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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

For the Quarterly Period Ended June 30, 2003

Commission file number
333-49459

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New South Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

| | 1900 Crestwood BoulevardBirmingham, Alabama(Address of Principal Executive Offices) |  | 35210(Zip Code) | 
| | ----------------------------------------------------------------------------------- |  | --------------- | 

(205) 951-4000(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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-QINDEX



|         |  |                       |  |                                                                                                    | Page
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------- | ----
|         |  |                       |  |                                                                                                    |     
|Part I.  |  | Financial Information | 
|         |  |                       |  |                                                                                                    |     
|         |  | Item 1.               |  | Financial Statements (Unaudited)                                                                   |     
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Condensed Consolidated Balance Sheets June 30, 2003 and December 31, 2002                         | 2   
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Condensed Consolidated Income StatementsThree months ended June 30, 2003 and 2002                 | 3   
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Condensed Consolidated Income Statements Six months ended June 30, 2003 and 2002                  | 4   
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Condensed Consolidated Statements of Shareholders Equity Six months ended June 30, 2003 and 2002 | 5   
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2003 and 2002           | 6   
|         |  |                       |  |                                                                                                    |     
|         |  |                       |  | Notes to Condensed Consolidated Financial Statements                                               | 7   
|         |  |                       |  |                                                                                                    |     
|         |  | Item 2.               |  | Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations | 16  
|         |  |                       |  |                                                                                                    |     
|         |  | Item 4.               |  | Controls and Procedures                                                                            | 26  
|         |  |                       |  |                                                                                                    |     
|Part II. |  | Other Information     | 
|         |  |                       |  |                                                                                                    |     
|         |  | Item 1.               |  | Legal Proceedings                                                                                  | 27  
|         |  |                       |  |                                                                                                    |     
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                | 27  
|         |  |                       |  |                                                                                                    |     
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                   | 27  

|Signatures    | 28
|------------- | --
|              |   
|Exhibit Index | 29

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NEW SOUTH BANCSHARES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except
shares)



|                                                                                                                                             |  | June30,2003 |           | December31,2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | --------------- | -
|                                                                                                                                             |  |             |           |                 |  
|                                                                                                                                             |  | (Unaudited) |           | (Audited)       |  
|ASSETS                                                                                                                                       |  |             |           |                 |  
|Cash and due from banks                                                                                                                      |  | $           | 17,154    |                 | $
|Interest-bearing deposits in other banks                                                                                                     |  |             | 5,353     |                 |  
|Investment securities available for sale                                                                                                     |  |             | 294,713   |                 |  
|Residual interest in loan securitizations                                                                                                    |  |             | 9,352     |                 |  
|Loans available for sale                                                                                                                     |  |             | 191,778   |                 |  
|Loans, net of unearned income                                                                                                                |  |             | 903,230   |                 |  
|Allowance for loan losses                                                                                                                    |  |             | (13,292   | )               |  
|                                                                                                                                             |  |             |           |                 |  
|Net Loans                                                                                                                                    |  |             | 889,938   |                 |  
|Premises and equipment, net                                                                                                                  |  |             | 7,274     |                 |  
|Mortgage servicing rights, net                                                                                                               |  |             | 9,451     |                 |  
|Servicing advances                                                                                                                           |  |             | 19,116    |                 |  
|Other assets                                                                                                                                 |  |             | 20,161    |                 |  
|                                                                                                                                             |  |             |           |                 |  
|Total Assets                                                                                                                                 |  | $           | 1,464,290 |                 | $
|                                                                                                                                             |  |             |           |                 |  
|                                                                                                                                             |  |             |           |                 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                         |  |             |           |                 |  
|Deposits:                                                                                                                                    |  |             |           |                 |  
|Noninterest-bearing                                                                                                                          |  | $           | 85,103    |                 | $
|Interest-bearing                                                                                                                             |  |             | 891,199   |                 |  
|                                                                                                                                             |  |             |           |                 |  
|Total Deposits                                                                                                                               |  |             | 976,302   |                 |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                   |  |             | 179,398   |                 |  
|Federal Home Loan Bank advances                                                                                                              |  |             | 150,023   |                 |  
|Notes payable                                                                                                                                |  |             | 10,887    |                 |  
|Subordinated debentures                                                                                                                      |  |             | 59,500    |                 |  
|Accrued expenses, deferred revenue, and other liabilities                                                                                    |  |             | 32,700    |                 |  
|                                                                                                                                             |  |             |           |                 |  
|Total Liabilities                                                                                                                            |  |             | 1,408,810 |                 |  
|Shareholders Equity:                                                                                                                        |  |             |           |                 |  
|Common stock of $1.00 par value (authorized: 1.5 million shares; issued and outstanding: 1,255,537.1 at June 30, 2003 and December 31,
2002) |  |             | 1,256     |                 |  
|Additional paid-in capital                                                                                                                   |  |             | 29,475    |                 |  
|Retained earnings                                                                                                                            |  |             | 37,988    |                 |  
|Accumulated other comprehensive loss, net                                                                                                    |  |             | (13,239   | )               |  
|                                                                                                                                             |  |             |           |                 |  
|Total Shareholders Equity                                                                                                                   |  |             | 55,480    |                 |  
|                                                                                                                                             |  |             |           |                 |  
|Total Liabilities and Shareholders Equity                                                                                                   |  | $           | 1,464,290 |                 | $
|                                                                                                                                             |  |             |           |                 |  
|                                                                                                                                             |  |             |           |                 |  

See accompanying notes to condensed consolidated financial statements

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NEW SOUTH BANCSHARES, INC.CONDENSED CONSOLIDATED INCOME STATEMENTS(Unaudited)(In thousands, except per share data)



