 1.60% at December
31, 2001. The decrease resulted from increases in the balance of the Companys loans.





Net charge-offs of
residential mortgage loans were $.3 million during YTD 2002 and $2.8 million during YTD 2001, with the YTD 2001 being impacted by higher losses of Avondales portfolio. Net charge-offs of installment loans were $2.3 million during YTD 2002 and
$1.8 million during YTD 2001 resulting from sensitivity of these assets and borrowers to depressed economic conditions beginning during the second half of 2001.




22




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##### Table of Contents




Capital





At June 30, 2002 shareholders equity of the Company totaled $49.9 million, or 3.6% of total assets, compared to $50.6 million, or 3.9% of total assets at December 31, 2001. The decrease is
attributable to net income of $5.8 million earned during YTD 2002 offset by a $1.2 million decrease in accumulated other comprehensive loss, and by dividends paid of $5.3 million.





The OTS requires thrift financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk
weights ranging from zero to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital of the Bank consists of common shareholders equity, excluding accumulated other comprehensive loss, plus minority interest
in consolidated subsidiaries, and minus certain intangible assets. The Banks Tier 2 capital consists of the general reserve for loan losses subject to certain limitations. Consolidated regulatory capital requirements do not apply to thrift
holding companies. The following table sets forth the specific capital amounts and ratios of New South for the indicated periods.





Analysis of Capital





As of June 30,
2002


As of December 31, 2001(In thousands, except for percentages)Shareholder's equity

$
85,317


$
87,808Minority interest in consolidated subsidiaries


282



276Accumulated other comprehensive loss


12,381



11,093Servicing rights capital haircut


(1,648
)


Tier 1 capital


96,332



99,177Allowance for loan losses


10,760



9,910Tier 2 capital


10,760



9,910Low level recourse deduction


184



213Other






8,594Total deductions


184



8,807Total risk-based capital

$
106,908


$
100,280Risk-weighted assets (including off-balance sheet exposure)

$
966,899


$
851,056Tier 1 leverage ratio


7.03
%


7.66
%Total risk-based capital ratio


11.06



10.64Tier 1 risk-based capital ratio(1)


9.96



11.78


---

|(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.




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The Company completed the issuance of $16 million of Trust Preferred Securities
(TPS) through a private placement with an investment bank which closed on March 26, 2002. Part of the proceeds from the sale of TPS were used to repay the Companys working capital loans and purchase a residual interest in a loan
securitization owned by the Bank totaling $5.7 million, its fair value and other corporate purposes, including a possible additional capital investment in the Bank. The TPS will bear an interest rate of 90-day LIBOR plus 360 basis points and will
not exceed 11% for the initial five years they are outstanding. The effective interest rate at June 30, 2002 was 5.47%. The TPS are callable at the Companys option, at par, beginning March 26, 2007 and mature March 26, 2032.





Liquidity





The Company operated with sufficient liquidity during Second Quarter 2002 and expects liquidity levels to remain sufficient throughout 2002. In particular, at June 30, 2002, the Company had $105.0 million in unused FHLB borrowing
capacity. In addition, the Company has available other borrowing sources such as federal funds lines and securities which could be pledged as collateral for Security Repo Agreements.




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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 is of the opinion that the ultimate resolution of these lawsuits will not have a material adverse effect on the
Companys financial condition or results of operations.





Item 4.Submission of Matters to a Vote of Security Holders





The Annual meeting of
shareholders of the Company was held on May 28, 2002. The following matter was submitted to a vote of the Companys shareholders:





Election of Three Director Nominees was approved:





Name

Total Votes For

Total Votes Against

Total Votes WithheldW.T. Ratliff, Jr. (Term Expires 2005)

1,110,045.10

0

0Robert M. Couch (Term Expires 2005)

1,110,045.10

0

0David A. Roberts (Term Expires 2005)

1,110,045.10

0

0





Remaining Directors not elected at this meeting
whose terms continue:





William T. Ratliff, III (Term Expires 2003)


Lizabeth R. Nichols (Term Expires 2004)





Item 5.Other Information





None.





Item 6.Exhibits and Reports on Form 8-K





ITEM 6(A)EXHIBITS





The exhibits listed in the Exhibit Index at page 27 of this Form 10-Q are filed herewith or are incorporated by
reference herein.





ITEM 6(B)REPORTS on Form 8-K





A report on Form 8-K was filed by the Company during the period April 1, 2002 to June 30, 2002. The report was filed on July 31, 2002 regarding the
Companys change in accountants. No financial statements were filed with this report.




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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.





By:

/s/    ROBERT M. COUCHRobert M. Couch Executive Vice
President





August 14, 2002


By:

/s/    ROGER D. MURPHREERoger D. Murphree Chief
Financial Officer





August 14, 2002




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##### Table of Contents




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


---

|* |  | 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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