SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-KSB
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended December 31, 1996
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 0-25478
First Southern Bancshares, Inc.
(Name of Small Business Issuer in Its Charter)
Georgia 58-2171291
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2727 Panola Road, Lithonia, Georgia 30058
(Address of Principal Executive Offices) (Zip Code)
(770) 487-3511
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
10,000,000 Shares of Common Stock, $5.00 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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 past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year: $5,518,619
Aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a
specified date within the past 60 days: $4,417,460
<PAGE>
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 553,503 at March 14, 1997.
Transitional Small Business Disclosure format (check one):
Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal
year ended December 31, 1996 are incorporated by reference into
Part II.
Portions of the Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held on April 17, 1997, are
incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
General
The Company was incorporated as a Georgia business
corporation on February 16, 1995 and became a bank holding
company by acquiring all of the common stock of First Southern
Bank (the "Bank") on July 3, 1995. The Company presently has two
operating subsidiaries, the Bank and FSB Mortgage Services, Inc.
("Mortgage Services"), a mortgage company. The Company was
organized to facilitate the Bank's ability to serve its
customers' requirements for financial services. The holding
company structure provides flexibility for expansion of the
Company's banking business through the possible acquisition of
other financial institutions and the provision of additional
banking-related services that the traditional commercial bank may
not provide under present laws. For example, banking regulations
require that the Bank maintain a minimum ratio of capital to
assets. In the event that the Bank's growth is such that this
minimum ratio is not maintained, the Company may borrow funds,
subject to capital adequacy guidelines of the Federal Reserve,
and contribute them to the capital of the Bank and otherwise
raise capital in a manner that is unavailable to the Bank under
existing banking regulations.
The Company acquired the assets of and employed the
personnel of American Financial Mortgage Corp. on September 9,
1996. The resulting company, Mortgage Services, is a mortgage
company licensed by the State of Georgia and has received lender
approval from the Department of Housing and Urban Development,
FHA, Fannie Mae and the Veterans Administration.
The Company has no present plans to acquire any additional
operating subsidiaries. The Company may, however, make
additional acquisitions in the future in the event that such
acquisitions are deemed to be in the best interests of the
Company and its shareholders. Such acquisitions, if any, will be
subject to certain regulatory approvals and requirements. See
"Business - Bank Holding Company Regulations."
The Bank
General
The Bank, a state bank located in Lithonia, Georgia, was
incorporated on March 16, 1987, and opened for business on
April 26, 1989.
The Bank's home office is located at 2727 Panola Road,
Lithonia, Georgia 30058. In 1994, the Bank opened a branch
office in the South DeKalb Mall, Decatur, Georgia and in 1996
opened an additional branch in the Rockbridge Place Shopping
Center, Stone Mountain, Georgia in order to provide more
convenient services for the residents of its service area. The
Bank conducts a general commercial banking business that serves
South DeKalb County, acts as an issuing agent for U.S. savings
bonds, travelers checks and cashiers checks, and offers
collection teller services. The Bank has no subsidiaries.
The Bank does not engage in any line of business in addition
to normal commercial banking activities. The Bank does not
engage in any operations in foreign countries nor is a material
portion of the Bank's revenues derived from customers in foreign
countries.
The philosophy of Bank management continues to be to
emphasize prompt and responsive service to residents of South
DeKalb County in order to attract customers and to acquire market
share now controlled by other financial institutions in the
Bank's market area.
The Bank's Primary Service Area
The Bank's primary service area is South DeKalb County,
along with certain portions of Rockdale County. The primary
focus of the Bank are the small business and commercial/service
firms in the area plus individuals and households who reside in
or commute to the area. The majority of the Bank's customers are
drawn from the described area.
Competition
The Bank must compete for both deposit and loan customers
with other financial institutions with greater resources than are
available to the Bank. Currently, there are numerous branches of
regional and local banks, as well as other types of entities
offering financial services, located in the Bank's market area.
Deposits
The Bank offers a wide range of commercial and consumer
deposit accounts, including non-interest bearing checking
accounts, money market checking accounts (consumer and
commercial), negotiable order of withdrawal ("NOW") accounts,
individual retirement accounts, time certificates of deposit, and
regular savings accounts. The sources of deposits typically are
residents and businesses and their employees within the Bank's
market area, obtained through personal solicitation by the Bank's
officers and directors, direct mail solicitation and
advertisements published in the local media. The Bank pays
competitive interest rates on time and savings deposits and has a
service charge fee schedule competitive with other financial
institutions in the Bank's market area, covering such matters as
maintenance fees on checking accounts, per item processing fees
on checking accounts, returned check charges and the like.
Loan Portfolio
The Bank engages in a full complement of lending activities,
including consumer/installment loans, home equity lines of
credit, construction loans and commercial loans, with particular
emphasis on small business loans. The Bank believes that the
origination of short-term fixed rate loans and loans tied to
floating interest rates is the most desirable method of
conducting its lending activities.
Consumer Loans
The Bank's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes,
including loans for automobiles, home improvements and
investments. This category of loans also includes loans secured
by second mortgages on the residences of borrowers.
Commercial Lending
Commercial lending is directed principally toward businesses
whose demands for funds fall within the Bank's legal lending
limits and which are existing deposit customers of the Bank.
This category of loans includes loans made to individual,
partnership or corporate borrowers and obtained for a variety of
business purposes.
Investments
As of December 31, 1996, investment securities comprised
approximately 22.60% of the Bank's assets, with loans (net of
loan loss reserves) comprising approximately 61.99% of assets.
The Bank invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United
States and other taxable securities.
Asset/Liability Management
It is the objective of the Bank to manage assets and
liabilities to provide a satisfactory, consistent level of
profitability within the framework of established cash, loan,
investment, borrowing and capital policies. Certain officers of
the Bank are charged with the responsibility for developing and
monitoring policies and procedures that are designed to ensure
acceptable composition of the asset/liability mix. It is the
overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits
of all categories made by individuals, partnerships and
corporations. Management of the Bank seeks to invest the largest
portion of the Bank's assets in consumer/installment, commercial
and construction loans.
The Bank's asset/liability mix is monitored on a daily basis
with a report reflecting the interest-sensitive assets and
interest-sensitive liabilities being prepared and presented to
the Bank's Board of Directors on a monthly basis. The objective
of this policy is to control interest-sensitive assets and
liabilities so as to minimize the impact of substantial movements
in interest rates on the Bank's earnings.
Correspondent Banking
Correspondent banking involves the provision of services by
one bank to another bank that cannot provide that service for
itself from an economic or practical standpoint. The Bank
purchases correspondent services offered by larger banks,
including check collections, security safekeeping, investment
services, wire transfer services, coin and currency supplies,
overline and liquidity loan participation, and sales of loans to
or participation with correspondent banks.
Employees
As of December 31, 1996 the Bank had 42 full-time employees.
The Bank is not a party to any collective bargaining agreement
and, in the opinion of management, the Bank enjoys excellent
relations with its employees.
<PAGE>
SELECTED FINANCIAL AND STATISTICAL DATA
<TABLE>
Table 1
Average Balance Sheets
<CAPTION>
1996 1995 1994
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate Balances Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (including loan fees) (1) $ 27,666 3,104 11.22% $ 22,827 2,585 11.32% $ 19,240 1,994 10.36%
Investment securties:
Taxable 9,557 615 6.44% 7,084 375 5.29% 6,285 308 4.90%
Nontaxable 1,939 87 4.49% 172 7 4.07% 0 0 0
Federal funds sold 3,867 206 5.33% 3,473 202 5.82% 2,336 95 4.07%
Total interest-earning assets 43,029 4,012 9.32% 33,556 3,169 9.44% 27,861 2,397 8.60%
Other non-interest earning assets 5,209 4,490 4,264
Total assets $ 48,238 $ 38,046 $ 32,125
Liabilities and stockholders' equity:
Interest bearing liabilities:
Deposits:
Interest bearing demand
and savings $ 8,641 267 3.09% $ 6,971 203 2.91% $ 6,596 198 3.00%
Time 25,281 1,483 5.87% 18,414 1,066 5.79% 14,777 618 4.18%
Other borrowings 255 21 8.24% 34 3 8.82% 0 0 0
Total interest bearing liabilities 34,177 1,771 5.18% 25,419 1,272 5.00% 21,373 816 3.82%
Other non-interest bearing liabilities 8,644 7,469 6,013
Stockholders' equity 5,417 5,158 4,739
Total liabilities and stockholders'
equity $ 48,238 $ 38,046 $ 32,125
Excess of interest-earning assets over
Interest-bearing liabilities $ 8,852 $ 8,137 $ 6,488
Ratio of interest-earning assets to
Interest-bearing liabilities 125.90% 132.01% 130.36%
Net interest income $2,241 $1,897 $1,581
Net interest spread 4.14% 4.44% 4.79%
Net interest yield on interest earning assets 5.21% 5.65% 5.67%
(1) Non-accrual loans and the interest income which was recorded on these loans (both prior and subsequent to the time the loans
were placed on non-accrual status, if any) are included in the yield calculation for loans in all periods reported.