|                                                                                       |  | ThreemonthsendedJune30, |       
|-------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                       |  |                         |       
|                                                                                       |  | 2003                    |       
|                                                                                       |  |                         |       
|Interest Income:                                                                       |  |                         |       
|Interest on loans                                                                      |  | $                       | 17,926
|Interest on securities available for sale                                              |  |                         | 3,477 
|Interest on other short-term investments                                               |  |                         | 45    
|                                                                                       |  |                         |       
|Total Interest Income                                                                  |  |                         | 21,448
|Interest Expense:                                                                      |  |                         |       
|Interest on deposits                                                                   |  |                         | 8,449 
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                         | 1,636 
|Interest on Federal Home Loan Bank advances                                            |  |                         | 1,132 
|Interest on notes payable                                                              |  |                         | 100   
|Interest on subordinated debentures                                                    |  |                         | 935   
|                                                                                       |  |                         |       
|Total Interest Expense                                                                 |  |                         | 12,252
|Net Interest Income                                                                    |  |                         | 9,196 
|Provision for Loan Losses                                                              |  |                         | 1,705 
|                                                                                       |  |                         |       
|Net Interest Income After Provision for Loan Losses                                    |  |                         | 7,491 
|Noninterest Income:                                                                    |  |                         |       
|Loan administration income                                                             |  |                         | 706   
|Origination fees                                                                       |  |                         | 5,107 
|Gain on sale of investment securities available for sale                               |  |                         | 116   
|Gain on sale of loans and mortgage servicing rights                                    |  |                         | 7,227 
|Other income                                                                           |  |                         | 1,284 
|                                                                                       |  |                         |       
|Total Noninterest Income                                                               |  |                         | 14,440
|Noninterest Expense:                                                                   |  |                         |       
|Salaries and benefits                                                                  |  |                         | 11,105
|Net occupancy and equipment expense                                                    |  |                         | 1,027 
|Other expense                                                                          |  |                         | 6,364 
|                                                                                       |  |                         |       
|Total Noninterest Expense                                                              |  |                         | 18,496
|                                                                                       |  |                         |       
|Income Before Provision for Income Taxes                                               |  |                         | 3,435 
|Provision for Income Taxes                                                             |  |                         | 168   
|                                                                                       |  |                         |       
|Net Income                                                                             |  | $                       | 3,267 
|                                                                                       |  |                         |       
|Weighted average shares outstanding                                                    |  |                         | 1,256 
|Basic and diluted earnings per share:                                                  |  | $                       | 2.60  

See accompanying notes to condensed consolidated financial
statements

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NEW SOUTH BANCSHARES, INC.CONDENSED CONSOLIDATED INCOME STATEMENTS(Unaudited)(In thousands, except per share data)



|                                                                                       |  | SixmonthsendedJune30, |       
|-------------------------------------------------------------------------------------- |  | --------------------- | ------
|                                                                                       |  |                       |       
|                                                                                       |  | 2003                  |       
|                                                                                       |  |                       |       
|Interest Income:                                                                       |  |                       |       
|Interest on loans                                                                      |  | $                     | 35,250
|Interest on securities available for sale                                              |  |                       | 6,919 
|Interest on other short-term investments                                               |  |                       | 76    
|                                                                                       |  |                       |       
|Total Interest Income                                                                  |  |                       | 42,245
|Interest Expense:                                                                      |  |                       |       
|Interest on deposits                                                                   |  |                       | 17,322
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                       | 3,263 
|Interest on Federal Home Loan Bank advances                                            |  |                       | 2,465 
|Interest on notes payable                                                              |  |                       | 208   
|Interest on subordinated debentures                                                    |  |                       | 1,875 
|                                                                                       |  |                       |       
|Total Interest Expense                                                                 |  |                       | 25,133
|Net Interest Income                                                                    |  |                       | 17,112
|Provision for Loan Losses                                                              |  |                       | 2,550 
|                                                                                       |  |                       |       
|Net Interest Income After Provision for Loan Losses                                    |  |                       | 14,562
|Noninterest Income:                                                                    |  |                       |       
|Loan administration income                                                             |  |                       | 1,392 
|Origination fees                                                                       |  |                       | 8,958 
|Gain on sale of investment securities available for sale                               |  |                       | 2,328 
|Gain on sale of loans and mortgage servicing rights                                    |  |                       | 11,828
|Other income                                                                           |  |                       | 1,968 
|                                                                                       |  |                       |       
|Total Noninterest Income                                                               |  |                       | 26,474
|Noninterest Expense:                                                                   |  |                       |       
|Salaries and benefits                                                                  |  |                       | 21,939
|Net occupancy and equipment expense                                                    |  |                       | 1,985 
|Other expense                                                                          |  |                       | 11,645
|                                                                                       |  |                       |       
|Total Noninterest Expense                                                              |  |                       | 35,569
|                                                                                       |  |                       |       
|Income Before Provision for Income Taxes                                               |  |                       | 5,467 
|Provision for Income Taxes                                                             |  |                       | 269   
|                                                                                       |  |                       |       
|Net Income                                                                             |  | $                     | 5,198 
|                                                                                       |  |                       |       
|Weighted average shares outstanding                                                    |  |                       | 1,256 
|Basic and diluted earnings per share:                                                  |  | $                     | 4.14  

See accompanying notes to condensed consolidated financial
statements

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



|                                                       |  | CommonStock |       | AdditionalPaid-InCapital |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome(Loss) |        | TotalShareholdersEquity |  
|------------------------------------------------------ |  | ----------- | ----- | ------------------------ | - | ---------------- |  | ----------------------------------------- | ------ | ------------------------ | -
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|                                                       |  |             |       |                          |   | (In thousands)   |  |                                           |        |                          |  
|Balance at January 1, 2003                             |  | $           | 1,256 |                          | $ | 29,475           |  | $                                         | 37,147 |                          | $
|Comprehensive Income:                                  |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Net income                                             |  |             |      |                          |   |                 |  |                                           | 5,198  |                          |  
|Other comprehensive income, net of tax                 |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Net unrealized gains on cash flow hedges (1)           |  |             |      |                          |   |                 |  |                                           |       |                          |  
|Unrealized losses on securities available for sale (1) |  |             |      |                          |   |                 |  |                                           |       |                          |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Total other comprehensive income                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Total comprehensive income                             |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Common dividends paid ($3.47 per share)                |  |             |      |                          |   |                 |  |                                           | (4,357 | )                        |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Balance at June 30, 2003                               |  | $           | 1,256 |                          | $ | 29,475           |  | $                                         | 37,988 |                          | $
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Balance at January 1, 2002                             |  | $           | 1,256 |                          | $ | 29,475           |  | $                                         | 30,962 |                          | $
|Comprehensive Income:                                  |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Net income                                             |  |             |      |                          |   |                 |  |                                           | 5,846  |                          |  
|Other comprehensive income, net of tax                 |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Net unrealized losses on cash flow hedges (1)          |  |             |      |                          |   |                 |  |                                           |       |                          |  
|Unrealized gains on securities available for sale (1)  |  |             |      |                          |   |                 |  |                                           |       |                          |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Total other comprehensive loss                         |  |             |       |                          |   |                  |  |                                           |        |                          |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Total comprehensive income                             |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Common dividends paid ($4.20 per share)                |  |             |      |                          |   |                 |  |                                           | (5,273 | )                        |  
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  
|Balance at June 30, 2002                               |  | $           | 1,256 |                          | $ | 29,475           |  | $                                         | 31,535 |                          | $
|                                                       |  |             |       |                          |   |                  |  |                                           |        |                          |  

______________

| | (1) | See disclosure of reclassification amount and tax effect in notes to condensed consolidated financial statements
| | --- | ----------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements

