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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

Securities Exchange Act of 1934



For the Quarterly Period Ended September 30, 2003 Commission file number
333-49459



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New South Bancshares, Inc.

(Exact
name of registrant as specified in its charter)



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



(205) 951-4000

(Registrants telephone number, including area code)



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



Yes x     No ̈



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



Yes ̈No x



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NEW SOUTH BANCSHARES, INC.

FORM 10-Q



INDEX



|              |  |                       |  |                                                                                                           |  | Page
|------------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|Part I.       |  | Financial Information |  |                                                                                                          
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements (Unaudited)                                                                          |  |     
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Balance Sheets  September 30, 2003 and December 31, 2002                          |  | 2   
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Income Statements  Three months ended September 30, 2003 and 2002                 |  | 3   
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Income Statements  Nine months ended September 30, 2003 and 2002                  |  | 4   
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Statements of Shareholders Equity  Nine months ended September 30, 2003 and 2002 |  | 5   
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows  Nine months ended September 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        |  | 17  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                                   |  | 27  
|              |  |                      
|Part II.      |  | Other Information     |  |                                                                                                          
|              |  |                       | 
|              |  | Item 1.               |  | Legal Proceedings                                                                                         |  | 28  
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                          |  | 28  
|              | 
|Signatures    |  | 29                   
|              | 
|Exhibit Index |  | 30                   





1



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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except shares)



|                                                                                                                                                  |  | September 30, 2003 |           |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | -
|                                                                                                                                                  |  | (Unaudited)        |           |   | (Audited)         |  
|ASSETS                                                                                                                                            |  |                    |           |   |                   |  
|Cash and due from banks                                                                                                                           |  | $                  | 39,404    |   |                   | $
|Interest-bearing deposits in other banks                                                                                                          |  |                    | 29,858    |   |                   |  
|Federal funds sold and securities purchased under agreements to resell                                                                            |  |                    | 20,000    |   |                   |  
|Investment securities available for sale                                                                                                          |  |                    | 238,597   |   |                   |  
|Residual interest in loan securitizations                                                                                                         |  |                    | 9,246     |   |                   |  
|Loans available for sale                                                                                                                          |  |                    | 92,725    |   |                   |  
|Loans, net of unearned income                                                                                                                     |  |                    | 903,176   |   |                   |  
|Allowance for loan losses                                                                                                                         |  |                    | (13,424   | ) |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Net Loans                                                                                                                                         |  |                    | 889,752   |   |                   |  
|Premises and equipment, net                                                                                                                       |  |                    | 7,280     |   |                   |  
|Mortgage servicing rights, net                                                                                                                    |  |                    | 8,574     |   |                   |  
|Servicing advances                                                                                                                                |  |                    | 11,154    |   |                   |  
|Other assets                                                                                                                                      |  |                    | 32,419    |   |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Total Assets                                                                                                                                      |  | $                  | 1,379,009 |   |                   | $
|                                                                                                                                                  |  |                    |           |   |                   |  
|                                                                                                                                                  |  |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                              |  |                    |           |   |                   |  
|Deposits:                                                                                                                                         |  |                    |           |   |                   |  
|Noninterest bearing                                                                                                                               |  | $                  | 92,867    |   |                   | $
|Interest bearing                                                                                                                                  |  |                    | 905,479   |   |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Total Deposits                                                                                                                                    |  |                    | 998,346   |   |                   |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                        |  |                    | 129,216   |   |                   |  
|Federal Home Loan Bank advances                                                                                                                   |  |                    | 115,023   |   |                   |  
|Notes payable                                                                                                                                     |  |                    | 6,237     |   |                   |  
|Subordinated debentures                                                                                                                           |  |                    | 50,500    |   |                   |  
|Accrued expenses and other liabilities                                                                                                            |  |                    | 20,169    |   |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Total Liabilities                                                                                                                                 |  |                    | 1,319,491 |   |                   |  
|                                                                                                                                                  |  |                   
|Shareholders' Equity:                                                                                                                             |  |                    |           |   |                   |  
|Common stock of $1.00 par value (authorized: 1.5 million shares; issued and outstanding: 1,255,537.1 at September 30, 2003 and
December 31, 2002) |  |                    | 1,256     |   |                   |  
|Additional paid-in capital                                                                                                                        |  |                    | 29,475    |   |                   |  
|Retained earnings                                                                                                                                 |  |                    | 40,790    |   |                   |  
|Accumulated other comprehensive loss, net                                                                                                         |  |                    | (12,003   | ) |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Total Shareholders' Equity                                                                                                                        |  |                    | 59,518    |   |                   |  
|                                                                                                                                                  |  |                    |           |   |                   |  
|Total Liabilities and Shareholders' Equity                                                                                                        |  | $                  | 1,379,009 |   |                   | $
|                                                                                                                                                  |  |                    |           |   |                   |  



See accompanying notes
to condensed consolidated financial statements





2



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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited)

(In thousands, except per share data)



|                                                                                       |  | Three months ended
|-------------------------------------------------------------------------------------- |  | ------------------
|                                                                                       |  | September 30,     
|                                                                                       |  | 2003              
|Interest Income:                                                                       |  |                   
|Interest on loans                                                                      |  | $                 
|Interest on securities available for sale                                              |  |                   
|Interest on other short-term investments                                               |  |                   
|                                                                                       |  |                   
|Total Interest Income                                                                  |  |                   
|                                                                                       |  |                   
|Interest Expense:                                                                      |  |                   
|Interest on deposits                                                                   |  |                   
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                   
|Interest on Federal Home Loan Bank advances                                            |  |                   
|Interest on notes payable                                                              |  |                   
|Interest on subordinated debentures                                                    |  |                   
|                                                                                       |  |                   
|Total Interest Expense                                                                 |  |                   
|                                                                                       |  |                   
|Net Interest Income                                                                    |  |                   
|Provision for Loan Losses                                                              |  |                   
|                                                                                       |  |                   
|Net Interest Income After Provision for Loan Losses                                    |  |                   
|                                                                                       |  |                   
|Noninterest Income:                                                                    |  |                   
|Loan administration income                                                             |  |                   
|Origination fees                                                                       |  |                   
|Gain (loss) on sale of investment securities available for sale                        |  |                   
|Gain on sale of loans and mortgage servicing rights                                    |  |                   
|Other income                                                                           |  |                   
|                                                                                       |  |                   
|Total Noninterest Income                                                               |  |                   
|                                                                                       |  |                   
|Noninterest Expense:                                                                   |  |                   
|Salaries and benefits                                                                  |  |                   
|Net occupancy and equipment expense                                                    |  |                   
|Other expense                                                                          |  |                   
|                                                                                       |  |                   
|Total Noninterest Expense                                                              |  |                   
|                                                                                       |  |                   
|                                                                                       |  |                   
|Income Before Provision for Income Taxes                                               |  |                   
|Provision for Income Taxes                                                             |  |                   
|                                                                                       |  |                   
|                                                                                       |  |                   
|Net Income                                                                             |  | $                 
|                                                                                       |  |                   
|Weighted average shares outstanding                                                    |  |                   
|                                                                                       |  |                   
|Basic and diluted earnings per share:                                                  |  | $                 