</TABLE>
<PAGE>
<TABLE>
Table 2
Volume Rate Analysis
The following table shows a summary of the changes in interest income and interest expense resulting from
changes in volume and changes in rates for each major category of interest-earning assets and interest-bearing
liabilities for 1996 over 1995, and 1995 over 1994.
<CAPTION>
1996 over 1995 1995 over 1994
Increase (decrease) due to changes in: Increase (decrease) due to changes in:
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income on: $ $
Loans (including loan fees) 545 (26) 519 389 202 591
Investment securities:
Taxable 145 95 240 41 26 67
Nontaxable 76 4 80 3 4 7
Federal funds sold 22 (18) 4 56 51 107
Total interest-earning assets 788 55 843 489 283 772
Interest expense on:
Deposits:
Interest bearing demand
and savings 50 14 64 11 (6) 5
Time 400 17 417 181 267 448
Other borrowings 19 (1) 18 1 2 3
Total interest bearing liabilities $ 469 30 499 $ 193 263 456
Rate/volume variances are allocated between rate variances and volume variances using a weighted average allocation method.
</TABLE>
<PAGE>
<TABLE>
Table 3
Investment Portfolio
The following table presents the book value and market value of investments by
category at December 31, 1996 and 1995
<CAPTION>
1996 1995
Book Market Book Market
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,348 $ 1,363 $ 3,290 $ 3,302
U.S. Government Agencies 5,880 5,862 4,577 4,620
State, county and municipal 2,743 2,735 1,160 1,159
Mortgage-backed Securities 1,810 1,798 461 470
$ 11,781 $ 11,758 $ 9,488 $ 9,551
<CAPTION>
Weighted
U.S. U.S. Average
Maturities at December 31, 1996 Treasury Agencies SCM Yields
<S> <C> <C> <C> <C>
Within 1 year $ 451 0 0 5.34%
After 1 through 5 years 897 1,697 855 5.73%
After 5 through 10 years 0 4,183 1,173 6.93%
After 10 years 0 0 715 5.19%
Totals $ 1,348 5,880 2,743 6.25%
</TABLE>
<PAGE>
<TABLE>
Table 4
Loan Portfolio
The following table presents loans by type at the end of each of the
last two years:
<CAPTION>
1996 1995
<S> <C> <C>
Commercial, financial and agricultural $ 19,552 $ 10,468
Real estate - construction 3,117 2,239
Real estate - mortgage 6,345 7,430
Installment loans to individuals 3,677 2,641
$ 32,691 $ 22,778
As of December 31, 1996, maturities of loans in the indicated
classifications were as follows:
<CAPTION>
Commercial,
Financial and Real Estate
Maturity Agricultural Construction Total
<S> <C> <C> <C>
Within 1 year $ 3,768 $ 1,556 $ 5,324
1 to 5 years 14,079 1,561 15,640
After 5 years 1,705 0 1,705
$ 19,552 $ 3,117 22,669
As of December 31, 1996, the interest terms of loans in the indicated
classifications for the indicated maturity ranges are as follows:
<CAPTION>
Fixed Variable
Interest Interest
Rates Rates Total
<S> <C> <C> <C>
Commercial, financial and agricultural:
1 to 5 years maturity $ 4,674 9,405 14,079
After 5 years maturity 495 1,210 1,705
5,169 10,615 15,784
Real estate - construction:
1 to 5 years maturity 120 1,441 1,561
After 5 years maturity 0 0 0
120 1,441 1,561
$ 5,289 12,056 17,345
The following summerizes past due and non-accrual loans, other real estate, and interest
that would have been and has been reported on non-accrual loans as of December 31, 1996
and 1995.
<CAPTION>
1996 1995
<S> <C> <C>
Other real estate 426 0
Accruing loans 90 days or more past due 0 0
Non-accrual loans 184 164
A loan is placed on non-accrual status when, in management's judgement, the collection of
interest appears doubtful. As a result of management's ongoing review of the loan portfolio,
loans as classified as non-accrual generally when they are past due in principal or interest
payments for more than 90 days or its is otherwise not reseaonable to expect collection of
principal and interest under the original terms. Exceptions are allowed for 90 day past
due loans when such loans are well secured and in process of collection.
</TABLE>
<PAGE>
<TABLE>
Table 5
Allowance for Loan Losses
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of year $ 387 $ 400
Charge-offs:
Commercial, financial and agricultural 175 36
Real estate 0 0
Installment loans to individuals 36 89
211 125
Recoveries:
Commercial, financial and agricultural 32 13
Real Estate 0 0
Installment loans to individuals 17 3
49 16
Net charge-offs 162 109
Additions charged to operations 140 95
Balance at end of year $ 365 $ 386
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.59% 0.48%
Management's policy is to perform an annual review of the Bank's loan
portfolio. As a result of this review and management's ongoing monitoring
efforts, each loan is assigned a risk rating based upon the borrower's
ability to repay, the underlying collateral, the economic conditions and
other factors relevant to the loan. The allowance for loan losses is
provided based upon the risk ratings assigned or specific losses identified.
An assessment of the adequacy of the allowance for loan losss is made
quarterly based upon the loan ratings and the composition and growth of
the loan portfolio.
</TABLE>
<PAGE>
<TABLE>
Table 6
Deposits
The average balance of deposits and the average rates paid on such deposits
are summarized for the periods indicated in the following table:
<CAPTION>
1996 1995
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 8,321 - $ 7,066 -
Interest-bearing demand
and savings 8,641 3.09% 6,971 2.91%
Time deposits 25,281 5.87% 18,414 5.79%
$ 42,243 $ 32,451
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1996 are summarized as follows:
<S> <C>
Within 3 months $ 4,506
After 3 through 6 months 793
After 6 through 12 months 502
After 12 months 4,067
$ 9,868
</TABLE>
<PAGE>
<TABLE>
Table 7
Selected Ratios
The following table sets out certain ratios of the consolidated
entity for the years indicated:
<CAPTION>
1996 1995
<S> <C> <C>
Net income to:
Average stockholders' equity 5.58% 6.01%
Average assets 0.63% 0.81%
Dividends to net income 8.61% -
Average equity to average assets 11.23% 13.55%
</TABLE>
<PAGE>
Supervision and Regulation
The following discussion sets forth the material elements
of the regulatory framework applicable to banks and bank holding
companies and provides certain specific information related to
the Company.
General
The Company is a bank holding company registered with the
Board of Governors of the Federal Reserve System (the "Federal
Reserve") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). As such, the Company and its non-bank
subsidiary are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the
Federal Reserve.
The BHC Act requires every bank holding company to obtain
the prior approval of the Federal Reserve before: (a) it may
acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, the bank holding
company will directly or indirectly own or control more than 5%
of the voting shares of the bank; (b) it or any of its
subsidiaries, other than a bank, may acquire all or substantially
all of the assets of any bank; or (c) it may merge or consolidate
with any other bank holding company.
The BHC Act further provides that the Federal Reserve may
not approve any transaction that would result in a monopoly or
would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in
any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a
monopoly in any section of the country, or that in any other
manner would be in restraint of trade, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by the
public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to
consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned and
the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking Act"), which became
effective on September 29, 1995, repealed the prior statutory
restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company, and any other bank holding
company located in Georgia may now acquire a bank located in any
other state, and any bank holding company located outside Georgia
may lawfully acquire any Georgia-based bank, regardless of state
law to the contrary, in either case subject to certain
deposit-percentage, aging requirements, and other restrictions.
The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state-chartered banks may branch
interstate through acquisitions of banks in other states. By
adopting legislation prior to that date, a state has the ability
either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate
branching altogether.
In February 1996, the Georgia Legislature adopted the
"Georgia Interstate Branching Act" effective June 1, 1997. The
Georgia Interstate Banking Act will permit Georgia-based banks
and bank holding companies owning or acquiring banks outside of
Georgia and all non-Georgia banks and bank holding companies
owning or acquiring banks in Georgia to merge any lawfully
acquired bank into an interstate branch network. The Georgia
Interstate Branching Act also allows banks to establish de novo
branches on a limited basis beginning July 1, 1996. Beginning
July 1, 1998, the number of de novo branches which may be
established will no longer be limited.
The BHC Act generally prohibits the Company from engaging in
activities other than banking or managing or controlling banks or
other permissible subsidiaries and from acquiring or retaining
direct or indirect control of any company engaged in any
activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In
determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an
activity reasonably can be expected to produce benefits to the
public, such as greater convenience, increased competition, or
gains in efficiency, that outweigh possible adverse effects, such
as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount
securities brokerage activities, performing certain data
processing services, acting as agent or broker in selling credit
life insurance and certain other types of insurance in connection
with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies.