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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                 |  | ForthesixmonthsendedJune30, |         
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------
|                                                                                                                 |  |                             |         
|                                                                                                                 |  | 2003                        |         
|                                                                                                                 |  |                             |         
|                                                                                                                 |  | (In thousands)              |         
|Operating Activities:                                                                                            |  |                             |         
|Net income                                                                                                       |  | $                           | 5,198   
|Adjustments to reconcile net income to net cash used in operating activities:                                    |  |                             |         
|Accretion of discounts and fees                                                                                  |  |                             | (61     
|Provision for loan losses                                                                                        |  |                             | 2,550   
|Depreciation and amortization                                                                                    |  |                             | 664     
|Amortization and impairment of mortgage servicing rights                                                         |  |                             | 6,109   
|Origination of loans available for sale                                                                          |  |                             | (644,844
|Proceeds from the sale of loans available for sale and servicing rights                                          |  |                             | 589,735 
|Gain on sale of investment securities available for sale                                                         |  |                             | (2,328  
|Gain on sale of premises and equipment                                                                           |  |                             | (9      
|Gain on sale of loans available for sale and mortgage servicing rights                                           |  |                             | (11,828 
|Decrease in other assets                                                                                         |  |                             | 5,045   
|Increase (decrease) in accrued expenses, deferred revenue, and other liabilities                                 |  |                             | 15,631  
|                                                                                                                 |  |                             |         
|Net Cash Provided by (Used in) Operating Activities                                                              |  |                             | (34,138 
|                                                                                                                 |  |                             |         
|Investing Activities:                                                                                            |  |                             |         
|Net decrease in interest-bearing deposits in other banks                                                         |  |                             | 2,555   
|Net increase in federal funds sold and securities purchased under agreements to resell                           |  |                             |        
|Proceeds from sales of investment securities available for sale                                                  |  |                             | 128,676 
|Proceeds from maturities, calls, and repayments of investment securities available for sale                      |  |                             | 53,608  
|Purchases of investment securities available for sale                                                            |  |                             | (180,616
|Net increase in loan portfolio                                                                                   |  |                             | (81,883 
|Purchases of premises and equipment                                                                              |  |                             | (781    
|Proceeds from sale of premises and equipment                                                                     |  |                             | 335     
|                                                                                                                 |  |                             |         
|Net Used in Investing Activities                                                                                 |  |                             | (78,106 
|Financing Activities:                                                                                            |  |                             |         
|Net increase in noninterest-bearing deposits                                                                     |  |                             | 884     
|Net increase in interest-bearing deposits                                                                        |  |                             | 65,086  
|Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase            |  |                             | 32,189  
|Net increase (decrease) in notes payable                                                                         |  |                             | 2,645   
|Net increase of Federal Home Loan Bank Advances                                                                  |  |                             | 15,999  
|Proceeds from the issuance of guaranteed preferred beneficial interests in the Companys subordinated debentures |  |                             | 9,000   
|Dividends paid                                                                                                   |  |                             | (4,357  
|                                                                                                                 |  |                             |         
|Net Cash Provided by Financing Activities                                                                        |  |                             | 121,446 
|                                                                                                                 |  |                             |         
|Net increase in cash and cash equivalents                                                                        |  |                             | 9,202   
|Cash and cash equivalents at beginning of period                                                                 |  |                             | 7,952   
|                                                                                                                 |  |                             |         
|Cash and cash equivalents at end of period                                                                       |  | $                           | 17,154  
|                                                                                                                 |  |                             |         

See accompanying notes to condensed consolidated financial statements

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

Six Months Ended June 30, 2003

1. General

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America. The accompanying interim condensed consolidated financial statements are
unaudited; however, in the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included, and are of a normal recurring nature. Certain amounts in the prior year
condensed consolidated 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 condensed consolidated financial statements. These condensed
consolidated 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 two wholly owned subsidiaries, New South Federal Savings Bank
(New South or the Bank) and New South Management Services, LLC. New South has three subsidiaries, 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 condensed consolidated financial statements presented primarily represent the accounts of Bancshares and New South. Three of the New South Joint Ventures are consolidated with their minority interests
included in other accrued expenses, deferred revenues, and other liabilities. One New South Joint Venture is accounted for under the equity method. Avondale Funding.com, inc. a wholly owned subsidiary of New South was dissolved in June 2003. On July
1, 2003, New South sold its interest in New South Agency, Inc. to an affiliated company at a sales price in excess of its recorded cost, resulting in a gain of $.4 million. 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. At June
30, 2003 and December 31, 2002 the recorded investment in loans that were considered to be impaired under Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan - an Amendment of
SFAS No. 5 and 15,were $14.8 million and $5.5 million, respectively. The related allowances for loan losses on impaired loans was $3.7 million and $.7 million at June 30, 2003 and December 31, 2002, respectively.

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, identified loan impairment, 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 are 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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##### Table of Contents

While management uses available information to estimate inherent losses 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 judgment about information available at the time of their examination.

Mortgage Servicing Rights

The Company sells a 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 at a specified interest rate and price (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 Accounting 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 attributable to ineffectiveness 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:

9



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##### Table of Contents

|                                                         |  | ThreemonthsendedJune30, |     
|-------------------------------------------------------- |  | ----------------------- | ----
|                                                         |  |                         |     
|                                                         |  | 2003                    |     
|                                                         |  |                         |     
|Losses from interest rate caps                           |  | $                       | (49 
|Gains (losses) from interest rate lock contracts         |  |                         | (124
|Gains (losses) from mandatory forward delivery contracts |  |                         | 148 
|                                                         |  |                         |     
|                                                         |  | $                       | (25 
|                                                         |  |                         |     

|                                                         |  | SixmonthsendedJune30, |    
|-------------------------------------------------------- |  | --------------------- | ---
|                                                         |  |                       |    
|                                                         |  | 2003                  |    
|                                                         |  |                       |    
|Losses from interest rate caps                           |  | $                     | (38
|Gains from interest rate lock contracts                  |  |                       | 209
|Gains (losses) from mandatory forward delivery contracts |  |                       | 159
|                                                         |  |                       |    
|                                                         |  | $                     | 330
|                                                         |  |                       |    

3.Supplemental Cash Flow Information

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



|                                                                      |  | SixmonthsendedJune30, |       
|--------------------------------------------------------------------- |  | --------------------- | ------
|                                                                      |  |                       |       
|                                                                      |  | 2003                  |       
|                                                                      |  |                       |       
|Transfers of loans to foreclosed properties and repossessed assets    |  | $                     | 4,952 
|Change in unrealized gain on investment securities available for sale |  |                       | (1,822

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 $4.4 million during the first six months of 2003.
Generally, such dividends are not subject to tax since they result from S Corporation income on which shareholders have previously been taxed.

