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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

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

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

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.

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

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NEW SOUTH BANCSHARES, INC.
FORM 10-Q
INDEX

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NEW SOUTH BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements

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

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

See accompanying notes to consolidated financial statements

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

See accompanying notes to consolidated financial statements.

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

Three Months Ended March 31, 2003

1.  General

          The consolidated financial statements have been prepared using generally accepted accounting principles.  The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included, and are of a normal recurring nature.  Certain amounts in the prior year financial statements have been reclassified to conform with the 2003 presentation.  These reclassifications had no effect on net income and were not material to the financial statements.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2002.

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

2.  Critical Accounting Policies

     Investment Securities Available for Sale

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

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

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     Residual Interests in Loan Securitizations

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

     Loans Available for Sale

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

     Loans

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

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

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

     Allowance for Loan Losses

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

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

     Mortgage Servicing Rights

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

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

     Derivative Instruments and Hedging Activities

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

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

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

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3.  Supplemental Cash Flow Information

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

4.  S Corporation Election

          The Company has elected S Corporation status.  Corporations electing such treatment under the Internal Revenue Code generally are not subject to Federal corporate taxation.  Certain states, however, do not recognize S Corporation status; therefore, the Company incurs state income taxes for those jurisdictions.  Profits and losses flow through to the S Corporation shareholders directly in proportion to their per share ownership in the entity.  Accordingly, shareholders are required to include profits and losses from the Company on their individual income tax returns for federal, and state and local, if applicable, income tax purposes.

          Typically, S Corporations declare dividends to shareholders in an amount sufficient to enable shareholders to pay the tax on any S Corporation income included in the shareholder’s individual income.  The Company paid dividends totaling $1.5 million during the First Quarter 2003.  Generally, such dividends are not subject to tax since they result from S Corporation income on which shareholders have previously been taxed.

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5. Comprehensive Income

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

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

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6.  Segment Reporting

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

          Residential Mortgage Banking originates and services single-family mortgage loans.  These loans are originated through the Company’s network of retail loan origination offices and through brokers and correspondents.  Commercial Real Estate Lending consists of loans secured primarily by multi-family housing.  Automobile Lending consists of the origination and servicing of loans secured by automobiles, light trucks, and vans.  These loans are primarily acquired on an indirect basis through automobile dealers.  Portfolio Management oversees the Company’s overall portfolio of marketable assets as well as New South’s funding needs.  Other includes unallocated corporate overhead.  Residential Mortgage Banking, Commercial Real Estate Lending, and Automobile Lending retain the assets generated by each unit, and are credited with the interest income generated by those assets unless they are actually sold in the secondary market with the results of such sales being attributed to each unit.  Each unit pays a market-based funds-use charge to Portfolio Management.  The segment results include certain other overhead allocations.  The results for the reportable segments of the Company for First Quarter 2003 and First Quarter 2002 are included in the following tables.

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