The BHC Act does not place territorial limitations on permissible
non-banking activities of bank holding companies. Despite prior
approval, the Federal Reserve has the power to order a holding
company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary
of that bank holding company.
The bank subsidiary of the Company is a member of the
Federal Deposit Insurance Corporation (the "FDIC"), and as such,
its deposits are insured by the FDIC to the maximum extent
provided by law. Each such subsidiary is also subject to
numerous state and federal statutes and regulations that affect
its business, activities, and operations, and each is supervised
and examined by one or more state or federal bank regulatory
agencies.
The FDIC and the Georgia Department of Banking and Finance
(the "Georgia Department") regularly examine the operations of
the subsidiary banks and are given authority to approve or
disapprove mergers, consolidations, the establishment of
branches, and similar corporate actions. The FDIC and the
Georgia Department also have the power to prevent the continuance
or development of unsafe or unsound banking practices or other
violations of law.
Payment of Dividends
The Company is a legal entity separate and distinct from its
banking and other subsidiaries. The principal sources of cash
flow of the Company, including cash flow to pay dividends to its
shareholders, are dividends by its subsidiary bank. There are
statutory and regulatory limitations on the payment of dividends
by the subsidiary bank to the Company as well as by the Company
to its shareholders.
If, in the opinion of the federal banking regulator, a
depository institution under its jurisdiction is engaged in or is
about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the depository
institution, could include the payment of dividends), such
authority may require, after notice and hearing, that such
institution cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that
deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a depository institution may not pay any dividend if
payment would cause it to become undercapitalized or if it
already is undercapitalized. See "-- Prompt Corrective Action."
Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
The payment of dividends by the Company and the subsidiary
bank may also be affected or limited by other factors, such as
the requirement to maintain adequate capital above regulatory
guidelines.
Capital Adequacy
The Company and its subsidiary bank are required to comply
with the capital adequacy standards established by the Federal
Reserve and the appropriate federal banking regulator in the case
of its banking subsidiary. There are two basic measures of
capital adequacy for bank holding companies that have been
promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be
satisfied for a bank holding company to be considered in
compliance.
The risk-based capital standards are designed to make
regulatory capital requirements more sensitive to differences in
risk profile among banks and bank holding companies, to account
for off-balance-sheet exposure, and to minimize disincentives for
holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights.
The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based
Capital Ratio") of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance-sheet items,
such as standby letters of credit) is 8%. At least half of Total
Capital must comprise common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other
intangible assets ("Tier 1 Capital"). The remainder may consist
of subordinated debt, other preferred stock, and a limited amount
of loan loss reserves ("Tier 2 Capital"). At December 31, 1996,
the Company's consolidated Total Risk-Based Capital Ratio and its
Tier 1 Risk-Based Capital Ratio (i.e., the ratio of Tier 1
Capital to risk-weighted assets) were 16% and 15%, respectively.
In addition, the Federal Reserve has established minimum
leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum ratio (the "Leverage Ratio") of
Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally
are required to maintain a Leverage Ratio of at least 3%, plus an
additional cushion of 100 to 200 basis points. The Company's
Leverage Ratio at December 31, 1996 was 11%. The guidelines also
provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will
consider a "tangible Tier 1 Capital Leverage Ratio" (deducting
all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital
requirements adopted by its federal banking regulator, which are
substantially similar to those adopted by the Federal Reserve for
bank holding companies.
The Bank was in compliance with applicable minimum capital
requirements as of December 31, 1996. The Company has not been
advised by any federal banking agency of any specific minimum
capital ratio requirement applicable to it or its subsidiary
depository institutions.
Failure to meet capital guidelines could subject a bank to a
variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a
prohibition on the taking of brokered deposits, and certain other
restrictions on its business. As described below, substantial
additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital
requirements. See "-- Prompt Corrective Action."
The federal bank regulators continue to indicate their
desire to raise capital requirements applicable to banking
organizations beyond their current levels. In this regard, the
Federal Reserve and the FDIC have, pursuant to FDICIA, recently
adopted final regulations, which will become mandatory on
January 1, 1998, requiring regulators to consider interest rate
risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position) in the evaluation of a bank's
capital adequacy. The bank regulatory agencies have concurrently
proposed a methodology for evaluating interest rate risk which
would require banks with excessive interest rate risk exposure to
hold additional amounts of capital against such exposures. The
market risk rules will apply to any bank or bank holding company
whose trading activity equals 10% or more of its total assets, or
whose trading activity equals $1 billion or more.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act
as a source of financial strength for, and to commit resources to
support, its banking subsidiary, This support may be required at
times when, absent such Federal Reserve policy, the Company may
not be inclined to provide it. In addition, any capital loans by
a bank holding company to any of its banking subsidiaries are
subordinate in right of payment to deposits and to certain other
indebtedness of such banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company
to a federal bank regulatory agency to maintain the capital of a
banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a
depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by,
the FDIC after August 9, 1989, in connection with (a) the default
of a commonly controlled FDIC-insured depository institution or
(b) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a
conservator or receiver, and "in danger of default" is defined
generally as the existence of certain conditions indicating that
a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims
of shareholders of the insured depository institution or its
holding company, but is subordinate to claims of depositors,
secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository
institution. The subsidiary depository institutions of the
Company are subject to these cross-guarantee provisions. As a
result, any loss suffered by the FDIC in respect of these
subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated
losses against the depository institution's banking affiliates,
and a potential loss of the Company's investment in such other
subsidiary depository institutions.
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under
this system, which became effective in December 1992, the federal
banking regulators are required to establish five capital
categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions,
with respect to institutions in the three undercapitalized
categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject
to a narrow exception, FDICIA requires the banking regulator to
appoint a receiver or conservator for an institution that is
critically undercapitalized. The federal banking agencies have
specified by regulation the relevant capital level for each
category.
The capital levels established for each of the categories
are as follows:
<TABLE>
<CAPTION>
Total Tier 1
Capital Category Tier 1 Capital Risk-Based Capital Risk-Based Capital Other
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not
subject
to a
capital
directive
Adequately 4% or more 8% or more 4% or more --
Capitalized
Undercapitalized less than 4% less than 8% less than 4% --
Significantly less than 3% less than 6% less than 3% --
Undercapitalized
Critically 2% or less -- -- --
Undercapitalized tangible
equity
</TABLE>
For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards, plus the amount of
outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized is
required to submit an acceptable capital restoration plan to its
appropriate federal banking agency. Under FDICIA, a bank holding
company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain
limitations. The obligation of a controlling holding company
under FDICIA to fund a capital restoration plan is limited to the
lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions,
establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital
restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with
respect to any undercapitalized depository institution to take
any of the actions it is required to or may take with respect to
a significantly undercapitalized institution as described below
if it determines "that those actions are necessary to carry out
the purpose" of FDICIA.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a new risk-based
assessment system for insured depository institutions that takes
into account the risks attributable to different categories and
concentrations of assets and liabilities. The new system, which
went into effect on January 1, 1994, assigns an institution to
one of three capital categories: (a) well capitalized;
(b) adequately capitalized; and (c) undercapitalized. These
three categories are substantially similar to the prompt
corrective action categories described above, with the
"undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory
subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds
(which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance
assessment rate is then determined based on the capital category
and supervisory category to which it is assigned. Under the
final risk-based assessment system, as well as the prior
transitional system, there are nine assessment risk
classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are
applied. Assessment rates for members of both the Bank Insurance
Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
for the first half of 1995, as they had during 1994, ranged from
23 basis points (0.23% of deposits) for an institution in the
highest category (i.e., "well capitalized" and "healthy") to 31
basis points (0.31% of deposits) for an institution in the lowest
category (i.e., "undercapitalized" and "substantial supervisory
concern"). These rates were established for both funds to
achieve a designated ratio of reserves to insured deposits (i.e.,
1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May
1995, the FDIC reduced the assessment rate applicable to BIF
deposits in two stages, so that, beginning 1996, the deposit
insurance premiums for 92% of all BIF members in the highest
capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the
existing assessment rate range of 23 to 31 basis points for SAIF
members for the foreseeable future given the undercapitalized
nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF
premium rates had adverse consequences for SAIF-insured
institutions and other banks with SAIF assessed deposits,
including reduced earnings and an impaired ability to raise funds
in capital markets and to attract deposits, on July 28, 1995, the
FDIC, the Treasury Department, and the Office of Thrift
Supervision released statements outlining a proposed plan to
recapitalize the SAIF, the principal feature of which was a
special one-time assessment on depository institutions holding
SAIF-insured deposits, which was intended to recapitalize the
SAIF at a reserve ratio of 1.25%. This proposal contemplated
elimination of the disparity between the assessment rates on BIF
and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit
Insurance Funds Act of 1996 (the "Funds Act") was enacted by
Congress as part of the omnibus budget legislation and signed
into law on September 30, 1996. As directed by the Funds Act,
the FDIC implemented a special one-time assessment of
approximately 65.7 basis points (0.657%) on a depository
institution's SAIF-insured deposits held as of March 31, 1995 (or
approximately 52.6 basis points on SAIF deposits acquired by
banks in certain qualifying transactions).