10



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##### Table of Contents

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 have been displayed as part of other comprehensive income in the same
or earlier periods. The disclosure of the reclassification amounts is as follows:



|                                                                                                           |  | ThreemonthsendedJune30,2003 |      
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | -----
|                                                                                                           |  |                             |      
|                                                                                                           |  | (In thousands)              |      
|                                                                                                           |  | BeforeTaxAmount             |      
|                                                                                                           |  |                             |      
|Net unrealized gains on cash flow hedges arising during the period                                         |  | $                           | 1,639
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                             | (75  
|Net unrealized gains on available for sale securities arising during the period                            |  |                             | 504  
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                             | (116 
|                                                                                                           |  |                             |      
|Total other comprehensive income                                                                           |  | $                           | 1,952
|                                                                                                           |  |                             |      



|                                                                                                           |  | ThreemonthsendedJune30,2002 |       
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                                           |  |                             |       
|                                                                                                           |  | (Inthousands)               |       
|                                                                                                           |  | BeforeTaxAmount             |       
|                                                                                                           |  |                             |       
|Net unrealized losses on cash flow hedges arising during the period                                        |  | $                           | (6,606
|Reclassification adjustments for net losses related to cash flow hedges included in net income             |  |                             | 1     
|Net unrealized gains on available for sale securities arising during the period                            |  |                             | 3,659 
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                             | (77   
|                                                                                                           |  |                             |       
|Total other comprehensive loss                                                                             |  | $                           | (3,023
|                                                                                                           |  |                             |       

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|                                                                                                           |  | SixmonthsendedJune30,2003 |       
|---------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                           |  |                           |       
|                                                                                                           |  | (Inthousands)             |       
|                                                                                                           |  | BeforeTaxAmount           |       
|                                                                                                           |  |                           |       
|Net unrealized gains on cash flow hedges arising during the period                                         |  | $                         | 3,494 
|                                                                                                           |  |                           |       
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                           | (83   
|Net unrealized gains on available for sale securities arising during the period                            |  |                           | 506   
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                           | (2,328
|                                                                                                           |  |                           |       
|Total other comprehensive income                                                                           |  | $                         | 1,589 
|                                                                                                           |  |                           |       



|                                                                                                           |  | SixmonthsendedJune30,2002 |       
|---------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                           |  |                           |       
|                                                                                                           |  | (Inthousands)             |       
|                                                                                                           |  | BeforeTaxAmount           |       
|                                                                                                           |  |                           |       
|Net unrealized losses on cash flow hedges arising during the period                                        |  | $                         | (1,893
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                           | (54   
|Net unrealized gains on available for sale securities arising during the period                            |  |                           | 1,377 
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                           | (784  
|                                                                                                           |  |                           |       
|Total other comprehensive loss                                                                             |  | $                         | (1,354
|                                                                                                           |  |                           |       

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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 and other income producing properties. 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 principally 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 three and six months ended June 30, 2003
and 2002 are included in the following tables.



|                                        |  | ForthethreemonthsendedJune30,2003 |        
|--------------------------------------- |  | --------------------------------- | -------
|                                        |  |                                   |        
|                                        |  | ResidentialMortgageBanking        |        
|                                        |  |                                   |        
|Interest income                         |  | $                                 | 12,375 
|Interest expense                        |  |                                   |       
|Intra-company funds (used) / provided   |  |                                   | (5,637 
|Provision for loan losses               |  |                                   | 1,675  
|Noninterest income                      |  |                                   | 13,996 
|Noninterest expense                     |  |                                   | 13,040 
|                                        |  |                                   |        
|Net income (loss) before income taxes   |  |                                   | 6,019  
|Provision for (benefit of) income taxes |  |                                   | 301    
|                                        |  |                                   |        
|Net income (loss)                       |  | $                                 | 5,718  
|                                        |  |                                   |        
|Depreciation and amortization, net      |  | $                                 | 136    
|Total assets                            |  |                                   | 807,408
|Capital expenditures                    |  |                                   | 143    



|                                        |  | ForthethreemonthsendedJune30,2002 |        
|--------------------------------------- |  | --------------------------------- | -------
|                                        |  |                                   |        
|                                        |  | ResidentialMortgageBanking        |        
|                                        |  |                                   |        
|Interest income                         |  | $                                 | 11,429 
|Interest expense                        |  |                                   |       
|Intra-company funds (used) / provided   |  |                                   | (7,119 
|Provision for loan losses               |  |                                   | 455    
|Noninterest income                      |  |                                   | 8,954  
|Noninterest expense                     |  |                                   | 10,245 
|                                        |  |                                   |        
|Net income (loss) before income taxes   |  |                                   | 2,564  
|Provision for (benefit of) income taxes |  |                                   | 133    
|                                        |  |                                   |        
|Net income (loss)                       |  | $                                 | 2,431  
|                                        |  |                                   |        
|Depreciation and amortization, net      |  | $                                 | 116    
|Total assets                            |  |                                   | 673,128
|Capital expenditures                    |  |                                   | 157    

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|                                        |  | ForthesixmonthsendedJune30,2003 |        
|--------------------------------------- |  | ------------------------------- | -------
|                                        |  |                                 |        
|                                        |  | ResidentialMortgageBanking      |        
|                                        |  |                                 |        
|Interest income                         |  | $                               | 24,525 
|Interest expense                        |  |                                 |       
|Intra-company funds (used) / provided   |  |                                 | (11,651
|Provision for loan losses               |  |                                 | 2,825  
|Noninterest income                      |  |                                 | 22,355 
|Noninterest expense                     |  |                                 | 25,060 
|                                        |  |                                 |        
|Net income (loss) before income taxes   |  |                                 | 7,344  
|Provision for (benefit of) income taxes |  |                                 | 368    
|                                        |  |                                 |        
|Net income (loss)                       |  | $                               | 6,976  
|                                        |  |                                 |        
|Depreciation and amortization, net      |  | $                               | 246    
|Capital expenditures                    |  |                                 | 446    



|                                        |  | ForthesixmonthsendedJune30,2002 |        
|--------------------------------------- |  | ------------------------------- | -------
|                                        |  |                                 |        
|                                        |  | ResidentialMortgageBanking      |        
|                                        |  |                                 |        
|Interest income                         |  | $                               | 22,291 
|Interest expense                        |  |                                 |       
|Intra-company funds (used) / provided   |  |                                 | (13,350
|Provision for loan losses               |  |                                 | 686    
|Noninterest income                      |  |                                 | 17,365 
|Noninterest expense                     |  |                                 | 19,869 
|                                        |  |                                 |        
|Net income (loss) before income taxes   |  |                                 | 5,751  
|Provision for (benefit of) income taxes |  |                                 | 294    
|                                        |  |                                 |        
|Net income (loss)                       |  | $                               | 5,457  
|                                        |  |                                 |        
|Depreciation and amortization, net      |  | $                               | 237    
|Capital expenditures                    |  |                                 | 267    