See accompanying notes
to condensed consolidated financial statements



3



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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(Unaudited)

(In thousands, except per share data)



|                                                                                       |  | Nine months ended
|-------------------------------------------------------------------------------------- |  | -----------------
|                                                                                       |  | September 30,    
|                                                                                       |  | 2003             
|Interest Income:                                                                       |  |                  
|Interest on loans                                                                      |  | $                
|Interest on securities available for sale                                              |  |                  
|Interest on other short-term investments                                               |  |                  
|                                                                                       |  |                  
|Total Interest Income                                                                  |  |                  
|Interest Expense:                                                                      |  |                  
|Interest on deposits                                                                   |  |                  
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                  
|Interest on Federal Home Loan Bank advances                                            |  |                  
|Interest on notes payable                                                              |  |                  
|Interest on subordinated debentures                                                    |  |                  
|                                                                                       |  |                  
|Total Interest Expense                                                                 |  |                  
|Net Interest Income                                                                    |  |                  
|Provision for Loan Losses                                                              |  |                  
|                                                                                       |  |                  
|Net Interest Income After Provision for Loan Losses                                    |  |                  
|Noninterest Income:                                                                    |  |                  
|Loan administration income                                                             |  |                  
|Origination fees                                                                       |  |                  
|Gain on sale of investment securities available for sale                               |  |                  
|Gain on sale of loans and mortgage servicing rights                                    |  |                  
|Other income                                                                           |  |                  
|                                                                                       |  |                  
|Total Noninterest Income                                                               |  |                  
|Noninterest Expense:                                                                   |  |                  
|Salaries and benefits                                                                  |  |                  
|Net occupancy and equipment expense                                                    |  |                  
|Other expense                                                                          |  |                  
|                                                                                       |  |                  
|Total Noninterest Expense                                                              |  |                  
|                                                                                       |  |                  
|Income Before Provision for Income Taxes                                               |  |                  
|Provision for Income Taxes                                                             |  |                  
|                                                                                       |  |                  
|Net Income                                                                             |  | $                
|                                                                                       |  |                  
|Weighted average shares outstanding                                                    |  |                  
|Basic and diluted earnings per share:                                                  |  | $                



See accompanying notes
to condensed consolidated financial statements



4



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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)



|                                                       |  |                |       |            |   |          |  |   | Accumulated   |   |  |               |        
|------------------------------------------------------ |  | -------------- | ----- | ---------- | - | -------- |  | - | ------------- | - |  | ------------- | -------
|                                                       |  |                |       | Additional |   |          |  |   | Other         |   |  | Total         |        
|                                                       |  | Common         |       | Paid-In    |   | Retained |  |   | Comprehensive |   |  | Shareholders' |        
|                                                       |  | Stock          |       | Capital    |   | Earnings |  |   | Income (Loss) |   |  | Equity        |        
|                                                       |  | (In thousands) |      
|Balance at January 1, 2003                             |  | $              | 1,256 |            | $ | 29,475   |  | $ | 37,147        |   |  | $             | (14,748
|                                                       |  |                |       |            |  
|Comprehensive Income:                                  |  |                |       |            |   |          |  |   |               |   |  |               |        
|Net income                                             |  |                |      |            |   |         |  |   | 9,406         |   |  |               |       
|Other comprehensive income, net of tax                 |  |                |       |            |   |          |  |   |               |   |  |               |        
|Net unrealized gains on cash flow hedges (1)           |  |                |      |            |   |         |  |   |              |   |  |               | 7,830  
|Unrealized losses on securities available for sale (1) |  |                |      |            |   |         |  |   |              |   |  |               | (5,085 
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Total other comprehensive income                       |  |                |       |            |   |          |  |   |               |   |  |               | 2,745  
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Total comprehensive income                             |  |                |       |            |   |          |  |   |               |   |  |               |        
|                                                       |  |                |       |            |  
|Common dividends paid ($4.59 per share)                |  |                |      |            |   |         |  |   | (5,763        | ) |  |               |       
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Balance at September 30, 2003                          |  | $              | 1,256 |            | $ | 29,475   |  | $ | 40,790        |   |  | $             | (12,003
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|                                                       |  |                |       |            |  
|Balance at January 1, 2002                             |  | $              | 1,256 |            | $ | 29,475   |  | $ | 30,962        |   |  | $             | (11,093
|Comprehensive Income:                                  |  |                |       |            |   |          |  |   |               |   |  |               |        
|Net income                                             |  |                |      |            |   |         |  |   | 9,026         |   |  |               |       
|Other comprehensive income, net of tax                 |  |                |       |            |   |          |  |   |               |   |  |               |        
|Net unrealized losses on cash flow hedges (1)          |  |                |      |            |   |         |  |   |              |   |  |               | (9,576 
|Unrealized gains on securities available for sale (1)  |  |                |      |            |   |         |  |   |              |   |  |               | 4,582  
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Total other comprehensive loss                         |  |                |       |            |   |          |  |   |               |   |  |               | (4,994 
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Total comprehensive income                             |  |                |       |            |   |          |  |   |               |   |  |               |        
|Common dividends paid ($5.55 per share)                |  |                |      |            |   |         |  |   | (6,968        | ) |  |               |       
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        
|Balance at September 30, 2002                          |  | $              | 1,256 |            | $ | 29,475   |  | $ | 33,020        |   |  | $             | (16,087
|                                                       |  |                |       |            |   |          |  |   |               |   |  |               |        