In addition, the FDIC proposed a revision in the SAIF
assessment rate schedule that effected, as of October 1, 1996
(a) a widening in the assessment rate spread among institutions
in the different capital and risk assessment categories, (b) an
overall reduction of the assessment rate range assessable on SAIF
deposits of from 0 to 27 basis points, and (c) a special interim
assessment rate range for the last quarter of 1996 of from 18 to
27 basis points on institutions subject to FICO assessments.
Effective January 1, 1997, FICO assessments will be imposed on
both BIF- and SAIF-insured deposits in annual amounts presently
estimated at 1.29 basis points and 6.44 basis points,
respectively. Beginning in January, 2000, BIF- and SAIF- insured
institutions will share the FICO interest costs at equal rates
currently estimated 2.43 basis points. The Company anticipates
that the net effect of the decrease in the premium assessment
rate on SAIF deposits will result in a reduction in its total
deposit insurance premium assessments for the years 1997 through
1999, assuming no further changes in announced premium assessment
rates. The Funds Act further provides that BIF and SAIF are to
be merged, creating the "Deposit Insurance Fund," on January 1,
1999, provided that bank and savings association charters are
combined by that date.
Under the FDIA, insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable
law, regulation, rule, order, or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed which
contain wide-ranging proposals for altering the structures,
regulations and competitive relationships of the nation's
financial institutions. It cannot be predicted whether or what
form any proposed regulation or statute will be adopted or the
extent to which the business of the Company may be affected by
such regulation or statute.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank's main office building is located at 2727 Panola
Road, Lithonia, Georgia. The Bank also operates two branch
offices: the office located at South DeKalb Mall, 2801 Candler
Road, Decatur, Georgia, which is leased (the lease expires in
June 2001), and the office located at Rockbridge Plaza, 5771
Rockbridge Road, Stone Mountain, Georgia, which is owned by the
Bank.
Other than normal commercial lending activities of the Bank,
the Company generally does not invest in real estate, interests
in real estate, real estate mortgages, or securities of or
interests in entities primarily engaged in real estate
activities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company is a party or of which any of its properties are subject;
nor are there material proceedings known to the Company to be
contemplated by any governmental authority; nor are there
material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any
of the foregoing, is a party or has an interest adverse to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's common stock, $5.00 par value ("Common
Stock"), is not traded on an established trading market, and
there is only very limited trading. The following table sets
forth high and low bid information for the Common Stock for each
of the quarters in which trading has occurred since January 1,
1995 (information for the first two quarters of 1995 is for the
Bank's Common Stock prior to its acquisition by the Company).
The prices set forth below reflect only information that has come
to management's attention and do not include retail mark-ups,
markdowns or commissions and may not represent actual
transactions.
Quarter Ended: High Bid Low Bid
March 31, 1995 $ 10.00 $ 8.00
June 30, 1995 10.00 9.61
September 30, 1995 10.00 5.00
December 31, 1995 10.00 8.00
March 31, 1996 10.00 10.00
June 30, 1996 10.00 10.00
September 30, 1996 10.00 10.00
December 31, 1996 10.00 10.00
As of March 14, 1997 there were 956 holders of record of
Common Stock.
The Company paid an annual cash dividend of $.05 per share for
stockholders of record at December 31, 1996. The Company's
dividend policy in the future will depend on the Bank's earnings,
capital requirements, financial condition, and other factors
considered relevant by the Board of Directors of the Company.
See "Description of Business - Bank Regulation."
The Company did not have any sales of unregistered securities
during 1996, except as follows: in partial payment for the
purchase of assets of American Financial Mortgage Corp., the
Company issued 5,000 shares of Common Stock at $10.00 per share;
and the Company issued 2,646 shares to various individuals also
at $10.00 per share.
The Company did not have any sales of unregistered securities
during 1995 and 1994.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The responses to this item are included in the Company's
Annual Report to Shareholders under the heading, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" at pages 5 through 7, and are hereby incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in the
Company's Annual Report to Shareholders at pages 8 through 22,
and are hereby incorporated herein by reference:
Report of Independent Certified Public Accountants
Financial Statements
Consolidated Balance Sheets dated as of December 31,
1996 and 1995
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 17, 1997 under the headings, "Election of Directors -
Director Nominees and Continuing Directors" at pages 2-4,
"Principal Officers" at page 5, "Beneficial Ownership of Common
Stock" at pages 7-8, and "Compliance With Section 16(a) of the
Securities Exchange Act of 1934" at page 9, and are incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 17, 1997 under the heading, "Executive Compensation" at
pages 5 and 6, and are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The responses to this item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 17, 1997 under the heading, "Beneficial Ownership of Common
Stock" at pages 7-8, and are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 17, 1997 under the headings "Certain Transactions" at page
6, and are incorporated herein by reference.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
3.1 The Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Instruments Defining the Rights of Security
Holders.(2)
13.1 The Company's 1996 Annual Report to
Shareholders (incorporated by reference in
Items 6 and 7 of this Report). Except with
respect to those portions specifically
incorporated by reference into this Report,
the Company's 1996 Annual Report to
Shareholders is not deemed to be filed as part
of this Report.
24.1 Power of attorney. See the signature pages to
this Report.
27.1 Financial Data Schedule (for SEC use only).
__________________
(1) Incorporated herein by reference to exhibit of same number
in the Company's 1995 Form 10-KSB.
(2) See the Articles of Incorporation of the Company at Exhibit
3.1 hereto and the Bylaws of the Company at Exhibit 3.2 hereto.
(b) No reports on Form 8-K were filed in the fourth
quarter of 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST SOUTHERN BANCSHARES, INC.
By: /s/ James E. Young
James E. Young
President
Date: March 31, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears on the signature page to this Report
constitutes and appoints James E. Young and Willard C. Lewis and
each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and
in his name, place, and stead, in any and all capacities, to sign
any and all amendments to this Report, and to file the same, with
all exhibits hereto, and other documents in connection herewith
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Gregory T. Baranco Chairman of the Board March 31, 1997
Gregory T. Baranco
/s/ Bernard H. Bronner Director March 31, 1997
Bernard H. Bronner
/s/ Nathaniel Bronner, Jr. Director March 31, 1997
Nathaniel Bronner, Jr.
/s/ Robert L. Brown Director March 31, 1997
Robert L. Brown
/s/ William H. Cleveland Director March 31, 1997
William H. Cleveland
/s/ Robert McMahan Director March 31, 1997
Robert McMahan
/s/ C. David Moody Director March 31, 1997
C. David Moody
/s/ Lynn Pattillo Director March 31, 1997
Lynn Pattillo
/s/ Thom Peters Director March 31, 1997
Thom Peters
/s/ Porter Sanford Director March 31, 1997
Porter Sanford
/s/ James E. Young Director and President March 31, 1997
James E. Young*
/s/ Willard C. Lewis Executive Vice President March 31, 1997
Willard C. Lewis**
* Principal executive officer
** Principal Accounting and Financial Officer
<PAGE>
EXHIBIT INDEX
Page Number in
Exhibit Sequentially
Number Exhibit Numbered Copy
3.1 The Articles of Incorporation.(1) ___
3.2 Bylaws.(1) ___
4.1 Instruments Defining the Rights of Security N/A
Holders.(2)
13.1 The Company's 1996 Annual Report to ___
Shareholders (incorporated by reference in
Items 6 and 7 of this Report). Except with
respect to those portions specifically
incorporated by reference into this Report,
the Company's 1996 Annual Report to
Shareholders is not deemed to be filed as
part of this Report.
24.1 Power of attorney. See the signature pages ___
to this Report.
27.1 Financial Data Schedule (for SEC use only). ___
____________________
(1) Incorporated herein by reference to exhibit of same number
in the Company's 1995 Form 10-KSB.
(2) See the Articles of Incorporation of the Company at Exhibit
3.1 hereto and the Bylaws of the Company at Exhibit 3.2 hereto.
FIRST SOUTHERN BANCSHARES, INC.
And Subsidiaries
ANNUAL REPORT
1996
<PAGE>
Management Discussion and Analysis
Overview
First Southern Bancshares, Inc. (the "Company") is a bank holding
company which wholly owns First Southern Bank (the "Bank") and
FSB Mortgage Services, Inc. ("Mortgage Services"). This
financial overview provides insight into the financial condition
of the Company and addresses the factors that have affected
earnings. The Company's consolidated financial statements and
accompanying notes which follow are an integral part of this
overview and should be read in conjunction with it.