7. Commitments

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



|                             |  | June 30,2003 |         | December31,2002 |  
|---------------------------- |  | ------------ | ------- | --------------- | -
|                             |  |              |         |                 |  
|Letters of credit            |  | $            | 4,186   |                 | $
|Commitments to extend credit |  |              | 322,595 |                 |  

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8. Recent Accounting Pronouncements

In April 2003, the FASB
issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities(SFAS No. 149). 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 relationships designated after June 30, 2003. The Companys adoption of SFAS No. 149 did not have a material impact on the condensed consolidated financial position and
results of operations.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity(SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150
is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Mandatory redeemable financial instruments are subject to the
provisions of this statement for the first fiscal period beginning after December 15, 2003. The Company does not anticipate the adoption of SFAS No. 150 to be material to the condensed consolidated financial statements.

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##### Table of Contents

Item 2.Managements Discussion and Analysis of Consolidated FinancialCondition and Results of Operations

Basis of Presentation

The following discussion should be read in conjunction with the Companys
Condensed Consolidated Financial Statements and Notes thereto and the other financial data included elsewhere in this document including those policies deemed to be critical summarized herein Footnote 2. 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 Condensed Consolidated
Financial Statements, the Notes thereto, and the other financial data included elsewhere in this document. All tables and condensed consolidated 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 Consolidated Financial Condition and Results of Operations (MD&A) is to provide
an analysis of significant changes in the Companys assets, liabilities, and shareholders equity at June 30, 2003 as compared to December 31, 2002, in addition to including an analysis of income for three months ended June 30, 2003
(Second Quarter 2003) and six months ended June 30, 2003 (YTD 2003) as compared to three months ended June 30, 2002 (Second Quarter 2002) and six months ended June 30, 2002 (YTD 2002).

On June 25, 2003 the Company issued $9.0 million of Trust Preferred Securities (TPS) in a private placement through an investment bank. Proceeds from the TPS were
used to call existing subordinated debentures in July 2003, which bear a fixed interest rate of 8.5%. The TPS will mature July 7, 2033, are callable after five years, and bear an interest rate of 90-day LIBOR plus 325 basis points. The initial rate
was 4.27%.

In May 2003, the Company completed the call of an existing securitization (the 1994 Securitization), resulting in the purchase of $8.7
million of conforming and nonconforming residential mortgage loans and the recognition of a gain totaling $2.0 million, which is included in gain on sale of loans and mortgage servicing rights.

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

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##### Table of Contents

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 $3.3 million in Second Quarter 2003 and $3.0 million in Second Quarter 2002. On a per share basis, net earnings were $2.60 and $2.36, respectively, for each period.
During Second Quarter 2003 the annualized return on average assets was .94% and the annualized return on average equity was 19.20% compared to .86% and 18.84%, respectively, for Second Quarter 2002.

Net income totaled $5.2 million for YTD 2003 and $5.8 million for YTD 2002. On a per share basis, net earnings were $4.14 and $4.65, respectively, for each period. During YTD 2003 the annualized return
on average assets was .76% and the annualized return on average equity was 15.35% compared to .87% and 18.85%, respectively, for YTD 2002.

Net Interest Income, Earning Assets
and Interest bearing Liabilities

Net interest income for Second Quarter 2003 was $9.2 million, a $.4 million, or 4.0%, decrease from $9.6 million for Second
Quarter 2002. This decrease resulted primarily from a change in the mix of earning assets that resulted in a decline in the yield on earning assets of 76 basis points while the cost of interest bearing liabilities declined 63 basis points during
Second Quarter 2003 as compared with Second Quarter 2002. The larger decline in yield on earning assets was attributable to a change in the mix of loans resulting from the 2002 Securitization with its reduction of higher rate automobile installment
loans and the reduction of higher rate mortgage loans resulting from repayment in the current interest rate environment.

Net interest income for YTD 2003 was
$17.1 million, a $1.0 million, or 5.7%, decrease from $18.1 million for YTD 2002. Consistent with Second Quarter 2003, the decrease resulted primarily from a change in the mix of earning assets resulting in a decline in the yield on earning assets
of 82 basis points compared with a decline in the cost of interest bearing liabilities of 64 basis points during YTD 2003 as compared with YTD 2002. The change in the mix of loans, primarily a reduction of automobile installment loans resulting from
the 2002 Securitization and the reduction of higher rate mortgage loans resulting from repayment in the current interest rate environment, resulted in the larger decline in yield on earning assets.

Net interest income continues to reflect the impact of the Companys interest rate swap contracts (Swaps). During periods of declining interest rates, the contracts reduce the benefit
the Company realizes from repricing its liabilities. Net interest income was reduced by $3.6 million and $3.0 million during Second Quarter 2003 and Second Quarter 2002, respectively. Similarly, net interest income was decreased by $7.5 million and
$6.1 million during YTD 2003 and YTD 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, over their contractural rates, for Second Quarter 2003 by 283 basis points versus 215 basis points for Second Quarter 2002. The cost of Swaps on Security Repo Agreements
increased their cost by 294 basis points YTD 2003 and 224 basis points YTD 2002.

17



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##### Table of Contents

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

Average Balances, Income, Expense, and Rates



|                                                                           |  | For the three months ended June 30, |          
|-------------------------------------------------------------------------- |  | ----------------------------------- | ---------
|                                                                           |  |                                     |          
|                                                                           |  | 2003                                |          
|                                                                           |  |                                     |          
|                                                                           |  | AverageBalance                      |          
|                                                                           |  |                                     |          
|                                                                           |  | (In thousands, except percentages)  |          
|Assets                                                                     |  |                                     |          
|Loans, net of unearned income(1)                                           |  | $                                   | 978,572  
|Federal funds sold                                                         |  |                                     | 14,940   
|Investment securities available for sale                                   |  |                                     | 197,431  
|Other investments                                                          |  |                                     | 71,189   
|                                                                           |  |                                     |          
|Total earning assets                                                       |  |                                     | 1,262,132
|Allowance for loan losses                                                  |  |                                     | (12,389  
|Other assets                                                               |  |                                     | 150,944  
|                                                                           |  |                                     |          
|Total Assets                                                               |  | $                                   | 1,400,687
|                                                                           |  |                                     |          
|Liabilities and Shareholders Equity                                       |  |                                     |          
|Other interest bearing deposits                                            |  | $                                   | 6,728    
|Savings deposits                                                           |  |                                     | 112,322  
|Time deposits                                                              |  |                                     | 759,973  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                     | 153,401  
|Other borrowings                                                           |  |                                     | 8,770    
|Federal Home Loan Bank advances                                            |  |                                     | 131,644  
|Subordinated debentures                                                    |  |                                     | 51,093   
|                                                                           |  |                                     |          
|Total interest bearing liabilities                                         |  |                                     | 1,223,931
|Noninterest bearing deposits                                               |  |                                     | 98,140   
|Accrued expenses and other liabilities                                     |  |                                     | 20,827   
|Shareholders equity                                                       |  |                                     | 57,789   
|                                                                           |  |                                     |          
|Total Liabilities and Shareholders Equity                                 |  | $                                   | 1,400,687
|                                                                           |  |                                     |          
|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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Average Balances, Income, Expense, and Rates