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



See accompanying notes to condensed consolidated financial statements



5



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NEW SOUTH BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                            |  | For the nine months ended September 30, |         
|------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------
|                                                                                            |  | 2003                                    |         
|                                                                                            |  | (in thousands)                          |         
|Operating Activities:                                                                       |  |                                         |         
|Net income                                                                                  |  | $                                       | 9,406   
|Adjustments to reconcile net income to net cash used in operating activities:               |  |                                         |         
|Amortization (accretion) of discounts and fees                                              |  |                                         | 1,011   
|Provision for loan losses                                                                   |  |                                         | 4,525   
|Depreciation and amortization                                                               |  |                                         | 1,044   
|Amortization and impairment of mortgage servicing rights                                    |  |                                         | 8,372   
|Origination of loans available for sale                                                     |  |                                         | (967,712
|Proceeds from the sale of loans available for sale and servicing rights                     |  |                                         | 976,712 
|Gain on sale of investment securities available for sale                                    |  |                                         | (1,646  
|Loss on sale of premises and equipment                                                      |  |                                         |        
|Gain on sale of loans available for sale and mortgage servicing rights                      |  |                                         | (19,323 
|(Increase) decrease in other assets                                                         |  |                                         | (2,058  
|Increase in accrued expenses and other liabilities                                          |  |                                         | 3,541   
|                                                                                            |  |                                         |         
|Net Cash Provided by Operating Activities                                                   |  |                                         | 13,872  
|                                                                                            |  |                                        
|Investing Activities:                                                                       |  |                                         |         
|Net (increase) decrease in interest-bearing deposits in other banks                         |  |                                         | (21,950 
|Net increase in federal funds sold and securities purchased under agreements to resell      |  |                                         | (20,000 
|Proceeds from sales of investment securities available for sale                             |  |                                         | 201,634 
|Proceeds from maturities, calls, and repayments of investment securities available for sale |  |                                         | 98,023  
|Purchases of investment securities available for sale                                       |  |                                         | (202,991
|Net increase in loan portfolio                                                              |  |                                         | (83,873 
|Purchases of premises and equipment                                                         |  |                                         | (1,232  
|Proceeds from sale of premises and equipment                                                |  |                                         | 391     
|                                                                                            |  |                                         |         
|Net Cash Used in Investing Activities                                                       |  |                                         | (29,998 
|                                                                                            |  |                                        
|Financing Activities:                                                                       |  |                                         |         
|Net increase in noninterest-bearing deposits                                                |  |                                         | 8,648   
|Net increase in interest-bearing deposits                                                   |  |                                         | 81,774  
|Net decrease in federal funds purchased and securities sold under agreements to repurchase  |  |                                         | (16,075 
|Net decrease in notes payable                                                               |  |                                         | (2,005  
|Net increase (decrease) of Federal Home Loan Bank Advances                                  |  |                                         | (19,001 
|Proceeds from the issuance of subordinated debentures                                       |  |                                         | 18,000  
|Repayment of subordinated debentures                                                        |  |                                         | (18,000 
|Dividends paid                                                                              |  |                                         | (5,763  
|                                                                                            |  |                                         |         
|Net Cash Provided by Financing Activities                                                   |  |                                         | 47,578  
|                                                                                            |  |                                         |         
|Net increase in cash and cash equivalents                                                   |  |                                         | 31,452  
|Cash and due from bank at beginning of period                                               |  |                                         | 7,952   
|                                                                                            |  |                                         |         
|Cash and due from bank at end of period                                                     |  | $                                       | 39,404  
|                                                                                            |  |                                         |         



See accompanying notes
to condensed consolidated financial statements



6



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NEW SOUTH BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Nine Months Ended September 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 two subsidiaries, 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 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. In July 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.



7



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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
September 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 $10.8 million and $5.5 million, respectively. The related allowances for loan losses on impaired loans were $2.5 million and $.7 million at September 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.



8



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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 typically 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 money market and 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 and certain Caps 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). Certain of the Companys Caps are undesignated 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



---

|                                                 |  | Three months ended |     
|------------------------------------------------ |  | ------------------ | ----
|                                                 |  | September 30,      |     
|                                                 |  | 2003               |     
|Gains from interest rate caps                    |  | $                  | 172 
|Gains from interest rate lock contracts          |  |                    | 137 
|Losses from mandatory forward delivery contracts |  |                    | (398
|                                                 |  |                    |     
|                                                 |  | $                  | (89 
|                                                 |  |                    |     
|                                                 | 
|                                                 |  | Nine months ended  |     
|                                                 |  | September 30,      |     
|                                                 |  | 2003               |     
|Gains (losses) from interest rate caps           |  | $                  | 134 
|Gains from interest rate lock contracts          |  |                    | 346 
|Losses from mandatory forward delivery contracts |  |                    | (239
|                                                 |  |                    |     
|                                                 |  | $                  | 241 
|                                                 |  |                    |     



3. Supplemental Cash Flow
Information



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



|                                                                      |  | Nine months ended
|--------------------------------------------------------------------- |  | -----------------
|                                                                      |  | September 30,    
|                                                                      |  | 2003             
|Transfers of loans to foreclosed properties and repossessed assets    |  | $                
|Change in unrealized gain on investment securities available for sale |  |                  



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 $5.8 million during the first nine 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



---

5. Comprehensive Income



Comprehensive income is the total of net income and other comprehensive income, consisting of 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 Condensed Consolidated Statements of Shareholders Equity.