The First Southern Bank is a full service commercial bank
chartered in the State of Georgia. The Bank is a community bank
which operates three retail locations in south DeKalb County and
focuses on small to medium size businesses, individuals and
professionals. On July 19, 1996, the Bank began operations of its
new Rockbridge Plaza Branch. The branch is located in Stone
Mountain, Georgia and has three drive through bays, a drive up
ATM, as well as a state of the art electronic message board.
This facility was constructed by the bank after a careful
demographic analysis of the entire metropolitan Atlanta area.
This analysis included not only potential undeveloped locations
but also a large list of local bank branches that were available
due the to mergers and acquisitions of several major banks.
On September 9, 1996, the Company purchased the assets of and
employed the personnel of American Financial Mortgage Corp.
("AFM"). The resulting company, FSB Mortgage Services Inc., is a
mortgage company licensed by the State of Georgia Department of
Banking and Finance and has received approval from the Department
of Housing and Urban Development, FHA, Fannie Mae and the
Veterans Administration.
The Company's principal business activities are affected by many
factors, including general economic and financial conditions, the
level and volatility of interest rates, currency and security
valuations, competitive conditions, transactional volume and
market liquidity. As a result, revenues and profitability are
subject to fluctuations reflecting the impact of these factors.
During 1996, interest rates and macro-economic growth remained
stable, therefore, inflation did not have a material impact on
the Company.
Results of Operations
The Company reported after tax earnings of $301,843 for the year
ended December 31, 1996, as compared to $309,674 for the same
period in 1995. While the 1996 results of operations remained
virtually unchanged when compared to 1995. The Company
experienced higher levels of interest income and interest expense
proportionate to its increase in asset size. Net interest income
before provision for loan losses was $2,240,957 at December 31,
1996 as compared to $1,896,677 at year end 1995. During 1996,
the Company increased its provision for loan losses by $45,000 to
reflect the growth in the Company's loan portfolio. During 1996,
net loans increased by 44.37 percent.
Net Interest Income
Net interest income, the primary source of the Company's
earnings, is the amount by which interest and fees generated by
earning assets (principally loans and investment securities)
exceeds the total interest costs of the funds (mainly deposits)
obtained to carry them. Net interest income rose by $344,280 or
18.15 percent for the period ending December 31, 1996 as compared
with the same period in 1995. Strong growth in interest-
earnings assets, primarily loans, accounted for the earnings
gain. During 1996 gross loans grew by $43.52 percent, while
total interest bearing deposits grew by 20.02 percent.
STATEMENT OF CONDITION
Liquidity
The Bank primarily manages its liquidity position through federal
funds sold. At December 31, 1996, the Bank had $1,300,000 in
federal fund sold. This is a $4,400,000 decrease from 1995
levels and resulted from increase loan demand and management
efforts to improve the interest yields the Company earns on its
assets. Management feels this level is significant to meet
immediate deposit withdrawal demands at the end of December 31,
1996. Additional sources of liquidity include cash and due form
banks, federal funds line from correspondent banks, maturing
investment securities and payments on commercial and
installments.
At December, 31,1996. The Bank's liquid assets (cash and due form
banks, investment securities, and federal funds sold) represented
30.57 percent of total assets compared to 40.91 percent at
December 31, 1995.
Investment Securities
The Bank invests a portion of its assets in U.S. treasury bills
and notes, U.S. government sponsored agency securities, as well
as, mortgage backed bonds. At December 31, 1996 and 1995, the
Bank's investment securities portfolio represented approximately
22.60 percent of total assets, respectively. The investment
portfolio, based on amortized cost, increased by $2,293,000 or
24.17 percent during 1996.
At December 31, 1996, the Bank's securities portfolio was
invested in the following types of securities:
Available for Sale Held for Maturity
U.S. Treasuries -% 19%
U.S. Agencies 93 24
Mortgage Backed 7 20
Municipals - 37
____ ____
100% 100%
==== ====
The fair value of the Bank's total investment portfolio was less
than its book value by $22,492 at year-end.
Provision for Losses on Loans
The provision for losses on loans, which decreased 5.52 percent
or $21,330 in 1996 compared to 1995, is the charge to operating
earnings that management feels is necessary to maintain the
reserve for possible loan losses at an adequate level. The
allowance is based on management's assessment of the Company's
risk of possible loan defaults. Management determines the
adequacy of the allowance by considering the dollar amount of
loans outstanding, individual evaluations of problem loans,
current economic conditions, the underlying collateral value of
the loan and prior loan loss experience.
At December 31, 1996, the allowance for loan losses represented
1.12 percent of gross loans compared to 1.70 percent at December
31, 1995. Management believes that this level of reserve is
adequate to absorb possible loan losses on existing loans,
including non-accrual loans of $184,000 at December 31, 1996,
that may be uncollectible. Non-accrual loans were approximately
$240,000 at the end of 1995.
Premises and Equipment
First Southern operates three retail commercial banking
operations in DeKalb County, Georgia. The Company's main office
is located in Lithonia, Georgia, the South DeKalb Mall Branch is
located in Decatur and the Company's Rockbridge Branch is located
in Stone Mountain, Georgia. On July 19, 1996, the Company began
operating the Rockbridge Plaza Branch after an extensive study of
metropolitan Atlanta designed to determine the best location for
a new branch. After five months of operation, the branch
maintains over $2,500,000 in deposits and now rivals the main
office in new account openings. The Company also utilizes a
building in Decatur, Georgia as its Operations Center and to
house its mortgage company.
The Company maintains a wide area network ("WAN"). The Company's
WAN enables it to communicate to locations efficiently, as well
as process customer information. The Company believes leading
edge technology will further enhance the Company's ability to
remain competitive with major banks. The Company's investment in
premises and equipment at December 31, 1996 was $2,909,751
compared to $2,055,975 at December 31, 1995.
Deposits
The Company held total deposits of $45,535,324 at December 31,
1996 compared to $36,383,055 for the same period in 1995. This
represents an increase of 25.16 percent and is attributed to a
47.65 percent increase in non-interest bearing demand accounts, a
40.88 percent increase in interest-bearing demand accounts, and a
71.67 percent increase in $100,000 and over time deposits. During
the period time deposits less than $100,000 decreased by 6.30
percent.
Stockholder's Equity
Stockholder's equity increased by 6.09 percent of which 5.70
percent resulted from 1996 earnings. The unrealized gain or loss
from securities is the difference between the fair market value
and the book value of the Company's investment securities
portfolio that was held in the available for sale category. The
net unrealized loss on the investment portfolio was $10,937 for
December 31, 1996. This amount had a negligible effect on total
equity. Total stockholders equity for December 31, 1996 was
$5,627,789 compared to $5,304,787 for the same period in 1995.
The Company maintained total retained earnings of $357,581.
Income Taxes
For the year ended December 31, 1996, the Company had estimated
income taxes of $76,703 compared to $125,600 at December 31,
1995. The decrease in income taxes is attributed to the bank's
investment in tax free municipal bonds. This strategy has
enabled management to reduce its income tax liability.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Southern Bancshares, Inc.
Lithonia, Georgia:
We have audited the accompanying consolidated balance sheets of
First Southern Bancshares, Inc. (the "Company") and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the
three years ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of First Southern Bancshares and subsidiaries as of
December 31, 1996 and 1995, and the results of its operations and
its cash flows for the three years ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
under a Plan of Reorganization First Southern Bancshares was
created as a holding company through the conversion of all
outstanding shares of First Southern Bank to shares of the
Company. The financial statements presented herein represent the
consolidated entity.
February 13, 1996.