|                                                                           |  | For the six months ended June 30,  |          
|-------------------------------------------------------------------------- |  | ---------------------------------- | ---------
|                                                                           |  |                                    |          
|                                                                           |  | 2003                               |          
|                                                                           |  |                                    |          
|                                                                           |  | AverageBalance                     |          
|                                                                           |  |                                    |          
|                                                                           |  | (In thousands, except percentages) |          
|Assets                                                                     |  |                                    |          
|Loans, net of unearned income(1)                                           |  | $                                  | 969,463  
|Federal funds sold                                                         |  |                                    | 12,599   
|Investment securities available for sale                                   |  |                                    | 196,071  
|Other investments                                                          |  |                                    | 66,845   
|                                                                           |  |                                    |          
|Total earning assets                                                       |  |                                    | 1,244,978
|Allowance for loan losses                                                  |  |                                    | (12,158  
|Other assets                                                               |  |                                    | 145,957  
|                                                                           |  |                                    |          
|Total Assets                                                               |  | $                                  | 1,378,777
|                                                                           |  |                                    |          
|Liabilities and Shareholders Equity                                       |  |                                    |          
|Other interest bearing deposits                                            |  | $                                  | 6,719    
|Savings deposits                                                           |  |                                    | 107,603  
|Time deposits                                                              |  |                                    | 738,638  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                    | 148,818  
|Other borrowings                                                           |  |                                    | 9,111    
|Federal Home Loan Bank advances                                            |  |                                    | 147,345  
|Subordinated debentures                                                    |  |                                    | 50,798   
|                                                                           |  |                                    |          
|Total interest bearing liabilities                                         |  |                                    | 1,209,032
|Noninterest bearing deposits                                               |  |                                    | 94,295   
|Accrued expenses and other liabilities                                     |  |                                    | 18,876   
|Shareholders equity                                                       |  |                                    | 56,574   
|                                                                           |  |                                    |          
|Total Liabilities and Shareholders Equity                                 |  | $                                  | 1,378,777
|                                                                           |  |                                    |          
|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, the largest component of earning assets, averaged $978.6 million during Second Quarter 2003, compared with $951.5 million during Second Quarter 2002, an increase of $27.1
million, or 2.8%, reflecting increased loan origination volume which offset the impact of the 2002 Securitization. As previously noted, the 2002 Securitization directly impacted the yield on earning assets by reducing automobile installment loans,
typically among the highest yielding loans, which averaged $31.9 million during Second Quarter 2003 and $131.6 million during Second Quarter 2002, a decrease of $99.7 million, or 75.8%.

Loans averaged $969.5 million during YTD 2003, compared with $910.2 million during YTD 2002, an increase of $59.3 million, or 6.5%, again reflecting increased loan origination volume offsetting the impact of the 2002
Securitization on volume. Consistent with Second Quarter results, automobile installment loans averaged $27.5 million during YTD 2003 and $125.0 million during YTD 2002, a decrease of $97.5 million, or 78.0%.

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Investment securities available for sale (Investments AFS) decreased 17.9% when comparing the Second Quarter 2003 average of
$197.4 million to the Second Quarter 2002 average of $240.4 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 $168.4 million during Second Quarter 2003 and $199.0 million during Second Quarter 2002. The GNMA securities were primarily funded with certain Security Repo Agreements, which averaged $143.9 million, of the total $153.4
million, during Second Quarter 2003 compared with $171.2 million, of the total $181.7 million, during Second Quarter 2002.

Similar to Second Quarter 2003,
Investments AFS decreased 21.1% when comparing the YTD 2003 average of $196.0 million to the YTD 2002 average of $248.6 million. GNMA securities averaged $166.1 million during YTD 2003 and $195.4 million during YTD 2002. Security Repo Agreements,
funding the GNMA securities averaged $139.1 million, of the total $148.8 million, during YTD 2003 compared with $163.2 million, of the total $177.1 million, during YTD 2002.

Federal Home Loan Bank (FHLB) advances and interest bearing deposits are significant funding sources. FHLB advances averaged $131.6 million and $119.7 million during Second Quarter 2003 and Second Quarter
2002, respectively, an increase of $11.9 million or 10.0%. Interest bearing deposits averaged $879.0 million during Second Quarter 2003 and $873.3 million during Second Quarter 2002, an increase of $5.7 million, or .7%.

Federal Home Loan Bank (FHLB) advances averaged $147.3 million and $116.2 million during YTD 2003 and YTD 2002, respectively, an increase of $31.1 million or 26.8%.
Interest bearing deposits averaged $853.0 million during YTD 2003 and $860.9 million during YTD 2002, a decrease of $7.9 million, or .9%.

Noninterest Income and Noninterest
Expenses

Noninterest income totaled $14.4 million during Second Quarter 2003 compared to $10.0 million for the same period in the prior year, an increase of
$4.4 million, or 43.7%. Loan administration income totaled $.7 million during Second Quarter 2003, compared with $2.1 million during Second Quarter 2002, a decrease of $1.4 million, or 66.0%. This decrease reflects increased amortization of
servicing related assets of $1.7 million resulting from the high level of prepayments in the current interest rate environment. Origination fees totaled $5.1 million during Second Quarter 2003 and $2.9 million during Second Quarter 2002, an increase
of $2.2 million, or 75.0%, reflecting a 88.0% increase in the origination of residential mortgage loans. Gain on the sales of loans and mortgage servicing rights during Second Quarter 2003 totaled $7.2 million, compared with $3.8 million during
Second Quarter 2002, an increase of $3.4 million, or 88.4%. This increase is attributable to the $2.0 million gain resulting from the call of the 1994 Securitization and increased residential mortgage origination volume.