In the calculation of other 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:



|                                                                                                                                        |  | Three months ended September 30, 2003 |       
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------
|                                                                                                                                        |  | (In thousands)                        |       
|                                                                                                                                        |  |                                       |       
|                                                                                                                                        |  | Before                                |       
|                                                                                                                                        |  | Tax                                   |       
|                                                                                                                                        |  | Amount                                |       
|                                                                                                                                        |  |                                       |       
|Net unrealized gains on cash flow hedges arising during the period                                                                      |  | $                                     | 4,966 
|Reclassification adjustments for net gains related to cash flow hedges included in net income                                           |  |                                       | (136  
|Net unrealized losses on available for sale securities arising during the period                                                        |  |                                       | (4,200
|Reclassification adjustments for net losses related to available for sale securities related to cash flow hedges included in net
income |  |                                       | 682   
|                                                                                                                                        |  |                                       |       
|Total other comprehensive income                                                                                                        |  | $                                     | 1,312 
|                                                                                                                                        |  |                                       |       



11



---

|                                                                                                           |  | Three months ended |       
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                           |  | September 30, 2002 |       
|                                                                                                           |  | (In thousands)     |       
|                                                                                                           |  |                    |       
|                                                                                                           |  | Before             |       
|                                                                                                           |  | Tax                |       
|                                                                                                           |  | Amount             |       
|                                                                                                           |  |                    |       
|Net unrealized losses on cash flow hedges arising during the period                                        |  | $                  | (7,891
|Reclassification adjustments for net losses related to cash flow hedges included in net income             |  |                    | (240  
|Net unrealized gains on available for sale securities arising during the period                            |  |                    | 5,500 
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                    | (1,269
|                                                                                                           |  |                    |       
|Total other comprehensive loss                                                                             |  | $                  | (3,900
|                                                                                                           |  |                    |       



12



---

|                                                                                                           |  | Nine months ended  |       
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                           |  | September 30, 2003 |       
|                                                                                                           |  | (In thousands)     |       
|                                                                                                           |  |                    |       
|                                                                                                           |  | Before             |       
|                                                                                                           |  | Tax                |       
|                                                                                                           |  | Amount             |       
|Net unrealized gains on cash flow hedges arising during the period                                         |  | $                  | 8,460 
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                    | (219  
|Net unrealized losses on available for sale securities arising during the period                           |  |                    | (3,694
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                    | (1,646
|                                                                                                           |  |                    |       
|Total other comprehensive income                                                                           |  | $                  | 2,901 
|                                                                                                           |  |                    |       
|                                                                                                           | 
|                                                                                                           |  | Nine months ended  |       
|                                                                                                           |  | September 30, 2002 |       
|                                                                                                           |  | (In thousands)     |       
|                                                                                                           |  | Before             |       
|                                                                                                           |  | Tax                |       
|                                                                                                           |  | Amount             |       
|                                                                                                           |  |                    |       
|Net unrealized losses on cash flow hedges arising during the period                                        |  | $                  | (9,784
|Reclassification adjustments for net gains related to cash flow hedges included in net income              |  |                    | (294  
|Net unrealized gains on available for sale securities arising during the period                            |  |                    | 6,877 
|Reclassification adjustments for net gains related to available for sale securities included in net income |  |                    | (2,053
|                                                                                                           |  |                    |       
|Total other comprehensive loss                                                                             |  | $                  | (5,254
|                                                                                                           |  |                    |       



13



---

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 includes principally 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 until they are actually sold in the secondary market. Generally, the results of such sales are 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 nine months ended September 30, 2003 and
2002 are included in the following tables.



|                                        |  | For the three months ended September 30, 2003
|--------------------------------------- |  | ---------------------------------------------
|                                        |  |                                              
|                                        |  |                                              
|                                        |  |                                              
|                                        |  |                                              
|Interest income                         |  | $                                            
|Interest expense                        |  |                                              
|Intra-company funds (used)/provided     |  |                                              
|Provision for loan losses               |  |                                              
|Noninterest income                      |  |                                              
|Noninterest expense                     |  |                                              
|                                        |  |                                              
|Net income (loss) before income taxes   |  |                                              
|Provision for (benefit of) income taxes |  |                                              
|                                        |  |                                              
|Net income (loss)                       |  | $                                            
|                                        |  |                                              
|Depreciation and amortization, net      |  | $                                            
|Total assets                            |  |                                              
|Capital expenditures                    |  |                                              
|                                        | 
|                                        |  | For the three months ended September 30, 2002
|                                        |  |                                              
|                                        |  |                                              
|                                        |  |                                              
|                                        |  |                                              
|Interest income                         |  | $                                            
|Interest expense                        |  |                                              
|Intra-company funds (used)/provided     |  |                                              
|Provision for loan losses               |  |                                              
|Noninterest income                      |  |                                              
|Noninterest expense                     |  |                                              
|                                        |  |                                              
|Net income (loss) before income taxes   |  |                                              
|Provision for (benefit of) income taxes |  |                                              
|                                        |  |                                              
|Net income (loss)                       |  | $                                            
|                                        |  |                                              
|Depreciation and amortization, net      |  | $                                            
|Total assets                            |  |                                              
|Capital expenditures                    |  |                                              



14



---

|                                        |  | For the nine months ended September 30, 2003
|--------------------------------------- |  | --------------------------------------------
|                                        |  |                                             
|                                        |  |                                             
|                                        |  |                                             
|Interest income                         |  | $                                           
|Interest expense                        |  |                                             
|Intra-company funds (used)/provided     |  |                                             
|Provision for loan losses               |  |                                             
|Noninterest income                      |  |                                             
|Noninterest expense                     |  |                                             
|                                        |  |                                             
|Net income (loss) before income taxes   |  |                                             
|Provision for (benefit of) income taxes |  |                                             
|                                        |  |                                             
|Net income (loss)                       |  | $                                           
|                                        |  |                                             
|Depreciation and amortization, net      |  | $                                           
|Capital expenditures                    |  |                                             



|                                        |  | For the nine months ended September 30, 2002
|--------------------------------------- |  | --------------------------------------------
|                                        |  |                                             
|                                        |  |                                             
|                                        |  |                                             
|Interest income                         |  | $                                           
|Interest expense                        |  |                                             
|Intra-company funds (used) / provided   |  |                                             
|Provision for loan losses               |  |                                             
|Noninterest income                      |  |                                             
|Noninterest expense                     |  |                                             
|                                        |  |                                             
|Net income (loss) before income taxes   |  |                                             
|Provision for (benefit of) income taxes |  |                                             
|                                        |  |                                             
|Net income (loss)                       |  | $                                           
|                                        |  |                                             
|Depreciation and amortization, net      |  | $                                           
|Capital expenditures                    |  |                                             



7. Commitments



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



|                              |  | September 30,2003 |         | December 31,2002
|----------------------------- |  | ----------------- | ------- | ----------------
|Letters of credit             |  | $                 | 3,311   |                 
|Commitments to extend credit. |  |                   | 223,100 |                 



15



---

8. Recent Accounting Pronouncements



In April 2003, the Financial Accounting Standards Board (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. On November 7, 2003, the FASB deferred indefinitely the classification and measurement provisions related to mandatorily redeemable non controlling interests. The Company does
not anticipate the adoption of SFAS No. 150, or its modifications, to be material to the condensed consolidated financial statements.