<PAGE>
<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS
<CAPTION>
1996 1995
<S> <C> <C>
Cash and due from banks $ 2,858,625 $ 2,046,906
Federal Funds Sold 1,300,000 5,700,000
Securities available for sale,
at fair value (Note 2) 4,301,985 3,887,888
Securities held to maturity
(fair value of $7,456,739 in 1996
and $5,662,808 in 1995) (Note 2) 7,480,583 5,644,389
Loans (Notes 3 and 10) 32,691,757 22,778,100
Less allowance for loan losses (Note 3) (365,231) (386,561)
Loans, net 32,326,526 22,391,539
Premises and equipment, net (Note 6) 2,909,751 2,055,975
Foreclosed real estate, net of
allowance of $47,121 (Note 4) 378,690 -
Other assets 588,478 504,064
TOTAL ASSETS $52,144,638 $42,230,761
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 9,979,254 $ 6,758,903
Interest-bearing demand 5,601,021 3,975,759
Savings 3,298,627 3,037,360
Time, $100,000 and over 12,042,080 7,014,753
Other time 14,614,342 15,596,280
Total Deposits 45,535,324 36,383,055
Note payable (Note 9) 400,000 80,000
Other liabilities 564,970 462,919
Obligation under capital
lease (Note 10) 16,555 -
Total Liabilities 46,516,849 36,925,974
Stockholders' Equity:
Common stock, par value $5,
10,000,000 shares authorized,
528,958 shares issued, 528,958
and 526,312 shares outstanding
in 1996 and 1995, respectively 2,644,790 2,631,560
Paid in capital 2,647,268 2,631,560
Treasury stock (10,913) (45,647)
Retained earnings (Deficit) 357,581 81,817
Net unrealized gain (Loss) on
securities, net of deferred taxes (10,937) 5,497
Total Stockholders' Equity 5,627,789 5,304,787
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,144,638 $42,230,761
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Interest and fees on loans $3,103,798 $2,585,428 $1,994,104
Interest on investments 702,336 382,454 307,723
Interest on Federal funds sold 205,566 201,431 95,500
Total Interest Income 4,011,700 3,169,313 2,397,327
Interest expense
Interest paid on deposits 1,749,666 1,269,480 816,080
Interest on notes payable 21,077 3,156 -
Total interest expense 1,770,743 1,272,636 816,080
Net interest income 2,240,957 1,896,677 1,581,247
Provision for loan losses (Note 3) (140,000) (95,000) (113,000)
Net interest income after
provision for loan losses 2,100,957 1,801,677 1,468,247
Other income
Service charges on deposit accounts 823,167 764,994 723,927
Other service charges, commissions
and fees 605,181 189,617 156,772
Net realized gains on sales
of securities available for sale 14,124 - -
Other operating income 64,447 30,078 12,229
Total Other Income 1,506,919 984,689 892,928
Other expenses
Salaries and employee benefits 1,577,478 1,068,805 1,019,585
Equipment expense 343,021 279,430 217,977
Occupancy expense 249,682 193,424 141,295
Loss on foreclosed real estate - 25,077 -
Other operating expenses 1,059,149 784,356 636,273
Total Other Expenses 3,229,330 2,351,092 2,015,130
Income before income taxes 378,546 435,274 346,045
Income tax expense 76,703 125,600 6,220
NET INCOME $ 301,843 $ 309,674 $ 339,825
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .57 $ .59 $ .65
DIVIDENDS PER COMMON SHARE $ .05 $ - $ -
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Net
Unrealized
Retained Gain
Common Treasury (Loss) on
Stock Stock Earnings Investment
Shares Par Value Surplus Shares Amount (Deficit) Securities Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 526,312 $2,631,560 $2,631,560 - $ - $(227,857) $(69,715) $4,965,548
Purchase of treasury stock - - - (4,750) (45,647) - - (45,647)
Net Income - - - - - 309,674 - 309,674
Net change in unrealized gain on
available for sale securities,
net of deferred taxes - - - - - - 75,212 75,212
Balance, December 31, 1995 526,312 2,631,560 2,631,560 (4,750) (45,647) 81,817 5,497 5,304,787
Stock Sold 2,646 13,230 13,230 - - - - 26,460
Purchase of Treasury Stock - - - (1,705) (12,788) - - (12,788)
Sale of Treasury Stock - - 2,478 5,000 47,522 - - 50,000
Net Income - - - - - 301,843 - 301,843
Dividends Declared
($.05 per share) - - - - - (26,079) - (26,079)
Net change in unrealized gain on
available for sale securities,
net of deferred taxes - - - - - - (16,434) (16,434)
Balance, December 31, 1996 528,958 $2,644,790 $2,647,268 (1,455) $(10,913) $357,581 $(10,937) $5,627,789
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST SOUTHERN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 301,843 $ 309,674 $ 339,825
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 294,229 244,134 205,394
Premium accretion, net of discount amortization 4,824 29,456 33,330
Provision for loan losses 92,879 95,000 113,000
Provision for losses on foreclosed real estate 47,121 19,000 11,900
Deferred income taxes (2,372) 38,746 (46,318)
Increase in interest receivable (38,011) (83,305) (61,811)
Increase (decrease) in interest payable 119,328 136,038 42,760
Other prepaids, deferrals and accruals, net (82,222) 8,819 (126,997)
Total adjustments 435,776 487,888 171,258
Net cash provided by operating activities 737,619 797,562 511,083
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in Federal funds sold 4,400,000 (3,100,000) (200,000)
Purchase of securities available for sale (2,997,623) (2,086,411) (2,966,451)
Proceeds from the sale of securities available
for sale 1,012,892 - -
Proceeds from the sale of securities held
to maturity 199,828 - -
Proceeds from maturities of securities
available for sale 1,243,522 201,684 424,487
Purchase of securities held to maturity (4,987,012) (3,251,857) -
Proceeds from maturities of securities
held to maturity 3,268,598 2,386,064 -
Increase in Foreclosed Real Estate (425,811) - -
Net increase in loans (10,027,866) (2,401,229) (2,594,418)
Proceeds from sales of foreclosed real estate - 72,232 -
Purchases of premises and equipment (1,148,005) (440,269) (447,477)
Net cash used in investing activities (9,461,477) (8,619,786) (5,783,859)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 336,555 80,000 -
Sale of common stock 13,230 - -
Dividends paid (16,919) - -
Sale of treasury stock 47,522 - -
Paid capital 15,708 - -
Purchase of treasury stock (12,788) (45,647) -
Net increase in deposits 9,152,269 5,316,179 7,389,193
Net cash provided by financing activities 9,535,577 5,350,532 7,389,193
Net increase (decrease) in cash and due from banks 811,719 (2,471,692) 2,116,417
Cash and due from banks, beginning of year 2,046,906 4,518,598 2,402,181
CASH AND DUE FROM BANKS, END OF YEAR $2,858,625 $2,046,906 $ 4,518,598
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year for Interest $1,651,415 $1,010,141 $ 773,320
Cash Paid During the Year for Income Taxes $ 84,453 $ 119,750 $ -
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
FIRST SOUTHERN BANCSHARES AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies
Nature of Business: Effective July 3, 1995, First Southern
Bancshares, Inc. (the "Company") was created out of a
reorganization of First Southern Bank (the "Bank"). The Bank is
now a wholly-owned subsidiary of the Company. The reorganization
was effected pursuant to a Plan of Reorganization (the "Plan"),
dated as of February 16, 1995. Pursuant to the Plan, each share
of the Bank common stock outstanding was converted into one share
of the Company common stock.
First Southern Bank is a state chartered bank operating in the
State of Georgia. The Bank provides a variety of financial
services to individuals, small and medium-sized business and
professionals in communities located in and around Dekalb County
and metropolitan Atlanta, Georgia.
Use of Estimates: The preparation of financial statement in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and the valuation of foreclosed real estate.
In connection with the determination of the estimated losses on
loans and foreclosed real estate management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, further reductions in the
carrying amounts of loans and foreclosed assets may be necessary
based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the estimated losses on loans and
foreclosed real estate. Such agencies may require the
Association to recognize additional losses based on their
judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real
estate may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be
estimated.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries First Southern Bank (the "Bank") and FSB
Mortgage Services ("FSB Mortgage"). All significant intercompany
transactions and balances have been eliminated in the
consolidation.
FSB Mortgage Services, Inc.: On May 22, 1996, FSB Mortgage
Services, Inc. was created as a wholly-owned subsidiary of First
Southern Bancshares, Inc. (the "Parent"). FSB Mortgage was
formed to provide mortgage related services to communities in and
around Dekalb County, as well as, the entire metropolitan
Atlanta, Georgia area.
On June 17, 1996, 30,000 shares of the Company's common stock
were issued at a price of $10 per share for a total of $300,000.
On May 23, 1996, FSB Mortgage entered into an asset purchase
agreement to purchase the assets of an existing business which
provides residential mortgage lending and mortgage brokerage
services. The purchase price for the purchased assets totaled
$225,000. The purchase price was paid as $175,000 in cash and
5,000 shares of the Parent's common stock valued at $50,000.
This agreement was consummated on September 6, 1996.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 1 - Summary of Significant Accounting Policies, continued
Basis of Presentation: The accounting and reporting policies of
the Company and its subsidiary conform to generally accepted
accounting principles and with general practices within the
banking industry. Assets held by the Bank in a fiduciary or
agency capacity are not assets of the Bank and are not included
in the financial statements.
Investment Securities: The Bank's investments in securities are
classified in the following two categories:
Securities Held to Maturity: Securities held to maturity
are those securities which the Bank has the ability and
intent to hold to maturity. These securities are stated at
cost adjusted for amortization of premium and accretion of
discount, which are recognized in interest income using the
interest method. Realized gains and losses on the sale of
investment securities are computed on the basis of specific
identification of the amortized cost of each security and
included in earnings.