Noninterest expenses were $18.5 million during Second Quarter 2003 and $15.0 million during Second Quarter 2002, an increase of $3.5 million, or 23.1%. Salaries and benefits were $11.1
million for Second Quarter 2003, a $1.8 million, or 19.4%, increase compared to $9.3 million for Second Quarter 2002. This increase is primarily attributable to an increase in commissions, reflecting increased loan origination volume. Other
noninterest expense totaled $6.4 million during Second Quarter 2003 compared with $4.7 million during Second Quarter 2002, an increase of $1.7 million, or 36.2%. These other noninterest expense increases were attributable to expenses and losses
associated with sales of foreclosed real estate and repossessed assets, certain expenses and losses in the mortgage loan servicing area, computer and software maintenance expenses, and increased legal and professional expenses.

Noninterest income totaled $26.5 million during YTD 2003 compared to $21.0 million for the same period in the prior year, an increase of $5.5 million, or 26.2%. Loan administration
income totaled $1.4 million during YTD 2003, compared with $4.5 million during YTD 2002, a decrease of $3.1 million, or 69.0%. This decrease is attributable to an increase in amortization of servicing related assets of $3.4 million resulting from
the level of prepayments in the current interest rate environment. Origination fees totaled $9.0 million during YTD 2003 and $5.5 million during YTD 2002, an increase of $3.5 million, or 62.6%, reflecting a 63.8% increase in the origination of
residential mortgage loans. Gain on sale of Investments AFS, totaled $2.3 million during YTD 2003 and $.8 million during YTD 2002, representing the sale of specific securities. Gain on the sales of loans and mortgage servicing rights during YTD 2003
totaled $11.8 million, compared with $8.0 million during YTD 2002, an increase

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of $3.9 million, 48.7%. This increase is attributable to the $2.0 million gain resulting from the call of the 1994 Securitization and increased residential
mortgage origination volume.

Noninterest expenses were $35.6 million during YTD 2003 and $29.9 million during YTD 2002, an increase of $5.7 million, or 19.1%.
Salaries and benefits were $21.9 million for YTD 2003, a $3.3 million, or 18.1%, increase compared to $18.6 million for YTD 2002. This increase is primarily attributable to an increase in commissions, reflecting increased loan origination volume.
Other noninterest expense totaled $11.6 million during YTD 2003 compared with $9.3 million during YTD 2002, an increase of $2.3 million, or 25.6%. These other noninterest expense increases were attributable to expenses and losses associated with
sales of foreclosed real estate and repossessed assets, certain expenses and losses in the mortgage loan servicing area, computer and software maintenance expenses, and increased legal and professional expenses.

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, interest rate caps (Caps), and forward contracts 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, 2003, New South had Swaps with notional amounts totaling $390 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 June 30, 2003, $120 million and $240 million of these Swaps were designated as cash flow hedges, under SFAS No. 133,
for 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 $30 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 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. . The Company entered into three new Swaps during YTD 2003, while one Swap matured, resulting in a $20 million net
increase since December 31, 2002

New South also had $75 million in Caps outstanding at June 30, 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

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Companys risk against increases in the costs of liabilities. The weighted average LIBOR based strike rate for then 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 June 30, 2003, 90 day LIBOR was 1.12%. 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 rather than OCI. During Second Quarter 2003, the Company did not purchase any additional Caps.

Asset Quality

The following table summarizes nonperforming assets as of the dates indicated



|                                                                                          |  | June30,2003                     |        | December31,2002 |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | --------------- | -
|                                                                                          |  |                                 |        |                 |  
|                                                                                          |  | (Inthousands,exceptpercentages) |       
|Nonaccrual and impaired loans                                                             |  | $                               | 23,790 |                 | $
|Restructured loans                                                                        |  |                                 | 1,416  |                 |  
|                                                                                          |  |                                 |        |                 |  
|Total nonperforming loans                                                                 |  |                                 | 25,206 |                 |  
|Foreclosed properties and repossessed assets                                              |  |                                 | 6,779  |                 |  
|                                                                                          |  |                                 |        |                 |  
|Total nonperforming assets                                                                |  | $                               | 31,985 |                 | $
|                                                                                          |  |                                 |        |                 |  
|Allowance for loan losses to period-end nonperforming loans                               |  |                                 | 52.73  | %               |  
|Allowance for loan losses to period-end nonperforming assets                              |  |                                 | 41.56  | %               |  
|Nonperforming assets to period-end loans and foreclosed properties and repossessed assets |  |                                 | 3.51   | %               |  
|Nonperforming loans to period-end loans                                                   |  |                                 | 2.79   | %               |  

Nonperforming assets totaled $32.0 million at June 30, 2003, an increase of $.1
million from $31.9 million at December 31, 2002. Nonaccrual and impaired loans decreased $1.4 million, or 5.5%, to $23.8 million at June 30, 2003 from $25.2 million at December 31, 2002, due to the foreclosure of one commercial property which was
included in nonaccrual and impaired loans at December 31, 2002. Nonaccrual and impaired loans include $10.0 million of individual mortgage loans associated with one residential development. Foreclosed properties and repossessed assets totaled $6.8
million at June 30, 2003 and $5.3 million at December 31, 2002, an increase of $1.5 million, reflecting primarily the foreclosure of the one commercial property noted above.

As of June 30, 2003, servicing termination triggers were exceeded in two of the securitizations for which the Company has retained the servicing. At June 30, 2003, the Companys servicing asset was $1.5 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.

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Provision and Allowance for Loan Losses

Management
establishes allowances for the purpose of absorbing losses that are inherent within the loan portfolio and that are expected to occur based on managements review of historical losses, underwriting standards, changes in the composition of the
loan portfolio, changes in the economy, and other factors. The allowance for loan losses is maintained at a level considered adequate to provide for losses as determined by managements continuing review and evaluation of the loans and its
judgment as to the impact of economic conditions on the portfolio. Charges are made to the allowance for loans that are charged off during the year while recoveries of these amounts are credited to the account. The Company follows a policy of
charging off loans determined to be uncollectible by management.