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



16



---

Item 2. Managements Discussion and Analysis of Consolidated Financial

Condition 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 in Note 2. The Companys accounting policies are integral to the financial results discussed herein. The significant accounting
policies of the Company are contained in Note 1 to the Consolidated Financial Statements filed in the Companys Form 10-K 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 September 30, 2003 as compared to December 31, 2002, in addition to including an analysis of income for three months ended
September 30, 2003 (Third Quarter 2003) and nine months ended September 30, 2003 (YTD 2003) as compared to three months ended September 30, 2002 (Third Quarter 2002) and nine months ended September 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 $9.0 million of 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%.



On August 27, 2003 the Company issued an additional $9.0 million of TPS in another private placement through an investment
bank. Proceeds from the TPS were used to call $9.0 million of existing subordinated debentures in September 2003, which bear a fixed interest rate of 8.5%. The TPS will mature October 7, 2033, are callable after five years, and bear an interest rate
of 90-day LIBOR plus 315 basis points. The initial rate was 4.29%.



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 Third 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 Third 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., Triad Guaranty, 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.



17



---

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 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 $4.2 million in Third Quarter 2003 and $3.2 million in Third Quarter 2002. On a per share basis, net earnings were
$3.35 and $2.53, respectively, for each period. During Third Quarter 2003 the annualized return on average assets was 1.13% and the annualized return on average equity was 23.73% compared to .88% and 19.97%, respectively, for Third Quarter 2002.



Net income totaled $9.4 million for YTD 2003 and $9.0 million
for YTD 2002. On a per share basis, net earnings were $7.49 and $7.19, respectively, for each period. During YTD 2003 the annualized return on average assets was .89% and the annualized return on average equity was 18.23% compared to .88% and
19.23%, respectively, for YTD 2002.



Net Interest Income, Earning Assets and
Interest bearing Liabilities



Net interest income for
Third Quarter 2003 was $10.7 million, a $.1 million increase from $10.6 million for Third Quarter 2002. This increase resulted primarily from the offsetting impact of increases attributable to volume resulting primarily from loan growth as reduced
by a change in the mix of earning assets. Loan growth contributed to an increase in average earning assets of $43.8 million compared with an increase in average interest bearing liabilities of $24.9 during Third Quarter 2003 as compared with Third
Quarter 2002. This increase was mitigated as the yield on earning assets declined 99 basis points while the cost of interest bearing liabilities declined 88 basis points during Third Quarter 2003 as compared with Third 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 $27.8 million, a $1.0 million, or 3.3%, decrease from $28.8 million for YTD 2002. The decrease resulted primarily from a change in the mix of earning assets resulting in a decline in the yield on earning assets of 88
basis points compared with a decline in the cost of interest bearing liabilities of 72 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 $3.0 million and $3.1 million
during Third Quarter 2003 and Third Quarter 2002, respectively. Similarly, net interest income was decreased by $10.5 million and $9.2 million during YTD 2003 and YTD 2002, respectively. See Interest Sensitivity and Market Risk section
for a more detailed discussion of Swaps.



18



---

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 contractual
rates, for Third Quarter 2003 by 290 basis points versus 210 basis points for Third Quarter 2002. The cost of Swaps on Security Repo Agreements increased their cost by 293 basis points YTD 2003 and 220 basis points YTD 2002.



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



Average Balances, Income, Expense, and Rates



|                                            |  | For the three months ended September 30, |          
|------------------------------------------- |  | ---------------------------------------- | ---------
|                                            |  | 2003                                     |          
|                                            |  |                                          | Average  
|                                            |  |                                          | Balance  
|                                            |  |                                          |          
|                                            |  | (In thousands, except percentages)      
|Assets                                      |  |                                          |          
|Loans, net of unearned income(1)            |  | $                                        | 1,022,849
|Federal funds sold.                         |  |                                          | 12,014   
|Investment securities available for sale    |  |                                          | 220,273  
|Other investments.                          |  |                                          | 78,958   
|                                            |  |                                          |          
|Total earning assets.                       |  |                                          | 1,334,094
|Allowance for loan losses                   |  |                                          | (13,437  
|Other assets                                |  |                                          | 151,394  
|                                            |  |                                          |          
|Total Assets                                |  | $                                        | 1,472,051
|                                            |  |                                          |          
|Liabilities and Shareholders' Equity        |  |                                          |          
|Other interest bearing deposits.            |  | $                                        | 5,945    
|Savings deposits                            |  |                                          | 124,072  
|Time deposits.                              |  |                                          | 786,932  
|Federal funds purchased and securities      |  |                                          |          
|sold under agreements to repurchase .       |  |                                          | 158,115  
|Other borrowings                            |  |                                          | 8,503    
|Federal Home Loan Bank advances             |  |                                          | 152,796  
|Subordinated debentures                     |  |                                          | 56,762   
|                                            |  |                                          |          
|Total interest bearing liabilities          |  |                                          | 1,293,125
|Noninterest bearing deposits                |  |                                          | 103,209  
|Accrued expenses and other liabilities.     |  |                                          | 20,523   
|Shareholders' equity.                       |  |                                          | 55,194   
|                                            |  |                                          |          
|Total Liabilities and Shareholders' Equity. |  | $                                        | 1,472,051
|                                            |  |                                          |          
|Net interest rate spread.                   |  |                                          |          
|                                            |  |                                          |          
|Net interest income                         |  |                                          |          
|                                            |  |                                          |          
|Net interest rate margin                    |  |                                          |          
|                                            |  |                                          |          