Securities Available for Sale: Securities classified as
available for sale are those debt securities that the Bank
intends to hold for an indefinite period of time but not
necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various
factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and
liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Realized gains or
losses on the sale of investment securities available for
sale are computed on the basis of specific identification of
the amortized cost of each security and included in
earnings.
Securities available for sale are carried at fair value with
unrealized holding gains and losses, net of deferred taxes,
reported as a net amount in a separate component of stockholders'
equity until realized.
Loans: Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are stated
at the amount of unpaid principal, reduced by unearned discount.
Interest on commercial and real estate loans is credited to
income on a daily basis based upon the principal amount
outstanding. Most interest on installment loans is credited to
income on a daily basis based upon the principal amount
outstanding. The remaining interest on installment loans is
credited to income based on the sum-of-the-months-digits method,
the results of which are not materially different from generally
accepted accounting principles.
Accrual of interest income is discontinued on impaired loans
when, in the opinion of management, collection of such interest
income becomes doubtful. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is
reversed against current interest income. Accrual of interest on
such loans is resumed when, in management's judgment, the
collection of interest and principal amounts become probable.
Allowance for Loan Losses: The allowance for loan losses is
established through a provision for loan losses charged to
expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible and is based on
evaluations of the collectibility of loans, prior loan loss
experience, the estimated value of any underlying collateral and
current economic conditions.
Loan Fees and Costs: Fees on loans and costs incurred in
origination of loans are recognized at the time the loan is
recorded on the books. Because loan fees are not significant and
the majority of the related loans have maturities of one year of
less, the results on operations are not materially different than
the results which would be obtained by accounting for loan fees
and costs in accordance with generally accepted accounting
principles as set forth in Statement of Financial Accounting
Standards No. 91.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 1 - Summary of Significant Accounting Policies, continued
The Bank and FSB Mortgage have adopted SFAS 122 "Accounting for
Mortgage Servicing Rights". SFAS 122 requires that a mortgage
banking enterprise recognize as separate assets, rights to
service mortgage loans for others,
however, those servicing rights are acquired.
Foreclosed Real Estate: Real estate properties acquired through,
or in lieu of, loan foreclosure are to be sold and are initially
recorded at fair value at the date of foreclosure, establishing a
new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell.
Revenues and expenses from operations and changes in the
valuation allowance are included in loss on foreclosed real
estate.
Premises and Equipment: Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
principally by the straight-line method over the following
estimated useful lives:
Years
Buildings and Improvements 10-40
Equipment 5-10
The Bank has adopted SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 requires that long-lived assets such as premises and
equipment be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the review for recoverability,
the entity should estimate the future cash flows expected to
result from the use of the assets and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
asset, an impairment loss is recognized. Otherwise, an impairment
loss is not recognized. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity
expects to hold and use should be based on the fair value of the
asset. The adoption of SFAS 121 had no material effect on the
Company's financial statements.
Income Taxes: The Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS
No. 109 requires a balance sheet approach to accounting for
income taxes and requires that deferred tax assets and
liabilities be adjusted in the period of enactment for the effect
of an enacted change in tax laws or rates. The adoption of SFAS
No. 109 had no material effect on the consolidated financial
statements.
Earnings Per Share: Net income per common and common equivalent
share was computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents
outstanding during each year. Common stock equivalent shares
represent outstanding stock options.
Statement of Cash Flows: For purposes of reporting cash flows,
cash and due from banks includes cash on hand and amounts due
from banks (including cash items in process of clearing). Cash
flows from loans originated by the Bank, deposits,
interest-bearing deposits and Federal funds purchased and sold
are reported net.
Current Accounting Developments: The Financial Accounting
Standards Board has issued SFAS 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of
Liabilities", which becomes effective for years beginning after
December 31, 1996.
SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities. The statement generally requires that servicing
assets and liabilities be subsequently measured by (a)
amortization in proportion to and over the period of estimated
servicing income or loss and (b) assessment for asset impairment
or increased obligation based on their fair values. The Bank is
currently assessing the potential future impact of the
application of this statement.
Reclassifications: Certain amounts for 1995 and 1994 have been
reclassified to conform to the 1996 presentation.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 2 - Investment Securities
Securities Held to Maturity: The amortized cost and estimated fair value of
securities held to maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and
agencies securities $3,241,082 $17,515 $(17,200) $3,241,397
State and municipal
securities 2,743,068 5,532 (13,572) 2,735,028
Mortgage-backed securities 1,496,433 2,081 (18,200) 1,480,314
$7,480,583 $25,128 $(48,972) $7,456,739
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and
agencies securities $4,080,862 $12,631 $ (1,456) $4,092,037
State and municipal
securities 1,160,000 3,651 (4,498) 1,159,153
Mortgage-backed securities 403,527 8,091 - 411,618
$5,644,389 $24,373 $ (5,954) $5,662,808
Securities Available for Sale: The amortized cost and estimated fair value of
securities available for sale are as follows:
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and
agencies securities $3,987,178 $ 16,029 $(19,615) $3,983,592
Mortgage-backed securities 313,455 5,128 (190) 318,393
$4,300,633 $ 21,157 $(19,805) $4,301,985
</TABLE>
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 2 - Investment Securities, continued
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and
agencies securities $3,785,982 $ 47,720 $ (3,407) $3,830,295
Mortgage-backed securities 57,663 - (70) 57,593
$3,843,645 $ 47,720 $ (3,477) $3,887,888
</TABLE>
The amortized cost and estimated fair value of securities available for sale and
held for maturity at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Securities Held to Maturity Securities
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year $ 34,883 $ 36,853 $ 504,314 $ 503,856
Due from one year to five years 598,974 596,520 3,570,029 3,558,603
Due from five to ten years 3,666,776 3,668,612 3,406,240 3,394,280
$4,300,633 $4,301,985 $7,480,583 $7,456,739
</TABLE>
In December 1995, the Bank implemented the Financial Accounting
Standards Board (FASB) Special Report "A Guide to Implementation
of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities". In conjunction with the issuance of
the Special Report, FASB permitted a one-time reassessment of
securities classifications and allowed reclassification of
securities in the "held to maturity" category without calling
into question management's intention to hold other securities to
maturity in the future. In accordance with the implementation of
the Special Report, the Bank transferred securities with an
amortized cost of $1,957,864 from "held to maturity" to
"available for sale". The securities had an unrealized gain of
approximately $13,000 on the date of transfer.
During April 1994, the Bank transferred all securities classified
as "available for sale" to the "held to maturity" category. The
unrealized loss on the date of transfer continues to be reported
as a separate component of stockholders' equity and amortized
over the security remaining life as an adjustment of interest
yield. The Bank had a net change in unrealized loss of $16,434
net of deferred taxes of $2,372 for 1996 and had a net change in
unrealized gain of $75,212, net of deferred taxes of $38,746 for
1995.
Proceeds from sales of investment securities during 1996 were
$1,212,720. Gross gains of $14,125 and no losses were realized on
those sales. There were no sales of investment securities during
1995 and 1994.
Investment securities carried at approximately $4,736,084 and
$2,949,000 at December 31, 1996 and 1995, respectively, were
pledged to secure public deposits as required or permitted by
law.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 3 - Loans and Allowance for Loan Losses
The composition of loans is summarized as follows:
1996 1995
Commercial, financial and
agricultural $19,552,000 $10,468,000
Real estate-construction 3,117,000 2,239,000
Real estate-mortgage 6,345,000 7,430,000
Consumer installment loans 1,457,000 1,754,000
Other 2,220,757 887,100
32,691,757 22,778,100
Allowance for loan losses (365,231) (386,561)
LOANS, NET $32,326,526 $22,391,539
Changes in the allowance for loan losses are as follows:
1996 1995 1994
Balance, beginning of year $386,561 $400,219 $401,835
Provision charged to
operations 92,879 95,000 113,000
Loans charged off (163,645) (125,141) (176,684)
Recoveries 49,436 16,483 62,068
BALANCE, END OF YEAR $365,231 $386,561 $400,219
As required by FASB No. 114 "Accounting by Creditors for Impairment
of a Loan" (as amended by FASB No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures"), the Bank
has loans amounting to approximately $482,042 and $305,334 that were
specifically classified as impaired at December 31, 1996 and December
31, 1995, respectively. The total allowance for loan losses related
to these loans was $142,290 at December 31, 1996 and $98,875 at
December 31, 1995. Interest income on impaired loans of $73,408
and $19,949 was recognized in 1996 and 1995, respectively.
Note 4 - Foreclosed Real Estate
Activity in the allowance for losses for foreclosed real estate
was as follows:
1996 1995
Balance, beginning of year $ - $ 11,900
Provision charged to income (47,121) 19,000
Charge-offs, net of recoveries - (30,900)
BALANCE, END OF YEAR $(47,121) $ -
The loss on foreclosed real estate included net expenses of
$6,077 in 1995 resulted from the operation of foreclosed real
estate.