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

The Companys allowance for loan losses is based upon managements judgment and assumptions regarding risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The evaluation of the allowance
for loan losses includes managements identification and analysis of loss inherent in various portfolio segments using a credit grading process and specific reviews and evaluations of certain significant problem credits. In addition, management
monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general economic conditions in the service area with residential mortgage and 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 June 30, 2003, as previously discussed, nonaccrual and impaired loans included $10.0 million of individual mortgage loans associated with one residential 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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|                                                                     |  | SixMonthsEndedJune
30, |        
|-------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                     |  |                        |        
|                                                                     |  | 2003                   |        
|                                                                     |  |                        |        
|Loans, net of unearned income                                        |  | $                      | 903,230
|                                                                     |  |                        |        
|Average loans, net of unearned income                                |  | $                      | 969,463
|                                                                     |  |                        |        
|Balance of allowance for loan losses at beginning of period          |  | $                      | 12,312 
|Loans charged off                                                    |  |                        |        
|Residential mortgage                                                 |  |                        | 775    
|Installment                                                          |  |                        | 1,772  
|Commercial                                                           |  |                        | 118    
|                                                                     |  |                        |        
|Total charge-offs                                                    |  |                        | 2,665  
|                                                                     |  |                        |        
|Recoveries of loans previously charged off:                          |  |                        |        
|Residential mortgage                                                 |  |                        | 181    
|Installment                                                          |  |                        | 899    
|Commercial                                                           |  |                        | 15     
|                                                                     |  |                        |        
|Total recoveries                                                     |  |                        | 1,095  
|                                                                     |  |                        |        
|Net charge-offs                                                      |  |                        | 1,570  
|Provision for loan losses                                            |  |                        | 2,550  
|                                                                     |  |                        |        
|Balance of allowance for loan losses at end of period                |  | $                      | 13,292 
|                                                                     |  |                        |        
|Allowance for loan losses to period-end loans                        |  |                        | 1.47   
|Net charge-offs to average loans, net of unearned income, annualized |  |                        | 0.33   

The provision for loan losses was $2.6 million for YTD 2003 compared with $3.1 million
for YTD 2002, a decrease of $.5 million. The decrease in the provision for loan losses reflects the impact of the 2002 Securitization on the mix of loans, specifically the lower level of automobile installment loans through the first six months of
2003. As a percentage of loans, net of unearned income, the allowance for loan losses increased to 1.47% at June 30, 2003 from 1.42% at June 30, 2002. The increase resulted from lower loan balances compared with the prior year.

Net charge-offs of loans were $1.6 million during YTD 2003 and $2.6 million during YTD 2002, reflecting the impact of the 2002 Securitization.

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Capital

Shareholders equity of the Company totaled $55.5
million at June 30, 2003 and $53.1 million at December 31, 2002 and was 3.8% and 4.0% of total assets, respectively. The increase is attributable to net income of $5.2 million earned during YTD 2003 plus a $1.5 million increase in accumulated other
comprehensive income, as reduced by dividends paid of $4.3 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.



|                                                            |  | As ofJune 30,2003                    |         | As ofDecember 31,2002 |  
|----------------------------------------------------------- |  | ------------------------------------ | ------- | --------------------- | -
|                                                            |  |                                      |         |                       |  
|                                                            |  | (In thousand, except for percentage) |        
|Shareholders equity                                        |  | $                                    | 99,277  |                       | $
|Minority interest in consolidated subsidiaries              |  |                                      | 277     |                       |  
|Accumulated other comprehensive loss                        |  |                                      | 13,239  |                       |  
|Servicing rights capital haircut                            |  |                                      | (112    | )                     |  
|                                                            |  |                                      |         |                       |  
|Tier 1 capital                                              |  |                                      | 112,681 |                       |  
|Allowance for loan losses                                   |  |                                      | 11,238  |                       |  
|                                                            |  |                                      |         |                       |  
|Tier 2 capital                                              |  |                                      | 11,238  |                       |  
|Low level recourse deduction                                |  |                                      | 4,577   |                       |  
|                                                            |  |                                      |         |                       |  
|Total deductions                                            |  |                                      | 4,577   |                       |  
|                                                            |  |                                      |         |                       |  
|Total risk-based capital                                    |  | $                                    | 119,342 |                       | $
|                                                            |  |                                      |         |                       |  
|Risk weighted assets (including off balance sheet exposure) |  | $                                    | 936,843 |                       | $
|Tier 1 leverage ratio                                       |  |                                      | 7.76    | %                     |  
|Tier 1 risk-based capital ratio (1)                         |  |                                      | 11.54   |                       |  
|Total risk-based capital ratio                              |  |                                      | 12.74   |                       |  

| | (1) | Tier 1 capital utilized in the tier 1 capital ratio is reduced by the low level resourse 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

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##### Table of Contents

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.

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 45.3% of total deposits as of June 30, 2003. These brokered deposits are
either deposits solicited by the Company from national and regional brokerage firms, which accounted for approximately $442.2 million of deposits at June 30, 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 June 30, 2003, alternative funding
sources included $15.0 million of available lines to purchase federal funds, $3.0 million unused warehousing lines of credit from other financial institutions related to the New South Joint Ventures, and $118.9 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 $71.5 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 4Controls 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 1Legal 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 condensed consolidated financial condition or results of operations.

Item 4Submission of Matters to a Vote of Security Holders

The Annual Meeting of shareholders of the Company was held on May 19, 2003. The following matter was submitted to a vote of the Companys shareholders:

Election of One Director Nominee was approved:



|Name                                        |  | Total Votes For |  | Total Votes Against |  | Total Votes Withheld
|------------------------------------------- |  | --------------- |  | ------------------- |  | --------------------
|William T. Ratliff, III (Term Expires 2006) |  | 948,726.60      |  | 0                   |  | 0                   



Remaining Directors not elected at this meeting
whose terms continue:

W. T. Ratliff, Jr. (Term Expires 2005) 
            Robert M. Couch (Term Expires 2005)              David A. Roberts (Term Expires 2005)
                     Lizabeth R. Nichols (Term Expires 2004)

Item 6Exhibits and Reports on Form 8-K

ITEM 6(A)EXHIBITS

The exhibits listed in the Exhibit Index at page 29 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 on May 28, 2003 containing a press release announcing its results of operations for the year ended December 31, 2002.

A report on Form 8-K was filed by the Company on June 27, 2003 announcing the partial repayment of its 8.50% Junior Subordinated Deferrable Interest Debentures due June 30, 2028 and the partial
redemption of the 8.50% Cumulative Trust Preferred Securities of New South Capital Trust I.





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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.



|                |  |                                        
|--------------- |  | ---------------------------------------
|August 13, 2003 |  | By:                                    
|                |  |                                        
|                |  | Robert M. CouchExecutive Vice President





|                |  |                                          
|--------------- |  | -----------------------------------------
|August 13, 2003 |  | By:                                      
|                |  |                                          
|                |  | Roger D. MurphreeChief Financial Officier



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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                                                 
|      |                                                                                                                                                           
|31.1  | Certification of Chief Executive Officer                                                                                                                  
|      |                                                                                                                                                           
|31.2  | Certification of Chief Financial Officer                                                                                                                  
|      |                                                                                                                                                           
|32.1  | 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.
|      |                                                                                                                                                           
|32.2  | Certification Pursuant to 18 U.S.C. Section 1350, as to Section 906 of the Sarbanes-Oxley Act of 2002 by Roger D. Murphree, 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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