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



19



---

Average Balances, Income, Expense, and Rates



|                                            |  | For the nine months ended September 30, |                
|------------------------------------------- |  | --------------------------------------- | ---------------
|                                            |  | 2003                                    |                
|                                            |  |                                         | Average Balance
|                                            |  |                                         |                
|                                            |  | (In thousands, except percentages)     
|Assets                                      |  |                                         |                
|Loans, net of unearned income(1)            |  | $                                       | 987,454        
|Federal funds sold.                         |  |                                         | 12,402         
|Investment securities available for sale    |  |                                         | 204,227        
|Other investments.                          |  |                                         | 70,927         
|                                            |  |                                         |                
|Total earning assets.                       |  |                                         | 1,275,010      
|Allowance for loan losses                   |  |                                         | (12,589        
|Other assets                                |  |                                         | 147,789        
|                                            |  |                                         |                
|Total Assets                                |  | $                                       | 1,410,210      
|                                            |  |                                         |                
|Liabilities and Shareholders' Equity        |  |                                         |                
|Other interest bearing deposits.            |  | $                                       | 6,458          
|Savings deposits                            |  |                                         | 113,153        
|Time deposits.                              |  |                                         | 754,913        
|Federal funds purchased and securities      |  |                                         |                
|sold under agreements to repurchase .       |  |                                         | 151,951        
|Other borrowings                            |  |                                         | 8,906          
|Federal Home Loan Bank advances             |  |                                         | 149,182        
|Subordinated debentures                     |  |                                         | 52,808         
|                                            |  |                                         |                
|Total interest bearing liabilities          |  |                                         | 1,237,371      
|Noninterest bearing deposits                |  |                                         | 97,299         
|Accrued expenses and other liabilities.     |  |                                         | 19,431         
|Shareholders' equity.                       |  |                                         | 56,109         
|                                            |  |                                         |                
|Total Liabilities and Shareholders' Equity. |  | $                                       | 1,410,210      
|                                            |  |                                         |                
|Net interest rate spread.                   |  |                                         |                
|                                            |  |                                         |                
|Net interest income                         |  |                                         |                
|                                            |  |                                         |                
|Net interest rate margin                    |  |                                         |                
|                                            |  |                                         |                



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



Loans, the largest component of earning assets,
averaged $1,022.8 million during Third Quarter 2003, compared with $986.3 million during Third Quarter 2002, an increase of $36.5 million, or 3.7%, reflecting increased loan origination volume which offset the impact of the 2002 Securitization on
loan volume. As previously noted, the 2002 Securitization directly impacted the yield on earning assets by reducing the number of automobile installment loans in the portfolio, typically among the highest yielding loans. Automobile installment loans
averaged $51.5 million during Third Quarter 2003 and $143.1 million during Third Quarter 2002, a decrease of $91.6 million, or 64.0%.



Loans averaged $987.5 million during YTD 2003, compared with $935.8 million during YTD 2002, an increase of $51.7 million, or 5.5%, again reflecting
increased loan origination volume offsetting the impact of the



20



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2002 Securitization. Consistent with Third Quarter results, automobile installment loans averaged $35.6 million during
YTD 2003 and $129.1 million during YTD 2002, a decrease of $93.5 million, or 72.4%.



Investment securities available for sale (Investments AFS) decreased 8.1% when comparing the Third Quarter 2003 average of $220.3 million to the Third Quarter 2002 average of $239.6 million. Investments
AFS continue 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 $189.5 million during Third Quarter 2003 and $194.5
million during Third Quarter 2002. The GNMA securities were primarily funded with certain Security Repo Agreements, which averaged $149.6 million, of the total $158.1 million, during Third Quarter 2003 compared with $172.5 million, of the total
$177.2 million, during Third Quarter 2002.



YTD 2003 average
Investments AFS were $204.2 million, a decrease of 16.8% when compared to the YTD 2002 average of $245.6 million. GNMA securities averaged $174.0 million during YTD 2003 and $195.1 million during YTD 2002. Security Repo Agreements funding the GNMA
securities averaged $142.8 million of the total $152.0 million during YTD 2003 compared with $166.4 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 $152.8 million
during Third Quarter 2003 and $142.2 million during Third Quarter 2002, an increase of $10.6 million, or 7.4%. Interest bearing deposits averaged $916.9 million during Third Quarter 2003 and $891.2 million during Third Quarter 2002, an increase of
$25.7 million, or 2.9%.



Federal Home Loan Bank
(FHLB) advances averaged $149.2 million during YTD 2003 and $124.9 million during YTD 2002, an increase of $24.3 million, or 19.4%. Interest bearing deposits averaged $874.5 million during YTD 2003 and $871.1 million during YTD 2002.



Noninterest Income and Noninterest Expenses



Noninterest income totaled $14.3 million during Third Quarter 2003 compared
to $10.4 million for the same period in the prior year, an increase of $3.9 million, or 37.6%. Loan administration income totaled $1.6 million during Third Quarter 2003, compared with $1.4 million during Third Quarter 2002, an increase of $.2
million, or 14.2%. This increase reflects a reduction in amortization of servicing related assets of $.3 million. Origination fees totaled $4.9 million during Third Quarter 2003 compared with $3.9 million during Third Quarter 2002, an increase of
$1.0 million, or 26.0%, reflecting a 23.9% increase in the originations of residential mortgage loans. Loss on sale of investments AFS was $.7 million during Third Quarter 2003 compared with a gain on sale of Investments AFS of $1.3 million during
Third Quarter 2002 as a result of the sale of securities. Gains on the sales of loans and mortgage servicing rights during Third Quarter 2003 totaled $7.5 million, compared with $3.0 million during Third Quarter 2002, an increase of $4.5 million.
This increase is attributable, in general, to an increase in the volume of loans sold resulting from increased mortgage loan originations and $1.1 million of non recurring distributions to residual holders of certain securitizations representing
excess cash collections.



Noninterest expenses were $18.6
million during Third Quarter 2003 and $15.9 million during Third Quarter 2002, an increase of $2.7 million, or 17.3%. Salaries and benefits were $11.2 million for Third Quarter 2003, a $1.4 million, or 14.5%, increase compared to $9.8 million for
Third Quarter 2002. This increase is primarily attributable to an increase in commissions, reflecting increased loan origination volume. Other noninterest expense totaled $6.3 million during Third Quarter 2003 compared with $5.0 million during Third
Quarter 2002, an increase of $1.3 million, or 26.1%. 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 $40.8 million during YTD 2003 compared to $30.9 million for the same period in the prior year, an increase of $9.9 million, or
32.0%. Loan administration income totaled $3.0 million during YTD 2003, compared with $5.9 million during YTD 2002, a decrease of $2.9 million, or 48.9%. This decrease is primarily attributable to an increase in amortization of servicing related
assets of $3.5 million resulting from the increased level of prepayments due to the current interest rate environment. Origination fees totaled $13.9 million during YTD 2003 and $9.4 million during YTD 2002, an increase of $4.5 million, or 47.4%,
reflecting a 32.3%



21



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increase in the origination of residential mortgage loans. Gain on sale of Investments AFS totaled $1.6 million during
YTD 2003 and $2.1 million during YTD 2002. Gain on the sales of loans and mortgage servicing rights during YTD 2003 totaled $19.3 million, compared with $10.5 million during YTD 2002, an increase of $8.8 million, or 84.9%. Generally, this increase
is due to the increase in the volume of loans sold, $1.1 million of nonrecurring distributions to residual holders of certain securitizations representing excess cash collections, and to the $2.0 million gain resulting from the call of the 1994
Securitization.