Note 5 - Related Parties
In the normal course of business, the Bank has made loans at
prevailing interest rates and terms to directors and executive
officers of the Company and its subsidiary. The aggregate dollar
was $3,310,950 at December 31, 1996 and $2,435,637 at December
31, 1995. During 1996, $638,296 of new loans were made and
principal repayments totaled $374,970.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 6 - Premises and Equipment
Major classifications of these assets are summarized as follows:
1996 1995
Land $ 459,622 $ 258,000
Buildings 1,595,947 1,274,534
Leasehold Improvements 144,600 144,600
Equipment 1,841,801 1,254,702
4,041,970 2,931,836
Accumulated depreciation (1,132,219) (875,861)
$2,909,751 $2,055,975
Depreciation expense for the years ended December 31, 1996, 1995,
and 1994 was $294,229, $244,134, and $205,394, respectively.
Note 7 - Operating Leases
The Bank leases a facility and ATM space under various operating
leases. The Bank facility lease contains an additional renewal
option for seven years. Rental expense was $52,547 in 1996,
$46,351 in 1995 and $26,030 in 1994. Future minimum rental
commitments under the leases are:
1997 36,292
1998 39,174
1999 39,657
2000 38,532
2001 16,055
$169,710
Contingent lease payments are applicable to the leases and are
based on the Bank's proportionate share of the landlord's
operating costs.
Note 8 - Income Taxes
The consolidated provision for income taxes consisted of the
following:
1996 1995 1994
Currently Payable $76,703 $125,600 $ 6,220
Deferred - - -
$76,703 $125,600 $ 6,220
The Company's provision for income taxes differs from the amounts
computed by applying the Federal income tax statutory rates to
income before income taxes. A reconciliation of the differences
is as follows:
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 8 - Income Taxes, continued
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tax provision at
statutory rate $128,706 34.0% $147,993 34.0% $ 117,655 34.0%
Effect of tax exempt
income (29,746) (7.0) (2,582) (.6) - -
Nondeductible expenses 1,442 .5 1,937 .4 1,657 .5
Benefit of net
operating loss
carryforward - - - - (119,418) (34.5)
Other items, net (23,699) (6.0) (21,748) (5.0) 6,326 1.8
PROVISION FOR INCOME
TAXES $ 76,703 21.5% $125,600 28.8% $ 6,220 1.8%
</TABLE>
Deferred income taxes (benefits) arising from temporary differences between
the tax basis and the reported amounts in the consolidated financial
statements are as follows:
December 31,
__________________________________
1996 1995 1994
Provision for loan losses $ 5,072 $14,778 $ (481)
Depreciation 4,223 22,378 33,489
Preopening expenses - - 11,745
Contributions - - 5,901
$ 9,295 $37,156 $ 50,654
Net deferred income tax liabilities of $460 at December 31, 1996 are
included in other liabilities. Pursuant to SFAS No. 109, the
components of deferred income taxes at December 31, 1996 are as
follows:
Deferred tax assets:
Loan loss reserves $ 79,718
Valuation allowance (18,097)
61,621
Deferred tax liabilities:
Unrealized gain on securities (460)
Depreciation (61,621)
Net deferred tax liability $ (460)
At December 31, 1995, the Company had no remaining operating loss
carryforwards available to offset future taxable income.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 9 - Note Payable
Consolidated notes payable are summarized below:
1996 1995
A $450,000 line of credit arrangement, due
on demand and expiring on June 30, 1997.
The note bears interest at the bank's prime
rate and is payable at maturity. $400,000 $80,000
Note 10 - Obligation Under Capital Lease
Under the terms of the purchase asset agreement entered into with
the seller Company, FSB Mortgage Services, Inc. assumed a Capital
Lease Agreement for the purchase of equipment. In accordance
with the agreement, lease payments of $1,063.61 including
interest at 16.689% are payable monthly. The Company expects to
exercise the residual buy-out option of $3,120 in November, 1997.
The present value of the remaining lease payments is $16,555
including the buy-out option.
Note 11 - Commitments and Contingent Liabilities
Judgments and Claims: The Bank is a defendant in certain legal
proceedings in connection with its normal business activities.
It is the best judgment of management and its legal counsel that
none of these matters, when resolved, will have a material effect
on the consolidated financial position of the Company.
Commitments to Extend Credit: In the ordinary course of
business, the Bank has entered into off balance sheet financial
instruments which are not reflected in the consolidated financial
statements. These instruments include commitments to extend
credit, standby letters of credit, and commercial letters of
credit. Such financial instruments are recorded in the financial
statements when funds are disbursed or the instruments become
payable. The Bank uses the same credit policies for these off
balance sheet financial instruments as it does for instruments
that are recorded in the financial statements.
Following is an analysis of significant off balance sheet
financial instruments.
December 31,
1996 1995
Commitments to extend credit $14,351,489 $10,201,461
Standby letters of credit - 30,000
$14,351,489 $10,231,461
Commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of a
fee. Since many of the commitment amounts expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The credit risk involved in
issuing these financial instruments is essentially the same as
that involved in extending loans to customers. The amount of
collateral obtained, if deemed necessary by the Bank, upon
extension of credit, is based on management's credit evaluation
of the customer. Collateral held varies but may include real
estate and improvements, marketable securities, accounts
receivable, inventory, equipment and personal property.
<PAGE>
Notes to the Consolidated Financial Statements, Continued
Note 11 - Commitments and Contingent Liabilities, continued
The Bank does not anticipate any material losses as a result of
these commitments.
Note 12 - Concentrations of Credit
Most of the Bank's loans, commitments and standby letters of
credit have been granted to customers in the Bank's market area.
The concentrations of credit by type of loan are set forth in
Note 3. Standby letters of credit are granted primarily to
commercial borrowers of the Bank.
The Bank, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of
25% of the lesser of the Bank's combined capital stock and
capital surplus accounts or the Bank's net assets which amounted
to approximately $1,406,335 and $1,351,000 at December 31, 1996
and 1995, respectively.
Note 13 - Stock Options
The Bank has issued to the president of the Bank, options to
purchase a total of 5,000 shares of common stock at $10.00 per
share. These options, each of which will be exercisable for a
period of five (5) years from the date of grant, will be granted
at the rate of 1,000 shares per year, beginning on the date of
the president's employment. Each subsequent 1,000 share option
will be granted on the four successive anniversaries of the
president's employment. All of these options must be exercised
no later than five (5) years from the date of grant. As of
December 31, 1995, none of the options granted had been
exercised. The exercise of outstanding stock options would not
have a dilutive effect on earnings.
Note 14 - Employee Benefit Plan
The Bank has a defined contribution pension plan in effect for
substantially all full-time employees. Salaries and employee
benefits expense includes $3,955 in 1996, $4,745 in 1995, and
$2,709 in 1994, for such plans. Employer contributions under the
defined contribution plan are made at the discretion of the Board
of Directors.
Note 15 - Regulatory Matters
Banking regulations require the Bank to maintain minimum capital
levels in relation to Bank assets. At December 31, 1996, the
Bank's capital ratios were considered adequate based on
regulatory minimum capital requirements. The minimum capital
requirements and the actual capital ratios for the Bank at
December 31, 1996 were as follows:
Regulatory
Actual Requirement
Leverage capital ratio 12% 4.00%
Risk based capital ratios:
Core capital 16% 4.00%
Total capital 17% 8.00%
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,858,625
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,301,985
<INVESTMENTS-CARRYING> 7,480,583
<INVESTMENTS-MARKET> 7,456,739
<LOANS> 32,691,757
<ALLOWANCE> 365,231
<TOTAL-ASSETS> 52,144,638
<DEPOSITS> 45,535,324
<SHORT-TERM> 400,000
<LIABILITIES-OTHER> 581,525
<LONG-TERM> 0
0
0
<COMMON> 2,644,790
<OTHER-SE> 2,982,999
<TOTAL-LIABILITIES-AND-EQUITY> 52,144,638
<INTEREST-LOAN> 3,103,798
<INTEREST-INVEST> 907,902
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,011,700
<INTEREST-DEPOSIT> 1,749,666
<INTEREST-EXPENSE> 1,770,743
<INTEREST-INCOME-NET> 2,240,957
<LOAN-LOSSES> 140,000
<SECURITIES-GAINS> 14,124
<EXPENSE-OTHER> 3,229,330
<INCOME-PRETAX> 378,546
<INCOME-PRE-EXTRAORDINARY> 301,843
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301,843
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 0
<LOANS-NON> 184,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 30,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 386,561
<CHARGE-OFFS> 163,645
<RECOVERIES> 49,436
<ALLOWANCE-CLOSE> 365,231
<ALLOWANCE-DOMESTIC> 365,231
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