Noninterest expenses were $54.2 million during
YTD 2003 and $45.3 million during YTD 2002, an increase of $8.9 million, or 19.7%. Salaries and benefits were $33.2 million for YTD 2003, a $4.8 million, or 16.8%, increase compared to $28.4 million for YTD 2002, due to the increase in commissions
reflecting increased loan origination volume. Other noninterest expense totaled $17.9 million during YTD 2003 compared with $13.8 million during YTD 2002, an increase of $4.1 million, or 30.0%, due 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



The Asset/Liability Management Committee (ALCO) of New South 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 September 30, 2003, New South had Swaps with notional amounts totaling $360 million of receive variable/pay fixed swap contracts designed to convert variable rate funding to a fixed rate, thus reducing the impact
of an upward movement in interest rates on the net interest rate margin. At September 30, 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 resulting from the maturity of two Swaps and the addition 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



22



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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 had $225 million
in Caps outstanding at September 30, 2003, including $150 million added during Third Quarter 2003. The Company is exposed to rising liability costs due to the short-term nature of its liability portfolio. The Caps generally serve to mitigate the
Companys risk against increases in the costs of liabilities. The weighted average LIBOR based strike rate for the Caps is 5.44%. At September 30, 2003, 90 day LIBOR was 1.16%, therefore short-term interest rates levels would have to increase
significantly before the Caps would provide the Company with a material benefit. Under SFAS No. 133, $125 million of the Caps are undesignated as hedges and do not qualify for hedge accounting. Accordingly, increases in the market value of those
Caps are recorded through the income statement. Conversely under SFAS No. 133, $100 million of the Caps were designated as cash flow hedges of certain time deposits and money market deposits. The increase in the market value of the designated Caps
are recorded as OCI.



Asset Quality



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

|                                                                                          |  | September 30, 2003                 |        |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ----------------- | -
|                                                                                          |  | (In thousands, except percentages) |       
|Nonaccrual and impaired loans                                                             |  | $                                  | 21,255 |   |                   | $
|Restructured loans                                                                        |  |                                    | 1,411  |   |                   |  
|                                                                                          |  |                                    |        |   |                   |  
|Total nonperforming loans                                                                 |  |                                    | 22,666 |   |                   |  
|Foreclosed properties and repossessed assets                                              |  |                                    | 5,526  |   |                   |  
|                                                                                          |  |                                    |        |   |                   |  
|Total nonperforming assets                                                                |  | $                                  | 28,192 |   |                   | $
|                                                                                          |  |                                    |        |   |                   |  
|Allowance for loan losses to period-end nonperforming loans                               |  |                                    | 59.23  | % |                   |  
|Allowance for loan losses to period-end nonperforming assets                              |  |                                    | 47.62  | % |                   |  
|Nonperforming assets to period-end loans and foreclosed properties and repossessed assets |  |                                    | 3.10   | % |                   |  
|Nonperforming loans to period-end loans                                                   |  |                                    | 2.51   | % |                   |  



Nonperforming assets
totaled $28.2 million at September 30, 2003, a decrease of $3.7 million from $31.9 million at December 31, 2002. Nonperforming assets include $8.7 million of individual mortgage loans, originally totaling $10.0 million, associated with one
residential development. This $8.7 million includes $6.4 million of nonaccrual and impaired loans and $2.3 million of foreclosed properties and repossessed assets, after a charge off of $1.3 million during Third Quarter 2003. Nonaccrual and impaired
loans decreased $3.9 million, or 15.6%, to $21.3 million at September 30, 2003 from $25.2 million at December 31, 2002, due to the foreclosure of properties included in nonaccrual and impaired loans at December 31, 2002. Foreclosed properties and
repossessed assets totaled $5.5 million at September 30, 2003 and $5.3 million at December 31, 2002, an increase of $.2 million, or 4.3%.



As of September 30, 2003, servicing termination triggers were exceeded in two of the securitizations for which the Company has retained servicing. At
September 30, 2003, the Companys servicing asset was $1.3 million for these two securitizations. The Company has advised the respective bond insurance companies of the event 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 companies will not exercise their contractual rights in the future, which would require New South to write-off any remaining
servicing asset for which it no longer performs the servicing function.



23



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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 losses
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 risks in the loan portfolio. The amount of the provision
for loan losses 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 September 30, 2003, as previously discussed, nonperforming assets included individual mortgage loans associated with one residential development. The
nonperforming assets include nonaccrual and impaired loans totaling $6.4 million and foreclosed properties totaling $2.3 million, after charge-offs totaling $1.3 million. The Bank has initiated a strategy of foreclosing each of these mortgage loans
in the one residential development as well as proceeding with associated claims from various third parties. Foreclosure efforts in the one residential development are expected to be completed by year-end 2003. To date, none of the foreclosed
properties have been disposed. The Banks strategy includes plans to maintain and operate these properties in the one residential development for an undetermined period until their disposal. Provisions for loan losses and losses on other real
estate owned related to this residential development total $3.7 million, inclusive of charge-offs totaling $1.3 million previously discussed. 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.



24



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



|                                                                     |  | Nine Months Ended September 30, |        
|-------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                     |  |                                 | 2003   
|Loans, net of unearned income                                        |  | $                               | 903,176
|                                                                     |  |                                 |        
|Average loans, net of unearned income                                |  | $                               | 987,454
|                                                                     |  |                                 |        
|Balance of allowance for loan losses at beginning of period          |  | $                               | 12,312 
|                                                                     |  |                                
|Loans charged off:                                                   |  |                                 |        
|Residential mortgage.                                                |  |                                 | 2,859  
|Installment                                                          |  |                                 | 2,504  
|Commercial .                                                         |  |                                 | 118    
|                                                                     |  |                                 |        
|Total charge-offs                                                    |  |                                 | 5,481  
|                                                                     |  |                                 |        
|                                                                     |  |                                
|Recoveries of loans previously charged off:                          |  |                                 |        
|Residential mortgage.                                                |  |                                 | 450    
|Installment                                                          |  |                                 | 1,602  
|Commercial .                                                         |  |                                 | 16     
|                                                                     |  |                                 |        
|Total recoveries                                                     |  |                                 | 2,068  
|                                                                     |  |                                 |        
|Net charge-offs                                                      |  |                                 | 3,413  
|Provision for loan losses .                                          |  |                                 | 4,525  
|                                                                     |  |                                 |        
|Balance of allowance for loan losses at end of period                |  | $                               | 13,424 
|                                                                     |  |                                 |        
|Allowance for loan losses to period-end loans                        |  |                                 | 1.49   
|                                                                     |  |                                 |        
|Net charge-offs to average loans, net of unearned income, annualized |  |                                 | 0.46   



The provision for loan
losses was $4.5 million for YTD 2003 compared with $4.9 million for YTD 2002, a decrease of $.4 million, reflecting the impact of the 2002 Securitization on the mix of loans, specifically the lower level of automobile installment loans. As a
percentage of loans, net of unearned income, the allowance for loan losses increased to 1.49% at September 30, 2003 from 1.41% at September 30, 2002, as a result of lower loan balances compared with the prior year.



Net charge-offs of loans were $3.4 million during YTD 2003 and $4.2 million
during YTD 2002, reflecting the $1.3 million charge-off of residential mortgage loans associated with one residential development discussed above, and the impact of the 2002 Securitization.



25



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Capital



Shareholders equity of the Company totaled $59.5 million, or 4.3% of total assets at September 30, 2003 and $53.1 million, or 4% of total assets at
December 31, 2002. The increase is attributable to net income of $9.4 million earned during YTD 2003 plus a $2.8 million increase in accumulated other comprehensive income, as reduced by dividends paid of $5.8 million.



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



|                                                             |  | As of September 30, 2003               |         |   | As of December 31, 2002 |  
|------------------------------------------------------------ |  | -------------------------------------- | ------- | - | ----------------------- | -
|                                                             |  | (In thousands, except for percentages)
|Shareholder's equity                                         |  | $                                      | 103,821 |   |                         | $
|Minority interest in consolidated subsidiaries.              |  |                                        | 285     |   |                         |  
|Accumulated other comprehensive loss .                       |  |                                        | 12,003  |   |                         |  
|Servicing rights capital haircut .                           |  |                                        | (21     | ) |                         |  
|                                                             |  |                                        |         |   |                         |  
|Tier 1 capital                                               |  |                                        | 116,088 |   |                         |  
|Allowance for loan losses.                                   |  |                                        | 9,368   |   |                         |  
|                                                             |  |                                        |         |   |                         |  
|Tier 2 capital.                                              |  |                                        | 9,368   |   |                         |  
|Low level recourse deduction                                 |  |                                        | 4,871   |   |                         |  
|                                                             |  |                                        |         |   |                         |  
|Total deductions                                             |  |                                        | 4,871   |   |                         |  
|                                                             |  |                                        |         |   |                         |  
|Total risk-based capital                                     |  | $                                      | 120,585 |   |                         | $
|                                                             |  |                                        |         |   |                         |  
|Risk-weighted assets (including off-balance sheet exposure). |  | $                                      | 894,407 |   |                         | $
|Tier 1 leverage ratio                                        |  |                                        | 8.47    | % |                         |  
|Tier 1 risk-based capital ratio (1)                          |  |                                        | 12.43   |   |                         |  
|Total risk-based capital ratio                               |  |                                        | 13.48   |   |                         |  



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



New South has consistently exceeded regulatory minimum guidelines and it is the intention of management to continue to
monitor these ratios to ensure regulatory compliance and maintain adequate capital for New South. New Souths current capital ratios place the Bank in the well capitalized regulatory category.



Liquidity



Liquidity management involves monitoring the Companys sources and uses of funds in order to meet its day-to-day cash
flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing



26



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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 were approximately 45.7% of total deposits as
of September 30, 2003. These brokered deposits are either deposits solicited by the Company from national and regional brokerage firms, which accounted for approximately $456.0 million of deposits at September 30, 2003, or are unsolicited and are
the result of the Companys competitive rates. The solicited brokered deposits are utilized as alternative funding sources that are often less expensive 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 September 30, 2003, alternative funding sources included $45.0 million of available lines to purchase federal funds,
$6.3 million unused warehouse lines of credit from other financial institutions related to the New South Joint Ventures, $15.0 million bank line of credit, $48.8 million in unused Federal Reserve System borrowing capacity and $155.6 million in
unused FHLB borrowing capacity. The ability to draw on certain of these funding sources is subject to the Company having sufficient collateral. The Company also had $30.7 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 and to insure that adequate reserve sources are available, if needed.



Item 4. Controls and Procedures



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



27



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Part II



Other Information



Item 1. Legal Proceedings



The Company, from time to time, has been named in ordinary, routine litigation. Certain of these lawsuits are class actions requesting unspecified or
substantial damages. In each case, a class has not yet been certified. These matters have arisen in the normal course of business and are related to lending, collections, servicing and other activities. The Company believes that it has meritorious
defenses to these lawsuits. Management, based upon consultation with legal counsel, is of the opinion that the ultimate resolution of these lawsuits will not have a material adverse effect on the Companys condensed consolidated financial
condition or results of operations.



Item 6. Exhibits and
Reports on Form 8-K



ITEM 6(A)EXHIBITS



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



ITEM
6(B)REPORTS on Form 8-K



A report on Form 8-K was filed
by the Company on September 3, 2003 containing a press release announcing its results of operations for the quarter ended June 30, 2003.



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



28



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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.



|November 12, 2003 |  | By: /s/ Robert M. Couch  
|----------------- |  | -------------------------
|                  |  | Robert M. Couch          
|                  |  | Executive Vice President 
|                  | 
|November 12, 2003 |  | By: /s/ Roger D. Murphree
|                  |  | Roger D. Murphree        
|                  |  | Chief Financial Officer  



29



---

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
|-- |  | ----------------------------------------------------------------------------------------



30